<PAGE>
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, 1998
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 15, 1999, based on the closing price of said stock on
the Nasdaq National Market on such date $22.00.
As of March 15, 1999, 25,766,078 shares of the Common Stock, $.01 par value,
and 752,547 shares of the Nonvoting Common Stock, $.01 par value, of the
Registrant were outstanding.
1
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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).
PENDING MERGER
On November 23, 1998, the Company announced a proposed merger (the "Merger")
with CMAC Investment Corporation ("CIC"), a holding company which, through
Commonwealth Mortgage Assurance Company ("CMAC"), competes with the Company
as a provider of private mortgage insurance coverage in the United States. As
proposed, upon consummation of the Merger, Amerin shareholders will receive,
in a tax free exchange, .5333 shares of CIC common stock for each share of
Amerin stock. The Merger is expected to be accounted for on a pooling of
interests basis. Consummation of the Merger is subject to customary
conditions, including the approval of the stockholders of each of Amerin and
CIC.
The combined company is expected to be the second largest mortgage insurance
company in the U. S. based on new insurance written in 1998. Following the
Merger, Frank P. Filipps, president and chief executive officer of CIC, will
be chairman and chief executive officer of the combined company. Roy J.
Kasmar, president and chief operating officer of Amerin, will hold the same
positions with the combined company. Gerald L. Friedman, chairman and chief
executive officer of Amerin, will become chairman emeritus of the combined
company, and Herbert Wender, chairman of CIC, will become chairman of the
executive committee of the board of directors of the combined company. The
new board will initially be made up of members from Amerin's and CIC's boards.
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It is currently anticipated that, following completion of the Merger, the
mortgage insurance operations of Amerin Guaranty and CMAC will be
consolidated, and Amerin Guaranty will not continue to operate as a
stand-alone mortgage insurance company. Therefore, the information set forth
herein should be read as historical in nature, and should not be viewed as an
indication of the future financial condition or business prospects of the
company resulting from the merger of Amerin and CIC. Please refer to the
Merger Proxy for information with respect to all matters relating to the
Merger. Copies of the Merger Proxy are available upon request from the
Company.
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
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
direct primary risk in force as of the dates indicated:
<TABLE>
<CAPTION>
PRIMARY INSURANCE AND RISK IN FORCE
Years ended December 31,
-----------------------------------------------------
1998 1997 1996
------------------ ----------------- ----------------
(in millions of dollars)
<S> <C> <C> <C>
Direct Primary
Insurance In Force............................. $28,147 $20,394 $14,777
Direct Primary
Risk In Force.................................. 7,032 5,149 3,671
</TABLE>
3
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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. Mortgage insurance on loans insured on and after July 29, 1999 will
also be subject to mandatory cancellation pursuant to recently enacted
federal legislation. See "Regulation -- Homeowners Protection Act of 1997."
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 in the last two
years:
PERCENTAGES OF NEW INSURANCE WRITTEN
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Purchase Loans 63.2% 83.8%
Refinance Loans 36.8% 16.2%
</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).
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The following table sets forth the dollar amounts and percentages of new
insurance written represented by each of the three premium plans in 1998 and
1997:
<TABLE>
<CAPTION>
NEW PRIMARY INSURANCE WRITTEN
1998 1997
---- ----
(in millions of dollars)
<S> <C> <C> <C> <C>
Monthly premium plan $13,546 89.3% $6,879 87.7%
Annual premium plan 1,588 10.5 856 10.9
Single premium plan 30 0.2 107 1.4
------- ----- ------ -----
Total $15,164 100.0% $7,842 100.0%
------- ----- ------ -----
</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, 1998, Amerin Guaranty's pool insurance in force was
$5.2 billion, representing $85.9 million of risk in force. See "Regulation --
New York Circular Letter No. 2."
Amerin Guaranty provided contract underwriting services to certain lenders on
a limited basis during 1997. Amerin Guaranty significantly expanded the level
of contract underwriting services in 1998 and has established 5 regional
underwriting facilities pursuant to a short term lease. The net cost of
contract underwriting in 1998 was $14.9 million compared to $1.5 million in
1997. The Company expects future contract underwriting expenditures will
fluctuate based on the overall level of new mortgage originations in the
industry. The total industry mortgage production of $1.4 trillion in 1998 was
a new annual record and 40 percent above the previous record set in 1993.
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 85.1%, 85.2% and 84.2% of the Company's net
premiums written for 1998, 1997 and 1996, respectively. Amerin Guaranty's
three largest customers (including branches and affiliates of such customers)
in 1998 were Norwest Mortgage, Inc., Countrywide Home Loans, Inc. and Chase
Manhattan Mortgage Corporation which accounted for 38.7%, 17.7% and 8.6%,
respectively, of the Company's net premiums written for 1998. 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.
5
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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, 1998 Amerin Guaranty had done business with 125 master
policyholders, of which it considered 72 to be active master policyholders
(lenders which had submitted applications for insurance within the preceding
90 days, excluding branches, affiliates and companies acquired or merged into
other lenders).
SALES AND MARKETING AND COMPETITION
SALES AND MARKETING
Amerin Guaranty sells its insurance products through its own employees, located
throughout the United States. At December 31, 1998, Amerin Guaranty had a total
of 49 sales and marketing employees, 22 of which work in Amerin Guaranty's
office in Chicago, Illinois.
COMPETITION
THE FOLLOWING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE POSSIBLE EFFECTS ON
COMPETITION OF THE PENDING MERGER BETWEEN THE COMPANY AND CMAC INVESTMENT
CORPORATION. SEE "BUSINESS - PENDING MERGER."
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 1998. 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 41.5%, 43.1% and 42.8% of
all loans insured by the FHA, VA or by private mortgage insurers in 1998,
1997 and 1996, 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;
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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
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, 1998, 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.
Fannie Mae recently announced that it would require less coverage on certain
loans written through its Desktop Underwriter (DU) program. This reduction of
coverage will result in a reduction in the amount of premium Amerin Guaranty
earns in connection with such DU loans. Freddie Mac may announce a similar
reduction in coverage requirements. Furthermore, Fannie Mae and Freddie Mac
may further reduce coverage requirements, but only to the extent consistent
with their charters which specifically require mortgage insurance. In the
event of such reductions, Amerin Guaranty could lose additional premium
revenue.
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,
------------------------------------------------
1998 1997 1996
------------------ ------------ ------------
<S> <C> <C> <C>
FHA/VA................................................. 41.5% 43.1% 42.8%
Private mortgage insurance............................. 58.5 56.9 57.2
------------------ ------------ ------------
100.0% 100.0% 100.0%
------------------ ------------ ------------
------------------ ------------ ------------
</TABLE>
- ----------------
Sources: INSIDE MORTGAGE FINANCE and the Mortgage Insurance Companies of
America.
7
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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
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.
The Company believes that the claim incidence for loans with LTV of 95%
("95s")is substantially higher than for loans with LTV ratios of 90% or less.
In addition, the claim incidence for mortgages in which the original loan
amount exceeds the maximum loan amount eligible for purchase by Fannie Mae
and Freddie Mac is higher than for mortgages in which the original amount is
at or below such amount. Finally, the claim incidence for ARMs during a
prolonged period of rising interest rates would be 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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CHARACTERISTICS OF PRIMARY RISK IN FORCE
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1998 1997 1996
------------------- ------------------ ------------------
(in millions of dollars except percentages)
<S> <C> <C> <C>
DIRECT PRIMARY RISK IN FORCE: $7,032.0 $5,148.9 $3,671.0
LENDER CONCENTRATION:
Top 3 lenders(1)............................ 61.1% 69.3% 70.5%
Top 10 lenders(1)........................... 84.7% 85.6% 87.4%
LTV:
97s......................................... 2.4% 0.7% 0.2%
95s......................................... 38.9% 49.1% 48.8%
90s(2)...................................... 46.7% 45.8% 46.7%
85s and below............................... 12.0% 4.4% 4.3%
AVERAGE COVERAGE PERCENTAGE: 25.0% 25.2% 24.8%
LOAN TYPE:
Fixed(3).................................... 88.1% 80.1% 77.7%
ARMs........................................ 4.9% 8.6% 11.4%
ARMs with potential negative amortization...
.2% 0.4% 0.6%
Fixed/Adjustable(4)......................... 4.6% 6.4% 5.4%
Balloon..................................... 2.2% 3.9% 4.6%
Other....................................... --% 0.6% 0.3%
MORTGAGE TERM:
15 years and under.......................... 4.9% 2.5% 2.5%
Over 15 years............................... 95.1% 97.5% 97.5%
PROPERTY TYPE:
Single family detached...................... 87.8% 94.4% 94.5%
Condominium................................. 5.0% 4.7% 4.5%
Other(5).................................... 7.2% 0.9% 1.0%
OCCUPANCY STATUS:
Primary residence........................... 97.9% 98.9% 99.2%
Second home................................. 1.4% 1.1% 0.8%
Non-owner occupied.......................... .7% --% --%
LOAN AMOUNT:
$100,000 or less............................ 21.3% 21.5% 22.7%
Over $100,000 to $197,000(6)................ 59.2% 58.6% 58.1%
Over $197,000 to $227,150(6)(7).............
9.3% 8.5% 8.0%
Over $227,150............................... 10.2% 11.4% 11.2%
</TABLE>
- ----------------------
(1) Based on original application volume.
(2) For the purposes of applying underwriting standards and
determining premiums, Amerin Guaranty considers loans under which
the borrower makes a down payment of at least 10% and finances the
mortgage insurance premium as part of the loan (resulting in a
final LTV over 90%) to be 90s. Such loans are classified as 95s in
the above table, and are so classified by Fannie Mae. At December
31, 1998, less than 1% of Amerin Guaranty's risk in force
consisted of these types of loans.
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(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 in 1998 was
$197,000.
(7) The maximum individual loan amount for single unit properties
eligible for purchase by Fannie Mae
and Freddie Mac was $214,600 for 1997 and $227,150 for 1998. This limit
has been increased to $240,000 for 1999.
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 subsequent years and the percentages of new insurance written in
California in 1996, 1997 and 1998 were reduced to 20.5%, 19.4% and 19.1%,
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,
-----------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------------- ------------- -------------
TOP 10 STATES
California............................ 19.5% 22.8% 25.4%
Texas................................. 6.3% 6.1% 5.4%
Florida............................... 6.0% 5.4% 5.0%
Illinois.............................. 5.2% 4.4% 4.0%
Colorado.............................. 4.0% 3.4% 3.3%
New York.............................. 3.9% 3.7% 3.5%
Virginia.............................. 3.2% * *
Pennsylvania.......................... 3.2% 3.3% 2.9%
Minnesota............................. 3.1% 3.4% 3.4%
New Jersey............................ 3.0% 3.1% *
Massachusetts......................... * 3.2% 3.5%
Arizona............................... * * 2.5%
Top 10 total........................ 57.4% 58.8% 58.9%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TOP 10 MSAS
Los Angeles........................... 5.3% 6.2% 7.0%
Chicago............................... 4.3% 3.5% 3.2%
Washington, D.C....................... 2.9% 2.6% 2.3%
Riverside-San Bernardino. 2.2% 1.8% *
Minneapolis........................... 2.2% 2.3% 2.3%
Orange County......................... 2.0% 2.9% 3.2%
Phoenix............................... 1.9% 2.0% 2.1%
Atlanta............................... 1.9% * *
Denver................................ 1.9% * *
New York.............................. 1.8% * *
Oakland............................... * 2.2% 2.6%
San Diego............................. * 1.9% 2.0%
Boston................................ * 1.9% 2.1%
San Francisco......................... * * 1.8%
---------------- ------------- -------------
Top 10 total........................ 26.4% 27.3% 28.6%
</TABLE>
* Not a top 10 location for the date indicated.
INSURANCE IN FORCE BY POLICY YEAR
The following table sets forth the dispersion of Amerin Guaranty's primary
insurance in force as of December 31, 1998, by year of policy origination
since Amerin Guaranty began operations in April 1993:
PRIMARY INSURANCE IN FORCE BY POLICY YEAR
<TABLE>
<CAPTION>
Primary Insurance
in Force Percent of
Policy Year -------- Total
----------- (in millions of -----
dollars)
<S> <C> <C>
1993 $ 143 .5
1994 887 3.2
1995 2,894 10.3
1996 4,262 15.1
1997 5,890 20.9
1998 14,071 50.0
------- -----
Total $28,147 100.0
------- -----
</TABLE>
UNDERWRITING PRACTICES
The Company writes substantially all of its insurance on a delegated
underwriting approval authority 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, when taken
together, the various underwriting and risk management features discussed
below provide acceptable protection to the Company against the possible risks
associated with writing substantially all business on a delegated
underwriting approval basis.
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<PAGE>
Amerin Guaranty does not cancel coverage on loans that it insures under
delegated underwriting, but may seek reimbursement from lenders in respect to
claims on loans so insured which violate specific, pre-stated loan
eligibility standards. The performance of loans insured through programs of
delegated underwriting, including Amerin Guaranty'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
situations. The Company believes that its underwriting standards are
generally consistent with the industry. Amerin Guaranty regularly reviews its
underwriting guidelines to address changes in the mortgage market, industry
practices 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 non-renewal of
insurance coverage. If a lender should commit Amerin Guaranty to insure a
loan that 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 the
following principal areas: lender approval; market analysis; loan and
portfolio monitoring that includes lender audits.
LENDER APPROVAL
Because Amerin Guaranty writes substantially all of its insurance on a
delegated underwriting basis, the Company has utilized prudent lender
approval criteria. 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 Department conducts a thorough
review of each candidate lender. Depending on the lender, such review may
include analysis 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 stated underwriting guidelines.
12
<PAGE>
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 Guaranty uses consumer credit scores to provide a
timely, objective evaluation of borrower creditworthiness. These scoring
systems also permit Amerin Guaranty to review the overall credit quality of
the portfolio and determine performance expectations for the business insured.
MARKET ANALYSIS
Amerin Guaranty regularly reviews economic and real estate market conditions
across the country, concentrating efforts on those areas and regions
identified as undesirable, declining and potentially declining. The Company
reviews the composition of its overall portfolio and its business by lender
and within geographic markets to identify concentrations of risk. Specific
elements of risk which are reviewed by Amerin Guaranty include LTV, loan
type, loan amount, property type, occupancy status and borrower employment.
The Company 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 and/or within these markets.
LOAN AND PORTFOLIO MONITORING
Amerin Guaranty's systems generate reports on all loans committed for
insurance. Specific reports highlight those lenders and loans that possess
certain high-risk criteria, including high debt ratios, self-employed
borrowers and attached housing. Risk management personnel review the data
received by Amerin Guaranty in respect to all such loans on a daily basis,
and contact the lender as necessary to effectively manage the level of risk
on these loans and within the portfolio. If it is determined that a lender is
approving loans with excessive risk for Amerin insurance, Amerin Guaranty'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.
The majority of its lenders include the credit score assigned to each loan as
part of the data transmitted to Amerin Guaranty for generation of the
insurance certificate. As well, Amerin Guaranty obtains credit scores from a
third-party vendor for all loans committed for insurance on a daily basis.
The Company uses these scores to provide a timely, objective evaluation of
borrower credit-worthiness. The Company reviews the 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, then
trends these scores and averages over time and relates this information
historically to loan performance. Accurate and timely analysis of this
information and its patterns is integral to successfully managing the risk
within the portfolio. Management believes that borrower creditworthiness is
the most significant manageable source of risk to the Company 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.
13
<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, real-time basis.
The Company also conducts a periodic on-site review of a lender's
Amerin-insured business. Lenders with significant risk concerns as identified
through The Company's daily and weekly risk reporting and analysis of the
business and related negative trends may be 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 those higher risk loans originated
by the lender in the specified period. The sample of loans to be
re-underwritten during the audit may be augmented by loans with certain risk
factors or insured under waivers to Amerin Guaranty's underwriting guidelines
granted to the lender, but is most frequently targeted toward specific risk
factors or trends identified through the daily, weekly, monthly reporting and
analysis processes. The intent of the loan review is to identify errors in
the loan data transmitted to Amerin Guaranty, to determine compliance with
Amerin Guaranty's underwriting guidelines and eligible loan criteria, to
assess the quality of a lender's underwriting decisions and to rate the risk
of the individual loans. Audits are graded based on the risk ratings of the
loans reviewed, lender compliance and data integrity. The results of each
audit are set forth in a report to the lender that 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 approval 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 by Amerin Guaranty insureds is 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.
14
<PAGE>
The following table shows the number of loans insured by Amerin Guaranty, the
related number of loans in default and the percentage of loans in default
(default rate) as of the dates indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Insured loans in force................................... 226,953 164,314 120,685
Loans in default......................................... 3,203 2,352 1,439
Percentage of loans in default (default rate)............ 1.41% 1.43% 1.20%
</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 primary risk in force as
of December 31, 1998, 1997 and 1996. Amerin Guaranty's default rate on
California loans improved significantly in 1998 due to improving economic and
housing market conditions in the state. 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 PRIMARY RISK IN FORCE(1)
<TABLE>
<CAPTION>
Percent of Default Rate as of
Amerin Guaranty's ------------------------------------------
Primary Risk in December 31,
Force as of ------------------------------------------
December 31,
1998 1998 1997 1996
------------------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
California.......................... 19.5% 1.81% 2.27% 2.06%
Texas............................... 6.3% 1.10% 1.07% 0.86%
Florida............................. 6.0% 1.75% 1.75% 1.50%
Illinois............................ 5.2% 1.75% 1.87% 1.08%
Colorado............................ 4.0% 0.87% 0.73% 0.70%
New York............................ 3.9% 2.04% 2.23% 2.03%
Virginia............................ 3.2% 0.87% .72% .40%
Pennsylvania........................ 3.2% 1.53% 1.38% 1.27%
Minnesota........................... 3.1% .80% .68% .69%
New Jersey.......................... 3.0% 1.54% 1.46% 1.06%
Total Portfolio..................... 100.0% 1.41% 1.43% 1.20%
</TABLE>
- ---------------------
(1) Top 10 states as determined by total primary risk in force as of
December 31, 1998. Default rates are shown by state based on location
of the underlying property.
15
<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 Guaranty offered a claim payment
calculation whereby the original principal amount of an insured loan was
multiplied by the percentage of coverage applicable to that loan. All
policies issued after December 31, 1996 have offered coverage under industry
standard practice, and all claims paid to Fannie Mae and Freddie Mac after
that date have been calculated pursuant to industry standard practice
regardless of the date the policy was issued. Amerin Guaranty continues to
pay claims based on its original claim calculation method for policies issued
on or prior to December 31, 1996 to beneficiaries other than Fannie Mae and
Freddie Mac. 41.3% of total claims paid in 1998 were paid under Amerin's
original claim calculation method. Management expects this percentage to
decline over time.
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.
16
<PAGE>
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 86% of Amerin Guaranty's insurance
in force as of December 31, 1998. This means that only 14% 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 establishes reserves for defaulted loans based on its
estimates of (a) the probability of a given default resulting in a claim and
(b) the severity of the claim, or the amount of the claim which would result
if the default becomes a claim. Amerin Guaranty's estimates of the
probabilities of defaults becoming claims take into account the number of
months the loan is past due, its foreclosure status and the geographic region
of the mortgaged property. Amerin Guaranty's estimates of the severity of a
claim take into account the type of insurance (primary or pool), the claim
payment method (whether industry standard or the original Amerin method) and
the level of coverage on the loan. Such probability and severity estimates
are primarily derived from Amerin Guaranty's own default experience.
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.
17
<PAGE>
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 the sum of
policyholders' surplus plus the contingency reserve calculated in accordance
with statutory accounting practices exceeds 24:9 to 1 and (ii) the sum of
Amerin Guaranty's expense ratio and loss ratio exceed 100%. 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 has
entered into reinsurance arrangements ("Captive Arrangements") with mortgage
reinsurance affiliates of 9 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." "New York
Circular Letter No. 2"
By letter dated January 20, 1999, Freddie Mac has advised Amerin Guaranty
that all Freddie Mac-approved mortgage insurers must present all captive
reinsurance transactions in which the captive reinsurer participates in more
than 25 percent of the risk sharing to Freddie Mac for its approval. Freddie
Mac also advised Amerin Guaranty that it is conducting an analysis of the
potential effects that captive reinsurance transactions could have on
mortgage insurers, and that it expected to complete this analysis and
communicate a decision on Freddie Mac's position on these transactions by
June 30, 1999. The Company cannot predict what conclusions, if any, will be
reached by Freddie Mac, or what effect such conclusions might have on
existing Captive Arrangements or Amerin Guaranty's ability to enter into
additional Captive 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. Arrangements that provide capital
support (such as the Centre Re Agreement) also can be used to help support
the claims-paying ability rating of the insurer.
Reinsurance does not discharge Amerin Guaranty, as the primary insurer, from
liability to a policyholder. The reinsurer agrees to indemnify Amerin
Guaranty for the reinsurer's share of losses incurred under a reinsurance
agreement, unlike an assumption arrangement, where the assuming reinsurer's
liability to the policyholder is substituted for that of Amerin Guaranty.
CLAIMS-PAYING ABILITY RATINGS
Certain national mortgage lenders and a large segment of the mortgage
securitization market, including Fannie Mae and Freddie Mac, generally will
not purchase mortgages or mortgage-backed securities unless the private
mortgage insurance on the mortgages has been issued by an insurer with a
claims-paying ability rating of at least "Aa3" from Moody's or "AA-" from
S&P, Duff & Phelps Credit Rating Co. or Fitch Investors Service, Inc.
18
<PAGE>
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 Insurance Asset Management 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, 1998
limited investments in the securities of a single issuer (other than the U.S.
government and certain of its agencies).
At December 31, 1998, based on carrying value, 100% of the Company's
investments were in fixed income securities, 89.3% of which were securities
rated "A" or better, with 67.5% rated "AAA" and 14.7% rated "AA," in each
case by at least one nationally recognized rating organization. The Company
does not currently intend to invest in equity securities.
The Company's investment policies and strategies are subject to change
depending upon regulatory, economic and market conditions and the existing or
anticipated financial condition and operating requirements, including the tax
position, of the Company.
19
<PAGE>
INVESTMENT OPERATIONS
At December 31, 1998, the carrying value of the Company's investment
portfolio was $439.1 million and amortized cost was $422.3 million. At
December 31, 1998, municipal securities represented 76.8% of carrying value
of the total investment portfolio.
The effective duration of the investment portfolio is 6.32 years at December
31, 1998. The following table indicates the aging of the investment portfolio:
<TABLE>
<CAPTION>
Duration Percent
-------- -------
<S> <C>
0 - 1 years 2.7
1 - 3 years 10.4
3 - 5 years 16.8
5 - 7 years 33.6
7 - 10 years 30.0
After 10 years 6.5
</TABLE>
For further information concerning investment operations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Financial Condition", set forth in Item 7, and Note 4 of Notes to
Consolidated 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 13 of Notes to
Consolidated Financial Statements of the Company, set forth on page F-20
herein.
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.
20
<PAGE>
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.
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.
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
21
<PAGE>
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 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.
22
<PAGE>
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.
HOMEOWNERS PROTECTION ACT OF 1997
The Federal Homeowners Protection Act of 1997 (the "Act"), which was signed
into law in July 1998, applies primarily to mortgage loans consummated on or
after July 29, 1999, and provides for automatic cancellation of borrower-paid
mortgage insurance after such loans amortize down to specified loan-to-value
ratio (in most cases 78%). The mandatory cancellation provisions of the Act
are not applicable to lender-paid mortgage insurance at specified levels. The
Act also provides for voluntary cancellation pursuant to the borrower's
written request if certain conditions are met; initial disclosure at or
before consummation of the mortgage of the borrower's rights with respect to
cancellation; subsequent annual disclosure of such rights; notification upon
cancellation of mortgage insurance; and notification if a request for
cancellation is denied. The Act further provides that eight states which
already had laws not inconsistent with the Act as of January 2, 1998, were
exempt from the Act, and allowed these states a period of two years from
enactment of the Act to amend such laws in a manner consistent with the
provisions of the Act. The Company believes that application of the
provisions of the Act will not have a material effect on the operations or
financial results of the Company.
NEW YORK CIRCULAR LETTER NO. 2
The New York Insurance Department ("NYID") recently issued Circular Letter
No. 2, dated February 1, 1999 (the "Letter"), which concluded that captive
mortgage reinsurance arrangements are permissible if they "constitute a
legitimate transfer of risk..[and]...are fair and equitable to the
parties..." The Letter further stated that the NYID is in the process of
developing guidelines for determining which captive arrangements are
permissible. The Letter also concluded that "supernotes/performance notes,"
"dollar pool" insurance, and "un-captive captives" violate New York law. The
Company is in the process of seeking further guidance with regard to the
Letter . The Company will review any guidelines issued by the NYID, and
analyze its risk-sharing arrangements relative to such guidelines. If
necessary, the Company will revise its risk-sharing arrangements to bring
them into compliance with the requirements of the Letter and any NYID
guidelines. However, issuance by the NYID of guidelines which require Amerin
Guaranty to revise material terms of its existing Captive Arrangements could
have a material adverse effect on Amerin's business and financial results.
Furthermore, the Company cannot predict the nature or consequences of the
guidance, if any, which will be provided by the NYID or what actions, if any,
the NYID may take in connection with practices or transactions determined to
be violative of New York law.
23
<PAGE>
EMPLOYEES
At December 31, 1998, the Company had 178 full-time employees. Of its total
work force, 144 were assigned to the Company's headquarters in Chicago,
Illinois, and 34 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 its 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.
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 15, 1999, the approximate number of record holders of the
Registrant's Common Stock was 78. The following table sets forth, for the
period indicated, the high and low last sale prices of the Registrant's
Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
--------------- ----------------
<S> <C> <C>
1998:
First Quarter................................................................ $30-1/8 $26-1/4
Second Quarter............................................................... $33-11/16 $27-5/8
Third Quarter................................................................ $31-3/8 $18-7/8
Fourth Quarter............................................................... $25-1/8 $13-13/16
1997:
First Quarter................................................................ $26-1/8 $19-7/8
Second Quarter............................................................... $24-7/8 $17-3/4
Third Quarter................................................................ $28-3/4 $22-5/8
Fourth Quarter............................................................... $32-5/8 $22-1/2
</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
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
24
<PAGE>
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 13 of Notes to Consolidated
Financial Statements of the Registrant set forth on page F-20 herein.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------- -------------- --------------- --------------- -------------
1998 1997 1996 1995 1994
-------------- -------------- --------------- --------------- -------------
(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........................... $125,383 $94,740 $70,000 $33,946 $10,274
Increase in unearned premiums.................. (2,283) (2,411) (7,651) (6,387) (5,037)
Net premiums earned............................ 123,100 92,329 62,349 27,559 5,237
Net investment income.......................... 21,312 18,607 16,871 7,612 4,818
Realized investment gains...................... 1,515 1,167 161 491 435
Total revenues.......................... 145,927 112,103 79,381 35,662 10,490
Expenses:
Losses incurred................................ 34,354 30,272 20,681 7,757 262
Policy acquisition costs....................... 22,340 10,520 8,485 6,641 2,456
Underwriting and other expenses............... 16,046 14,643 10,623 6,915 5,765
Merger expenses................................ 1,098 - - - -
Compensation charge resulting from initial
public offering.............................. - - - 35,741 --
Total expenses.......................... 73,838 55,435 39,789 57,054 8,482
Income tax expense 20,906 15,909 11,363 1,419 -
Net income (loss)................................ 51,183 40,759 28,229 (22,811) 2,008
Pay-in-kind dividends on
preferred stock................................ - - - 5,287 5,067
Net income (loss) applicable to
common stockholders............................ 51,183 40,759 28,229 (28,098) (3,059)
OTHER OPERATING DATA:
Mortgage insurance operating ratios:
(GAAP)(1)
Loss ratio.............................. 27.9% 32.8% 33.2% 28.2% 5.0%
Expense ratio........................... 30.6% 26.6% 30.6% 49.2% 157.0%
Combined ratio.......................... 58.5% 59.3% 63.8% 77.3% 162.0%
(Statutory)(1)
Loss ratio.............................. 27.9% 32.8% 33.2% 28.2% 5.0%
Expense ratio........................... 25.4% 25.6% 27.4% 42.8% 97.4%
Combined ratio.......................... 53.3% 58.4% 60.6% 70.9% 102.4%
PER SHARE DATA:(2)
Net Income (loss) - Basic........................ $1.94 $1.56 $1.08 $(2.32) $(0.36)
Net Income (loss) - Diluted...................... $1.92 $1.54 $1.07 $(2.32) $(0.36)
Weighted average shares outstanding (in
thousands):
Basic......................................... 26,374 26,119 26,038 12,106 8,467
Diluted....................................... 26,702 26,483 26,351 12,106 8,467
Book value (at year end)......................... $15.44 $13.39 $11.53 $10.55 $5.59
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
As of and for the years ended December 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING AND STATUTORY DATA:
Number of policies in force................... 226,953 164,314 120,385 68,112 22,937
Default rate.................................. 1.41% 1.43% 1.20% 0.89% 0.18%
Persistency................................... 69.3 % 87.2 % 87.6 % 93.0 % 96.2 %
Direct primary insurance in force (in millions)
$ 28,147 $ 20,394 $ 14,777 $8,262 $2,750
Direct primary risk in force (in millions)....
$7,032 $5,149 $3,671 $1,989 $ 580
Amerin Guaranty Corporation:
Statutory capital (in millions)...........
376.4 $307.8 $260.7 $227.0 $ 90.5
Risk-to-capital ratio..................... 18.3 16.1 13.3 8.2 6.4
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ---------------- --------------- -------------- -------------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Total investments............................. $ 439,142 $ 377,720 $ 328,793 $ 296,982 $ 96,246
Total assets.................................. 545,232 440,558 365,731 316,934 107,261
Unearned premiums............................. 26,114 23,352 20,525 12,710 6,323
Loss reserves................................. 43,849 31,280 18,730 7,092 262
13.5% Convertible Preferred
Stock(3)...................................... - - -- -- 40,755
Total common stockholders'
equity........................................ 409,230 350,155 300,609 274,137 58,081
</TABLE>
- --------------------
(1) GAAP and statutory accounting practices (SAP) ratios reflect the Company's
status as a new company and include start-up and other expenses incurred
prior to the commencement of significant operations. SAP ratios reflect the
combined results of the Company's insurance subsidiaries and do not include
holding company costs. Expense ratios exclude the compensation charge
resulting from the Company's initial public offering.
(2) For 1995 and subsequent, 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.
(3) The 13.5% Convertible Preferred Stock was redeemed on December 1, 1995 at a
redemption price of $46.0 million.
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF CONSOLIDATED OPERATIONS
1998 COMPARED TO 1997
Total revenues for 1998 were $145.9 million, an increase of 30% over total
revenues of $112.1 million for 1997. The growth in revenues was due primarily
to the increases in net premiums earned and investment income in 1998 as
compared to 1997, as discussed below.
New insurance written in 1998 was $15.2 billion, compared to $7.8 billion in
1997. The dramatic growth in new insurance written is due to the increase in
the Company's market share from 6.5% in 1997 to 8.1% in 1998 and the record
volume of originations due to the heavy refinance environment. As of December
31, 1998, Amerin's primary insurance in force was $28.1 billion as compared
with $20.4 billion as of December 31, 1997, which represents a 38% increase.
Net premiums written for 1998 were $125.4 million compared to $94.7 million
for 1997, which represents a 32% increase. The increase was primarily
attributable to a 95% increase in Amerin Guaranty's new insurance written
which resulted in the growth in insurance in force and related premium
revenue which was partially offset by the reduced persistency rate which
decreased to 69.3% at December 31, 1998 from 87.2% at December 31, 1997. The
decline in the persistency rate was due to the increased level of refinance
activity in 1998.
Net premiums earned increased by $30.8 million to $123.1 million for 1998
from $92.3 million for 1997. This increase was due to the increase in
insurance written and in force in 1998 as compared to 1997.
Net investment income of $21.3 million for 1998 increased by $2.7 million (or
15%) over 1997, due primarily to Amerin's net operating cash flows over the
course of 1998, which resulted in an increase in the average amount of
invested assets. Realized investment gains for 1998 were $1.5 million
compared to realized investment gains of $1.2 million for 1997. As of
December 31, 1998 and 1997, the yields to maturity on the investment
portfolio were 5.5% and 5.6%, respectively, and the average durations of the
investment portfolio remained constant at 6.3 years.
Losses incurred in 1998 were $34.4 million, compared to $30.3 million in
1997. The Company's loss ratio decreased from 32.8% for 1997 to 27.9% for
1998. The reduction in loss ratio is due to the decline in the default rate
from 1.43% at December 31, 1997 to 1.41% at December 31, 1998 and the growth
rate in paid claims was significantly less than the growth rate in insurance
in force. Approximately 86% of the Company's insurance in force has been
issued within the last three years and has not reached the peak claim paying
period. Based on historical industry experience, the majority of claims occur
in the third through sixth year after loan origination. Because of the
Company's limited operating history, its loss experience is expected to
increase significantly as its policies continue to age.
27
<PAGE>
The Company's expense ratio increased from 26.6% for 1997 to 30.6% in 1998.
The significant increase in expenses is due to the increase in contract
underwriting expenses associated with the 95% increase in new insurance
written in 1998.
The Company's effective tax rate was 29.0% in 1998. The effective tax rate
for 1998 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 $51.2
million for 1998, or $1.92 per share on a diluted basis compared to net
income of $40.8 for 1997 or $1.54 per share on a diluted basis.
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.
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.
Approximately 92% of Amerin Guaranty's insurance in force has been issued
28
<PAGE>
within the last three years and has not reached the peak claim paying period.
Based on historical overall mortgage insurance industry experience, the
majority of claims occur in the third through sixth year after loan
origination. At December 31, 1997, Amerin Guaranty's default rate of 1.43%
compares favorably to an industry equivalent seasoned rate of 1.72%. 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 had 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.
FINANCIAL CONDITION
The Company's consolidated total investments were $439.1 million at December
31, 1998, compared with $377.7 million at December 31, 1997. The Company
generated consolidated cash flows from operating activities of $57.8 million
during 1998, compared to $54.6 million generated during 1997. All of the
Company's fixed maturity securities at December 31, 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-."
The aggregate fair value (carrying value) of the fixed maturity securities
was greater than amortized cost at December 31, 1998 by $16.8 million. At
December 31, 1997, the aggregate fair value (carrying value) of the Company's
fixed maturity securities was greater than amortized cost by $12.7 million.
The increase during 1998 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 1998. Fixed maturity securities of $192.9 million or
44.5% of total fixed maturity securities at December 31, 1998 have stated
maturities of 10 years or greater. As a result of these long-term holdings,
if interest rates should increase, the fair value of these securities will
decline and common stockholders' equity will decrease.
Consolidated loss reserves increased by $12.5 million to $43.8 million at
December 31, 1998 from $31.3 million at December 31, 1997, primarily due to
the growth of insurance in force. See "-- Results of Consolidated Operations --
1998 Compared to 1997." Consistent with industry practices, the Company
does not establish loss reserves for future claims on insured loans which are
not currently in default.
29
<PAGE>
Consolidated unearned premiums increased $2.7 million from $23.4 million at
December 31, 1997 to $26.1 million at December 31, 1998, reflecting the
increase in insurance in force during 1998 versus 1997. 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 common stockholders' equity increased to $409.2 million at
December 31, 1998, from $350.2 million at December 31, 1997, an increase of
17%. This increase resulted primarily from the results of 1998 operations.
LIQUIDITY AND CAPITAL RESOURCES
THE FOLLOWING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE EFFECTS OF THE
PENDING MERGER BETWEEN THE COMPANY AND CMAC INVESTMENT CORPORATION ON THE
OVERALL LIQUIDITY AND CAPITAL RESOURCES OF THE RESULTING COMBINED COMPANY.
SEE "BUSINESS - PENDING MERGER."
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
$57.8 million, $54.6 million and $43.3 million, respectively, in 1998, 1997
and 1996, 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 does not expect to incur significant capital costs in 1999.
In connection with the merger of CMAC Investment Corporation, the Company
expects to incur investment banking, legal, accounting and other related cash
transaction costs and fees. Additionally, the Company expects to incur merger
related employee severance associated with the integration of the separate
companies. The merger related cash expenses, estimated to be approximately
$15 million in 1999, will be charged to expense in the period incurred and
funded from current operations of Amerin Guaranty. A majority of the
expenditures will be incurred in the second and third quarters of 1999.
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 1999 without regulatory
approval is approximately $8.5 million.
30
<PAGE>
In addition, dividend restrictions have been placed on the Company and its
subsidiaries by Moody's Investor Services, Inc., Fitch Investor 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.
Amerin Guaranty is the principal insurance subsidiary of the Company. Amerin
Guaranty's risk-to-capital ratio was 18.3:1 at December 31, 1998, compared to
16.1:1 at December 31, 1997. This increase was due to the growth in Amerin
Guaranty's risk in force during 1998.
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 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 underway with these efforts, which are scheduled to be
completed in early 1999.
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.
31
<PAGE>
The Company has reviewed the Year 2000 initiatives of CMAC. CMAC has
indicated they have experienced very few problems related to year 2000
testing. CMAC believes that it does not have material exposure to the Year
2000 issue with respect to its information systems since its existing systems
correctly define the year 2000. CMAC's information systems will be used for
the combined company's operations.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK EXPOSURE
The Company is exposed to various market risks, most specifically changes in
interest rates. Market risk is the potential loss arising from adverse
changes in market rates and prices. The Company does not enter into
derivatives or other similar financial instruments for trading or speculative
purposes. The following analysis presents the hypothetical loss in fair value
of the financial instruments held by the Company at December 31, 1998. The
range of changes in interest rates used in the analysis reflects the
Company's view of changes that are reasonably possible over a one year
period. This discussion of market risks related to the Company's consolidated
balance sheet includes estimates of future economic environments caused by
changes in market risks. The effect of actual changes in these risk factors
may differ materially from the Company's estimates. In the ordinary course of
business, the Company also faces risks that are either nonfinancial or
nonquantifiable, including credit risk and legal risk. These risks are not
included in the following analysis.
The fair value of the Company's cash and cash equivalents investment
portfolio at December 31, 1998 approximated its carrying value due to its
short-term duration. Market risk was estimated as the potential decrease in
fair value resulting from a hypothetical one percentage point increase in
interest rates for the instruments contained in the cash and cash equivalents
investment portfolio and the resulting fair value was not materially
different from the December 31, 1998 carrying value.
At December 31, 1998, the fair value of the Company's fixed maturities
available for sale was $433.4 million, which was $16.8 million greater than
its aggregate amortized cost. This portfolio, which is not hedged, consists
of investment grade fixed income securities. At December 31, 1998, municipal
securities represented 76.8% of the carrying value of the investment
portfolio. The valuation of the Company's fixed maturity portfolio is subject
to long-term interest rate risk. A hypothetical one percentage point increase
in long-term interest rates would decrease the fair value of the portfolio at
December 31, 1998 by approximately $13 million.
This sensitivity analysis provides only a limited, point-in-time view of the
market risk sensitivity of the Company's financial instruments. The actual
impact of interest rate and price changes may differ significantly from those
shown in the analysis. The sensitivity is further limited as it does not take
into consideration any actions the Company could take in response to or in
anticipation of movements in interest rates or prices.
32
<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 following table sets forth certain information regarding the Registrant's
executive officers as of March 15, 1999:
<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 (43)......................... President, Chief Operating Officer and Director of the Company and
Amerin Guaranty
Jerome J. Selitto (57)..................... Vice Chairman of the Company and Amerin Guaranty and Director of
Amerin Guaranty
David I. Vickers (38)...................... Senior Vice President, Chief Financial Officer and Treasurer of the
Company and Amerin Guaranty and Director of Amerin Guaranty
Randolph C. Sailer II (44)................. Senior Vice President, General Counsel and Secretary of the Company
and Amerin Guaranty and Director of Amerin Guaranty
William V. Nardiello (50).................. Executive Vice President, Sales and Marketing of Amerin Guaranty
Albert V.Will (43)......................... Executive Vice President, Operations of Amerin Guaranty
Sean P. Connelly (32)...................... Senior Vice President, Director of Information Technology of Amerin
Guaranty
Michael J. Dirrane (42).................... Senior Vice President, National Sales Director of Amerin Guaranty
Matthew K. Lindland (36)................... Senior Vice President, Director of Corporate Transactions of Amerin
Guaranty
Sergio E. Murer (34)....................... Senior Vice President, Operations of Amerin Guaranty
R. Bruce Van Fleet, III (47)............... Senior Vice President, National Accounts Director, of Amerin Guaranty
Philip P. Yee (45)......................... Senior Vice President, Marketing Services and Corporate
Communications, of Amerin Guaranty
Alan E. Goldberg (44)...................... Director of the Company and Amerin Guaranty
Howard I. Hoffen (35)...................... Director of the Company and Amerin Guaranty
Larry E. Swedroe (47)...................... Director of the Company
</TABLE>
33
<PAGE>
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 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. Nardiello has been Executive Vice President of Sales and Marketing since
August of 1998. Prior thereto, Mr. Nardiello was Vice President of Business
Development for the Thomas Group from July 1996 to May 1998, President and
Chief Executive Officer of Residential Information Services from March 1995
until May 1996, Vice President of the Thomas Group from July 1994 to March
1995, and a partner in Results Marketing Group from May 1992 to June 1994.
Mr. Will has been Executive Vice President, Operations, of the Company since
August 1998. Since August 1997, he has been a Principal of eoTek, LLC., and of
Looking Glass Partners. He served as Chief Operating Officer of Ban One
Mortgage from November 1995 through August 1997, and Senior Vice President of
Residential Services Corporation of America from September 1989 through
November 1995.
34
<PAGE>
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 1998. 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
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, Product Development of Amerin
Guaranty since October 1998, Senior Vice President, Operations of Amerin
Guaranty from December 1997 to October 1998, and Vice President of Amerin
Guaranty from September 1996 to December 1997. 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.
Mr. Goldberg has been a director of the Company and Amerin Guaranty since
April 1992. Mr. Goldberg has been Chairman of Morgan Stanley Dean Witter
Capital Partners since February 1998. Prior thereto, he was co-head of MSDW
Capital Partners. He has been a Managing Director of Morgan Stanley & Co.
Incorporated since January 1988. Mr. Goldberg also serves as a director of
Allegiance Telecom, Inc., Catalytica, Inc., Smurfit-Stone Container
Corporation, Equant, N. V., and several other private companies.
35
<PAGE>
Mr. Hoffen is currently a Managing Director, from November 1996 was a
Principal, from February 1994 through November 1996 was a Vice President, and
from September 1989 through February 1994 an Associate, at Morgan Stanley &
Co. Incorporated. He is a Vice President of Morgan Stanley Leveraged Equity
Fund II, Inc. (MSLEF, Inc.), which is the general partner of MSLEF and a
Director of Coho Energy Inc. and Catalytica, Inc. Mr. Hoffen has been a
director of Amerin Guaranty since January 1993.
Mr. Swedroe has been a principal of Buckingham Asset Management, Inc., a
personal investment advisory firm, since May 1996. From January 1994 to April
1996, he was Vice Chairman of Residential Services Corporation of America
(RSCA), the holding company for Prudential Home Mortgage and Lender's
Service, Inc. Prior thereto, he served as a Managing Director of RSCA from
November 1986 through December 1993.
NOTE: PURSUANT TO THE TERMS OF THE MERGER AGREEMENT, DATED AS OF NOVEMBER 22,
1998, BETWEEN THE COMPANY AND CMAC INVESTMENT CORPORATION, UPON COMPLETION OF
THE MERGER, THE COMPANY WILL BE ENTITLED TO NOMINATE FIVE OF THE FOURTEEN
MEMBERS OF THE BOARD OF DIRECTORS OF THE COMBINED ENTITY. OF THE CURRENT
DIRECTORS OF THE COMPANY, MESSRS. GOLDBERG AND HOFFEN WILL RESIGN UPON
COMPLETION OF THE MERGER. MESSRS. KASMAR AND SWEDROE, AND THREE OTHER PERSONS
TO BE DETERMINED, WILL BE NOMINATED AS DIRECTORS OF THE COMBINED ENTITY TO
FILL THESE FIVE POSITIONS.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors held seven meetings during 1998. All directors
attended at least 75% of the meetings of the board and any committee on which
they serve held during 1998 or the portion of 1998 during which they were a
director.
The board of directors has an Audit Committee, a Compensation Committee, a
Stock Plan Committee, and a Finance Committee. The board does not have a
nominating or similar committee. The present member of the Audit Committee is
Howard I. Hoffen. The responsibilities of the Audit Committee include:
recommending to the board of directors the independent auditors to be
selected to conduct the annual audit of the books and records of the Company;
reviewing the proposed scope of such audit and approving the audit fees to be
paid; and reviewing the adequacy and effectiveness of the internal accounting
and financial controls of the Company with the independent auditors and the
Company's financial and accounting staff. The Audit Committee did not meet
during 1998.
The Compensation Committee of the board of directors of Amerin Corporation is
comprised of Alan E. Goldberg (Chairman), Larry E. Swedroe and Gerald L.
Friedman. Mr. Friedman does not participate in consideration of his own
compensation. The responsibilities of the Compensation Committee include:
reviewing and approving executive compensation, including setting salaries
and bonuses, approving employment agreements, establishing bonus plans and
making awards thereunder and any related matters. The Compensation Committee
met once during 1998.
The Stock Plan Committee of the board of directors of Amerin Corporation is
comprised of Larry E. Swedroe (Chairman) and Alan E. Goldberg. The
responsibilities of the Stock Plan Committee include establishing stock
incentive plans and making awards thereunder and any related matters. The
Stock Plan Committee met twice during 1998.
36
<PAGE>
The current members of the Finance Committee are Larry E. Swedroe (Chairman),
Gerald L. Friedman and Alan E. Goldberg. Until February 5, 1998, the members
of the Finance Committee were Alan E. Goldberg (Chairman), Gerald L. Friedman
and Howard I. Hoffen. The responsibilities of the Finance Committee include:
recommending to the board of directors the investment advisor(s) to be
selected to manage the investment of the Company's assets; reviewing and
modifying as necessary the Company's internal investment guidelines; and
reviewing the performance of the Company's investment portfolio. The Finance
Committee met once during 1998.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's officers, directors and persons who beneficially own more than 10%
of a registered class of the Company's equity securities file with the
Securities and Exchange Commission and the Nasdaq Stock Market, Inc. certain
reports with respect to beneficial ownership of the Company's equity
securities.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and on written representations provided to
the Company by each executive officer, director and 10% beneficial owner, the
Company believes each such person filed on a timely basis the reports
required by Section 16(a) with respect to the beneficial ownership of equity
securities of the Company during the fiscal year ended December 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table provides information relating
to compensation for the year ended December 31, 1998 for the Chairman and the
other four most highly compensated executive officers of the Company
(collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
AWARDS PAYOUTS
------ -------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND COMPENSATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) ($) (#) ($) ($)
- ------------------ ---- ------ ------- ------------ ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald L. Friedman 1998 $250,000 $225,000
Chairman and Chief 1997 $240,000 $ 90,000 278,000
Executive Officer 1996 $215,000 $101,000
Roy J. Kasmar(1) 1998 $275,000 $325,000 34,400
President and Chief 1997 $245,000 $ 86,875 100,000 $102,188
Operating Officer 1996 $143,013 $ 74,000 $514,400 178,345 $105,509
Jerome J. Selitto 1998 $275,000 $ 60,000
Vice Chairman 1997 $265,000 $ 60,375 278,000
1996 $245,000 $ 66,000
Randolph C. Sailer II 1998 $185,500 $125,000
Senior Vice President 1997 $175,000 $ 55,000 23,112
and General Counsel; 1996 $155,000 $ 44,000
David I. Vickers(2) 1998 $200,000 $100,000
Senior Vice President 1997 $ 66,667 $ 36,000 41,602
</TABLE>
37
<PAGE>
- ---------
(1) Mr. Kasmar joined Amerin Guaranty in May 1996 at an annual salary of
$245,000. Of the amounts set forth for Mr. Kasmar for 1996 and 1997,
respectively, under "All Other Compensation," $105,509 and $102,188,
represent payment to Mr. Kasmar with respect to relocation expenses.
(2) Mr. Vickers joined Amerin Guaranty in August 1997 at an annual salary
of $200,000.
STOCK OPTION/SAR GRANTS IN LAST FISCAL YEAR. The following table sets forth
certain information regarding grants of stock options made during 1998 to the
Named Executive Officers pursuant to the Company's 1992 Long-Term Stock
Incentive Plan (the "Stock Incentive Plan"). No grants of stock appreciation
rights were made during 1997 to any of the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NAME NUMBER OF EXPIRATION POTENTIAL REALIZABLE VALUE OF
---- ---------- ---------- -----------------------------
SECURITIES EXERCISE DATE ASSUMED ANNUAL RATES OF STOCK
----------- % OF TOTAL PRICE ---- -----------------------------
UNDERLYING OPTIONS GRANTED ($/SH.)(1) PRICE ANNUAL APPRECIATION FOR
----------- TO EMPLOYEES ---------- -----------------------------
OPTIONS IN FISCAL YEAR OPTION TERM
------- --------------- -----------
GRANTED
------- 5%($) 10%($)
----- -----
<S> <C> <C> <C> <C> <C> <C>
R. Kasmar (2)...... 34,400 14.8% 29.50 4/21/07 $280,360 $619,544
</TABLE>
- ---------
(1) Based on the last reported sale price of the Common Stock on the Nasdaq
National Market on the business day immediately preceding the grant
date.
(2) Twenty percent of each of the options awards vests on each of the first
five anniversaries of the award.
STOCK OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTIONS/SAR VALUES. The following table sets forth information regarding the
number and value of securities resulting from the exercise of stock options
by the Named Executive Officers and the underlying unexercised stock options
held by the Named Executive Officers as of December 31, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NAME SHARES VALUE REALIZED EXERCISABLE/ EXERCISABLE/
---- ACQUIRED ON ($) UNEXERCISABLE UNEXERCISABLE
EXERCISE --- ------------- -------------
(#)
---
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FISCAL AT FISCAL YEAR END
YEAR END (#) ($) (1)
------------ -------
<S> <C> <C> <C> <C>
G. Friedman........... 0 0 55,600/222,400 $326,650/$1,306,600
R. Kasmar............. 0 0 35,633/242,532 $ 72,139/$ 244,365
J. Selitto............ 126,000 $3,389,550 62,100/228,900 $446,153/$1,426,103
R. Sailer............. 0 0 17,748/ 22,989 $254,859/$ 103,263
D. Vickers............ 0 0 8,321/ 33,281 $ 9,361/$ 43,674
</TABLE>
- ---------
(1) In addition to the options shown as exercisable as of December 31,
1998, an additional 6,500 of the options shown in the table as
unexercisable became exercisable on January 1, 1998, for Mr. Selitto.
38
<PAGE>
(2) The last reported sale price of the Common Stock on the Nasdaq National
Market on December 31, 1998 ($23.625 per share) was used to determine
the value of the in-the-money options. The dollar amounts shown
represent the amount by which the product of such last reported sale
price and the number of shares purchasable upon the exercise of such
in-the-money options exceeds the aggregate exercise price payable upon
such exercise.
COMPENSATION OF DIRECTORS
No additional compensation is paid to any director who is an employee of the
Company or of any of its subsidiaries for service on the board of directors.
Directors who are not representatives of the original group of five
institutional investors ("Outside Directors") receive $2,000 for each board
meeting attended. In addition, each Outside Director receives (i) at his or
her election, either (A) $30,000 in cash or (B) an annual grant of shares of
Common Stock under the Company's 1992 Long-Term Stock Incentive Plan (the
"Stock Incentive Plan"), with the number of shares equal to $30,000 divided
by the Fair Market Value (as defined below) of a share of the Company's
Common Stock on the Grant Date (as defined below), and (ii) an annual grant
under the Stock Incentive Plan of non-qualified options to purchase 1,000
shares of Common Stock. The options will vest in three equal installments on
the first, second and third anniversaries of the Grant Date, and will be
subject to an exercise price per share equal to the Fair Market Value of a
share of Common Stock on the Grant Date. For purposes of the foregoing, the
"Fair Market Value" of a share of Common Stock is the closing price per share
of the Common Stock on the Nasdaq National Market on the first day prior to
the Grant Date on which the Nasdaq National Market was open for trading. The
"Grant Date" is the date of the Annual Meeting of Stockholders of the
Company; provided, however, that if a director is appointed on a date other
than the date of the Annual Meeting of Stockholders, the "Grant Date" in such
year shall be the date of such appointment. Directors receive no additional
compensation for service on committees of the board. Outside Directors are
reimbursed for travel and expenses related to attendance at meetings of the
board of directors or board committees.
IT IS ANTICIPATED THAT, UPON CONSUMMATION OF THE MERGER, OUTSIDE DIRECTORS OF
THE SURVIVING CORPORATION WILL BE COMPENSATED SUBSTANTIALLY IN ACCORDANCE
WITH THE CURRENT COMPENSATION PRACTICES OF CMAC INVESTMENT CORPORATION.
SEVERANCE AGREEMENTS
In September 1997, the Company entered into severance agreements (the
"Severance Agreements") with each of Messrs. Friedman, Kasmar and Selitto.
The Severance Agreements provide for the payment of cash and the provision of
certain employee benefits in the event that a "Change in Control" of the
Company occurs and the executive is terminated within a two-year period
following such Change in Control. Pursuant to the Severance Agreements, any
of the following events will constitute a Change in Control: (i) A merger,
reorganization, consolidation of the Company, or a sale or transfer of the
assets of the Company, in which less than a majority of the combined voting
power of the then-outstanding voting stock of the surviving entity
immediately after such transaction is held in the aggregate by the holders of
voting stock of the company immediately prior to such transaction; (ii) the
filing of a Schedule 13D or Schedule 14D-1 disclosing that any person (other
than one of the Company's five original institutional investors) has become
the beneficial owner of securities representing 25% or more of the combined
voting power of the then-outstanding voting stock of the Company. For
purposes of the Severance Agreements, "termination" includes both actual
termination and "constructive termination," which is defined as any of: (i)
The failure to maintain the executive in substantially the same office or
position which the
39
<PAGE>
executive held immediately prior to the Change of Control; (ii) A significant
adverse change in the nature or scope of the authorities, powers, functions,
responsibilities or duties attached to the position which the executive held
immediately prior to the Change in Control; (iii) a reduction in the
aggregate of the cash compensation (salary and bonus) received by the
executive prior to the Change in Control; or (iv) the failure of the
surviving entity after a Change of Control to assume the Company's
obligations under the Severance Arrangements.
In the event of a Change of Control and termination of any of Messrs.
Friedman, Kasmar and Selitto as described above, the terminated executive
will be entitled to the following benefits: (i) a cash payment equal to three
times the executive's annual salary (not including any bonus); (ii) extension
of Company medical benefits for two years; and (iii) payment of any certain
"Excess Parachute Payment" excise tax amounts arising from the executive's
receipt of value under the Severance Arrangements through a gross-up payment
to the executive that covers (i) the applicable excise tax and (ii) the
income tax and the excise tax on the gross-up payment itself. Under
applicable federal tax laws, the Company (or its successor) will lose its
income tax deductions for both (i) the amount of the Excess Parachute Payment
and (ii) the gross-up payment.
PURSUANT TO THE TERMS OF THEIR RESPECTIVE SEVERANCE AGREEMENTS, MESSRS.
FRIEDMAN AND SELITTO WILL, UPON CONSUMMATION OF THE MERGER AND THEIR
TERMINATION OF EMPLOYMENT WITH THE COMPANY, BECOME ENTITLED TO THE SEVERANCE
BENEFITS DESCRIBED ABOVE. IN CONNECTION WITH COMPLETION OF THE MERGER, MR.
KASMAR WILL ENTER INTO AN EMPLOYMENT AGREEMENT WITH THE COMBINED ENTITY
PURSUANT TO WHICH HE WILL BE ENTITLED TO CHANGE OF CONTROL BENEFITS
SUBSTANTIALLY SIMILAR TO THOSE DESCRIBED ABOVE.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the board of directors of Amerin
Corporation is comprised of Alan E. Goldberg (Chairman), Larry E. Swedroe
and Gerald L. Friedman. Actions of the Compensation Committee require a
unanimous vote, except that Mr. Friedman does not participate in
consideration of his own compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the shares of
Common Stock beneficially owned as of March 16, 1999 (except as noted) by:
(i) each person or entity that is known by the Company to own beneficially
more than five percent of the outstanding shares of Common Stock; (ii) each
director of the Company, including the nominees for re-election as directors;
(iii) each Executive Officer named in the Summary Compensation Table herein;
and (iv) all directors and executive officers as a group.
40
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER(1) OWNED CLASS
<S> <C> <C>
Gerald L. Friedman.................................... 1,267,742(2) 4.8%
Alan E. Goldberg...................................... 705,018(3) 2.7%
Howard I. Hoffen...................................... 705,018(3) 2.7%
Larry E. Swedroe...................................... 2,760(4) *
Randolph C. Sailer II................................. 17,748(5) *
Roy J. Kasmar......................................... 334,400(6) *
Jerome J. Selitto..................................... 328,840(7) *
David I. Vickers...................................... 10,821(8) *
All directors and executive officers as a group
(10 persons)........................................ 2,766,956(9) 13.4%
First Plaza Group Trust............................... 1,350,189(10)(15) 5.3%
Jurika & Voyles, L. P................................. 1,976,033(11)(15) 8.0%
Legg Mason, Inc....................................... 1,800,613(12)(15) 7.3%
Lazard Freres & Co. LLC............................... 1,617,517(13)(15) 6.3%
Mellon Bank Corporation............................... 1,457,095(14)(15) 5.9%
</TABLE>
- --------
* Less than one percent
(1) Unless otherwise indicated in these footnotes, each stockholder has
sole voting and investment power with respect to the shares
beneficially owned. All share amounts reflect beneficial ownership
determined pursuant to Rule 13d-3 under the Securities Exchange Act of
1934, as amended. All information with respect to beneficial ownership
has been furnished by the respective director, executive officer or
stockholder, as the case may be.
(2) Includes 55,600 shares issuable upon exercise of stock options, 7,500
shares held by the Friedman Family Foundation (the "Foundation"), a
private charitable foundation, 30,000 shares held by the Gerald L.
Friedman Charitable Remainder Unitrust of 1997 (the "GLF Unitrust"), a
charitable remainder trust, 30,000 shares held by the Sheree A.
Friedman Charitable Remainder Unitrust of 1997 (the "SAF Unitrust") a
charitable remainder trust, 6,875 shares (as to which Mr. Friedman
disclaims beneficial ownership) held by the Sarah Beth Friedman 1989
Trust, a trust created for the benefit of Mr. Friedman's daughter,
6,875 shares (as to which Mr. Friedman disclaims beneficial ownership)
held by Rachael L. Friedman (Mr. Friedman's daughter), 7,000 shares (as
to which Mr. Friedman disclaims beneficial ownership) held by Daniel B.
Rand, and 222,400 stock options that will become exercisable upon
completion of the Merger.
(3) All of the shares shown are held by two wholly-owned subsidiaries of
Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"). Mr. Goldberg and
Mr. Hoffen are a Managing Director and Principal, respectively, of
Morgan Stanley & Co., Incorporated, an affiliate of MSDWD. Share data
shown for such individuals reflects shares shown as held by the two
wholly-owned subsidiaries of MSDWD, as to which such individuals
disclaim beneficial ownership.
(4) Includes 667 shares issuable upon exercise of stock options.
(5) Includes 17,748 shares issuable upon exercise of stock options.
(6) Includes 13,101 shares as to which restrictions on transferability will
lapse upon completion of the Merger, 91,266 shares issuable upon
exercise of vested stock options and 221,299 stock options that will
become vested upon completion of the Merger.
41
<PAGE>
(7) Includes 68,350 shares issuable upon exercise of vested stock
options and 222,400 stock options that will become exercisable upon
completion of the Merger.
(8) Includes 8,321 shares issuable upon exercise of stock options.
(9) Includes 1,010,178 shares issuable upon exercise of stock options,
13,101 shares as to which restrictions on transferability will lapse
upon completion of the Merger, and 705,018 shares in the aggregate for
Messrs. Goldberg and Hoffen. Messrs. Goldberg and Hoffen have
disclaimed beneficial ownership of such shares as described in Note (3)
above.
(10) The address of First Plaza Group Trust is Mellon Bank, N.A., as
Trustee, One Mellon Bank Center, Pittsburgh, PA 15258.
(11) The address of Jurika & Voyles, L. P. is 1999 Harrison Street,
Suite 700, Oakland, CA 94612.
(12) The address of Legg Mason, Inc. is 100 Light Street, Baltimore,
MD 21202.
(13) The address of Lazard Freres & Co. LLC is 30 Rockefeller Plaza,
New York, NY 10020.
(14) The address of Mellon Bank Corporation is One Mellon Bank Center,
Pittsburgh, PA 15258.
(15) Share ownership numbers and percentages are as of December 31, 1998,
the last date at which each of these holders was required to report
such ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to an employment agreement between Mr. Friedman and Amerin Guaranty,
in order to provide assistance with the tax liability, if any, associated
with the grant to Mr. Friedman of certain shares (the "Friedman Shares"), Mr.
Friedman has the right to borrow from Amerin Guaranty an amount equal to such
tax liability. Such loan would have a term of five years and bear interest
(payable at maturity) at the prime rate at the time the loan is made, would
be prepayable in whole or in part by Mr. Friedman at any time or from time to
time and would be accelerated to the extent of any cash proceeds from sales
by Mr. Friedman of the Friedman Shares. No loans have been made by Amerin
Guaranty to Mr. Friedman and no amounts are outstanding.
Pursuant to an agreement dated March 1, 1998, between Amerin Guaranty and
John F. Peterson, Senior Vice President of Amerin Guaranty, Mr. Peterson
resigned from Amerin Guaranty as of April 30, 1998. Pursuant to this
agreement, Mr. Peterson became entitled to exercise options to purchase
12,874 shares of Amerin Common Stock which otherwise would have become
exercisable in two equal installments of 6,437 on January 1, 1999 and 2000,
respectively. The agreement also provided for the payment by Amerin Guaranty
of Mr. Peterson's medical insurance premiums through April 30, 1999. The
estimated aggregate value of these benefits was $193,979, based on the market
prices per share of Amerin Common Stock at the dates of exercise.
The Company and Messrs. Friedman, Kasmar and Selitto are parties to certain
severance agreements. See "Executive Compensation -- Severance Agreements."
42
<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 44 to 45 for exhibits filed
with this report on Form 10-K.
(b) Reports on Form 8-K:
On October 15, 1998, the Registrant filed one report on
Form 8-K with respect to the adoption by the Registrant of
a Shareholders Rights Plan.
On November 25, 1998, the Registrant filed one report on
Form 8-K with respect to the Agreement and Plan of Merger,
dated November 22, 1998, entered into between the
Registrant and CMAC Investment Corporation.
43
<PAGE>
(c)
EXHIBITS
FORM 10-K
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Document Number
------- ----------------------- ------
<S> <C> <C>
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).
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Document Number
------- ----------------------- ------
<S> <C> <C>
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. (incorporated by reference)
10.9 Severance Agreement dated as of September 17, 1997 between Amerin Corporation and Roy J.
Kasmar. (incorporated by reference)
10.10 Severance Agreement dated as of September 17, 1997 between Amerin Corporation and Jerome J.
Selitto. (incorporated by reference)
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.
27.0 Financial Data Schedule
</TABLE>
45
<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: April 15, 1999
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ GERALD L. FRIEDMAN Director; Chairman of the Board and April 15, 1999
---------------------- Chief Executive Officer (PRINCIPAL
Gerald L. Friedman EXECUTIVE OFFICER)
/S/ ROY J. KASMAR Director; President and Chief April 15, 1999
--------------------- Operating Officer
Roy J. Kasmar
/S/ DAVID I. VICKERS Senior Vice President, Chief April 15, 1999
--------------------- Financial Officer (PRINCIPAL
David I. Vickers FINANCIAL OFFICER and PRINCIPAL
ACCOUNTING OFFICER)
/S/ ALAN E. GOLDBERG Director April 15, 1999
------------------------
Alan E. Goldberg
/S/ HOWARD I. HOFFEN Director April 15, 1999
------------------------
Howard I. Hoffen
/S/ LARRY E. SWEDROE Director April 15, 1999
------------------------
Larry E. Swedroe
</TABLE>
46
<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, 1998 and 1997.......................................................F-3
Consolidated Statements of Operations For the Years Ended
December 31, 1998, 1997 and 1996..............................................................................F-4
Consolidated Statements of Common Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996..........................................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996..............................................................................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, 1998 and 1997, and the
related consolidated statements of operations, common stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, 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 21, 1999
F - 2
<PAGE>
Amerin Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
------ ------
<S> <C> <C>
ASSETS
Investments (NOTE 4):
Fixed maturities available-for-sale, at fair value (amortized cost
$416,533 in 1998 and $361,660 in 1997)............................ $ 433,377 $ 374,320
Short-term investment............................................. 5,765 3,400
-------- --------
Total investments..................................................... 439,142 377,720
Cash and cash equivalents............................................. 7,186 4,456
Accrued investment income............................................. 6,024 5,872
Premiums receivable................................................... 5,607 5,020
Deferred policy acquisition costs..................................... 16,839 7,776
Prepaid federal income taxes (NOTE 7)................................. 45,000 25,257
Leasehold improvements, furniture and equipment, at cost, net of
accumulated depreciation of $5,255 in 1998 and $2,775 in 1997...... 13,203 9,315
Goodwill, net of accumulated amortization of $993 in 1998 and $844
in 1997 ........................................................... 1,984 2,133
Other assets.......................................................... 10,247 3,009
----------------- ---------------
Total assets $ 545,232 $ 440,558
----------------- ---------------
----------------- ---------------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Liabilities:
Loss reserves (NOTE 6)............................................ $ 43,849 $ 31,280
Unearned premiums................................................. 26,114 23,352
Current income taxes.............................................. -- 790
Deferred income taxes (NOTE 7).................................... 54,221 30,272
Payable for securities............................................ 2,699 --
Accrued expenses and other liabilities............................ 9,119 4,709
----------------- ---------------
Total liabilities 136,002 90,403
Commitments and contingencies (NOTES 8, 12, AND 13)
Common stockholders' equity (NOTE 11):
Voting Common Stock, $.01 par, 50,000,000 shares authorized,
25,755,221 and 24,488,725 shares issued and outstanding
in 1998 and 1997, respectively........................... 258 245
Nonvoting Common Stock, $.01 par, 50,000,000 shares authorized,
752,547 and 1,656,909 issued and outstanding in
1998 and 1997, respectively.............................. 8 17
Additional paid-in capital........................................ 321,811 316,642
Accumulated other comprehensive income............................ 10,948 8,229
-------------- ---------------
Retained earnings ................................................ 76,205 25,022
-------------- ---------------
Total common stockholders' equity .................................... 409,230 350,155
-------------- ---------------
Total liabilities and common stockholders' equity................. $ 545,232 $ 440,558
-------------- ---------------
-------------- ---------------
</TABLE>
See accompanying notes.
F - 3
<PAGE>
Amerin Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1998 1997 1996
--------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C>
REVENUES:
Net premiums written............................ $ 125,383 $ 94,740 $ 70,000
Increase in unearned premiums................... (2,283) (2,411) (7,651)
----------------- ------------------ ----------------
Net premiums earned............................. 123,100 92,329 62,349
Net investment income (NOTE 4).................. 21,312 18,607 16,871
Realized investment gains (NOTE 4).............. 1,515 1,167 161
----------------- ------------------ ----------------
Total revenues...................................... 145,927 112,103 79,381
EXPENSES:
Losses incurred................................. 34,354 30,272 20,681
Policy acquisition costs........................ 22,340 10,520 8,485
Underwriting and other expenses............... 16,046 14,643 10,623
Merger expenses................................. 1,098 -- --
----------------- ------------------ ----------------
Total expenses...................................... 73,838 55,435 39,789
----------------- ------------------ ----------------
Income before income taxes.......................... 72,089 56,668 39,592
Deferred income tax expense......................... 20,906 15,909 11,363
----------------- ------------------ ----------------
Net income.......................................... $ 51,183 $ 40,759 $ 28,229
----------------- ------------------ ----------------
----------------- ------------------ ----------------
Net income per common share (NOTE 15):
Basic......................................... $ 1.94 $ 1.56 $ 1.08
----------------- ------------------ ----------------
----------------- ------------------ ----------------
Diluted....................................... $ 1.92 $ 1.54 $ 1.07
----------------- ------------------ ----------------
----------------- ------------------ ----------------
</TABLE>
See accompanying notes.
F - 4
<PAGE>
Amerin Corporation and Subsidiaries
Consolidated Statements of Common Stockholders' Equity
<TABLE>
<CAPTION>
ACCUMULATED
VOTING NONVOTING ADDITIONAL OTHER RETAINED
COMMON COMMON PAID-IN COMPREHENSIVE EARNINGS
STOCK STOCK CAPITAL INCOME (DEFICIT) TOTAL
--------- ------------ ------------- ---------------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996..................... $ 224 $ 36 $ 314,614 $ 3,229 $ (43,966) $ 274,137
Comprehensive income:
Net income .................................. -- -- -- -- 28,229 28,229
Net unrealized investment losses,
net of tax and reclassification adjustment -- -- -- (3,007) -- (3,007)
---------
Comprehensive income......................... 25,222
Shares issued under long-term
incentive plan and options exercised ....... 1 -- 1,249 -- -- 1,250
---------- ------------ ------------- --------------- -------- -----------
Balance, December 31, 1996................... 225 36 315,863 222 (15,737) 300,609
Comprehensive income:
Net income................................... -- -- -- -- 40,759 40,759
Net unrealized investment gains, net of
tax and reclassification adjustment....... -- -- -- 8,007 -- 8,007
----------
Comprehensive income......................... 48,766
Shares issued under long-term
incentive plan and options exercised ..... 1 -- 779 -- -- 780
Nonvoting conversion......................... 19 (19) -- -- -- --
-------- ------------ ------------- --------------- -------- -----------
Balance, December 31, 1997 .................. 245 17 316,642 8,229 25,022 350,155
Comprehensive income:
Net income................................... -- -- -- -- 51,183 51,183
Net unrealized investment gains, net of
tax and reclassification adjustment....... -- -- -- 2,719 -- 2,719
-----------
Comprehensive income......................... 53,902
Shares issued under long-term
incentive plan and options exercised ..... 4 -- 5,169 -- -- 5,173
Nonvoting conversion......................... 9 (9) -- -- -- --
-------- ------------ ------------- --------------- ---------- -----------
Balance, December 31, 1998................... $ 249 $ 17 $ 321,811 $ 10,948 $ 76,205 $ 409,230
-------- ------------ ------------- --------------- ---------- -----------
-------- ------------ ------------- --------------- ---------- -----------
</TABLE>
See accompanying notes.
F - 5
<PAGE>
Amerin Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996
----- ----- ----
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 51,183 $ 40,759 $ 28,229
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in:
Accrued investment income..................... (152) (1,479) (2,017)
Premiums receivable........................... (587) 813 (3,458)
Unearned premiums............................. 2,762 2,827 7,815
Loss reserves................................. 12,569 12,550 11,638
Accrued expenses and other liabilities........ 4,578 101 1,301
Federal income taxes.......................... (2,149) 1,094 (365)
Policy acquisition costs deferred............. (17,533) (9,309) (9,087)
Policy acquisition costs amortized............ 8,470 7,102 7,937
Amortization.................................. 149 304 472
Depreciation................................... 2,480 1,211 718
Realized investment gains...................... (1,515) (1,167) (161)
Other items, net............................... (2,472) (230) 240
---------------- ---------------- ---------------
Net cash provided by operating activities......... 57,783 54,576 43,262
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of:
Fixed maturity securities......................... (254,823) (115,530) (223,025)
Short-term investments, net....................... (3,116) -- --
Property and equipment............................ (6,368) (6,294) (1,422)
Sale or maturity of:
Fixed maturity securities......................... 204,081 52,431 55,350
Short-term investments, net....................... -- 17,318 125,242
Property and equipment.......................... -- 29 2
---------------- ---------------- ---------------
Net cash used by investing activities (60,226) (52,046) (43,853)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.............................. 5,173 750 713
---------------- ---------------- ---------------
Net cash provided by financing activities............. 5,173 750 713
---------------- ---------------- ---------------
Net increase in cash and cash equivalents............. 2,730 3,280 122
Cash and cash equivalents at beginning of year........ 4,456 1,176 1,054
---------------- ---------------- ---------------
Cash and cash equivalents at end of year.............. $ 7,186 $ 4,456 $ 1,176
---------------- ---------------- ---------------
---------------- ---------------- ---------------
</TABLE>
See accompanying notes.
F - 6
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Statements
1. BUSINESS
Amerin Corporation (Company or Amerin), 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 65%,
69%, and 71% of net premiums written in 1998, 1997 and 1996, respectively.
Additionally, net premiums written in 1998 for the Company's three largest
customers were $49 million, $22 million, and $11 million. Similarly, net
premiums written in 1997 for the Company's three largest customers were $40
million, $19 million, and $7 million, while in 1996, net premiums written for
the Company's three largest customers were $29 million, $14 million, and $7
million. Approximately 20% of the Company's risk in force at December 31,
1998 was concentrated in California.
On November 23, 1998, the Company announced a proposed merger (the
"Merger") with CMAC Investment Corporation ("CIC"), a holding company which,
through Commonwealth Mortgage Assurance Company ("CMAC"), competes with the
Company as a provider of private mortgage insurance coverage in the United
States. As proposed, upon consummation of the Merger, Amerin shareholders
will receive, in a tax free exchange, .5333 shares of CIC common stock for
each share of Amerin stock. Consummation of the Merger is subject to
customary conditions, including the approval of the stockholders of Amerin
and CIC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts
of the Company and its 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 accumulated other
comprehensive income, 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 one year 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 reported in the consolidated
statements of operations.
F - 7
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated 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 anticipated claim payment
pattern based on historical industry experience. Single premiums written for
a coverage period of more than one year are amortized over the entire
coverage period, principally in correspondence with the anticipated claim
payment pattern based on historical industry experience.
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 reported 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
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 Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1998, the Company had
investments in Tax and Loss Bonds of $45.0 million.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (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 had no impact on the
Company's net income or common 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 common stockholders'
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
SEGMENT INFORMATION
In 1997, the Financial Accounting Standards Board (FASB), issued SFAS
131, "Disclosure About Segments of an Enterprise and Related Information",
which became effective on December 31, 1998. The Company operates in only one
reportable industry segment, and therefore, SFAS 131 did not require
disclosure of any significant information beyond that previously provided in
the Company's financial statements.
NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted average
number of common and common equivalent shares outstanding during the
respective period. Common equivalent shares include incremental shares from
dilutive stock options, which are calculated from the date of grant under the
treasury stock method using the average market price for the period.
EFFECT OF NEW PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company expects to adopt the new
Statement effective January 1, 2000. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value. The Company
does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
RECLASSIFICATIONS
Certain items in the 1997 consolidated financial statements have been
reclassified to conform with the presentation in the 1998 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:
F - 9
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Statements
3. STATUTORY ACCOUNTING PRACTICES (CONTINUED)
- - Investments in bonds are carried at amortized cost on a statutory basis.
GAAP requires that such fixed-maturity securities be classified as
held-to-maturity, trading, or available-for-sale. Held-to-maturity
securities are carried at amortized cost, and securities classified as
trading or available-for-sale are carried at fair value. Unrealized
holding gains and losses are reported in income for those securities
classified as trading and as accumulated other comprehensive income 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 prepaid federal income taxes
under GAAP.
F - 10
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Statements
3. STATUTORY ACCOUNTING PRACTICES (CONTINUED)
The following is a reconciliation of the Company's 1998, 1997 and 1996
consolidated net income and common stockholders' equity presented on a GAAP
basis to the corresponding amounts reported on a statutory basis for the
insurance subsidiaries:
<TABLE>
<CAPTION>
Common
Net Income Stockholders' Equity
------------------- ---------------------
(in thousands)
<C> <C>
1998:
Consolidated GAAP basis amounts.................. $ 51,183 $ 409,230
Company and non-insurance subsidiary amounts
and eliminations............................... 11,840 (3,227)
----------------- -----------------
Insurance subsidiaries GAAP basis amounts........ 63,023 406,003
Fixed maturities available-for-sale.............. -- (16,825)
Deferred policy acquisition costs................ (9,063) (16,839)
Contingency reserve.............................. -- (157,039)
Nonadmitted assets............................... -- (11,049)
Deferred income taxes............................ 2,739 9,105
Contingency reserve tax deduction................ 19,700 45,000
----------------- -----------------
Statutory basis amounts.......................... $ 76,399 $ 258,356
----------------- -----------------
----------------- -----------------
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
----------------- -----------------
----------------- -----------------
</TABLE>
F - 11
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated 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, 1998:
U.S. Treasury.......................... $ 23,685 $ 1,144 $ 18 $ 24,811
States and political subdivisions...... 320,078 14,791 112 334,757
Corporate securities................... 43,736 925 343 44,318
Redeemable preferred stock............. 1,649 21 -- 1,670
Mortgage-backed securities............. 27,385 436 -- 27,821
--------------- ------------ ------------- ---------------
Total fixed maturities..................... $ 416,533 $ 17,317 $ 473 $ 433,377
--------------- ------------ ------------- ---------------
--------------- ------------ ------------- ---------------
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..................... $ 361,660 $ 12,851 $ 191 $ 374,320
--------------- ------------ ------------- ---------------
--------------- ------------ ------------- ---------------
</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, 1998, by contractual maturity,
follows:
<TABLE>
<CAPTION>
Amortized Cost Fair Value
------------------- --------------------
(in thousands)
<S> <C> <C>
Due in one year or less........................... $ 3,041 $ 3,079
Due after one year through five years............. 43,812 44,335
Due after five years through ten years............ 156,113 163,605
Due after ten years............................... 184,533 192,867
Redeemable preferred stock........................ 1,649 1,670
Mortgage-backed securities........................ 27,385 27,821
--------------- -----------------
$ 416,533 $ 433,377
--------------- -----------------
--------------- -----------------
</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 Statements
4. INVESTMENTS (CONTINUED)
Proceeds from sales of investment securities were $204.1 million, $40.6
million, and $46.1 million in 1998, 1997 and 1996, respectively. Gross gains and
losses realized on those sales are presented below:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
-------------- --------------- ----------------
(in thousands)
<S> <C> <C> <C>
Realized on sales of investment securities:
Gains................................... $ 2,622 $ 1,224 $ 676
Losses.................................. (1,107) (57) (515)
------------- ------------- --------------
Net realized gains.......................... $ 1,515 $ 1,167 $ 161
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
The changes in net unrealized gains on investments in fixed-maturity
securities were $4.2 million in 1998, $12.3 million in 1997, and ($4.6 million)
in 1996.
At December 31, 1998, investments with a carrying amount of $8.9 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,
1998 1997 1996
---------------- ---------------- ------------------
(in thousands)
<S> <C> <C> <C>
Fixed-maturity securities............ $ 21,139 $ 18,580 $ 15,701
Short-term investments .............. 566 422 1,529
---------------- -------------- -----------------
21,705 19,002 17,230
Less: Investment expenses........... 393 395 359
---------------- -------------- -----------------
Net investment income................ $ 21,312 $ 18,607 $ 16,871
---------------- -------------- -----------------
---------------- -------------- -----------------
</TABLE>
5. COMPREHENSIVE INCOME
The components of other comprehensive income and the related tax effects are
as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998
Amount Income Amount
Before Tax Expense Net of
Taxes (Benefit) Taxes
------------------ ----------------- ---------------
(in thousands)
<S> <C> <C> <C>
Other comprehensive income:
Net unrealized investment gains arising
during the year........................ 4,953 1,994 3,704
Reclassification adjustment.............. (770) (530) (985)
---------------- ---------------- -------------
Net unrealized investment gain
recognized in other
comprehensive income................... $ 4,183 $ 1,464 $ 2,719
---------------- ---------------- -------------
---------------- ---------------- -------------
</TABLE>
F - 13
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Statements
<TABLE>
<CAPTION>
Year ended December 31, 1997
Amount Income Amount
Before Tax Expense Net of
Taxes (Benefit) Taxes
------------------ ----------------- ---------------
(in thousands)
<S> <C> <C> <C>
Other comprehensive income:
Net unrealized investment gains
arising during the year.................... 13,485 4,719 8,766
Reclassification adjustment.................. (1,167) (408) (759)
----------------- -------------- --------------
Net unrealized investment gain
recognized in other comprehensive
income........................ $ 12,318 $ 4,311 $ 8,007
----------------- -------------- --------------
----------------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
Amount Income Amount
Before Tax Expense Net of
Taxes (Benefit) Taxes
------------------ ----------------- ---------------
(in thousands)
<S> <C> <C> <C>
Other comprehensive income:
Net unrealized investment losses arising
during the year......................... (4,465) (1,563) (2,902)
Reclassification adjustment.............. (161) (56) (105)
----------------- -------------- --------------
Net unrealized investment loss
recognized in other comprehensive
income.................................. $ (4,626) $ (1,619) $ (3,007)
----------------- -------------- --------------
----------------- -------------- --------------
</TABLE>
6. LOSS RESERVES
The following table is a reconciliation of the beginning and ending loss
reserves for the years shown:
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- ----------------
(in thousands)
<S> <C> <C> <C>
Balance, January 1................................ $ 31,280 $ 18,730 $ 7,092
Losses and loss adjustment expenses, principally in
respect of default notices occurring in:
Current year................................ 36,133 29,196 20,344
Prior years................................. (1,779) 1,076 337
------------ ----------- --------------
Total losses and loss adjustment expenses... 34,354 30,272 20,681
------------ ----------- -------------
Loss and loss adjustment expense payments
principally in respect of default notices
occurring in:
Current year................................ 4,388 4,537 3,821
Prior years................................. 17,397 13,185 5,222
------------ ----------- -------------
Total payments.............................. 21,785 17,722 9,043
------------ ----------- -------------
Balance, December 31.............................. $ 43,849 $ 31,280 $ 18,730
------------ ----------- -------------
------------ ----------- -------------
</TABLE>
F - 14
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Statements
7. 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,
1998 1997
---------------- -----------------
(in thousands)
<S> <C> <C>
Deferred tax liabilities:
Contingency reserve deduction.................... $ 45,000 $ 25,257
Deferred policy acquisition costs................ 5,894 2,722
Unrealized gain on investments................... 5,895 4,431
Tax over book depreciation....................... 635 396
Other liabilities................................ 22 --
Other............................................ 347 323
------------- -------------
Total deferred tax liabilities....................... 57,793 33,129
Deferred tax assets:
Unearned premium reserves........................ 1,754 1,594
Accrued liabilities.............................. -- 43
Reserve discounting.............................. 1,204 773
Other............................................ 614 447
------------- -------------
Total deferred tax assets............................ 3,572 2,857
------------- -------------
Net deferred tax liability........................... $ 54,221 $ 30,272
------------- -------------
------------- -------------
</TABLE>
The nature of the Company's deferred tax assets and liabilities at
December 31, 1998 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.
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 purchases have been treated as
prepaid federal income taxes for financial reporting purposes. The Company
has included the allowable deductions attributable to the purchase of the Tax
and Loss Bonds within the deferred tax provision. The Company purchased $19.7
million, $14.4 million, and $10.3 million of Tax and Loss Bonds in 1998,
1997, and 1996 respectively.
The Company's income tax provision varied from the statutory federal income
tax rate applied to its net income before taxes as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---------------- -------------------- ------------------
(in thousands)
<S> <C> <C> <C>
Statutory federal income tax rate applied
to income before taxes..................... $ 25,231 $ 19,834 $ 13,857
Add (deduct) tax effect of:
Tax-exempt interest........................ (4,277) (4,016) (2,785)
Nondeductible goodwill amortization
and other nondeductible
expenses............... 170 113 106
Other (net)................................ (218) (22) 185
-------------- ---------------- ----------------
Income tax provision........................... $ 20,906 $ 15,909 $ 11,363
-------------- ---------------- ----------------
-------------- ---------------- ----------------
</TABLE>
F - 15
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Statements
8. REINSURANCE
Amerin Guaranty reinsures portions of its risk through reinsurance treaties
on an excess of loss basis. Amerin Guaranty remains liable to the extent that
the reinsuring companies do not meet their obligations under these reinsurance
treaties.
Amerin Guaranty has entered into captive reinsurance arrangements with
certain customers. The arrangements are structured on an excess layer basis with
insured loans grouped by loan origination year. Amerin Guaranty retains the
first layer of risk on a particular book of business, the captive reinsurer
assumes the next layer, and Amerin Guaranty assumes all losses above that point.
The captive reinsurers are required to maintain minimum capitalization equal to
10% of the risk assumed. At December 31, 1998, approximately $154.7 million of
risk was ceded under captive reinsurance arrangements. Reinsurance ceded reduced
premiums earned by $12.2 million in 1998, $5.2 million in 1997, and $1.8 million
in 1996.
In addition, Amerin Guaranty has a $100 million excess loss protection
treaty which covers Amerin Guaranty in the event the combined ratio exceeds 100%
and the risk to capital ratio exceeds 24.9 to 1. The amount ceded under the
treaty is based on the calculated leverage ratio at the end of each calendar
quarter. The total expense recognized under the treaty was $2.1 million, $1.8
million, and $1.8 million in 1998, 1997 and 1996, respectively.
9. RELATED PARTY TRANSACTIONS
During 1998 and 1997, both the Company and its subsidiaries maintained cash
accounts at an affiliate of one of the principal stockholders.
10. 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. 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 and net income per
share would have been as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1998 1997 1996
--------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Pro forma net income $ 47,685 $ 38,013 $ 27,788
Pro forma net income per common share
Basic $ 1.81 $ 1.46 $ 1.07
Diluted $ 1.79 $ 1.45 $ 1.06
</TABLE>
F - 16
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Statements
10. INCENTIVE COMPENSATION (CONTINUED)
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,
-------------------------------------------------------
1998 1997 1996
-------------------------------------------------------
<S> <C> <C> <C>
Dividend yield................................ 0% 0% 0%
Risk-free interest rate....................... 5.2% 6.5% 6.5%
Volatility.................................... 49.3% 49.4% 51.3%
Expected life (years)......................... 6.0 6.0 6.0
</TABLE>
The pro forma effects on net income and net income per common share are not
likely to be representative of the effects on reported net income in future
years as 1998, 1997 and 1996 pro forma amounts do not include pro forma
compensation expense related to grants made prior to 1995.
Transactions related to all stock options are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------------
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............. 1,820 $ 15.64 943 $ 11.40 692 $ 5.11
Granted....................... 232 22.46 1,030 19.04 329 23.02
Exercised..................... (362) 5.02 (63) 4.54 (73) 4.25
Canceled ..................... (101) 16.25 (90) 18.10 (5) 5.30
----------- ------------- ------------ ------------ ------------ ----------
Ending Balance................ 1,589 19.09 1,820 15.64 943 11.40
----------- ------------ ------------
----------- ------------ ------------
Exercisable at end of year.... 398 445 295
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
Under the plan, 1,016,000 shares were available for grant as awards or options
at December 31, 1998.
F -17
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Statements
10. INCENTIVE COMPENSATION (CONTINUED)
Information regarding options outstanding and exercisable at December 31, 1998
is summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------------------
Weighted Average
Remaining Weighted
Number Contractual Life Weighted Average Number Average
Outstanding (in years) Exercise Price Exercisable Exercise Price
---------------- ------------------- ----------------- ---------------- -----------------
(in thousands, except price data)
<S> <C> <C> <C> <C> <C>
$ 4.24 - $ 5.30 138 8.3 $ 4.94 95 $ 5.68
$13.8125 - $17.75 837 8.5 17.21 155 17.76
$21.25 - $29.50 614 8.5 24.83 148 23.36
---------------- ------------------- ---------------
1,589 8.5 19.09 398 16.98
---------------- ------------------- ---------------
---------------- ------------------- ---------------
</TABLE>
The weighted average fair value per share of options granted was $13.02,
$10.60, and $13.07 in 1998, 1997, and 1996, respectively.
11. COMMON STOCKHOLDERS' EQUITY
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, 1996............................ 22,381,818 3,609,625
Shares issued under long-term incentive plan.............. 22,665 --
Options exercised......................................... 72,709 --
Pay-in-kind dividends..................................... (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
Options exercised......................................... 362,134 --
Conversion to voting stock................................ 904,362 (904,362)
---------------- ---------------
Outstanding at December 31, 1998.......................... 25,755,321 752,547
---------------- ---------------
---------------- ---------------
</TABLE>
Shares of Voting Common Stock and Nonvoting Common Stock shall rank equally as
regards dividend rights, rights on liquidation, and winding up and dissolution.
F - 18
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Statements
11. COMMON STOCKHOLDERS' EQUITY (CONT.)
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.
Stock Purchase Rights
The Company adopted a Stockholder Rights Plan on October 20, 1998. Under
the terms of the plan, Rights will be distributed as a dividend at the rate of
one Right for each share of common stock held. Each Right will entitle the
holder to purchase, upon the occurrence of certain events, one one-hundredth of
a share of preferred stock for $105. The Rights generally will be exercisable
only if a person or group acquires beneficial ownership of 15 percent or more of
the Company's common stock, or commences a tender or exchange offer that, upon
consummation, would result in a person or group owning 15 percent or more the
Company's common stock. Under certain circumstances, the Rights are redeemable
at a price of $.01 per right. The Rights will expire on October 7, 2008.
12. 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 1999, $.2 million in 2000, $.3 million in 2001, $.3 million
in 2002, $.3 million in 2003, and $.5 million thereafter. Rent expense was $.6
million in 1998, 1997 and 1996.
F - 19
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Statements
13. 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
$229.4 million and $218.6 million at December 31, 1998 and 1997 respectively.
The statutory basis capital and surplus of Amerin Re was $29.0 million and
$28.0 million at December 31, 1998 and 1997, 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, 1998, 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 1999 without regulatory approval
is approximately $8.5 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.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of unaudited quarterly results of operations for 1998 and 1997
is as follows:
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
----------- -------------- -------------- ---------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1998
Net premiums earned......................... $ 27,609 $ 29,518 $ 31,237 $ 34,736
Net investment income and other............. 5,518 5,451 6,832 5,026
Net income.................................. 11,950 12,527 13,984 12,722
Net income per common share:
Basic................................. .46 .48 .53 .48
Diluted............................... .45 .47 .52 .48
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
</TABLE>
F -20
<PAGE>
Amerin Corporation and Subsidiaries
Notes to Consolidated Statements
15. 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>
Years Ended December 31,
---------------------------------------------------
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
Net income applicable to common stockholders $ 51,183 $ 40,759 $ 28,229
------------- -------------- --------------
------------- -------------- --------------
Weighted average number of common shares outstanding 26,374 26,119 26,038
Dilutive effect of stock options using the treasury stock
method 328 364 313
------------- -------------- --------------
Weighted average number of common and common equivalent
shares outstanding 26,702 26,483 26,351
------------- -------------- --------------
------------- -------------- --------------
Net income per common share:
Basic $ 1.94 $ 1.56 $ 1.08
Diluted 1.92 1.54 1.07
</TABLE>
F -21
<PAGE>
Amerin Corporation
(Parent Company)
Schedule II -- Condensed Financial Information of Registrant
Condensed Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1998 1997
--------------------- --------------------
<S> <C> <C>
ASSETS
Investment in subsidiaries...................................... $ 401,896 $ 340,499
Investments
Fixed maturities available-for-sale, at fair value
(amortized cost $391 in 1998 and $779 in 1997)........... 409 805
Short-term investments...................................... 53 4
------------------- ------------------
Total investments....................................... 402,358 809
Cash............................................................ 2,156 20
Accrued investment income....................................... 8 16
Goodwill, net of accumulated amortization (1998 -- $993;
1997 -- $844)........................................... 1,984 2,133
Due to subsidiaries.......................................... -- 4,682
Federal income taxes recoverable................................ 3,765 1,803
Other assets.................................................... 289 490
------------------- ------------------
Total assets................................................ $ 410,560 $ 350,452
------------------- ------------------
------------------- ------------------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Liabilities
Due to subsidiaries............................................. 942 --
Accounts payable and other liabilities ......................... 388 297
------------------- ------------------
Total liabilities........................................... 1,330 297
Common Stockholders' Equity
Voting Common Stock ................................. 249 245
Non-voting Common Stock ............................. 17 17
Additional paid-in capital.................................. 321,811 316,642
Accumulated other comprehensive income...................... 10,948 8,229
Retained earnings........................................... 76,205 25,022
------------------- ------------------
Total common stockholders' equity............................... 409,230 350,155
-------------------
------------------
Total liabilities and common stockholders' equity............... $ 410,560 $ 350,452
------------------- ------------------
------------------- ------------------
</TABLE>
See notes to consolidated financial statements
S-1
<PAGE>
Amerin Corporation
(Parent Company)
Schedule II -- Condensed Financial Information of Registrant (Continued)
Condensed Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------
1998 1997 1996
-------------------- ------------------ ---------------------
(in thousands)
<S> <C> <C> <C>
REVENUES
Net investment income................. $ 44 $ 80 $ 149
Realized investment gains (losses)........ 7 ( 3) --
----------------- ----------------- ------------------
Total revenues..................... 51 77 149
EXPENSES
Administrative and other.................. 1,798 1,611 1,084
----------------- ----------------- ------------------
Loss before equity in undistributed net income
of subsidiaries and income-tax benefit ....... (1,747) (1,534) (935)
Equity in undistributed net
income of subsidiaries................. 52,423 41,860 28,906
----------------- ----------------- ------------------
Net income before income taxes................... 50,676 40,326 27,971
Federal income-tax benefit........................ (507) (433) (258)
----------------- ----------------- ------------------
Net income applicable to common stockholders...... $ 51,183 $ 40,759 $ 28,229
----------------- ----------------- ------------------
----------------- ----------------- ------------------
</TABLE>
See notes to consolidated financial statements
S - 2
<PAGE>
Amerin Corporation
(Parent Company)
Schedule II -- Condensed Financial Information of Registrant (Continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- --------------------
(in thousands)
<S> <C> <C> <C>
Net cash used by operating activities............. $ (3,384) $ (1,159) $ (1,778)
Investing activities:
Capital contribution to subsidiaries........ -- (1,243) --
Purchase of:
Fixed maturities....................... (1,205) -- --
Short-term investments, net............ (48) -- --
Sale of:
Fixed maturities....................... 1,600 1,198 --
Short-term investments, net.... -- 346 945
----------------- ---------------- -----------------
Net cash provided by investing
activities......................... 348 301 945
Financing activities:
Issuance of common stock.................. 5,173 750 713
----------------- ---------------- -----------------
Net cash provided by financing
activities......................... 5,173 750 713
----------------- ---------------- -----------------
Increase (decrease) in cash............ 2,136 (108) (120)
Cash at beginning of year......................... 20 128 248
----------------- ---------------- -----------------
Cash at end of year............................... $ 2,156 $ 20 $ 128
----------------- ---------------- -----------------
----------------- ---------------- -----------------
</TABLE>
See notes to consolidated financial statements
S - 3
<PAGE>
Amerin Corporation and Subsidiaries
Schedule III -- Supplementary Insurance Information
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
Loss and
Deferred Loss
Policy Adjustment Unearned Future
Acquisition Expense Premium Policy Premium
Costs Reserves Reserves Benefits Revenues
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 Mortgage Guaranty $16,839 $43,849 $ 26,114 $ -- $123,100
1997 Mortgage Guaranty $ 7,776 $31,280 $ 23,352 $ -- $ 92,329
1996 Mortgage Guaranty $ 5,569 $18,730 $ 20,525 $ -- $ 62,349
Year Ended December 31,
-----------------------------------------------------------------------
Net
Investment Benefits, Amortization
Income and Claims, of Deferred
Realized Losses and Policy
Investment Settlement Acquisition Other Operating Net Premiums
Gain Expenses Costs Expenses Written
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 Mortgage Guaranty $ 22,827 $ 34,354 $ 8,469 $ 31,015 $ 125,383
1997 Mortgage Guaranty $ 19,774 $ 30,272 $ 7,102 $ 18,061 $ 94,740
1996 Mortgage Guaranty $ 17,032 $ 20,681 $ 7,937 $ 11,171 $ 70,000
</TABLE>
S-4
<PAGE>
Amerin Corporation and Subsidiaries
Schedule V -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at
Beginning of Balance at
Year Additions Deductions End of Year
--------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998:
Accumulated amortization of goodwill............. $ 844 $ 149 $ -- $ 993
Accumulated amortization of furniture and
equipment.................................... 2,775 2,479 -- 5,255
Accumulated amortization of other intangibles.... 1,616 -- -- 1,616
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
</TABLE>
S - 5
<PAGE>
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
<PAGE>
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:
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
<PAGE>
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 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
<PAGE>
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 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
-----------------------------
<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 21, 1999, 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, 1998.
ERNST & YOUNG LLP
Chicago, Illinois
April 15, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS AND RELATED NOTES OF AMERIN CORPORATION AND
SUBSIDIARIES FOR THE TWELVE MONTH PERIOD ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 433,377
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 439,142
<CASH> 7,186
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 16,839
<TOTAL-ASSETS> 545,232
<POLICY-LOSSES> 43,849
<UNEARNED-PREMIUMS> 26,114
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 266<F1>
<OTHER-SE> 408,964
<TOTAL-LIABILITY-AND-EQUITY> 545,232
123,100
<INVESTMENT-INCOME> 21,312
<INVESTMENT-GAINS> 1,515
<OTHER-INCOME> 0
<BENEFITS> 34,354
<UNDERWRITING-AMORTIZATION> 22,340
<UNDERWRITING-OTHER> 17,144
<INCOME-PRETAX> 72,089
<INCOME-TAX> 20,906
<INCOME-CONTINUING> 51,183
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,183
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.92
<RESERVE-OPEN> 31,280
<PROVISION-CURRENT> 36,133
<PROVISION-PRIOR> (1,779)
<PAYMENTS-CURRENT> 4,308
<PAYMENTS-PRIOR> 17,397
<RESERVE-CLOSE> 43,849
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Common stock at par value.
</FN>
</TABLE>
