-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RKWnPQ+CEtWWxL1/Y9f3H97HP6sSct+3Jckcw3CzoB5YXf0MY1BVvGCnSN7m4hKM 9oq4Fk8A+DKbVxAnkHk7/w== 0001047469-98-013004.txt : 19980401 0001047469-98-013004.hdr.sgml : 19980401 ACCESSION NUMBER: 0001047469-98-013004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERIN CORP CENTRAL INDEX KEY: 0001001603 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 113085148 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27146 FILM NUMBER: 98582662 BUSINESS ADDRESS: STREET 1: 200 E RANDOLPH DR STREET 2: 49TH FLOOR CITY: CHICAGO STATE: IL ZIP: 60601-7125 BUSINESS PHONE: 3095400078 MAIL ADDRESS: STREET 1: 200 EAST RANDOLPH DRIVE STREET 2: 49TH FLOOR CITY: CHICAGO STATE: IL ZIP: 60601-7125 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 /x/ For the fiscal year ended December 31, 1997 OR / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ______________ Commission file number 0-27146 AMERIN CORPORATION (Exact name of registrant as specified in its charter) Delaware 11-3085148 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 E. Randolph Drive, 49th Floor, Chicago, IL 60601-7125 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 540-0078 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------- Common Stock, $.01 par value Nasdaq National Market Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the Registrant's voting stock held by non- affiliates on March 16, 1998, based on the closing price of said stock on the Nasdaq National Market on such date $27.00: 588,113,784 As of March 16, 1998, 24,584,851 shares of the Common Stock, $.01 par value, and 1,656,909 shares of the Nonvoting Common Stock, $.01 par value, of the Registrant were outstanding. Documents Incorporated by Reference: Portions of the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A are incorporated herein by reference in Part III. 1 PART I ITEM 1. BUSINESS. GENERAL Amerin Corporation (the "Company" or "Amerin") is a holding company which, through Amerin Guaranty Corporation ("Amerin Guaranty"), is a provider of private mortgage insurance coverage in the United States to mortgage bankers, savings institutions, commercial banks and other lenders. Primary mortgage insurance provides mortgage default protection on individual loans. Amerin Guaranty issues primary insurance for first mortgage loans on owner occupied, one-to-four unit residential properties, including condominiums. Home purchasers who make down payments of less than 20% of the value of their home are usually required by the mortgage lender to qualify and pay for primary mortgage insurance on their mortgage loans. If the homeowner defaults on the mortgage loan, mortgage insurance reduces and, in some instances, eliminates any loss to the insured lender. Mortgage insurance does not cover losses that result from damage to the property. Private mortgage insurance is used by mortgage lenders to reduce their credit risk in mortgage loans with high loan to value ratios ("LTV") as well as to enhance their ability to sell the loans into the secondary mortgage market, principally to the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). Amerin Guaranty's claims-paying ability is rated "Aa3" by Moody's Investors Service, Inc. ("Moody's"), "AA" by Standard & Poor's Corporation ("S&P"), and "AA" by Fitch Investors Services, L.P. ("Fitch"). Amerin Guaranty commenced writing insurance in April 1993. The Company is a Delaware corporation. Its office is located at 200 East Randolph Drive, 49th Floor, Chicago, Illinois 60601-7125 (telephone number (312) 540-0078). PRODUCTS Primary mortgage insurance provides mortgage default protection on individual loans and covers unpaid loan principal, delinquent interest and certain expenses associated with the default and subsequent foreclosure (collectively, the "claim amount"). The insurer generally pays the coverage percentage of the claim amount specified in the primary policy, but has the option to pay 100% of the claim amount and acquire title to the property. The claim amount averages approximately 115% of the unpaid principal balance of the loan. Primary insurance generally applies to owner-occupied, first mortgage loans on one-to- four family homes, including condominiums. Primary coverage can be used on any type of residential mortgage loan instrument approved by the mortgage insurer. References in this document to amounts of insurance written or in force, risk written or in force and other historical data related to Amerin's insurance refer only to direct (before giving effect to reinsurance) primary insurance, unless otherwise indicated. Amerin Guaranty offers two kinds of primary insurance. The majority of Amerin Guaranty's primary insurance is written in the form of borrower paid mortgage insurance ("BPMI"), whereby mortgage insurance premiums are charged to the 2 borrower by the mortgage lender or loan servicer, which in turn remits the premiums to the mortgage insurer. Amerin Guaranty offers comparable mortgage insurance coverage in the form of lender paid mortgage insurance ("LPMI"), whereby mortgage insurance premiums are charged to the mortgage lender or loan servicer, which pays the premiums to the mortgage insurer. See "Certain Legal Matters Relating to Lender Paid Mortgage Insurance." Amerin Guaranty offers a program known as the Award Plus Plan to lenders utilizing LPMI. Under the Award Plus Plan, the lender is charged lower premium rates for loans insured and, based on performance of such loans over an extended period of time, is entitled to receive cash awards from, or required to pay cash surcharges to, Amerin Guaranty with respect to such loans. The following table shows Amerin Guaranty's direct insurance in force and net (after giving effect to applicable reinsurance) primary risk in force as of the dates indicated: PRIMARY INSURANCE AND RISK IN FORCE
Years ended December 31, ------------------------------------------------- 1997 1996 1995 ------------------------------------------------- (in millions of dollars) Direct Primary Insurance In Force ................ $20,394 $14,777 $8,262 Direct Primary Risk In Force...................... $5,149 3,671 1,989
Amerin Guaranty may not terminate coverage except for non-payment of premium, and such coverage is renewable at the option of the insured lender at the renewal rate in effect at the time the loan was originally insured. Lenders may cancel insurance at any time at their option or because of loan repayment, which may be accelerated in times of increased refinancing activity. In the case of loans purchased by Fannie Mae or Freddie Mac, borrowers which meet certain requirements may require lenders to cancel insurance when the principal balance of the insured loan is less than 80% of the property's current value and, in some cases, when such principal balance is less than 80% of the property's original value. Because maintenance of coverage is linked to LTV, coverage tends to be canceled earlier in areas which are experiencing housing price appreciation and to continue in force longer in areas experiencing housing price depreciation. These two factors, which may be exacerbated during periods of heavy mortgage refinancing, may result in an increase in the percentage of an insurer's portfolio comprised of loans in economically weak areas. The following table shows the percentage of new insurance written representing refinances in the last two years: 3
PERCENTAGES OF PRIMARY RISK WRITTEN 1997 1996 ---- ---- Purchase Loans 83.8% 86.4% Refinance Loans 16.2% 13.6%
Amerin Guaranty's premium rates are based upon the expected risk of a claim on the insured loan and take into account the LTV, loan type, mortgage term, occupancy status and coverage percentage. Premium rates cannot be changed after the issuance of coverage. The Company generally employs a national premium rate policy, rather than a regional or local policy, because it believes that each region of the United States is subject to similar factors affecting the risk of loss on insurance written. Amerin Guaranty has three basic types of premium payment plans. The most popular is a monthly premium plan under which only one or two months premium is paid at the mortgage loan closing, and thereafter premiums are remitted on a monthly basis to Amerin Guaranty. Based on the rapid market acceptance of monthly premium plans, the Company expects that such percentage will remain at this level or continue to increase slightly. The second type of premium payment plan is an annual premium plan in which a first-year premium is paid at the mortgage loan closing and annual renewal payments are paid thereafter. Renewal payments generally are (i) collected monthly from the borrower along with the mortgage payment and held in escrow by the loan servicer or (ii) reserved by the loan servicer for annual remittance to Amerin Guaranty in advance of each renewal year. The third type of premium payment plan is a single premium plan that involves a lump-sum payment at the loan closing. The single premium can be financed by the borrower by adding it to the principal amount of the mortgage. Premiums written under any of these plans may be either non-refundable or refundable if the coverage is canceled by the insured lender (which generally occurs when the loan is repaid or the LTV is less than 80% as a result of loan amortization and/or property appreciation). The following table sets forth the dollar amounts and percentages of new insurance written represented by each of the three premium plans in 1997 and 1996: 4
NEW PRIMARY INSURANCE WRITTEN 1997 1996 ---- ---- (in millions of dollars) Monthly premium plan $6,879 87.7% $6,671 86.6% Annual premium plan 856 10.9 867 11.2 Single premium plan 107 1.4 167 2.2 ------ ----- ------ ------ Total $7,842 100.0% $7,705 100.0% ====== ===== ====== ======
In addition to primary insurance, Amerin Guaranty also provides a limited amount of "pool" insurance. Amerin Guaranty offers pool insurance on a selective basis to address the needs of certain customers under specific circumstances. Pool insurance is generally used as an additional credit enhancement for certain secondary market mortgage transactions. Pool insurance generally covers a designated pool of mortgage loans rather than individual loans, and provides for the payment of the loss on any defaulted mortgage loan in the pool which exceeds the sum of the net proceeds of the ultimate disposition of the underlying property and the claim payment under any applicable primary insurance policy, up to a stated aggregate loss limit. At December 31, 1997, Amerin Guaranty pool insurance in force was $738 million, representing $7 million of risk in force. Amerin Guaranty provided contract underwriting services to certain lenders on a limited basis during 1997. Amerin Guaranty anticipates expanding the level of contract underwriting services in 1998 and has established a regional underwriting facility pursuant to a short term lease. CUSTOMERS Amerin Guaranty's customers are mortgage originators. Mortgage originators include mortgage bankers, savings institutions, commercial banks and other mortgage lenders. Amerin Guaranty is dependent on a small number of lenders for a substantial majority of its business. Amerin Guaranty's largest 10 customers were responsible for 85.2%, 84.2% and 85.8% of the Company's net premiums written for 1997, 1996 and 1995, respectively. Amerin Guaranty's three largest customers (including branches and affiliates of such customers) in 1997 were Norwest Mortgage, Inc., Countrywide Home Loans and Bank of America which accounted for 42.0%, 18.9% and 7.9%, respectively, of the Company's net premiums written for 1997. Amerin Guaranty's three largest customers (including branches and affiliates of such customers) in 1996 were Norwest Mortgage, Inc., Countrywide Home Loans and Bank of America which accounted for 41.9%, 19.2% and 10.6%, respectively, of the Company's net premiums written for 1996. To obtain primary insurance from Amerin Guaranty, a mortgage lender must first apply for and receive a master policy from Amerin Guaranty. Through December 31, 1997 Amerin Guaranty had done business with 105 master policyholders, of which it considered 55 to be active master policyholders (lenders which had submitted applications for insurance within the preceding 90 days, excluding branches, affiliates and companies acquired or merged into other lenders). 5 SALES AND MARKETING AND COMPETITION SALES AND MARKETING Amerin Guaranty sells its insurance products through its own employees, located throughout the United States. At December 31, 1997, Amerin Guaranty had a total of 42 sales and marketing employees, 17 of which work in Amerin Guaranty's office in Chicago, Illinois. COMPETITION The U.S. private mortgage insurance industry consists of nine active mortgage insurers. Amerin Guaranty is the seventh largest private mortgage insurer in the United States, based on new primary insurance written in 1997. General Electric Mortgage Insurance Corporation ("GEMICO"), an affiliate of General Electric Capital Corporation, and United Guaranty Residential Insurance Company ("UGC"), an affiliate of American International Group, Inc., have higher claims-paying ability ratings from Moody's, Fitch, and S&P than Amerin Guaranty, principally based on having definitive capital support agreements from affiliated companies and, as a result, they may have greater access to capital resources than Amerin Guaranty. The Company believes that Amerin Guaranty competes with other private mortgage insurers principally on the basis of its innovative approaches to sales, products, underwriting and claims processing. The Company believes that these innovations provide a lower cost product and greater efficiency and ease of interaction for mortgage lenders. The Company believes that these benefits are particularly attractive to larger mortgage lenders. Amerin Guaranty and other private mortgage insurers also compete directly with federal and state governmental and quasi-governmental agencies, principally the Federal Housing Administration ("FHA") and, to a lesser degree, the Veterans Administration ("VA"). These agencies sponsor government-backed mortgage insurance programs which, according to data from HUD, VA and Inside Mortgage Finance, accounted for 43.1%, 42.8% and 36.1% of all loans insured by the FHA, VA or by private mortgage insurers in 1997, 1996 and 1995, respectively. Management believes that the market share of private mortgage insurers relative to the FHA and VA is influenced by factors including: (i) the percentage of loans exceeding the FHA and VA limits, which has generally increased over time but may be reduced by increases in the FHA and VA limits; (ii) the percentage of high-LTV borrowers making down payments of 5% or more, at which levels private mortgage insurance has generally been more cost-effective than FHA borrowing; (iii) the number of borrowers eligible for VA insurance, which has recently been increased to include members of the National Guard and Reserves with at least six years' service; (iv) the level of refinancing activity (beginning in 1992, the FHA ceased charging renewal premiums on FHA refinancings of FHA loans, which made such refinancings relatively attractive) and (v) the relative attractiveness of FHA and privately insured mortgage products in various market conditions. Management believes that the introduction of the monthly premium product and lender paid mortgage insurance has increased the competitiveness of the private mortgage insurers versus the FHA and VA by spreading the initial 6 premium over a 12-month period and thereby lowering the borrower's closing costs. In addition to competition from federal agencies, Amerin Guaranty and other private mortgage insurers face competition from state-supported mortgage insurance funds. As of December 31, 1997, several states (including California, Connecticut, Maryland, Massachusetts, New York and Vermont) have state housing insurance funds which are either independent agencies or affiliated with state housing agencies. Management believes the share of newly-originated mortgages carrying mortgage insurance is influenced by several factors. The share of high-LTV loans carrying mortgage insurance has been increased by higher regulatory capital requirements for depository institutions holding uninsured high-LTV loans. The high-LTV share of mortgage originations is influenced by the level of refinancing activity (the share of high-LTV loans among refinancings is lower than among purchase money mortgages), and may be increased by affordable housing and central-city housing initiatives. The following table indicates the relative share of the mortgage insurance market based on new insurance written by FHA/VA and private mortgage insurers for the periods shown. FEDERAL GOVERNMENT AND PRIVATE MORTGAGE INSURANCE MARKET SHARE
Years ended December 31, ---------------------------------------- 1997 1996 1995 --------- --------- ---------- FHA/VA ................................... 43.1% 42.8% 36.1% Private mortgage insurance............... 56.9 57.2 63.9 --------- --------- ---------- 100.0% 100.0% 100.0% ========= ========= ==========
________________ Sources: INSIDE MORTGAGE FINANCE and the Mortgage Insurance Companies of America. Various proposals are being discussed by Congress and certain federal agencies to reform or modify the FHA. The Company is unable at this time to predict the scope and content of such proposals, or whether any such proposals will be enacted into law, and, if enacted, the effect on the Company. Amerin Guaranty and other private mortgage insurers also compete indirectly with mortgage lenders that elect to retain the risk of loss from defaults on all or a portion of their high LTV mortgage loans rather than obtain insurance for such risk. Any change in legislation which affects the risk-based capital rules imposed on savings institutions, like the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), may affect the desirability of foregoing insurance for savings institutions and, therefore, Amerin Guaranty's opportunity to insure more high LTV mortgage loans from such institutions. 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 7 conditions in the geographic market in which the property is located; (ii) the credit quality of the borrower; (iii) the LTV; (iv) the type of loan instrument (for example, whether the loan is a fixed rate mortgage or is an adjustable rate mortgage -"ARM"); (v) the purpose for which the loan is made (for example, a primary residence or a vacation home) and (vi) the underwriting practices of the lender originating the loan. Beginning in the second half of 1994, because of, among other factors, overcapacity in the home mortgage lending industry, increased competition among home mortgage lenders to expand their markets, particularly in response to affordable housing initiatives, and higher mortgage interest rates that prevailed through most of the first quarter of 1995, a higher proportion of new insurance written by the mortgage insurance industry generally contained factors (including reduced borrower credit quality and higher risk loan instruments) indicating a higher risk profile. Such higher risk loan instruments include loans with loan-to-value ratios of 95% ("95s"), ARMs, ARM 95s, ARMs with potential negative amortization, and mortgages with original loan amounts in excess of $214,600. The Company believes that the claim incidence for 95s is substantially higher than for loans with LTV ratios of 90% or less, that the claim incidence for mortgages in which the original loan amount exceeds $200,000 is substantially higher than for mortgages in which the original amount is $200,000 or less, and that the claim incidence for ARMs during a prolonged period of rising interest rates would be substantially higher than for fixed rate loans. While there is no meaningful data on claim incidence for loans with LTVs of 97% ("97s") because this product has only been recently offered by the industry, the Company anticipates that claim incidence on 97s will be higher than on 95s. Amerin Guaranty's premium rates take certain risk factors, such as higher LTVs or ARMs, into account. However, the premiums earned on mortgage insurance covering such types of loans, and the associated investment income, may ultimately prove to be inadequate to compensate for related future losses. The following table reflects certain characteristics of Amerin Guaranty's primary risk in force (as determined on the basis of information available on the date of mortgage insurance) by the categories and as of the dates indicated: 8
CHARACTERISTICS OF PRIMARY RISK IN FORCE December 31, ------------------------------------------ 1997 1996 1995 ----------- ------------ ---------- (in millions of dollars except percentages) DIRECT RISK IN FORCE: $5,148.9 $3,671.0 $1,989.4 LENDER CONCENTRATION: Top 3 lenders(1)..................................... 69.3% 70.5% 70.8% Top 10 lenders(1).................................... 85.6% 87.4% 86.8% LTV: 97s.................................................. 0.7% 0.2% 0.1% 95s.................................................. 49.1% 48.8% 50.6% 90s(2)............................................... 45.8% 46.7% 45.3% 85s and below........................................ 4.4% 4.3% 4.0% AVERAGE COVERAGE PERCENTAGE: 25.2% 24.8% 24.1% LOAN TYPE: Fixed(3)............................................. 80.1% 77.7% 72.3% ARMs................................................. 8.6% 11.4% 18.5% ARMs with potential negative amortization............ 0.4% 0.6% 1.2% Fixed/Adjustable(4).................................. 6.4% 5.4% 5.2% Balloon.............................................. 3.9% 4.6% 2.6% Other................................................ 0.6% 0.3% 0.3% MORTGAGE TERM: 15 years and under................................... 2.5% 2.5% 2.3% Over 15 years........................................ 97.5% 97.5% 97.7% PROPERTY TYPE: Single family detached............................... 94.4% 94.5% 94.5% Condominium.......................................... 4.7% 4.5% 4.3% Other(5)............................................. 0.9% 1.0% 1.2% OCCUPANCY STATUS: Primary residence.................................... 98.9% 99.2% 99.6% Second home.......................................... 1.1% 0.8% 0.4% Non-owner occupied................................... --% --% --% LOAN AMOUNT: $100,000 or less........................................ 21.5% 22.7% 24.0% Over $100,000 to $155,250(6)............................ 38.4% 38.3% 37.6% Over $155,250 to $214,600(6)(7)......................... 27.5% 26.5% 25.2% Over $214,600 to $250,000(7)............................ 4.7% 7.2% 5.9% Over $250,000........................................... 8.0% 7.8% 8.0% ______________________
(1) Based on original application volume. 9 (2) For the purposes of applying underwriting standards and determining premiums, Amerin Guaranty considers loans under which the borrower makes a down payment of at least 10% and finances the mortgage insurance premium as part of the loan (resulting in a final LTV over 90%) to be 90s. Such loans are classified as 95s in the above table, and are so classified by Fannie Mae. At December 31, 1997, .7% of Amerin Guaranty's risk in force consisted of these types of loans. (3) Fixed rate loans with temporary buydowns are included as fixed loans. (4) Loans with fixed interest rates for the first five years or more (and adjustable rates thereafter). (5) Includes two-to-four unit dwellings. (6) The maximum individual loan amount that the FHA could insure was set at $152,363 in the third quarter of 1994 and increased to $155,250 in the first quarter of 1996. (7) The maximum individual loan amount for single unit properties eligible for purchase by Fannie Mae and Freddie Mac was $207,000 for 1995 and 1996, and $214,600 for 1997. This limit has been increased to $227,150 for 1998. GEOGRAPHIC DISPERSION Amerin Guaranty's long-term strategy is to diversify the geographic mix of its portfolio to approximate the national distribution of high LTV loans. Amerin Guaranty seeks to implement this strategy by focusing its marketing efforts on high quality national and selected regional lenders to balance the geographic mix of its new business. In 1994, Amerin developed a high concentration of business in California, with 45.9% of that year's new insurance written in the state. This concentration resulted from greater early market penetration by Amerin Guaranty of lenders active in California relative to other regions. Amerin achieved greater market share in other regions in 1995, 1996 and 1997, and the percentages of new insurance written in California in 1995, 1996 and 1997 were reduced to 27.0%, 20.5% and 19.4%, respectively. As a result, management expects that the proportion of Amerin Guaranty's risk in force in California will continue to decline. The following table reflects the percentages of primary risk in force at the dates indicated for each of Amerin Guaranty's top 10 states and top 10 Metropolitan Statistical Areas ("MSAs"):
Primary Risk in Force ------------------------------------------------- December 31, ------------------------------------------------- 1997 1996 1995 --------------- --------------- ------------ TOP 10 STATES California ............................ 22.8% 25.4% 31.1% Texas.................................. 6.1% 5.4% 4.3% Florida................................ 5.4% 5.0% 4.6% Illinois............................... 4.4% 4.0% 3.5% New York............................... 3.7% 3.5% 3.4% Minnesota.............................. 3.4% 3.4% 2.7% Colorado............................... 3.4% 3.3% 3.3% 10 Pennsylvania........................... 3.3% 2.9% 2.5% Massachusetts.......................... 3.2% 3.5% 3.4% New Jersey............................. 3.1% * * Arizona................................ * 2.9% 3.3% ------- ------ ------ Top 10 total......................... 58.8% 59.3% 62.1% TOP 10 MSAs Los Angeles............................ 6.2% 7.0% 9.0% Chicago................................ 3.5% 3.2% 2.7% Orange County.......................... 2.9% 3.2% 4.2% Washington, D.C. ...................... 2.6% 2.3% 1.9% Minneapolis............................ 2.3% 2.3% 1.7% Oakland ............................... 2.2% 2.6% 3.3% Phoenix ............................... 2.0% 2.1% 2.4% San Diego ............................. 1.9% 2.0% 2.3% Boston ................................ 1.9% 2.1% 2.1% Riverside-San Bernardino............... 1.8% * * San Francisco........... * 1.8% 2.3% ------- ------ ------ Top 10 total ........................ 27.3% 28.6% 31.9% * Not a top ten location for the date indicated.
INSURANCE IN FORCE BY POLICY YEAR The following table sets forth the dispersion of Amerin Guaranty's insurance in force as of December 31, 1997, by year of policy origination since Amerin Guaranty began operations in April 1993: PRIMARY INSURANCE IN FORCE BY POLICY YEAR
Primary Insurance Percent of Policy Year in Force Total ----------- -------- ----- (in millions of dollars) 1993 $ 197 1.0% 1994 1,61 7.9 1995 4,634 22.7 1996 6,720 33.0 1997 7,225 35.4 ------- ----- Total $20,394 100.0% ======= =====
UNDERWRITING PRACTICES The Company writes substantially all of its insurance on a delegated underwriting basis. Under delegated underwriting, participating lenders are permitted to commit a mortgage insurer to insure a loan based on mutually agreed criteria. Management believes that the various underwriting and risk management features discussed below, taken together, provide acceptable protection to the Company against the possible risks associated with writing substantially all business on a delegated underwriting basis. Amerin Guaranty generally is not able to cancel coverage on loans which it insures under delegated underwriting, but may seek reimbursement from lenders in respect to claims on loans so insured which violate specific loan eligibility standards. The performance of loans insured through programs of 11 delegated underwriting, including Amerin's program of delegated underwriting, has not been tested over an extended period of time or over portfolios almost exclusively written based on delegated underwriting, nor has the performance of such loans been tested in a period of adverse economic conditions. The Company publishes underwriting guidelines which are employed by lenders in determining if loans qualify for insurance under Amerin Guaranty's delegated underwriting, and are also employed by the Company's underwriters in evaluating loans submitted for insurance under non-delegated underwriting. The Company believes that its underwriting standards are generally consistent with the industry. In certain areas, the Company's underwriting standards are more restrictive than those required by Fannie Mae and Freddie Mac. Amerin regularly reviews its underwriting guidelines to address changes in the mortgage market and economic conditions. Mortgage insurance coverage cannot be canceled by Amerin Guaranty, except for nonpayment of premiums or certain material violations of Amerin Guaranty's master policy, and remains renewable at the option of the insured for the life of the loan at a rate fixed when the insurance on the loan was initially issued. As a result, the impact of increased claims and incurred losses from policies originated in a particular year generally cannot be offset by renewal premium increases on policies in force or mitigated by nonrenewal of insurance coverage. If a lender should commit Amerin Guaranty to insure a loan which does not comply with the applicable underwriting guidelines, Amerin Guaranty is generally obligated to insure such a loan. The Company's risk management objective is to build a portfolio of insured loans whose claims incidence is equal to or less than the long-term average expected claims rates on which its premium rates are based. In order to meet this objective, the Company's risk management efforts are concentrated in four principal areas: lender approval; market analysis; loan and portfolio monitoring; and lender audits. LENDER APPROVAL Because the Company writes substantially all of its insurance on a delegated underwriting basis, the Company has utilized stringent lender approval requirements. The Company assigns delegated underwriting authority only to lenders with adequate financial resources, acceptable management and operations, and established records of originating good quality loans over a period of time. The Company's risk management personnel conduct a thorough review of each candidate lender. Depending on the lender, such review may include reviews of the lender's financial statements, the historical performance of loans originated by the lender, on-site interviews with the lender's executive and line management, and review of the lender's policies, procedures and loan programs. Special attention is paid to the quality of a lender's underwriting, on-site quality control and servicing, and to its compliance with underwriting guidelines. By incorporating the use of borrower credit scoring and Amerin Guaranty's proprietary mortgage scoring system, Amerin Guaranty has been able to streamline both its lender approval process and its lender audit process (discussed below). Amerin uses consumer credit scores to provide a timely, objective evaluation of borrower creditworthiness. These scoring systems also permit Amerin Guaranty to review the average scores of each lender's 12 borrowers, the number of borrowers with scores below certain thresholds, and the percentage of borrowers with insufficient credit histories to score. MARKET ANALYSIS Amerin Guaranty reviews economic and real estate market conditions in over 60 metropolitan areas on a quarterly basis. Amerin Guaranty considers the results of its market analysis in evaluating new business opportunities and the composition of its portfolio. Amerin Guaranty also may impose more restrictive underwriting guidelines on markets it believes to present higher risk. LOAN AND PORTFOLIO MONITORING Amerin Guaranty's systems generate reports of all loans committed for insurance which possess certain high risk criteria. These criteria include elements such as high debt ratios, self-employed borrowers and attached housing. Risk management personnel review the data received by Amerin in respect to all such loans on a daily basis, and contact the lender to establish that the level of risk on these loans is acceptable. If it is determined that a lender is approving loans with excessive risk for Amerin insurance, Amerin's senior risk management personnel will promptly contact the lender's management and take appropriate corrective action with the lender, up to and including restrictions on or termination of the lender's delegated underwriting authority. Amerin obtains credit scores from a third-party vendor for all loans committed for insurance on a weekly basis. Amerin uses these scores to provide a timely, objective evaluation of borrower creditworthiness. Amerin reviews the average scores of each lender's borrowers, the number of borrowers with scores below certain thresholds, and the percentage of borrowers with insufficient credit histories to score. Management believes that borrower creditworthiness is the greatest manageable source of risk to Amerin in current market conditions. Amerin Guaranty uses credit scores to evaluate the quality of a lender's business, and may take appropriate corrective action with a lender if credit scores indicate that the lender's business presents an undue level of risk to Amerin Guaranty. Amerin reviews the composition of its overall portfolio and its business by lender and within geographic markets to identify concentrations of risk. Specific elements which are reviewed by Amerin include LTV, loan type, loan amount, property type, occupancy status and borrower employment. Amerin may take appropriate corrective actions with a lender or adjust its underwriting guidelines on a regional or national basis to correct concentrations of risk at these levels. 13 LENDER AUDITS As noted above, through the use of borrower credit scoring and its own proprietary mortgage scoring system, Amerin Guaranty is able to monitor the credit quality of loans submitted for insurance on a daily basis. Amerin Guaranty also conducts thorough on-site review of each lender periodically. Lenders with significant insured volume are reviewed more frequently. Due to the real-time picture of credit quality obtained through the use of credit scoring and mortgage scoring, Amerin Guaranty has been able to streamline the lender audit process to focus primarily on higher risk loans originated by the lender in the preceding period. The sample of loans to be re-underwritten during the audit is augmented by any loans with certain risk factors or insured under waivers to Amerin's underwriting guidelines, if any, granted to the lender, and may be further increased to target specific risk factors identified in the periodic monitoring of the lender's business. Loans are reviewed to identify errors in the loan data transmitted to Amerin, to determine compliance with Amerin's underwriting guidelines and eligible loan criteria, to assess the quality of a lender's underwriting decisions and to rate the risk of the loans. Audits are graded based on the risk ratings of the loans reviewed, lender compliance and data integrity. In addition to the re-underwriting, any changes in the lender's policies, procedures or management are examined and lender quality control reports are reviewed. The results of each audit are set forth in a report to the lender which requires the lender to address any deficiencies identified in the review. If issues raised by the report are not resolved in a manner and within a time period acceptable to Amerin Guaranty, the lender's delegated underwriting authority may be restricted or terminated. DEFAULTS AND CLAIMS DEFAULTS The claim process begins with the insurer's receipt of notification of a default from the insured on an insured loan. Default is defined in the primary master policy as the failure by the borrower to pay when due an amount at least equal to the scheduled monthly mortgage payment under the terms of the mortgage. The master policy requires insureds to notify Amerin Guaranty of defaults, generally within 120 days after the initial default. Generally, defaults are reported sooner, and the average time for default reporting in 1997 by Amerin Guaranty insureds was approximately 60 days after initial default. In certain cases, Amerin Guaranty uses this earlier notification to facilitate workout analysis and loss mitigation efforts. The incidence of default is affected by a variety of factors, including the reduction of the borrower's income, unemployment, divorce, illness, the inability to manage credit and, in the case of ARMs, the level of interest rates. Borrowers may cure defaults by making all delinquent loan payments or by selling the property in full satisfaction of all amounts due under the mortgage. Defaults that are not cured result in a claim to Amerin Guaranty. The following table shows the number of loans insured by Amerin Guaranty, the related number of loans in default and the percentage of loans in default (default rate) as of the dates indicated: 14
December 31, ---------------------------------------- 1997 1996 1995 ---------------------------------------- Insured loans in force 164,314 120,685 68,112 Loans in default 2,352 1,439 605 Percentage of loans in default (default rate) 1.43% 1.20% 0.89%
Default rates differ from region to region in the United States depending upon economic conditions and cyclical growth patterns. The table below sets forth the default rates in Amerin Guaranty's 10 largest states by risk in force as of December 31, 1997, 1996 and 1995. Amerin Guaranty's default rate of 2.27% in California has been influenced by declines in home prices experienced in the period between 1993 and 1996, and by greater seasoning of Amerin's California business relative to its overall insured portfolio, as the percentage of Amerin Guaranty's business have declined steadily since 1994. Claim sizes on California policies tend to be larger than the average claim size due to high loan balances relative to other states. DEFAULT RATES BY TOTAL RISK IN FORCE(1)
Percent of Amerin Guaranty's Default Rate as of Primary Risk in ---------------------------------- Force as of December 31, December 31, ---------------------------------- 1997 1997 1996 1995 ---------------- ------ ------ ------ California ......... 22.8% 2.27% 2.06% 1.42% Texas............... 6.1% 1.07% 0.86% 0.76% Florida............. 5.4% 1.75% 1.50% 1.17% Illinois............ 4.4% 1.87% 1.08% 0.96% New York............ 3.7% 2.23% 2.03% 1.32% Minnesota........... 3.4% 0.68% 0.69% 0.45% Colorado............ 3.4% 0.73% 0.70% 0.45% Pennsylvania........ 3.3% 1.38% 1.27% 0.73% Massachusetts....... 3.2% 0.85% 0.64% 0.39% New Jersey.......... 3.1% 1.46% 1.06% 0.86% Total Portfolio..... 100.0% 1.43% 1.20% 0.89% _____________________
(1) Top 10 states as determined by total risk in force as of December 31, 1997. Default rates are shown by state based on location of the underlying property. 15 CLAIMS Claims result from defaults that are not cured. The frequency of claims does not directly correlate to the frequency of defaults due primarily to borrowers' ability to overcome temporary financial setbacks. Whether an uncured default leads to a claim principally depends on the borrower's equity at the time of default and the borrower's (or the insured's) ability to sell the home for an amount sufficient to satisfy all amounts due under the mortgage loan. In some cases, during the default period, Amerin Guaranty works with the insured for possible early disposal of the underlying property when the chance of the loan reinstating is minimal. Such dispositions typically result in a savings to Amerin Guaranty over the percentage coverage amount payable under the master policy. Under the terms of Amerin Guaranty's master policy, the lender is required to file a claim with Amerin Guaranty no later than approximately 60 days after it has acquired title to the underlying property, usually through foreclosure. Generally, private mortgage insurers calculate claims payments by applying a stated coverage percentage to an aggregate amount consisting of (i) the outstanding principal loan balance at the date of default, (ii) accrued interest from the date of default to the date a claim is filed, (iii) advances made by the insured or the servicer with respect to normal and customary real estate property taxes, hazard insurance premiums, foreclosure costs, reasonable attorney's fees not exceeding 3% of the sum of such principal amount plus such accrued interest, and (iv) reasonable expenses (generally requiring prior approval by the insurer) necessary for the protection and preservation of the property. Through December 31, 1996, Amerin was the only private mortgage insurer that calculated claims payments by applying a specified coverage percentage to the original principal amount of the insured loan. While this method was designed to simplify claims processing for clients, most submitted claims reflected the claims calculation used by other mortgage insurers and some clients advised Amerin Guaranty that it was confusing to use more than one method of calculating claims. As a result, management concluded that Amerin's unique coverage method was not being integrated into most lenders' claims processing. In addition, technological developments in claims reporting and processing over the past few years have resulted in the establishment of a single industry standard for electronic transmission of claims data which would have prevented Amerin Guaranty from participating in standardized electronic claims processing using its unique coverage method. In light of the above, management decided to implement the industry claims payment method for all loans insured on and after January 1, 1997. Fannie Mae and Freddie Mac have agreed that, with respect to all loans owned or securitized by them, they will accept claims payments from Amerin Guaranty calculated under the industry claims method for all claims submitted on and after January 1, 1997, irrespective of when the related loan was originally insured by Amerin Guaranty. With respect to all other loans insured prior to January 1, 1997, Amerin Guaranty will continue to pay claims under its original coverage method. Management believes that it will still be able to offer streamlined claims processing to its clients and that the change will have no material impact on its business. 16 Depending on the applicable state foreclosure law, an average of approximately 12 months elapses from the date of default to payment of a claim on an uncured default. To ensure continued coverage should the loan reinstate, the insured frequently continues to pay premiums after notice of default until the insured acquires title to the underlying property. Amerin Guaranty's current master policy excludes coverage on loans secured by property with physical damage, whether caused by fire, earthquake or other hazard, unless the property is restored to its condition at the time the policy was originated. Amerin guaranty must pay each claim within 60 days after a claim has been filed. Before a claim is filed, Amerin Guaranty may also agree with a lender on a settlement amount based on a prearranged sale of the property, which settlement amount may be less than an amount equal to the claim payment calculated under Amerin's master policy. Claim activity is not spread evenly throughout the coverage period of a primary book of business. Based on historical overall mortgage insurance industry experience, the majority of claims occur in the third through sixth years after loan origination, and substantially fewer claims are paid during the first two years after loan origination. Insurance written by Amerin Guaranty since January 1, 1996 represented 68.4% of Amerin Guaranty's insurance in force as of December 31, 1997. This means that only 31.6% of Amerin Guaranty's insurance in force has reached the beginning of its expected peak claims period. Because of the Company's limited operating history and historical industry claim experience, the Company's loss experience is expected to significantly increase as its policies continue to age. LOSS RESERVES A significant period of time may elapse between the occurrence of the borrower's default on mortgage payments (the event triggering a potential future claims payment), the reporting of such default to Amerin Guaranty and the eventual payment of the claim related to such uncured default. To recognize the liability for unpaid losses related to the default inventory, in accordance with industry practice and generally accepted accounting principles ("GAAP"), Amerin Guaranty establishes loss reserves in respect of defaults included in such inventory, based upon the estimated claim rate and estimated average claim amount. Included in loss reserves are loss adjustment expenses ("LAE"), if any, and estimates for incurred but not reported ("IBNR") defaults. These reserves are estimates and there can be no assurance that Amerin Guaranty's reserves will prove to be adequate to cover ultimate loss developments on reported defaults. The Company's profitability and financial condition would be adversely affected to the extent that the Company's loss reserves are insufficient to cover the actual related claims paid and expenses incurred. Consistent with industry practices and GAAP, Amerin Guaranty does not establish loss reserves in respect of estimated potential defaults that may occur in the future. Amerin Guaranty's reserving process for primary insurance utilizes an industry data base of mortgage insurers' nationwide report year delinquency experience for over 10 years. Delinquencies of various ages for such report years are tracked to determine the rate at which such delinquencies convert to actual claims. Such rates are then applied to Amerin Guaranty's population of actual reported delinquencies, multiplying the covered amount for delinquencies of various ages by the appropriate rate. Amerin reviews its claim rate and claim 17 amount assumptions on at least a semi-annual basis and adjusts its loss reserves accordingly. The impact of inflation is not explicitly isolated from other factors influencing the reserve estimates, although inflation is implicitly included in the estimates. Amerin Guaranty does not discount its loss reserves for financial reporting purposes. For a further description of loss reserves, see Note 2 to the consolidated financial statements of the Company, set forth on page F-7. REINSURANCE Amerin Guaranty currently uses reinsurance from Amerin Re Corporation, a wholly-owned subsidiary of the Company ("Amerin Re"), to remain in compliance with the insurance regulations of certain states requiring that a mortgage insurer limit its coverage percentage of any single risk to 25%. Amerin Guaranty currently intends to use reinsurance provided by Amerin Re solely for purposes of such compliance. Amerin Guaranty began ceding reinsurance to Amerin Re in the fourth quarter of 1994. Amerin Re does not currently intend to provide reinsurance to other mortgage guaranty insurance companies. Amerin Guaranty is party to an agreement (the "Centre Re Agreement") with the Centre Reinsurance Group ("Centre Re") pursuant to which Centre Re is obligated to repay, up to an aggregate amount of $100 million, all losses and allocated loss adjustment expenses paid by Amerin Guaranty during periods in which (i) the ratio of Amerin Guaranty's risk in force divided by policyholders' reserves and (ii) the sum of Amerin Guaranty's expense ratio and loss ratio both exceed certain stated levels. The claims-paying ability of Centre Re is rated "AA" by S&P. Amerin Guaranty has developed a program that permits mortgage lenders to participate on a limited basis in the risks and rewards of insuring loans originated by such lenders. To date, under this program, Amerin Guaranty had entered into reinsurance arrangements ("Captive Arrangements") with mortgage reinsurance affiliates of seven of its major mortgage lending customers. Management believes that the existence of Captive Arrangements enhances the Company's long-term relationships with these lenders. See "Certain Legal Matters Relating to Captive Mortgage Reinsurance Arrangements." In the future Amerin Guaranty may elect to use reinsurance involving the proportional sharing of risks, commonly known as quota share reinsurance, or may elect to use excess loss reinsurance. Reinsurance that provides capital support (such as the Centre Re Agreement) also can be used to help support the claims-paying ability rating of the insurer. Reinsurance does not discharge Amerin Guaranty, as the primary insurer, from liability to a policyholder. The reinsurer agrees to indemnify Amerin Guaranty for the reinsurer's share of losses incurred under a reinsurance agreement, unlike an assumption arrangement, where the assuming reinsurer's liability to the policyholder is substituted for that of Amerin Guaranty. CLAIMS-PAYING ABILITY RATINGS Certain national mortgage lenders and a large segment of the mortgage securitization market, including Fannie Mae and Freddie Mac, generally will 18 not purchase mortgages or mortgage-backed securities unless the private mortgage insurance on the mortgages has been issued by an insurer with a claims-paying ability rating of at least "Aa3" from Moody's or "AA-" from S&P, Duff & Phelps Credit Rating Co. or Fitch Investors Service, Inc. The Company and Amerin Guaranty are parties to agreements (the "Rating Agency Agreements") required by Moody's and S&P as a condition of the issuance to Amerin Guaranty and maintenance of their respective claims-paying ratings of "Aa3" and "AA." Failure to comply with the provisions of either of the Rating Agency Agreements could result in the withdrawal or reduction of Amerin Guaranty's claims-paying rating by one or both of the rating agencies, which would have a material adverse effect on the Company. The Rating Agency Agreements each contain certain limitations on the ability of the Company and Amerin Guaranty to declare or pay dividends or other distributions on their capital stock or to redeem or repurchase capital stock, to issue additional stock, to enter into certain transactions which might result in a change of control (as defined) of Amerin Guaranty, or to incur indebtedness (subject to certain exceptions). The Rating Agency Agreements also contain certain risk to capital requirements which prohibit Amerin Guaranty from writing additional insurance if minimum ratios are not met. Upon an initial failure to observe certain of such limitations, the Company is obligated to take corrective action, which could include making adjustments to Amerin Guaranty's investment portfolio, entering into quota share reinsurance arrangements and limiting underwriting of further risks. Management believes that the limitations set forth in the Rating Agency Agreements are not materially more restrictive than those that would be otherwise imposed on the Company and Amerin Guaranty by the rating agencies as a condition of maintenance of Amerin Guaranty's claims-paying ratings, absent such agreements. INVESTMENT PORTFOLIO POLICY AND STRATEGY The income from the Company's investment portfolio is one of its primary sources of cash flow and earnings. All investments of the Company are managed by Scudder, Stevens & Clark pursuant to the terms of an agreement which provides for an annual management fee based on the average value of the portfolio under management. The agreement may be terminated earlier upon 90 days' notice by either party. Amerin Guaranty's investment strategy is the result of various interrelated investment considerations including protection of principal, appreciation potential, tax consequences and yield. The Company typically maintains its investment portfolio with a longer average duration than its anticipated claims development in order to achieve higher yields. The Company intends to meet any cash mismatch with cash generated from operations or sales of investments. The Company's investment policies in effect at December 31, 1997 limited investments in the securities of a single issuer (other than the U.S. government and certain of its agencies). At December 31, 1997, based on carrying value, 100% of the Company's investments were in fixed income securities, 96% of which were securities rated "A" or better, with 71.2% rated "AAA" and 15.9% rated "AA," in each case 19 by at least one nationally recognized rating organization. The Company does not currently intend to invest in equity securities. The Company's investment policies and strategies are subject to change depending upon regulatory, economic and market conditions and the existing or anticipated financial condition and operating requirements, including the tax position, of the Company. INVESTMENT OPERATIONS At December 31, 1997, the carrying value of the Company's investment portfolio was $377.7 million and amortized cost was $365.1 million. At December 31, 1997, municipal securities represented 76.6% of carrying value of the total investment portfolio. The effective duration of the investment portfolio is 6.26 years at December 31, 1997. The following table indicates the aging of investment portfolio:
Duration Percent -------- ------- 0 - 1 years 2.9 1 - 3 years 9.1 3 - 5 years 17.9 5 - 7 years 22.8 7 - 10 years 40.9 After 10 years 6.4
For further information concerning investment operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition" and Note 4 of Notes to Consolidated Financial Statements of the Company, set forth on pages F-12 through F-13 herein. REGULATION DIRECT REGULATION The Company, Amerin Guaranty and Amerin Re are subject to comprehensive, detailed regulation for the protection of policyholders by the insurance departments of the various states in which they are licensed to transact business. Although their scope varies, state insurance laws in general grant broad powers to supervisory agencies or officials to examine companies and to enforce rules or exercise discretion touching almost every significant aspect of the insurance business. These include the licensing of companies to transact business and varying degrees of control over claims handling practices, reinsurance arrangements, premium rates, the forms and policies offered to customers, financial statements, periodic financial reporting, permissible investments and adherence to financial standards relating to statutory surplus, establishment and maintenance of required reserves, dividends and other criteria of solvency intended to assure the satisfaction of obligations to policyholders. Most states also regulate transactions between insurance companies and their parents or affiliates. For a description of limits on dividends payable, see Note 12 of Notes to Consolidated Financial Statements of the Company, set forth on page F-20 herein. 20 Mortgage insurers are generally restricted by state insurance laws and regulations to writing residential mortgage insurance business only. This restriction prohibits Amerin Guaranty and Amerin Re from directly writing other types of insurance. Mortgage insurance premium rates are subject to state regulation to protect policyholders against the adverse effects of excessive, inadequate or unfairly discriminatory rates and to encourage competition in the insurance marketplace. Changes in premium rates are subject to being justified, generally on the basis of the insurer's loss experience, expenses and future trend analysis. The general default experience in the mortgage insurance industry may also be considered. Premium rates are subject to review and challenge by state regulators. A number of states generally limit the amount of insurance risk which may be written by a private mortgage insurer to 25 times the insurer's total policyholders' reserves, commonly known as the "risk-to-capital" requirement. Amerin Guaranty is required to contribute to a contingency loss reserve an amount equal to 50% of earned premiums. Such amounts cannot be withdrawn for a period of 10 years, except under certain circumstances. Certain restrictions apply under the laws of several states to any licensed company ceding business to unlicensed reinsurers. Under such laws, if a reinsurer is not admitted or approved in such states, the company ceding business to the reinsurer cannot take credit in its statutory financial statements for the risk ceded to such reinsurer absent compliance with certain reinsurance security requirements. Amerin Re is admitted in Illinois, and therefore Amerin Guaranty receives credit on its statutory financials for business ceded to Amerin Re. In addition, several states also have special restrictions on mortgage guaranty reinsurance. As the dominant purchasers and sellers of conventional mortgage loans and beneficiaries of private mortgage insurance, Fannie Mae and Freddie Mac impose eligibility requirements, which may change from time to time, on private mortgage insurers in order for such insurers to be eligible to insure loans sold to such agencies. To the extent that Fannie Mae or Freddie Mac implements new eligibility requirements, or alters or liberalizes underwriting guidelines on low down payment mortgages they purchase, private mortgage insurers, including Amerin Guaranty, are likely to respond to or comply with such actions in order to remain eligible with both agencies, and thereby maintain market share of new insurance written. Currently, Amerin Guaranty is an approved mortgage insurer for both Freddie Mac and Fannie Mae. INDIRECT REGULATION Private mortgage insurers are indirectly, but significantly, impacted by regulations affecting purchasers of mortgage loans, such as Freddie Mac and Fannie Mae, and regulations affecting governmental insurers, such as the FHA and VA, and mortgage lenders. As a result, changes in federal housing legislation and other laws and regulations that affect the demand for private mortgage insurance may have a material effect on private mortgage insurers, including Amerin Guaranty. Various proposals are being discussed by Congress and certain federal agencies with respect to the reform or modification of the FHA, but the nature and extent of actual enacted legislation and possible effects of such legislation on Amerin Guaranty cannot be predicted. 21 The Real Estate Settlement and Procedures Act of 1974 ("RESPA") applies to most residential mortgages insured by Amerin Guaranty, and related regulations provide that mortgage insurance is a "settlement service" for purposes of loans subject to RESPA. Subject to limited exceptions, RESPA prohibits persons from accepting anything of value for referring real estate settlement services to any provider of such services. Although many states prohibit mortgage insurers from giving rebates, RESPA has been interpreted to cover many non-fee services as well. According to published reports, HUD has recently sent letters to Mortgage Guaranty Insurance Company ("MGIC") and Freddie Mac with respect to so-called "agency pool insurance," in which a mortgage insurer provides pool insurance to either Fannie Mae or Freddie Mac. As a result of the agency pool insurance policy, Fannie Mae or Freddie Mac reduces the guarantee fee paid by the lender whose loans are covered by the policy. HUD's letter raised the question of whether this type of pool insurance "could be seen as giving a thing of value - the below-cost pool policy - through Freddie Mac to the lender (the guarantee fee reduction), by means of an agreement to refer settlement (primary mortgage insurance) business" and thereby prohibited under RESPA. Amerin Guaranty has to date issued a minimal amount of agency pool insurance. Management believes that if HUD were to conclude that RESPA prohibits agency pool insurance, or if HUD established material restrictions on the use of agency pool insurance, such actions would not have a material adverse effect on the Company. Most originators of mortgage loans are required to collect and report data relating to a mortgage loan applicant's race, nationality, gender, marital status and census tract to HUD or the Federal Reserve under the Home Mortgage Disclosure Act of 1975 ("HMDA"). The purpose of HMDA is to detect possible discrimination in home lending and, through disclosure, to discourage such discrimination. Mortgage insurers are not required pursuant to any law or regulation to report HMDA data, although under the laws of several states, mortgage insurers are currently prohibited from discriminating on the basis of certain classifications. The active mortgage insurers, through their trade association, MICA, have entered into an agreement with the Federal Financial Institutions Examinations Council ("FFIEC") to report the same data on loans submitted for insurance as is required for most mortgage lenders under HMDA. Mortgage lenders are subject to various laws, including HMDA, the Community Reinvestment Act and the Fair Housing Act, and Fannie Mae and Freddie Mac are subject to various laws, including laws relating to government sponsored enterprises, which may impose obligations or create incentives for increased lending to low and moderate income persons or in targeted areas. The Company and Amerin Guaranty are also indirectly, but significantly, impacted by laws and regulations affecting originators and purchasers of mortgage loans, particularly Fannie Mae and Freddie Mac, and regulations affecting governmental insurers such as the FHA. Private mortgage insurers, including Amerin Guaranty, are highly dependent upon federal housing legislation and other laws and regulations which affect the demand for private mortgage insurance and the housing market generally. For example, the President of the United States has recently proposed a significant increase in the maximum individual loan amount that the FHA may insure, which would in turn increase the number of persons 22 eligible for FHA mortgages. Enactment of this proposal or any other legislation which increases the number of persons eligible for FHA or VA mortgages could have an adverse effect on the Company's ability to compete with the FHA or VA. Pursuant to FIRREA, the Office of Thrift Supervision ("OTS") issued risk-based capital rules in 1990 for savings institutions. These rules establish a lower capital requirement for a low down payment loan that is insured with private mortgage insurance, as opposed to remaining uninsured. Furthermore, the guidelines for real estate lending policies applicable to savings institutions and commercial banks provide that such institutions should require appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral for any mortgage with an LTV that equals or exceeds 85% at origination. To the extent FIRREA's risk-based capital rules or the guidelines for real estate lending policies applicable to savings institutions and commercial banks are changed in the future, some of the anticipated benefits of FIRREA and the guidelines for real estate lending policies to the mortgage insurance industry, including Amerin Guaranty, may be curtailed or eliminated. Proposals have been advanced which would allow Fannie Mae and Freddie Mac additional flexibility in determining the amount and nature of alternative recourse arrangements or other credit enhancements which they could utilize as substitutes for private mortgage insurance. The Company cannot predict if or when any of the foregoing legislation or proposals will be adopted, but if adopted and depending upon the nature and extent of revisions made, demand for private mortgage insurance may be adversely affected. There can be no assurance that other federal laws affecting such institutions and entities will not change, or that new legislation or regulations will not be adopted. In addition, Fannie Mae and Freddie Mac have entered into, and may in the future seek to enter into, alternative recourse arrangements or other credit enhancements based on their existing legislative authority. Political and monetary pressures to reduce the nation's budget deficit could, among other things, result in the partial or entire loss of the U.S. federal income tax deduction for mortgage loan interest, which could result in downward pressure on housing prices. Any reduction or loss of such deduction could reduce the volume of low down payment mortgages originated and private mortgage insurance written and adversely impact mortgage default patterns, and would materially adversely affect the Company's LPMI business. There can be no assurance that the above-mentioned federal laws and regulations or other federal laws and regulations affecting lenders, private and governmental mortgage insurers, or purchasers of insured mortgage loans, will not be amended, or that new legislation or regulations will not be adopted, in either case in a manner which will adversely affect the demand for private mortgage insurance. The Senate and the House of Representatives of the United States each passed bills in 1997 providing for mandatory notice to borrowers with respect to their right to cancel private mortgage insurance under certain circumstances and mandating cancellation of private mortgage insurance under certain specified conditions. Because the Senate and House bills contain differing provisions, enactment of a law will require the Senate and House to reach agreement in conference on a final bill. In addition to this federal legislation, legislation with respect to cancellation of private mortgage insurance has been introduced or enacted recently in more than 10 states. 23 Such legislation is similar to the federal legislation, in that most states appear to be focusing on disclosure to borrowers, while the legislation in some other states requires both disclosure and, under certain specified circumstances, mandatory cancellation of private mortgage insurance. Fannie Mae has also announced a proposed new policy with respect to disclosure and, under specified conditions, mandatory cancellation of private mortgage insurance. No prediction can be made at this time as to the eventual disposition of any of the above-described federal and state legislation or the Fannie Mae proposal, or the separate or cumulative impact of any such legislation or proposals on the mortgage insurance industry. CERTAIN LEGAL MATTERS RELATING TO LENDER PAID MORTGAGE INSURANCE In March 1993, Amerin Guaranty submitted a written request to HUD which asked that HUD provide written confirmation that Amerin Guaranty's lender-paid mortgage insurance and the Award Plus Plan were in compliance with the requirements of RESPA. In January 1996, Rick Lazio (R-NY), Chairman of the House Subcommittee on Banking and Community Opportunity, sent a letter to HUD asking for written guidance with respect to whether LPMI complies with RESPA. In August 1996, HUD responded to Representative Lazio. While not passing on the legality of any private mortgage insurer's LPMI product or marketing practice, the HUD response stated that regular, non-experience-based "LPMI products pose no RESPA concerns." With respect to LPMI products that offer mortgage lenders experience-based premiums, such as Amerin's Award Plus Plan, HUD further concluded that "there is nothing inherently violative of Section 8 of RESPA." The Company believes its Award Plus Plan satisfies the general criteria discussed in the HUD response regarding compliance with Section 8 of RESPA. Because the cost of LPMI is paid by the lender, to recover such additional cost, the mortgage loans insured pursuant to LPMI policies generally bear interest at a rate in excess of comparable loans insured by BPMI policies. Based on the advice of counsel, Amerin believes that the use of LPMI on a mortgage loan does not affect the deductibility from gross income for U.S. federal income tax purposes of otherwise deductible mortgage interest paid by the borrower on such loan. There can be no assurance, however, that the United States Internal Revenue Service ("IRS") may not challenge the conclusions reached by Amerin Guaranty's counsel, and a ruling by the IRS that did so could have a material adverse effect on Amerin's business and financial results. The Company does not intend to seek a ruling from the IRS. Political and monetary pressures to reduce the nation's budget deficit could, among other things, result in the partial or entire loss of the U.S. federal income tax deduction for mortgage interest, which could result in downward pressure on housing prices. Any reduction or loss of such deduction could reduce the volume of low down payment mortgages originated and private mortgage insurance written and adversely impact mortgage default patterns, and would materially adversely affect the Company's LPMI business. 24 CERTAIN LEGAL MATTERS RELATING TO CAPTIVE MORTGAGE REINSURANCE ARRANGEMENTS In October 1996, the Office of the Comptroller of the Currency (the "OCC"), which regulates banks, announced that Captive Arrangements were permissible for subsidiaries of banks, and that the OCC would consider applications from banks for approval of Captive Arrangements. On January 22, 1997, the OCC granted approval to Chase Manhattan Bank USA, NA, an affiliate of Chase Manhattan Mortgage Corporation, to enter into a Captive Arrangement. During 1997, the OCC granted similar approvals to at least five other banks. In December 1996, the OTS, which regulates thrifts, announced that it would consider, on a case-by-case basis, applications from thrifts for approval of Captive Arrangements. Management believes that these announcements by the OCC and the OTS, and the approval by the OCC of various Captive Arrangements, increase the likelihood of Captive Arrangements with Amerin Guaranty or other mortgage insurers. To date, the Company is not aware that the OTS has withheld approval of any Captive Arrangements. No assurance can be given as to when or whether any approvals from the OTS or additional approvals from the OCC will be forthcoming or whether such approvals will contain any conditions on any Captive Arrangements. In April 1996, Amerin Guaranty met with HUD and presented its position that Amerin Guaranty's Captive Arrangements are in compliance with RESPA. By letter dated August 6, 1997, HUD concluded that "...so long as payments for reinsurance under captive reinsurance arrangements are solely 'payment for goods or facilities actually furnished or for services actually performed,' these arrangements are permissible under RESPA." The HUD letter set forth a list of factors that may cause HUD to give particular scrutiny to a particular Captive Arrangement, and a two-part test for determining if a particular Captive Arrangement violates RESPA. Based on management's review of the HUD letter, Amerin believes that its Captive Arrangements comply with RESPA. There can be no assurance, however, that HUD will not challenge the compliance of specific Captive Arrangements under RESPA. A ruling by HUD that limits or prohibits the use of Captive Arrangements could have a material adverse effect on Amerin's business and financial results. 25 By letter dated March 17, 1997, the New York Insurance Department ("NYID") notified Amerin Guaranty that the Office of the General Counsel of the NYID had issued a legal opinion to the effect that Captive Arrangements violated certain provisions of the New York Insurance Law ("NYIL") relating to impermissible rebates and controlled business arrangements. The Company believes that similar letters were sent by the NYID to all other private mortgage insurers licensed to do business in New York. Subsequently, it was reported in the March 27, 1997 issue of the American Banker that a spokesman for the NYID stated that one mortgage insurance company "has violated some of the laws" relating to doing business with reinsurance companies affiliated with mortgage lenders. The American Banker article further stated that, according to the NYID spokesman, "payment to the reinsurance subsidiary must be proportional to the risk it assumes." Based on this test and on management's prior analysis of the applicable provisions of the NYIL, management believes that Amerin Guaranty's Captive Arrangements are not in violation of the NYIL. Amerin Guaranty has met with the New York Superintendent of Insurance and, at the request of the Superintendent, submitted written materials setting forth Amerin Guaranty's recommendations as to proposed regulation of Captive Arrangements. The NYID has since informed Amerin that the NYID is the process of formulating an overall regulatory position with respect to Captive Arrangements. A ruling or regulation by the NYID that limits or prohibits the use of Captive Arrangements could have a material adverse effect on Amerin's business and financial results. EMPLOYEES At December 31, 1997, the Company had 124 full-time employees. Of its total work force, 91 were assigned to the Company's headquarters in Chicago, Illinois, and 33 operated out of their homes around the country. None of the Company's employees is a member of a labor union. The Company believes that it maintains good relations with is employees. ITEM 2. PROPERTIES. The Registrant leases its principal executive offices in Chicago, Illinois, which consists of approximately 30,000 square feet of office space and maintains a satellite office in Westchester, Illinois, which consists of approximately 6,000 square feet. The Company believes its existing property is adequate for its present operations. ITEM 3. LEGAL PROCEEDINGS. From time to time, the Company and its subsidiaries are involved in certain routine legal proceedings arising in the normal course of their business, none of which is currently expected to have a material adverse effect on the Company's consolidated financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 26 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the Registrant's executive officers as of March 16, 1998:
Name and Age Title - ------------ ------------------------------------- Gerald L. Friedman (60) .......... Chairman of the Board of Directors and Chief Executive Officer of the Company and Amerin Guaranty Roy J. Kasmar (42) ............... President, Chief Operating Officer and Director of the Company and Amerin Guaranty Jerome J. Selitto (56) ........... Vice Chairman of the Company and Amerin Guaranty and Director of Amerin Guaranty David I. Vickers (37).............. Senior Vice President, Chief Financial Officer and Treasurer of the Company and Amerin Guaranty and Director of Amerin Guaranty Randolph C. Sailer II (43).......... Senior Vice President, General Counsel and Secretary of the Company and Amerin Guaranty and Director of Amerin Guaranty James G. Engelhardt (46) ......... Executive Vice President, Director of Risk Management of Amerin Guaranty Sean P. Connelly (31) ............. Senior Vice President, Director of Information technology of Amerin Guaranty Michael J. Dirrane (41) ........... Senior Vice President, National Sales Director of Amerin Guaranty Matthew K. Lindland (35) .......... Senior Vice President, Director of Corporate Transactions of Amerin Guaranty Sergio E. Murer (33) .............. Senior Vice President, Operations of Amerin Guaranty R. Bruce Van Fleet, III (46) ...... Senior Vice President, National Accounts Director, of Amerin Guaranty Philip P. Yee (44) ................ Senior Vice President, Marketing Services and Corporate Communications, of Amerin Guaranty
Mr. Friedman founded the Company and has been Chairman and Chief Executive Officer of the Company and Amerin Guaranty since April 1992. Prior thereto, he founded and served as Chairman and President of Financial Guaranty Insurance Corporation ("FGIC"), a AAA rated financial guarantor, from September 1983 to December 1990. Mr. Friedman began his career with MGIC in 1961, and, from 1978 to 1981, Mr. Friedman was President of MGIC Investment Corporation, the holding company of MGIC. Mr. Friedman has been a member of Amerin Corporation's and Amerin Guaranty's boards of directors since April 1992. Mr. Kasmar has been President and Chief Operating Officer of the Company and Amerin Guaranty since December 1997, Executive Vice President of Operations of Amerin Guaranty from May 1996 to December 1997, and a director of Amerin Guaranty since December 1996. Prior to joining Amerin Guaranty, Mr. Kasmar was Managing Director for Prudential Home Mortgage's Capital Markets from May 1988 to April 1996. He was Vice President in charge of Secondary Marketing and Chief Operating Officer at First Boston Capital Group from 1984 to 1988. Mr. Selitto has been Vice Chairman of the Company and Amerin Guaranty since November 1997, Executive Vice President and National Director of Marketing and Sales of Amerin Guaranty from December 1995 through November 1997, Senior Vice 27 President and National Director of Marketing of Amerin Guaranty from September 1994 through December 1995, and a director of Amerin Guaranty since December 1996. Prior thereto he was Senior Vice President and Director of Marketing for Amerin Guaranty's Central Region from October 1992 to September 1994. Prior to joining Amerin Guaranty, Mr. Selitto was managing director and manager of the Asset-Backed Securities Group at First Chicago Capital Markets, Inc. from August 1989 to October 1992. Mr. Vickers has been Senior Vice President, Chief Financial Officer and Treasurer of the Company and Amerin Guaranty since September 1997. Prior thereto, he was Senior Vice President, Chief Financial Officer, and Treasurer of Pioneer Financial Services from June 1992 to August 1997. He was with the public accounting firm of Ernst & Young from July 1983 to May 1992 where he was a Senior Manager in the Insurance Division. Mr. Vickers has been a member of Amerin Guaranty's board of directors since September 1997. Mr. Sailer has been Senior Vice President, General Counsel and Secretary of the Company and Amerin Guaranty since November 1992 and Vice President, General Counsel and Secretary of the Company and Amerin Guaranty from August 1992 to November 1992. Prior thereto, he was Vice President and Assistant General Counsel of Connie Lee Insurance Company in Washington, D.C. from February 1990 to July 1992. He served as Vice President and Assistant General Counsel of FGIC from October 1985 to January 1990, and worked in the securities law and corporate and municipal finance departments of three major New York firms from September 1980 to September 1985. Mr. Sailer has been a member of Amerin Guaranty's board of directors since September 1993. Mr. Engelhardt has been Executive Vice President and Director of Risk Management since December 1995 and Senior Vice President and Director of Risk Management of Amerin Guaranty from November 1992 through December 1995. Prior thereto he was Regional Director of MGIC's mid-Atlantic region from April 1990 to October 1992, and Director of Underwriting for the Northeast Division of MGIC from March 1987 to March 1990. Mr. Connelly has been Senior Vice President and Director of Information Technology of Amerin Guaranty since December 1997, and Vice President and Director of Management Information Systems of Amerin Guaranty from January 1996 through December 1997. Prior thereto, he was Vice President of Information Technology for Prudential Home Mortgage from January 1993 to December 1995, and worked in various technology positions within Prudential Home Mortgage from June 1987 through December 1992. Mr. Dirrane has been Senior Vice President and National Field Sales Director of Amerin Guaranty since January 1997. Prior thereto, Mr. Dirrane was Vice President and Northeast Regional Marketing Director of Amerin Guaranty from February 1993 to January 1997. Mr. Dirrane was Vice President of Correspondent Lending at Salem Five Mortgage from July 1992 to February 1993 and an Account Executive for MGIC from October 1987 to July 1992. Mr. Lindland has been Senior Vice President and Director of Corporate Transactions of Amerin Guaranty since December 1997, Vice President of Amerin Guaranty from December 1995 through December 1997, Director of Risk Analysis Assistant of Amerin Guaranty from December 1993 through December 1995, and Financial Analyst of Amerin Guaranty from July 1993 through December 1995. Prior thereto, Mr. Lindland was a Vice president of Rothschild Inc. from May 28 1992 through November 1992 and an Associate of Kidder, Peabody & Co. Incorporated from May 1988 through May 1992. Mr. Murer has been Senior Vice President, Operations of Amerin Guaranty since December 1997, and Vice President of Amerin Guaranty since September 1996. Prior thereto, Mr. Murer was Vice President of Finance for Norwest Mortgage from May 1996 through September 1996, Vice President of Correspondent Lending for Prudential Home Mortgage from August 1992 through May 1996, and Vice President of Secondary Marketing for Prudential Home Mortgage from April 1988 through July 1992. Mr. Van Fleet has been Senior Vice President and National Accounts Director since January 1997 and Senior Vice President and Director of Marketing for Amerin Guaranty's Eastern Region from December 1995 to January 1997. Prior to joining Amerin Guaranty, Mr. Van Fleet was Senior Vice President of Corporate Sales for Strategic Mortgage Services from August 1993 until December 1995, and a Director of National Accounts at PMI Mortgage Insurance Company from December 1990 until August 1993. Mr. Yee has been Senior Vice President, Marketing Services and Corporate Communications for Amerin Guaranty since December 1995 and Vice President, Director of Marketing Services and Corporate Communications from June 1994 to December 1995. Prior thereto, he was Director of Creative Services at Chemical Residential Mortgage Corporation from January 1993 to June 1994, and Director of Marketing for Bank of America's Residential Loan Division from January 1990 to April 1992. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS. On November 22, 1995, the Registrant's Common Stock began trading on the Nasdaq National Market under the symbol "AMRN". Prior to such date, no established public trading market for the Registrant's common equity existed. As of March 10, 1997, the approximate number of record holders of the Registrant's Common Stock was 89. The following table sets forth, for the period indicated, the high and low sale prices of the Registrant's Common Stock as reported on The Nasdaq National Market.
High Low ------- ------- 1996: First Quarter .................................. $28 1/2 $22 3/4 Second Quarter ................................. $27 1/4 $19 3/4 Third Quarter .................................. $26 $20 Fourth Quarter ................................. $25 3/4 $19 1997: First Quarter .................................. $26 1/4 $19 3/4 Second Quarter ................................. $25 1/2 $17 1/2 Third Quarter .................................. $29 $22 5/8 Fourth Quarter ................................. $33 3/8 $19 1/2
The Registrant has never paid any cash dividends on its capital stock. The Registrant currently intends to retain its future earnings to finance the 29 growth and development of its business and therefore does not anticipate paying cash dividends on its Common Stock for the foreseeable future. Amerin Corporation is a holding company whose principal source of cash flow is dividends and other permitted payments from its subsidiaries, Amerin Guaranty and Amerin Re. For a description of restrictions on the payment of dividends applicable to the Registrant and Amerin Guaranty, see Note 12 of Notes to Consolidated Financial Statements of the Registrant set forth on page F-20 herein. 30 ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------------------------------------------------------------------- (in thousands of dollars except ratios and per share data) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: Net premiums written .............. $ 94,740 $70,000 $33,946 $10,274 $1,611 Increase in unearned premiums...... (2,411) (7,651) (6,387) (5,037) (1,285) Net premiums earned ............... 92,329 62,349 27,559 5,237 326 Net investment income ............. 18,607 16,871 7,612 4,818 4,251 Realized investment gains ......... 1,167 161 491 435 707 Total revenues .................. 112,103 79,381 35,662 10,490 5,284 Expenses: Losses incurred ................... 30,272 20,681 7,757 262 -- Policy acquisition costs .......... 10,520 8,485 6,641 2,456 2,677 Underwriting and other expenses ... 14,643 10,623 6,915 5,765 5,403 Compensation charge resulting from initial public offering ... -- -- 35,741 -- -- Total expenses ............... 55,435 39,789 57,054 8,482 8,080 Income tax expense 15,909 11,363 1,419 -- -- Net income (loss) .................. 40,759 28,229 (22,811) 2,008 (2,795) Pay-in-kind dividends on preferred stock ................... -- -- 5,287 5,067 4,437 Net income (loss) applicable to common stockholders ............... 40,759 28,229 (28,098) (3,059) (7,232) OTHER OPERATING DATA: Mortgage insurance operating ratios: (GAAP)(1) Loss ratio ...................... 32.8% 33.2% 28.2% 5.0% -- Expense ratio ................... 27.3% 30.6% 49.2% 157.0% (2) Combined ratio .................. 60.1% 63.8% 77.3% 162.0% (2) (SAP)(1) Loss ratio ...................... 32.8% 33.2% 28.2% 5.0% -- Expense ratio ................... 25.6% 27.4% 42.8% 97.4% (2) Combined ratio .................. 58.4% 60.6% 70.9% 102.4% (2) PER SHARE DATA:(3) Net Income (loss) - Basic ........... $1.56 $1.08 $(2.32) $(0.36) $(0.99) Net Income (loss) - Diluted ......... $1.54 $1.07 $(2.32) $(0.36) $(0.99) 31 Weighted average shares outstanding (in thousands): Basic ............................ 26,119 26,038 12,106 8,467 7,328 Diluted .......................... 26,483 26,351 12,106 8,467 7,328 Book value (at period end) ......... $13.39 $11.53 $10.55 $5.59 $5.66 As of and for the year ended December 31, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------------------------------------------------------------- OPERATING AND STATUTORY DATA: Number of policies in force ...... 164,314 120,385 68,112 22,937 2,473 Default rate ..................... 1.43% 1.20% 0.89% 0.18% 0.16% Persistency ...................... 87.2% 87.6% 93.0% 96.2% -- Direct primary insurance in force (in millions)............. $ 20,394 $ 14,777 $ 8,262 $ 2,750 $ 272 Direct primary risk in force (in millions)................... $ 5,149 $ 3,671 $ 1,989 $ 580 $ 57 Amerin Guaranty Corporation: Statutory capital (in millions)...................... $ 307.8 $ 260.7 $ 227.0 $ 90.5 $ 70.8 Risk-to-capital ratio ......... 16.1 13.3 8.2 6.4 0.8 As of December 31, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------------------------------------------------------------- (in thousands of dollars) CONSOLIDATED BALANCE SHEETS DATA: Total investments ............ $ 377,720 $ 328,793 $ 296,982 $ 96,246 $ 72,094 Total assets.................. 415,301 354,824 316,328 107,261 79,421 Unearned premiums............. 23,352 20,525 12,710 6,323 1,286 Loss reserves................. 31,280 18,730 7,092 262 -- 13.5% Convertible Preferred Stock(4).................... -- -- -- 40,755 35,687 Total common stockholders' equity ..................... 350,155 300,609 274,137 58,081 40,840 ____________________
(1) Generally accepted accounting principles (GAAP) and statutory basis (SAP) ratios reflect the Company's status as a new company and include start-up and other expenses incurred prior to the commencement of significant operations. 32 SAP ratios reflect the combined results of the Company's insurance subsidiaries and do not include holding company costs. Expense ratios exclude the compensation charge resulting from the Company's Initial Public Offering. (2) Not meaningful. (3) The per share data for all periods prior to 1997 has been restated for the required adoption on December 31, 1997 of the new accounting standard on earnings per share. For 1995, 1996, and 1997, includes 13,340,000 shares issued in conjunction with the Company's November 28, 1995 initial public offering and also includes 2,250,068 shares, as of the date of such offering, out of a total of 11,000,000 shares that were previously excluded from weighted average shares. Such shares were subject to contingent recall provisions and the conditions required for the removal of recall provisions on the 11,000,000 shares had not been met. The Company's initial public offering removed the recall provisions on 2,250,068 of the shares and resulted in the cancellation of the remaining 8,749,932 common shares. (4) The 13.5% Convertible Preferred Stock was redeemed on December 1, 1995 at a redemption price of $46.0 million. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF CONSOLIDATED OPERATIONS 1997 COMPARED TO 1996 Total revenues for 1997 were $112.1 million, an increase of 41.2% over total revenues of $79.4 million for 1996. The growth in revenues was due primarily to the increases in net premiums earned as discussed below. New insurance written in 1997 was $7.8 billion, compared to $7.7 billion in 1996. Amerin's primary insurance in force was $20.4 billion as compared with $14.8 billion as of December 31, 1996, which represents a 38% increase. Net premiums written for 1997 were $94.7 million compared to $70.0 million for 1996, which represents a 35.3% increase. The increase was primarily attributable to the 38% increase in insurance in force. Management believes that Amerin Guaranty was able to increase revenues due primarily to continued strong levels of new business with the Company's top 10 lenders, the addition of new lenders during 1997, and an annualized persistency rate on in force business of 87.2% at December 31, 1997. Net premiums earned increased by $30.0 million to $92.3 million for 1997 from $62.3 million for 1996. This increase was primarily due to the increase in insurance in force in 1997 as compared to 1996. 33 Net investment income of $18.6 million for 1997 increased by $1.7 million (or 10.3%) over 1996, due primarily to investment of Amerin's net operating cash flows over the course of 1997, which resulted in an increase of 16.1% in the monthly average amount of invested assets. Realized investment gains for 1997 were $1.2 million compared to realized investment gains of $.2 million for 1996. This increase reflected higher sales activity within the portfolio due to the Company's desire to maintain a certain duration of the investment portfolio. As of December 31, 1997 and 1996, the yields to maturity on the investment portfolio were 5.6% and 5.8%, respectively, and the average durations of the investment portfolio were 6.3 years and 6.4 years, respectively. Losses incurred in 1997 were $30.3 million, compared to $20.7 million in 1996, as a result of aging of the Company's policies. The Company's loss ratio decreased from 33.2% for 1996 to 32.8% for 1997 due to favorable delinquency rates on business issued during the last three years. Because of its limited operating history, the Company expects it loss experience to increase as its policies age. Policy acquisition costs during 1997 of $10.5 million increased by $2.0 million (or 24.0%) compared to 1996 principally due to the growth in the level of marketing and underwriting activity in connection with the production of new insurance written in 1997. Underwriting and other expenses during 1997 increased by $4.0 million or 37.8% due to the increase in insurance in force which resulted in various administrative, technology, and occupancy costs relating to growth in the Company's personnel. The Company's effective tax rate was 28.1% in 1997. The effective tax rate for 1997 was below the statutory rate of 35%, principally reflecting the benefits of tax-exempt investment income. As a result of the foregoing factors, the Company has net income of $40.8 million for 1997 or $1.54 per share on a diluted basis, compared to net income of $28.2 million for 1996 or $1.07 per share on a diluted basis. 1996 COMPARED TO 1995 Total revenues for 1996 were $79.4 million, an increase of 122.6% over total revenues of $35.7 million for 1995. The growth in revenues was due primarily to the increases in net premiums earned and investment income in 1996 as compared to 1995, as discussed below. New insurance written in 1996 was $7.7 billion, compared to $5.9 billion in 1995. As of December 31, 1996, Amerin's primary insurance in force was $14.8 billion as compared with $8.3 billion as of December 31, 1995, which represents a 78.9% increase. Net premiums written for 1996 were $70.0 million compared to $33.9 million for 1995, which represents a 106.2% increase. The increase was primarily 34 attributable to a 30.1% increase in Amerin Guaranty's new insurance written to $7.7 billion and growth in insurance in force and related renewal premiums. Management believes that Amerin Guaranty was able to increase revenues due primarily to increased use by existing lenders of the Company's BPMI, the addition of new, large lenders which began doing business with the Company during the second half of 1995 and in 1996, and increased sales of LPMI. The increase in net premiums was also due to a lesser extent to higher average premiums during 1996 compared to 1995, principally due to the increased coverage requirements imposed by Fannie Mae and Freddie Mac during the first quarter of 1995, which requirements took effect over the course of 1995. Amerin Guaranty's monthly premium plan represented 86.6% and 81.5% of new insurance written for 1996 and 1995, respectively. Renewal premiums for 1996 increased 148.6% from 1995 to $56.9 million, due primarily to the growth of insurance in force throughout 1995, as well as increased popularity of the monthly premium plan in 1996. With respect to the monthly premium product, the first month's premium is recorded as new business and all subsequent premiums are recorded as renewals. Net premiums written for new business in 1996 increased 18.6% from 1995 to $13.1 million due to a greater volume of new business written in 1996. Net premiums earned increased by $34.8 million to $62.3 million for 1996 from $27.6 million for 1995. This increase was primarily due to the increase in insurance written and in force in 1996 as compared to 1995. Net investment income of $16.9 million for 1996 increased by $9.3 million (or 121.6%) over 1995, due primarily to investment of the proceeds from the Company's initial public offering in November 1995 (the "Initial Public Offering"), as well as Amerin's net operating cash flows over the course of 1996, which together resulted in an increase of 138.4% in the monthly average amount of invested assets. Realized investment gains for 1996 were $.2 million compared to realized investment gains of $.5 million for 1995. This decrease reflected lower sales activity within the portfolio due to the Company's desire to maintain a certain composition of the investment portfolio. Sales of investments in 1996 were made primarily in connection with the continuation of the Company's current investment strategy to increase investment in tax-exempt securities. As of December 31, 1996 and 1995, the yields to maturity on the investment portfolio were 5.8% and 6.2%, respectively, and the average durations of the investment portfolio were 6.4 years and 3.3 years, respectively, The average duration at December 31, 1995 reflected the investment of the net proceeds of the Initial Public offering in short-term investments pending their investment in tax-exempt securities with longer maturities. Losses incurred in 1996 were $20.7 million, compared to $7.8 million in 1995, as a result of aging of the Company's policies. Because of the Company's limited operating history, its loss experience is expected to increase significantly as its policies continue to age. Policy acquisition costs during 1996 of $8.5 million increased by $1.8 million (or 27.8%) compared to 1995 principally due to the growth in the level of marketing and underwriting activity in connection with the increased 35 production of new insurance written in 1996 compared to 1995. Underwriting and other expenses during 1996 increased by $3.7 million or 53.6% compared to 1995 due to the institution of an excess loss treaty, the increase in insurance in force and increases in various administrative and occupancy costs relating to growth in the Company's personnel, offset in part by the elimination in the 1996 period of standby commitment fees previously paid to certain of the Company's original stockholders. The Company's effective tax rate was 28.7% in 1996. The Company incurred tax expense in 1995 notwithstanding the fact that the Company reported a loss before taxes, which loss resulted from the Company's recording of the non-recurring non-deductible charge of $35.7 million discussed in the following paragraph. The Company fully utilized its net operating losses in 1995, with the result that no additional net operating losses were available for utilization in 1996. The effective tax rate for 1995 was below the statutory rate of 35%, principally reflecting the benefits of tax-exempt investment income. As a result of the foregoing factors, the company had net income of $28.2 million for 1996, or $1.07 per share on a diluted basis, compared to a net loss before pay-in-kind dividends on its previously outstanding 13.5% Convertible Preferred Stock of $22.8 million for 1995. The 1995 net loss was due to a non-recurring non-deductible charge of $35.7 million in the fourth quarter of 1995 as a result of its Chairman and President being entitled to shares of Common Stock pursuant to the provisions of a management agreement upon consummation of the Initial Public Offering. The net loss applicable to common shareholders (after pay-in-kind dividends) was $28.1 million, or $2.32 per share on a diluted basis for 1995. The 13.5% Convertible Preferred Stock was redeemed in connection with the Initial Public Offering. FINANCIAL CONDITION The Company's consolidated total investments were $377.7 million at December 31, 1997, compared with $328.8 million at December 31, 1996. The Company generated consolidated cash flows from operating activities of $54.6 million during 1997, compared to $43.3 million generated during 1996. All of the Company's $374.3 million of fixed maturity securities at December 31, 1997 are rated "investment grade," which is defined by the Company as a security having a National Association of Insurance Commissioners ("NAIC") rating of 1 or 2 or an S&P rating ranging from "AAA" to "BBB-." The aggregate fair value (carrying value) of the fixed maturity securities was greater than amortized cost at December 31, 1997 by $12.7 million. At December 31, 1996, the aggregate fair value (carrying value) of the Company's fixed maturity securities was greater than amortized cost by $.3 million. The increase during 1997 in the fair value of the Company's fixed maturity securities compared to amortized cost is due primarily to the decrease in interest rates during 1997. Fixed maturity securities of $168.8 million or 45.1% of total fixed maturity securities at December 31, 1997 have stated maturities of 10 years or greater. As a result of these long-term holdings, if interest rates should 36 increase, the fair value of these securities will decline and common stockholders' equity will decrease. Consolidated loss reserves increased by $12.6 million to $31.3 million at December 31, 1997 from $18.7 million at December 31, 1996, primarily due to the ongoing maturation of the Company's book of business, which is at an early stage of development, and the growth of insurance in-force. See "-- Results of Consolidated Operations -- 1997 Compared to 1996." Consistent with industry practices, the Company does not establish loss reserves for future claims on insured loans which are not currently in default. Consolidated unearned premiums increased $2.9 million from $20.5 million at December 31, 1996 to $23.4 million at December 31, 1997, reflecting the increase in insurance in force during 1997 versus 1996. The unearned premium reserve growth rate is significantly lower then the increase in insurance in force due to the increased concentration of monthly business. Consolidated stockholders' equity increased to $350.2 million at December 31, 1997, from $300.6 million at December 31, 1996, an increase of 16.5%. This increase resulted primarily from the results of 1997 operations and net unrealized investment gains. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated sources of funds consist primarily of premiums written and investment income. The principal uses of funds are the payment of claims and expenses. The Company's principal expense categories are policy acquisition costs, underwriting and other expenses and losses incurred on insurance policies. Policy acquisition costs include only those expenses that relate directly to, and vary with premium production, such as compensation of employees involved in underwriting, marketing and policy issuance functions, state premium taxes, and certain other underwriting expenses. Underwriting and other expenses include occupancy costs, personnel-related costs of non-production personnel, and administrative support and compliance costs. The Company generated positive cash flows from operations of approximately $54.6 million, $43.3 million and $22.2 million, respectively, in 1997, 1996 and 1995, as shown on the Consolidated Statements of Cash Flows. Positive cash flows are invested pending future payments of claims and other expenses. Should Amerin Guaranty experience cash flow shortfalls due to significantly higher than anticipated claims, or for other reasons, the Company anticipates funding such shortfalls through sales of short-term investments and, if required, other investment portfolio securities. The Company expects to incur aggregate capital costs of approximately $6 million in 1998 primarily to expand and enhance its computer hardware and software. The Company expects to fund such expenditures with cash flow from operations. Amerin Guaranty is the principal insurance subsidiary of the Company. Amerin Guaranty's risk-to-capital ratio was 16.1:1 at December 31, 1997, compared to 37 13.3:1 at December 31, 1996. This increase was due to the growth in Amerin Guaranty's risk in force during 1997. To provide against the possibility that rapid growth of the Company's business may generate levels of risk in force that could not be supported solely by internally-generated capital, the Company entered into an excess loss agreement with a major reinsurer effective January 1, 1996, and cancelable by the Company for a fee beginning in 2000. The claims-paying ability of the reinsurer is rated AA by S&P. This agreement provides additional support in the event that the Company's risk-to-capital ratio and its combined ratio both exceed specified levels and will be taken into account by S&P in measuring the Company's risk-to-capital ratio to the extent required by rapid growth. Premiums payable with respect to any quarterly period may vary to the extent that the Company's combined insurance risk-to-capital ratio exceeds certain specified levels. YEAR 2000 ISSUE The Company has determined that it will need to modify or replace significant portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and beyond. In April 1996 the Company commenced a major initiative to enhance its entire computer system. While this initiative was not undertaken with the primary goal of addressing the Year 2000 issue, all internal matters relating to the Year 2000 issue will be fully addressed upon completion of this initiative. The Company's comprehensive Year 2000 initiative is being managed by a team of internal staff and outside consultants. The team's activities are designed to ensure that there is no adverse effect on the Company's core business operations and that transactions with customers are fully supported. The Company is well under way with these efforts, which are scheduled to be completed in early 1999. The cost of the Year 2000 initiatives is not expected to be material to the Company's results of operations or financial position. The Company also has initiated discussions with its large customers and certain servicing companies to ensure that those parties have appropriate plans to fully address Year 2000 issues where their systems interface with the Company's systems or could otherwise impact its operations. The Company is assessing the extent to which its operations are vulnerable should those organizations fail to properly convert their computer systems on a timely basis. While the Company believes its planning efforts are adequate to address its Year 2000 concerns, there can be no guarantee that the systems and operations of other companies on which the Company's systems and operations rely will be converted on a timely basis. The failure of these other companies to fully convert their systems and operations on a timely basis could have a material adverse effect on the Company. 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements and supplementary data are indexed in the Index to Financial Statements and Schedules which appears on Page F-1 hereof and incorporated in this Item by reference thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There were no disagreements on accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item with respect to directors will appear in the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders, which will be filed not later than 120 days after the end of the fiscal year covered by this report on Form 10-K, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item will appear in the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders, which will be filed not later than 120 days after the end of the fiscal year covered by this report on Form 10-K, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item will appear in the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders, which will be filed not later than 120 days after the end of the fiscal year covered by this report on Form 10-K, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item will appear in the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders, which will be filed not later than 120 days after the end of the fiscal year covered by this report on Form 10-K, and is incorporated herein by reference. 39 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K: (a) 1. Financial Statements: The consolidated financial statements are indexed in the Index to Financial Statements and Schedules which appears on Page F-1 hereof and incorporated by reference in this Item by reference thereto. 2. Financial Statement Schedules: The financial statement schedules are indexed in the Index to Financial Statements and Schedules which appears on Page F-1 hereof and incorporated by reference in this Item by reference thereto. Other schedules are omitted due to the absence of conditions under which they are required or because the required information is provided in the financial statements or notes thereto. 3. Exhibits: See Exhibit Index on pages 41 to 42 for exhibits filed with this report on Form 10-K. (b) Reports on Form 8-K: On November 6, 1997, the Registrant filed one report on Form 8-K with respect to a distribution of Amerin Corporation Common Stock by The Morgan Stanley Leveraged Equity Fund II, L. P. ("MSLEF") to its various limited partners. Prior to such distribution, MSLEF was the single largest holder of Amerin Corporation Common Stock. 40 (c) EXHIBITS FORM 10-K INDEX TO EXHIBITS Exhibit Page Number Description of Document Number ------- ----------------------- ------ 3.1 Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-97514) and incorporated herein by reference). 3.2 Amended and Restated By-laws of the Registrant (filed as Exhibit 3.2 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-97514) and incorporated herein by reference). 4.1 Amended and Restated Shareholders Agreement dated as of November 1, 1995 among the Registrant, Gerald L. Friedman, Stuart M. Brafman and the Investors party thereto (filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-19757) and incorporated herein by reference). 4.2 Amendment No. 1 to the Amended and Restated Management Stock and Voting Agreement dated as of November 1, 1995 among the Registrant, Gerald L. Friedman and Stuart M. Brafman (filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-97514) and incorporated herein by reference). 4.3 Amended and Restated Employee-Shareholders Agreement dated as of November 1, 1995 among the Registrant and the Employee Grantees party thereto (filed as Exhibit 4.5 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-97514) and incorporated herein by reference). 10.1 Form of Second Amended and Restated Employment Agreement dated as of November 1, 1995 between Amerin Guaranty and Gerald L. Friedman (filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-97514) and incorporated herein by reference). 10.2 Form of Second Amended and Restated Employment Agreement dated as of November 1, 1995 between Amerin Guaranty and Stuart M. Brafman (filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-97514) and incorporated herein by reference). 10.3 Amended and Restated 1992 Long-Term Incentive Plan dated as of November 1, 1995 (filed as Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-97514) and incorporated herein by reference). 41 Exhibit Page Number Description of Document Number ------- ----------------------- ------ 10.5 Support Agreement (Moody's Investors Service, Inc.) dated as of August 26, 1992 among the Registrant (as successor in interest to USMIC Corporation), Amerin Guaranty Corporation (as successor in interest to Merit Mortgage Assurance Corporation) and Security Pacific National Trust Company (filed as Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-97514) and incorporated herein by reference). 10.6 Support Agreement (Second) dated as of August 26, 1992 among the Registrant (as successor in interest to USMIC Corporation), Amerin Guaranty Corporation (as successor in interest to Merit Mortgage Assurance Corporation) and Security Pacific National Trust Company (filed as Exhibit 10.6 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-97514) and incorporated herein by reference). 10.7 Office Lease dated April 13, 1995 by and between Amoco Properties Incorporated and Amerin Guaranty Corporation (filed as Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-97514) and incorporated herein by reference). 10.8 Severance Agreement dated as of September 17, 1997 between Amerin Corporation and Gerald L. Friedman. 10.9 Severance Agreement dated as of September 17, 1997 between Amerin Corporation and Roy J. Kasmar. 10.10 Severance Agreement dated as of September 17, 1997 between Amerin Corporation and Jerome J. Selitto. 10.11 Release and Separation Agreement, dated as of March 1, 1998, between Amerin Guaranty Corporation and John F. Peterson. 21.1 Subsidiaries of the Registrant (filed as Exhibit 21.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-97514) and incorporated herein by reference). 23.1 Consent of Ernst & Young LLP. 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERIN CORPORATION By: /s/ Gerald L. Friedman ---------------------- Gerald L. Friedman Chairman of the Board and Chief Executive Officer Date: March 26, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- /s/ Gerald L. Friedman Director; Chairman of March 26, 1998 - ---------------------- the Board and Chief Gerald L. Friedman Executive Officer (PRINCIPAL EXECUTIVE OFFICER) /s/ David I. Vickers Senior Vice President, March 26, 1998 - --------------------- Chief Financial Officer David I. Vickers (PRINCIPAL FINANCIAL OFFICER and PRINCIPAL ACCOUNTING OFFICER) /s/ Alan E. Goldberg Director March 26, 1998 - -------------------- Alan E. Goldberg /s/ Timothy A. Holt Director March 26, 1998 - ------------------- Timothy A. Holt /s/ Howard I.Hoffen Director March 26, 1998 - ------------------- Howard I. Hoffen /s/ Larry E. Swedroe Director March 26, 1998 - ------------------- Larry E. Swedroe 43 Amerin Corporation and Subsidiaries INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page ---- AUDITED CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets at December 31, 1997 and 1996 . . . . . . . F-3 Consolidated Statements of Operations For the Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . F-4 Consolidated Statements of Redeemable Preferred Stock and Common Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-7 FINANCIAL STATEMENT SCHEDULES II. Condensed Financial Information of Registrant Condensed Balance Sheets . . . . . . . . . . . . . . . . . S-1 Condensed Statements of Operations . . . . . . . . . . . . S-2 Condensed Statements of Cash Flows . . . . . . . . . . . . S-3 III. Supplementary Insurance Information . . . . . . . . . . . . S-4 V. Valuation and Qualifying Accounts . . . . . . . . . . . . . S-5
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 Report of Independent Auditors Board of Directors AMERIN CORPORATION We have audited the accompanying consolidated balance sheets of Amerin Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, redeemable preferred stock and common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Amerin Corporation and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Chicago, Illinois January 22, 1998 F-2 Amerin Corporation and Subsidiaries Consolidated Balance Sheets (in thousands, except share data)
December 31, ------------------------- 1997 1996 ------ ------ ASSETS Investments (NOTE 4): Fixed maturities available-for-sale, at fair value (amortized cost $361,660 in 1997 and $307,734 in 1996). . . . . . . . . . . . . $ 374,320 $ 308,076 Short-term investments . . . . . . . . . . . 3,400 20,717 --------- --------- Total investments . . . . . . . . . . . . . . . . 377,720 328,793 Cash and cash equivalents . . . . . . . . . . . . 4,456 1,176 Accrued investment income . . . . . . . . . . . . 5,872 4,393 Premiums receivable . . . . . . . . . . . . . . . 5,020 5,833 Deferred policy acquisition costs . . . . . . . . 7,776 5,569 Leasehold improvements, furniture and equipment, at cost, net of accumulated depreciation of $2,775 in 1997 and $1,625 in 1996 . . . . . . . . . . . . . . . 9,315 4,368 Goodwill, net of accumulated amortization of $844 in 1997 and $695 in 1996 . . . . . . . . 2,133 2,282 Other intangibles, net of accumulated amortization of $1,616 in 1997 and $1,460 in 1996 . . . . . . . . . . . . . . . . . . . . . . -- 156 Other assets . . . . . . . . . . . . . . . . . . 3,009 2,254 --------- --------- Total assets $ 415,301 $ 354,824 ========= ========= LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Liabilities: Loss reserves (NOTE 5) . . . . . . . . . . . . $ 31,280 $ 18,730 Unearned premiums . . . . . . . . . . . . . . 23,352 20,525 Current income taxes . . . . . . . . . . . . . 790 111 Deferred income taxes . . . . . . . . . . . . 5,015 289 Payable for securities . . . . . . . . . . . -- 9,677 Accrued expenses and other liabilities . . . . 4,709 4,883 --------- --------- Total liabilities 65,146 54,215 Commitments and contingencies (NOTES 7, 11, AND 12) Common stockholders' equity (NOTE 10): Voting Common Stock, $.01 par, 50,000,000 shares authorized, 24,488,725 and 22,471,214 shares issued and outstanding in 1997 and 1996, respectively . . . . . . . . . . . . . . . 245 225 Nonvoting Common Stock, $.01 par, 50,000,000 shares authorized, 1,656,909 and 3,609,625 shares issued and outstanding in 1997 and 1996, respectively . . . . . . . . . . . . . . . 17 36 Additional paid-in capital . . . . . . . . . . 316,642 315,863 Net unrealized investment gains . . . . . . . 8,229 222 Retained earnings (deficit) . . . . . . . . . 25,022 (15,737) --------- --------- Total common stockholders' equity . . . . . . . . 350,155 300,609 --------- --------- Total liabilities and common stockholders' equity $ 415,301 $ 354,824 ========= =========
See accompanying notes. F-3 Amerin Corporation and Subsidiaries Consolidated Statements of Operations
Years Ended December 31, ----------------------------------------- 1997 1996 1995 ------ ------ ------ (in thousands, except per share data) REVENUES: Net premiums written ............................ $ 94,740 $ 70,000 $ 33,946 Increase in unearned premiums.................... (2,411) (7,651) (6,387) -------- -------- -------- Net premiums earned ............................. 92,329 62,349 27,559 Net investment income (NOTE 4)................... 18,607 16,871 7,612 Realized investment gains (NOTE 4)............... 1,167 161 491 -------- -------- -------- Total revenues .................................... 112,103 79,381 35,662 EXPENSES: Losses incurred ................................. 30,272 20,681 7,757 Policy acquisition costs......................... 10,520 8,485 6,641 Underwriting and other expenses ................. 14,643 10,623 6,915 Compensation charge resulting from initial public offering (NOTE 10) .................... -- -- 35,741 -------- -------- -------- Total expenses .................................... 55,435 39,789 57,054 -------- -------- -------- Income (loss) before income taxes ................. 56,668 39,592 (21,392) -------- -------- -------- Income tax expense: Current ......................................... 15,494 11,239 1,375 Deferred ........................................ 415 124 44 -------- -------- -------- Total ........................................ 15,909 11,363 1,419 -------- -------- -------- Net income (loss) ................................. 40,759 28,229 (22,811) Pay-in-kind dividends on preferred stock (NOTE 10). -- -- 5,287 -------- -------- -------- Net income (loss) applicable to common stockholders $40,759 $28,229 $(28,098) ======== ======== ======== Net income (loss) per common share (NOTE 15): Basic ........................................ $ 1.56 $ 1.08 $ (2.32) ======== ======== ======== Diluted....................................... $ 1.54 $ 1.07 $ (2.32) ======== ======== ========
See accompanying notes. F-4 Amerin Corporation and Subsidiaries Consolidated Statements of Redeemable Preferred Stock and Common Stockholders' Equity
COMMON STOCKHOLDERS' EQUITY ----------------------------------------------------------------------------- NET UNREALIZED REDEEMABLE VOTING NONVOTING ADDITIONAL INVESTMENT RETAINED PREFERRED COMMON COMMON PAID-IN GAINS EARNINGS STOCK STOCK STOCK CAPITAL (LOSSES) (DEFICIT) TOTAL ---------- ------ ---------- ---------- ----------- --------- ----- (in thousands) Balance, January 1, 1995 ......... $ 40,755 $ 178 $ 36 $ 78,723 $ (4,988) $ (15,868) $ 58,081 Net loss ......................... -- -- -- -- -- (22,811) (22,811) Issuance of common stock ......... -- 46 -- 235,847 -- -- 235,893 Pay-in-kind dividends on preferred stock ........... 5,287 -- -- -- -- (5,287) (5,287) Redemption of preferred stock .... (46,042) -- -- -- -- -- -- Shares issued under long-term incentive plan................ -- -- -- 44 -- -- 44 Net unrealized investment gains .. -- -- -- -- 8,217 -- 8,217 ---------- ------ ---------- ---------- ----------- --------- ----- Balance, December 31, 1995 ....... -- 224 36 314,614 3,229 (43,966) 274,137 Net income ....................... -- -- -- -- -- 28,229 28,229 Shares issued under long-term incentive plan................ -- 1 -- 1,249 -- -- 1,250 Net unrealized investment losses........................ -- -- -- -- (3,007) -- (3,007) ---------- ------ ---------- ---------- ----------- --------- ----- Balance, December 31, 1996 ....... -- 225 36 315,863 222 (15,737) 300,609 Net income........................ -- -- -- -- -- 40,759 40,759 Shares issued under long-term incentive plan................ -- 1 -- 779 -- -- 780 Nonvoting conversion.............. -- 19 (19) -- -- -- -- Net unrealized investment gains .. -- -- -- -- 8,007 -- 8,007 ---------- ------ ---------- ---------- -------- --------- --------- Balance December 31, 1997......... $ -- $ 245 $ 17 $ 316,642 $ 8,229 $25,022 $ 350,155 ========== ====== ========== ========== ======== ========= =========
See accompanying notes. F-5 Amerin Corporation and Subsidiaries Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31, -------------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 40,759 $ 28,229 $ (22,811) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Change in: Accrued investment income ......................... (1,479) (2,017) (825) Premiums receivable ............................... 813 (3,458) (1,231) Unearned premiums.................................. 2,827 7,815 6,387 Loss reserves ..................................... 12,550 11,638 6,830 Accrued expenses and other liabilities ............ 101 1,301 180 Federal income taxes .............................. 1,094 (365) 644 Policy acquisition costs deferred ................... (9,309) (9,087) (6,812) Policy acquisition costs amortized .................. 7,102 7,937 5,267 Amortization ........................................ 304 472 472 Depreciation ........................................ 1,211 718 501 Realized investment gains ........................... (1,167) (161) (491) Non-cash compensation charge resulting from initial public offering ......................... -- -- 35,741 Other items, net .................................... (230) 240 (1,680) ---------- ---------- ---------- Net cash provided by operating activities ........... 54,576 43,262 22,172 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of: Fixed maturity securities ........................... (115,530) (223,025) (70,842) Short-term investments, net ......................... -- -- (136,011) Property and equipment .............................. (6,294) (1,422) (1,383) Sale or maturity of: Fixed maturity securities ........................... 52,431 55,350 32,271 Short-term investments, net ......................... 17,318 125,242 -- Property and equipment .............................. 29 2 43 ---------- ---------- ---------- Net cash used by investing activities (52,046) (43,853) (175,922) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock .................................. 750 713 200,152 Redemption of preferred stock ............................. -- -- (46,042) ---------- ---------- ---------- Net cash provided by financing activities ................. 750 713 154,110 ---------- ---------- ---------- Net increase in cash and cash equivalents ................. 3,280 122 360 Cash and cash equivalents at beginning of year ............ 1,176 1,054 694 ---------- ---------- ---------- Cash and cash equivalents at end of year .................. $ 4,456 $ 1,176 $ 1,054 ========== ========== ==========
See accompanying notes. F-6 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements 1. BUSINESS Amerin Corporation (Company), through its primary insurance subsidiary, Amerin Guaranty Corporation (Amerin Guaranty), provides mortgage guaranty insurance through lending institutions on first mortgages secured by residential property. A second wholly owned insurance subsidiary, Amerin Re Corporation (Amerin Re) reinsures mortgage guaranty insurance written by Amerin Guaranty. The Company's three largest customers accounted for 69%, 71%, and 71% of net premiums written in 1997, 1996 and 1995, respectively. Additionally, net premiums written in 1997 for the Company's three largest customers were $40 million, $19 million, and $7 million. Similarly, net premiums written in 1996 for the Company's three largest customers were $29 million, $14 million, and $7 million, while in 1995, net premiums written for the Company's three largest customers were $14 million, $7 million, and $3 million. Approximately 23% of the Company's risk in force at December 31, 1997 was concentrated in California. On November 28, 1995, the Company completed an initial public offering of its common stock (see Note 10). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of the Company and its insurance subsidiaries. All significant intercompany accounts and transactions have been eliminated. These financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) which, for the insurance subsidiaries, differ in certain respects from the accounting practices prescribed or permitted by state insurance regulatory authorities (statutory basis) (see Note 3). Significant accounting policies are as follows: USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. INVESTMENTS Fixed maturities that are available for sale are carried at fair value. Unrealized gains and losses on fixed maturities available for sale are excluded from operations and are recorded directly to common stockholders' equity, net of related deferred income taxes. The amortized cost of fixed maturities is adjusted for amortization of premiums to the first call date and the accretion of discounts to maturity. Such adjustments are included in net investment income. Included in fixed maturities are investments in mortgage-backed securities whose amortized cost is determined using the interest method including anticipated prepayments. Prepayment assumptions are obtained from dealer surveys. Short-term investments are carried at cost, which approximates fair value. Cash equivalents are highly liquid investments. Both short-term investments and cash equivalents have maturities of three months or less at the date of purchase. Realized gains and losses on investments are computed using specific amortized costs of the securities sold and are reflected in the statements of operations. F-7 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FINANCIAL INSTRUMENTS The fair values recorded in the financial statements for available-for-sale fixed maturity securities are based principally on quoted market prices. The carrying amounts for other financial instruments approximate their fair values. PREMIUM REVENUE RECOGNITION Premiums are written on an annual, monthly and single premium basis. Annual and monthly premiums written with respect to a policy year are earned on a daily pro rata basis over the policy year. Portions of annual premiums which relate to risk periods extending beyond the policy year are amortized over the period at risk in correspondence with the expiration of risk. Single premiums written for a coverage period of more than one year are amortized over the entire coverage period, principally in correspondence with the expiration of risk. POLICY ACQUISITION COSTS Policy acquisition costs include only those costs that relate directly to, and vary with, premium production. Such costs include compensation of employees involved in underwriting, marketing and policy issuance functions, state premium taxes, and certain other underwriting expenses. Net acquisition costs are deferred and amortized over the period in which the related premiums are earned. Anticipated losses and loss adjustment expenses are considered in determining the recoverability of acquisition costs. LOSS RESERVES Reserves are established for reported insurance losses based on when notices of default of insured mortgage loans are received. Reserves also reflect estimates for losses incurred on notices of default not yet reported by the lender. Reserves are established by management using estimated claim rates and claim amounts in estimating the ultimate loss. Although considerable variability is inherent in such estimates, management believes that the reserves for losses are adequate. Adjustments to reserve estimates are reflected in the financial statements in the periods in which the adjustments are made. REINSURANCE Reinsurance premiums and commissions are accounted for on a basis consistent with the accounting for the original policies issued and the terms of the reinsurance contracts. Prepaid reinsurance premium amounts are reported as assets. LEASEHOLD IMPROVEMENTS, FURNITURE AND EQUIPMENT Leasehold improvements, furniture and equipment consist of office improvements, furniture and fixtures, office equipment, computer hardware and software, which are recorded at cost and charged against income principally over their estimated service lives or, in the case of leasehold improvements, over the term of the lease. Depreciation is computed on the straight-line method over a period of five to ten years. Maintenance and repairs are charged to expense as incurred. GOODWILL AND OTHER INTANGIBLES Goodwill represents the excess of cost over net assets purchased in connection with the 1992 acquisition of Amerin Guaranty by the Company and is amortized on a straight-line basis over 20 years. F-8 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Other intangibles include organization and start-up costs incurred in the first year of operations. These costs are amortized using the straight-line method over five years and are fully amortized at December 31, 1997. INCOME TAXES Deferred income taxes are provided for temporary differences between the financial reporting and tax bases of assets and liabilities. Mortgage guaranty insurance companies are permitted to deduct from taxable income, subject to certain limitations, amounts added to statutory basis contingency loss reserves. The amounts deducted must be included in taxable income in the 10th year after being added to the contingency reserves or upon prior release of such reserves to cover excess losses as permitted by insurance regulators. The deductions from taxable income are only allowed to the extent that United States Mortgage Guaranty Tax and Loss Bonds ("Tax and Loss Bonds") are purchased and held in an amount equal to the tax benefit attributable to such deductions. At December 31, 1997, the Company had investments in Tax and Loss Bonds of $25.3 million. NET INCOME (LOSS) PER COMMON SHARE In 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128 (SFAS 128), "Earnings Per Share", which was required to be adopted on December 31, 1997. SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of stock options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS 128 requirements. EFFECT OF NEW PRONOUNCEMENTS In June 1997, the FASB issued Statement No. 130 (SFAS 130), "Reporting Comprehensive Income," which is effective for years beginning after December 15, 1997. SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 will require that enterprises (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the common stockholders' equity section of the consolidated balance sheets. In June 1997, the FASB also issued Statement No. 131 (SFAS 131), "Disclosure about Segments of an Enterprise and Related Information," which is effective for years beginning after December 15, 1997. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company anticipates adopting these standards in its 1998 financial statements as required. Implementation of these standards is not expected to have a material effect on the Company's financial statements. F-9 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements 3. STATUTORY ACCOUNTING PRACTICES The consolidated financial statements are prepared in conformity with GAAP which, for Amerin Guaranty and Amerin Re, differ in certain respects from statutory basis accounting practices. The following are the significant differences between statutory basis accounting practices and GAAP: - - Investments in bonds are carried at amortized cost on a statutory basis. GAAP requires that such fixed-maturity securities be classified as held-to-maturity, trading, or available-for-sale. Held-to-maturity securities are carried at amortized cost, and securities classified as trading or available-for-sale are carried at fair value. Unrealized holding gains and losses are reported in income for those securities classified as trading and as a separate component of common stockholders' equity for those securities classified as available-for- sale. - - Policy acquisition costs are charged to current operations on a statutory basis as incurred rather than deferred and amortized as related premiums are earned under GAAP. - - A contingency reserve is computed on the basis of statutory requirements for the security of all policyholders, regardless of whether loss contingencies actually exist; such reserves are not permitted under GAAP. - - Certain assets designated as "nonadmitted assets" are charged directly against surplus on a statutory basis but are reflected as assets under GAAP. - - Federal income taxes on a statutory basis are only provided on taxable income for which income taxes are currently payable, while under GAAP, taxes are also provided for temporary differences between the financial reporting and tax bases of assets and liabilities. - - Purchases of Tax and Loss Bonds are recorded as investments on a statutory basis while such purchases are recorded as payments of current income taxes under GAAP. In connection with the Company's November 1995 initial public offering, a nonrecurring non-cash compensation charge was recorded under GAAP related to ownership of the Company's common stock by two employees of Amerin Guaranty. Such non-cash compensation charges, which have no effect on total stockholders' equity, are not recorded on a statutory basis. F-10 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements 3. STATUTORY ACCOUNTING PRACTICES (CONTINUED) The following is a reconciliation of the Company's 1997, 1996 and 1995 consolidated net income (loss) and common stockholders' equity presented on a GAAP basis to the corresponding amounts reported on a statutory basis for the insurance subsidiaries:
Common Stockholders' Net Income (Loss) Equity ---------------- -------------------- (in thousands) 1997: Consolidated GAAP basis amounts .................... $ 40,759 $ 350,155 Company and non-insurance subsidiary amounts and eliminations ................................. 2,192 (9,899) --------- ----------- Insurance subsidiaries GAAP basis amounts .......... 42,951 340,256 Fixed maturities available-for-sale ................ -- (12,635) Deferred policy acquisition costs .................. (2,207) (7,776) Contingency reserve ................................ -- (95,488) Nonadmitted assets ................................. -- (7,961) Deferred income taxes .............................. 355 4,943 Contingency reserve tax deduction .................. 14,350 25,257 --------- ----------- Statutory basis amounts ............................ $ 55,449 $ 246,596 ========= =========== 1996: Consolidated GAAP basis amounts .................... $ 28,229 $ 300,609 Company and non-insurance subsidiary amounts and eliminations ................................ 751 (6,265) --------- ----------- Insurance subsidiaries GAAP basis amounts .......... 28,980 294,344 Fixed maturities available-for-sale ................ -- (388) Deferred policy acquisition costs .................. (1,150) (5,569) Contingency reserve ................................ -- (49,330) Nonadmitted assets ................................. -- (3,587) Deferred income taxes .............................. 122 302 Contingency reserve tax deduction .................. 10,300 10,907 --------- ----------- Statutory basis amounts ............................ $ 38,252 $ 246,679 ========= =========== 1995: Consolidated GAAP basis amounts .................... $ (22,811) $ 274,137 Company only amounts and eliminations .............. 258 (5,789) --------- ----------- Insurance subsidiaries GAAP basis amounts .......... (22,553) 268,348 Fixed maturities available-for-sale ................ -- (4,979) Deferred policy acquisition costs .................. (1,545) (4,419) Compensation expense ............................... 35,741 -- Contingency reserve ................................ -- (18,892) Nonadmitted assets ................................. -- (3,045) Deferred income taxes .............................. 44 1,787 Contingency reserve tax deduction .................. 607 607 --------- ----------- Statutory basis amounts ............................ $ 12,294 $ 239,407 ========= ===========
F-11 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements 4. INVESTMENTS The amortized cost and fair value of investments in fixed-maturity securities are summarized as follows:
Amortized Unrealized Unrealized Cost Gain Loss Fair Value --------- ---------- ---------- ---------- (in thousands) At December 31, 1997: U.S. Treasury........................ $ 30,785 $ 349 $ 58 $ 31,076 States and political subdivisions.... 277,547 11,918 -- 289,465 Corporate securities................. 18,416 317 37 18,696 Mortgage-backed securities........... 34,912 267 96 35,083 --------- ---------- ---------- ---------- Total fixed maturities.................... $ 1,660 12,851 191 $374,320 ========= ========== ========== ========== At December 31, 1996: U.S. Treasury........................ $ 14,687 $ 90 $ 96 $ 14,681 Foreign governments.................. 1,558 -- 14 1,544 States and political subdivisions.... 221,795 2,808 1,492 223,111 Corporate securities................. 25,240 112 210 25,142 Mortgage-backed securities........... 44,454 161 1,017 43,598 --------- ---------- ---------- ---------- Total fixed maturities.................... $307,734 $ 3,171 $2,829 $308,076 ========= ========== ========== ==========
The carrying amount of the Company's fixed-maturity securities can increase or decrease significantly in the near term as a result of changes in market interest rates. A summary of the amortized cost and fair value of investments in fixed-maturity securities at December 31, 1997, by contractual maturity, follows:
Amortized Cost Fair Value -------------- ---------- (in thousands) Due in one year or less........................ $ 601 $ 601 Due after one year through five years.......... 45,171 45,794 Due after five years through ten years......... 151,918 157,553 Due after ten years............................ 129,058 135,289 Mortgage-backed securities..................... 34,912 35,083 -------------- ---------- $361,660 $374,320 ============== ==========
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 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements 6. INVESTMENTS (CONTINUED) Proceeds from sales of fixed-maturity securities were $40.6 million, $46.1 million, and $28.4 million in 1997, 1996 and 1995, respectively. Gross gains and losses realized on those sales are presented below:
Years ended December 31, 1997 1996 1995 ------ ------ ------ (in thousands) Realized on sales of fixed-maturity securities: Gains......................................... $1,224 $ 676 $ 520 Losses........................................ (57) (515) (29) ------ ------ ------ Net realized gains.................................. $1,167 $ 161 $ 491 ====== ====== ======
The changes in net unrealized gains (losses) on investments in fixed-maturity securities were $12.3 million in 1997, ($4.6 million) in 1996, and $10.0 million in 1995. At December 31, 1997, investments with a carrying amount of $8.5 million were on deposit with state insurance departments to satisfy regulatory requirements. The composition of net investment income is as follows:
Years ended December 31, 1997 1996 1995 ------- ------- ------ (in thousands) Fixed-maturity securities $18,580 $15,701 $6,684 Short-term investments 422 1,529 1,087 ------- ------- ------ 19,002 17,230 7,771 Less: Investment expenses 395 359 159 ------- ------- ------ Net investment income $18,607 $16,871 $7,612 ======= ======= ======
F - 13 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements 5. LOSS RESERVES The following table is a reconciliation of the beginning and ending loss reserves for the years shown:
Years ended December 31, --------------------------------- 1997 1996 1995 ------- ------- ------ (in thousands) Balance, January 1....................................... $18,730 $ 7,092 $ 262 Losses and loss adjustment expenses, principally in respect of default notices occurring in: Current year................................... 29,196 20,344 7,037 Prior years.................................... 1,076 337 720 ------- ------- ------ Total losses and loss adjustment expenses...... 30,272 20,681 7,757 ------- ------- ------ Loss and loss adjustment expense payments principally in respect of default notices occurring in: Current year................................... 4,537 3,821 520 Prior years.................................... 13,185 5,222 407 ------- ------- ------ Total payments................................. 17,722 9,043 927 ------- ------- ------ Balance, December 31..................................... $31,280 $18,730 $7,092 ======= ======= ======
6. INCOME TAXES The Company and its subsidiaries file a consolidated federal income tax return. Significant components of the Company's deferred tax liabilities and assets are as follows:
At December 31, 1997 1996 ------ ------ (in thousands) Deferred tax liabilities: Deferred policy acquisition costs........... $2,722 $1,949 Unrealized gain on investments.............. 4,431 120 Tax over book depreciation.................. 396 205 Other....................................... 323 192 ------ ------ Total deferred tax liabilities................... 7,872 2,466 Deferred tax assets: Unearned premium reserves................... 1,594 1,425 Accrued liabilities......................... 43 43 Reserve discounting......................... 773 520 Other....................................... 447 189 ------ ------ Total deferred tax assets........................ 2,857 2,177 ------ ------ Net deferred tax liability....................... $5,015 $ 289 ====== ======
F - 14 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements 6. INCOME TAXES (CONTINUED) The nature of the Company's deferred tax assets and liabilities at December 31, 1997 is such that the general reversal pattern for these temporary differences is expected to result in the full realization of the Company's deferred tax assets. Valuation allowances for deferred tax assets were provided in years prior to 1995 because the Company's historical operating losses represented negative evidence that it was more likely than not that the Company would not be able to utilize the net operating loss carryforwards and unrealized investment losses. For 1995, the Company decreased the valuation allowance by $4.5 million, including a decrease of $1.7 million related to unrealized gains on investments reported as a component of common stockholders' equity. The remaining decrease in the valuation allowance was related principally to the utilization of net operating loss carryforwards. The Company has elected to purchase non-interest bearing Tax and Loss Bonds in lieu of paying federal income taxes to the extent permissible under Internal Revenue Code Section 832(e). The Company accounts for these purchases as a payment of current federal income taxes. The Company purchased $14.4 million and $10.9 million of Tax and Loss Bonds in 1997 and 1996, respectively, as payment of current income taxes, and paid income taxes of $.8 million in 1995. The Company's income tax provision varied from the statutory federal income tax rate applied to its net income (loss) before taxes as follows:
Years ended December 31, 1997 1996 1995 ------- ------- ------- (in thousands) Statutory federal income tax rate applied to income (loss) before taxes........................ $19,834 $13,857 $(7,487) Add (deduct) tax effect of: Nondeductible compensation........................ -- -- 12,509 Tax-exempt interest............................... (4,016) (2,785) (533) Decrease in valuation allowance................... -- -- (2,753) Nondeductible goodwill amortization and other nondeductible expenses................. 113 106 77 Other (net)....................................... (22) 185 (394) ------- ------- ------- Income tax provision................................... $15,909 $11,363 $1,419 ======= ======= =======
7. REINSURANCE Amerin Guaranty reinsures portions of its risks through reinsurance treaties. This process serves to limit Amerin Guaranty's exposure on such risks. Reinsurance ceded reduced premiums earned by $5.2 million in 1997, $1.8 million in 1996 and $.4 million in 1995. Amerin Guaranty would remain liable to its policyholders to the extent that such reinsurers do not meet their obligations under these arrangements. 8. RELATED PARTY TRANSACTIONS During 1997 and 1996, both the Company and its subsidiaries maintained cash accounts at an affiliate of one of the principal stockholders. F - 15 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements 9. INCENTIVE COMPENSATION The Company has a long-term incentive plan (Plan), which provides additional compensation to officers of Amerin Guaranty. Under the Plan, an aggregate of 8.3 million shares of common stock may be issued or sold as restricted stock or sold under incentive stock options, as the result of awards made to Plan participants. Incentive stock options awarded under the Plan vest over a five-year schedule. Plan participants are bound by an agreement not to vote any shares acquired under the Plan, until a future date determined by the Company's board of directors. The company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and, accordingly, recognizes no compensation expense for stock options granted to employees. Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based Compensation", requires disclosure of pro forma information regarding net earnings and earnings per share, using pricing models to estimate the fair value of stock option grants. Had compensation expense for the Company's stock option plans been determined based on the estimated fair value at the date of grant consistent with the methodology prescribed under SFAS 123, approximate net income (loss) and net income (loss) per share would have been as follows:
Years Ended December 31, ------------------------------------ 1997 1996 1995 ------- ------- -------- (in thousands, except per share data) Pro forma net income (loss).................... $38,013 $27,788 $(22,857) Pro forma net income (loss) per common share Basic..................................... $ 1.46 $ 1.07 $ (2.32) Diluted................................... $ 1.45 $ 1.06 $ (2.32)
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:
Years Ended December 31, -------------------------- 1997 1996 1995 ----- ------ ------ Dividend yield........................ 0% 0% 0% Risk-free interest rate............... 6.5% 6.5% 6.5% Volatility............................ 49.4% 51.3% 51.3% Expected life (years)................. 6.0 6.0 6.0
The pro forma effects on net income (loss) and net income (loss) per share are not likely to be representative of the effects on reported net income in future years as 1997, 1996 and 1995 pro forma amounts do not include pro forma compensation expense related to grants made prior to 1995. F - 16 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements 9. INCENTIVE COMPENSATION (CONTINUED) Transactions related to all stock options are as follows:
Years Ended December 31, ------------------------------------------------------------------------ 1997 1996 1995 ------------------------------------------------------------------------ Weighted Weighted Weighted Shares Average Shares Average Shares Average Under Exercise Under Exercise Under Exercise Option Price Option Price Option Price ------ -------- ------ -------- ------ -------- (in thousands, except price data) Beginning Balance 943 $11.40 692 $ 5.11 5,053 $ .85 Granted 1,030 19.04 329 23.02 71 10.32 Exercised (63) 4.54 (73) 4.25 -- -- Canceled (90) 18.10 (5) 5.30 (4,432) .33 ----- ------ --- ------ ------ ------ Ending Balance 1,820 $15.64 943 $11.40 692 $ 5.11 ===== ====== === ====== ====== ====== Exercisable at end of year 445 295 198 =====
Under the plan, 1,016,000 shares were available for grant as awards or options at December 31, 1997. Information regarding options outstanding and exercisable at December 31, 1997 is summarized as follows:
Options Outstanding Options Exercisable -------------------------------------------------------------------------------- Weighted Average Remaining Weighted Weighted Number Contractual Life Average Number Average Exercise Outstanding (in years) Exercise Price Exercisable Price ----------- ---------------- -------------- ----------- ---------------- (in thousands, except price data) $ 4.24 - $ 5.30 504 8.4 $ 4.60 383 $ 4.57 $16.00 - $17.75 830 9.3 17.70 11 16.00 $21.25 - $26.875 486 9.1 23.56 51 23.74 ----------- ---------------- -------------- ----------- ----------- 1,820 9.0 $15.64 445 $ 7.05 =========== ================ ============== =========== ===========
The weighted average fair value per share of options granted was $10.60, $13.07, and $12.11 in 1997, 1996, and 1995, respectively. F - 17 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements 10. PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY PREFERRED STOCK Prior to the redemption on December 1, 1995 of the outstanding shares of 13.5% Redeemable Cumulative Convertible Preferred Stock, each such share was convertible into Common Stock on June 30, 2007. The Company had the option to redeem the outstanding preferred shares at a price ranging from $1,000 to $1,030 per share (plus all accrued and unpaid dividends). The preferred shares were redeemable at the option of the holders upon a change of control of the Company. Dividends on preferred shares were payable on the last day of each quarter. Dividends for 1995 totaled $5.3 million and were paid in additional shares of preferred stock. The preferred shares were nonvoting, unless dividends were in arrears. Assuming 2,547,170 shares of the common stock and related proceeds of the Company's November 1995 initial public offering had been used to redeem the Preferred Stock at the beginning of the year, the 1995 net loss per diluted share would have been reduced to $(1.58). The Company has 10,000,000 authorized shares of preferred stock with a $.01 par value. COMMON STOCK Activity for Amerin Corporation's outstanding Common Stock, $.01 par value, is as follows:
Number of Shares --------------------------- Voting Nonvoting Common Common Stock Stock ---------- ---------- Outstanding at January 1, 1995.................. 17,789,500 3,609,625 Shares issued under long-term incentive plan.... 2,250 -- November 28, 1995 issuance...................... 13,340,000 -- Cancellation of restricted shares............... (8,749,932) -- ---------- --------- Outstanding at December 31, 1995................ 22,381,818 3,609,625 Shares issued under long-term incentive plan.... 22,665 -- Options exercised............................... 72,709 -- Options surrendered............................. (5,978) -- ---------- --------- Outstanding at December 31, 1996................ 22,471,214 3,609,625 Shares issued under long-term incentive plan.... 1,263 -- Options exercised............................... 63,532 -- Conversion to voting common stock............... 1,952,716 (1,952,716) ---------- --------- Outstanding at December 31, 1997................ 24,488,725 1,656,909 ========== =========
F - 18 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements 10. PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY (CONTINUED) Prior to the Company's initial public offering, the Company's Chairman and President owned 11 million shares of common stock. Such shares were subject to certain restrictions including transfer limitations and contingent recall provisions as described in a stock and voting agreement. Prior to 1995, conditions required for the removal of the recall provisions had not been met. On November 28, 1995, the Company completed an initial public offering of its common stock (the Offering). The net proceeds of the Offering were $200.2 million and a portion of the proceeds were used to redeem all of the outstanding shares of the Company's Redeemable Preferred Stock. When the Offering was consummated, the contingent recall provisions on 2,250,068 shares of the common stock owned by the Company's Chairman and President were removed and 8,749,932 shares of common stock owned by such officers, which were in excess of the number of shares to which they were entitled upon consummation of the Offering pursuant to the terms of a management agreement, were canceled without cost to the Company. Additionally, options to purchase 4,374,966 shares of common stock owned by the President prior to the Offering were canceled. The removal of the contingent recall provisions for a portion of the shares owned by the officers resulted in compensation expense of $35.7 million and a corresponding increase in additional paid-in capital. Shares of Voting Common Stock and Nonvoting Common Stock shall rank equally as regards dividend rights, rights on liquidation, and winding up and dissolution. Each holder of shares of Voting Common Stock shall be entitled to one vote per share on each matter on which the stockholders of the Company shall be entitled to vote. Except as otherwise required by law, each outstanding share of Nonvoting Common Stock shall not be entitled to vote on any matter on which the stockholders of the Company shall be entitled to vote. On any matter on which the holders of shares of Voting Common Stock and the holders of Nonvoting Common Stock are entitled to vote, they shall vote together as a single class, and each holder of shares of Nonvoting Common Stock shall be entitled to one vote for each share of such stock. Notwithstanding the foregoing, holders of shares of Nonvoting Common Stock shall be entitled to vote as a separate class on any amendment, repeal or modification of any provision of the Certificate of Incorporation that adversely affects the powers, preferences or special rights of holders of the Nonvoting Common Stock. The Voting Common Stock is convertible into the same number of shares of Nonvoting Common Stock by any regulated stockholder, at any time, provided that the Company will not be required to effect a conversion that would result in a violation by the Company or its subsidiaries, of any law, rule, regulation, or requirement of any governmental authority at that time. Additional restrictions apply to this conversion as defined in the Certificate of Incorporation. The Nonvoting Common Stock is convertible into the same number of shares of Voting Common Stock by any stockholder, at any time, subject to restrictions as defined in the Certificate of Incorporation. 11. COMMITMENTS AND CONTINGENCIES From time to time, the Company and its subsidiaries are involved in certain routine legal proceedings arising in the normal course of their business, none of which is currently expected to have a material adverse effect on the Company's consolidated financial condition or results of operations. The Company entered into a noncancelable operating lease for office space that expires in 2005. In addition to base rental costs, the lease provides for rent escalations resulting from increased assessments for real estate taxes, utilities and maintenance. Aggregate minimum rental commitments under the lease are $.2 million in 1998, $.2 million in 1999, $.2 million in 2000, $.3 million in 2001, $.3 million in 2002 and $.8 million thereafter. Rent expense for 1997, 1996 and 1995 was $.6 million, $.6 million and $.3 million, respectively. The Company has agreed to loan an officer an amount necessary to cover the potential tax liability, if any, that may be incurred by the officer in the event that a determination is made that the receipt of shares of Voting Common Stock constituted a taxable event. F - 19 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements 12. DIVIDEND RESTRICTIONS Under Illinois insurance regulations, Amerin Guaranty and Amerin Re are each required to maintain statutory basis capital and surplus of $1.5 million. The statutory basis capital and surplus of Amerin Guaranty was $218.6 million and $214.1 million at December 31, 1997 and 1996 respectively. The statutory basis capital and surplus of Amerin Re was $28.0 million and $32.6 million at December 31, 1997 and 1996, respectively. Insurance regulations limit the writing of mortgage guaranty insurance to an aggregate amount of insured risk no greater than 25 times the total of statutory capital and surplus and the statutory basis contingency reserve. At December 31, 1997, the Company's insurance subsidiaries' risk-to-capital ratios were below these limits. The payment of dividends from unassigned surplus by the insurance subsidiaries without prior approval of the Illinois Insurance Department is subject to certain restrictions principally including those relating to the greater of 10% of the prior year's statutory basis surplus or net income. The total amount of dividends that could be paid in 1998 without regulatory approval is approximately $2.8 million. In addition, dividend restrictions have been placed on the Company and its subsidiaries by Moody's Investors Services, Inc., Fitch Investors Services, L.P., and Standard & Poor's Corporation (collectively, Rating Agencies) as embodied in various support agreements (Agreements). Those restrictions require that no dividend will be declared or paid if the subsidiaries' net risk in force exceeds the maximum multiple of capital, as specified in the Agreements, or the subsidiaries' rating is less than the minimum rating allowed. 13. STANDBY COMMITMENTS The claims-paying ability of Amerin Guaranty is rated "AA" by Standard & Poor's Corporation, "AA" by Fitch Investors Services, L.P., and "Aa3" by Moody's Investor Services, Inc., based on the respective assessments by each rating service of the creditworthiness of Amerin Guaranty. Creditworthiness is a function of the level of paid-in and other capital, as well as other qualitative considerations. Prior to November 28, 1995, additional capital support was provided via standby capital in the form of standby commitments on the part of certain of the Company's stockholders. The Company was charged fees for the standby commitments that amounted to $.9 million in 1995. 14. QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of unaudited quarterly results of operations for 1997 and 1996 is as follows:
1ST 2ND 3RD 4TH -------- -------- -------- -------- (in thousands, except per share data) 1997 Net premiums earned................ $ 20,491 $ 21,913 $ 24,001 $ 25,924 Net investment income and other.... 4,461 4,597 4,775 5,941 Net income......................... 8,669 9,715 10,529 11,846 Net income per common share: Basic............................ .33 .37 .40 .45 Diluted.......................... .33 .37 .40 .45 1996 Net premiums earned................ $ 12,122 $ 14,755 $ 16,680 $ 18,792 Net investment income and other.... 4,086 3,816 4,366 4,764 Net income......................... 5,674 6,711 7,588 8,256 Net income per common share: Basic............................ .22 .26 .29 .32 Diluted.......................... .22 .25 .29 .31
F - 20 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements 15. NET INCOME (Loss) PER COMMON SHARE The following table sets forth the computation of net income (loss) per common share (in thousands, except per share data):
Years Ended December 31, -------------------------------- 1997 1996 1995 -------------------------------- Net income (loss) $40,759 $28,229 $(22,811) Less pay-in-kind dividends on preferred stock -- -- (5,287) ------- ------- -------- Net income (loss) applicable to common stockholders $40,759 $28,229 $(28,098) ======= ======= ======== Weighted average number of common shares outstanding 26,119 26,038 12,106 Dilutive effect of stock options using the treasury stock method 364 313 -- ------- ------- -------- Weighted average number of common and common equivalent shares outstanding 26,483 26,351 12,106 ======= ======= ======== Net income (loss) per common share: Basic $ 1.56 $ 1.08 $ (2.32) Diluted 1.54 1.07 (2.32)
For 1997, 1996 and 1995, the weighted average number of common shares includes 13,340,000 shares issued on November 28, 1995, in conjunction with the Company's initial public offering. Weighted average shares in 1997, 1996 and 1995 also includes 2,250,068 shares as of November 28, 1995 out of a total of 11,000,000 shares that were previously excluded from weighted average shares due to the fact that such shares were subject to contingent recall provisions and the conditions required for the removal of the recall provisions on the 11,000,000 shares had not been met. The Company's initial public offering removed the recall provisions on 2,250,068 of the 11,000,000 shares and resulted in the cancellation of the remaining 8,749,932 shares (see Note 10). Where the effect of common stock equivalents on net income or loss per share would be antidilutive, they are excluded from the average common and common equivalent shares outstanding. During 1995, the Company's stock options are antidilutive and are excluded from average common and common equivalent shares outstanding. Because preferred stock which was redeemed in 1995 was not convertible until 2007, at which time it was mandatorily convertible, conversion is not assumed for purposes of calculating diluted net loss per share in 1995. F - 21 Amerin Corporation (Parent Company) Schedule II -- Condensed Financial Information of Registrant Condensed Balance Sheets (in thousands)
December 31, --------------------------- 1997 1996 --------- -------- ASSETS Investment in subsidiaries......................................... $340,499 $294,436 Investments Fixed maturities available-for-sale, at fair value............. 805 1,936 Short-term investments......................................... 4 350 -------- -------- Total investments........................................... 809 2,286 Cash............................................................... 20 128 Accrued investment income.......................................... 16 46 Goodwill, net of accumulated amortized (1997 -- $844; 1996 -- $695).................................................. 2,133 2,282 Other intangibles, net of accumulated amortization (1997 -- $1,616; 1996 -- $1,460)................................................ -- 156 Due from Subsidiaries.............................................. 4,682 -- Federal income taxes recoverable................................... 1,803 847 Other assets....................................................... 490 619 -------- -------- Total assets................................................ $350,452 $300,800 ======== ======== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY LIABILITIES Due to subsidiaries................................................ -- 64 Accounts payable and other liabilities............................. 297 127 -------- -------- Total liabilities............................................ 297 191 COMMON STOCKHOLDERS' EQUITY Voting Common Stock............................................. 245 225 Non-voting Common Stock......................................... 17 36 Additional paid-in capital...................................... 316,642 315,863 Net unrealized investment gains................................. 8,229 222 Retained earnings (deficit)..................................... 25,022 (15,737) -------- -------- Total common stockholders's equity................................. 350,155 300,609 -------- -------- Total liabilities and common stockholders' equity.................. $350,452 $300,800 ======== ======== See notes to consolidated financial statements F - 22
Amerin Corporation (Parent Company) Schedule II -- Condensed Financial Information of Registrant (Continued) Condensed Statements of Operations
Year ended December 31, ----------------------------------------- 1997 1996 1995 ------ ------- -------- (in thousands) REVENUES Net investment income......................................... $ 80 $ 149 $ 283 Realized investment losses.................................... (3) -- (2) ------- ------- --------- Total revenues............................................. 77 149 281 EXPENSES Administrative and other...................................... 1,611 1,084 581 ------- ------- --------- Loss before equity in undistributed net income or loss of subsidiaries and income-tax benefit................... (1,534) (935) (300) Equity in undistributed net income (loss) of subsidiaries.................................... 41,860 28,906 (22,554) ------- ------- --------- Net income (loss) before income taxes............................. 40,326 27,971 (22,854) Federal income-tax benefit........................................ (433) (258) (43) ------- ------- --------- Net income (loss)........................................... 40,759 28,229 (22,811) Pay-in-kind dividends on preferred stock.......................... -- -- 5,287 ------- ------- --------- Net income (loss) applicable to common stockholders............... $40,759 $28,229 $(28,098) ======= ======= ========= See notes to consolidated financial statements
F - 23 Amerin Corporation and Subsidiaries Notes to Consolidated Financial Statements Amerin Corporation (Parent Company) Schedule II -- Condensed Financial Information of Registrant (Continued) Condensed Statements of Cash Flows
Year ended December 31, ------------------------------------------ 1997 1996 1995 ----------- -------------- ------------- (in thousands) Net cash provided (used) by operating activities.. $ (1,159) $(1,778) $ 974 Investing activities: Capital contribution to subsidiaries.......... (1,243) -- (152,000) Purchase of: Fixed maturities............................. -- -- (1,977) Short-term investments, net.................. -- -- (1,295) Sale of: Fixed maturities............................. 1,198 -- -- Short-term investments, net.................. 346 945 -- ----------- -------------- ------------- Net cash provided (used) by investing activities........................ 301 945 (155,272) Financing activities: Issuance of common stock....................... 750 713 200,152 Redemption of preferred stock.................. -- -- (46,042) ----------- -------------- ------------- Net cash provided by financing activities.................................. 750 713 154,110 ----------- -------------- ------------- Decrease in cash............................. (108) (120) (188) Cash at beginning of year......................... 128 248 436 ----------- -------------- ------------- Cash at end of year............................... $ 20 $ 128 $ 248 ----------- -------------- ------------- ----------- -------------- -------------
See notes to consolidated financial statements F-24
Amerin Corporation and Subsidiaries Schedule III -- Supplementary Insurance Information Year Ended December 31, - ----------------------------------------------------------------------------------------------------------------------------------- Loss and Benefits, Amortization Deferred Loss Claims, of Deferred Policy Adjustment Unearned Future Net Losses and Policy Other Net Acquisition Expense Premium Policy Premium Investment Settlement Acquisition Operating Premiums Costs Reserves Reserves Benefits Revenues Income Expenses Costs Expenses Written - ----------------------------------------------------------------------------------------------------------------------------------- 1997 Mortgage Guaranty $7,776 $31,280 $23,352 $ -- $92,329 $19,774 $30,272 $7,102 $18,061 $94,740 1996 Mortgage Guaranty $5,569 $18,730 $20,525 $ -- $62,349 $17,032 $20,681 $7,937 $11,171 $70,000 1995 Mortgage Guaranty $4,419 $ 7,092 $12,710 $ -- $27,559 $ 8,103 $ 7,757 $5,268 $44,027 $33,946
F - 25 Amerin Corporation and Subsidiaries Schedule V -- Valuation and Qualifying Accounts
Balance at Beginning of Balance at Year Additions Deductions End of Year ------------ --------- ---------- ----------- Year Ended December 31, 1997 Accumulated amortization of goodwill $ 695 $ 149 $ -- $ 844 Accumulated amortization of furniture and equipment 1,625 1,211 61 2,775 Accumulated amortization of other intangibles 1,460 156 -- 1,616 Year Ended December 31, 1996 Accumulated amortization of goodwill $ 546 $ 149 $ -- $ 695 Accumulated amortization of furniture and equipment 939 718 32 1,625 Accumulated amortization of other intangibles 1,137 323 -- 1,460 Year Ended December 31, 1995: Accumulated amortization of goodwill $ 397 $ 149 $ -- $ 546 Accumulated amortization of furniture and equipment 466 501 28 939 Accumulated amortization of other intangibles 814 323 -- 1,137
F - 26 EX-10.8 2 EXHIBIT 10.8 SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT (this "Agreement"), dated as of September 17, 1997, is made and entered by and between Amerin Corporation, a Delaware corporation (the "Company"), and Gerald L. Friedman (the "Executive"). WITNESSETH: WHEREAS, the Executive is a senior executive of the Company or one or more of its Subsidiaries and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth and financial strength of the Company; WHEREAS, the Company recognizes that, as is the case for most publicly held companies, the possibility of a Change in Control (as defined below) exists; WHEREAS, the Company desires to assure itself of both present and future continuity of management and desires to establish certain minimum severance benefits for certain of its senior executives, including the Executive, applicable in the event of a Change in Control; WHEREAS, the Company wishes to ensure that its senior executives are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change in Control; and WHEREAS, the Company desires to provide additional inducement for the Executive to continue to remain in the ongoing employ of the Company; NOW, THEREFORE, the Company and the Executive agree as follows: 1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Base Pay" means the Executive's annual base salary at a rate not less than the Executive's annual fixed or base compensation as in effect for Executive immediately prior to the occurrence of a Change in Control or such higher rate as may be determined from time to time by the Board or a committee thereof. (b) "Board" means the Board of Directors of the Company. (c) "Cause" means that, prior to any termination pursuant to Section 3(b), the Executive shall have committed: (i) an intentional act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company or any Subsidiary; (ii) intentional wrongful damage to property of the Company or any Subsidiary; (iii) intentional wrongful disclosure of secret processes or confidential information of the Company or any Subsidiary; or (iv) intentional wrongful engagement in any Competitive Activity; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act or failure to act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for "Cause" hereunder unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the Board then in office at a meeting of the Board called and held for such purpose, after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel (if the Executive chooses to have counsel present at such meeting), to be heard before the Board, finding that, in the good faith opinion of the Board, the Executive had committed an act constituting "Cause" as herein defined and specifying the particulars thereof in detail. Nothing herein will limit the right of the Executive or his beneficiaries to contest the validity or propriety of any such determination. (d) "Change in Control" means the occurrence during the Term of any of the following events: (i) The Company is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of the Company immediately prior to such transaction; (ii) The Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than [a majority] of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; or 2 (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) other than an Original Investor has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 25% or more of the combined voting power of the then-outstanding Voting Stock of the Company; Notwithstanding the foregoing provisions of Section 1(d)(iii), unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" shall not be deemed to have occurred for purposes of Section 1(d)(iii) solely because (A) the Company, (B) a Subsidiary, or (C) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company or any Subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 25% or otherwise, or because the Company reports that a change in control of the Company has occurred or will occur in the future by reason of such beneficial ownership. (e) "Competitive Activity" means the Executive's participation, without the written consent of an officer of the Company, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company and such enterprise's sales of any product or service competitive with any product or service of the Company amounted to 10% of such enterprise's net sales for its most recently completely fiscal year and if the Company's net sales of said product or service amounted to 10% of the Company's net sales for its most recently completed fiscal year. "Competitive Activity" will not include (i) the mere ownership of securities in any such enterprise and the exercise of rights appurtenant thereto or (ii) participation in the management of any such enterprise other than in connection with the competitive operations of such enterprise. (f) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Executive is entitled to participate, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist or any equivalent successor 3 policies, plans, programs or arrangements that may be adopted hereafter by the Company, providing perquisites, benefits and service credit for benefits at least as great in the aggregate as are payable thereunder prior to a Change in Control. (g) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (h) "Incentive Pay" means an annual amount equal to not less than the highest aggregate annual bonus, incentive or other payments of cash compensation, in addition to Base Pay, made or to be made in regard to services rendered in any calendar year during the three calendar years immediately preceding the year in which the Change in Control occurred pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Company, or any successor thereto providing benefits at least as great as the benefits payable thereunder prior to a Change in Control. (i) "Original Investor" means any of the five institutional investors which owned any capital stock of the Company as of November 1, 1995. (j) "Severance Period" means the period of time commencing on the date of the first occurrence of a Change in Control and continuing until the earliest of (i) the second anniversary of the occurrence of the Change in Control, (ii) the Executive's death, or (iii) the Executive's attainment of age 65. (k) "Subsidiary" means an entity in which the Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock. (l) "Term" means the period commencing as of the date hereof and expiring as of the later of (i) the close of business on December 31, 2002, or (ii) the expiration of the Severance Period; PROVIDED, HOWEVER, that (A) commencing on January 1, 2002 and each January 1 thereafter, the term of this Agreement will automatically be extended for an additional year unless, not later than September 30 of the immediately preceding year, the Company or the Executive shall have given notice that it or the Executive, as the case may be, does not wish to have the Term extended and (B) subject to the last sentence of Section 9, if, prior to a Change in Control, the Executive ceases for any reason to be an employee of the Company and any Subsidiary, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect. For purposes of this Section 1(k), the Executive shall not be deemed to have ceased to be an employee of the Company and any Subsidiary by reason of the transfer of Executive's employment between the Company and any Subsidiary, or among any Subsidiaries. (m) "Termination Date" means the date on which the Executive's employment is terminated, the effective date of which shall be the date of termination, or such other date that may be specified by the Executive if the termination is pursuant to Section 3(b). 4 (n) "Voting Stock" means securities entitled to vote generally in the election of directors. 2. OPERATION OF AGREEMENT. This Agreement will be effective and binding immediately upon its execution, but, anything in this Agreement to the contrary notwithstanding, this Agreement will not be operative unless and until a Change in Control occurs. Upon the occurrence of a Change in Control at any time during the Term, without further action, this Agreement shall become immediately operative; PROVIDED, HOWEVER, that this Agreement shall not become operative and shall be of no force and effect if operation of this Agreement would cause the Company to be unable to use the pooling of interests method of accounting in connection with the transactions resulting in such Change in Control. 3. TERMINATION FOLLOWING A CHANGE IN CONTROL. (a) In the event of the occurrence of a Change in Control, the Executive's employment may be terminated by the Company during the Severance Period and the Executive shall be entitled to the benefits provided by Section 4 unless such termination is the result of the occurrence of one or more of the following events: (i) The Executive's death; (ii) If the Executive becomes permanently disabled within the meaning of, and begins actually to receive disability benefits pursuant to, the long-term disability plan in effect for, or applicable to, Executive immediately prior to the Change in Control; or (iii) Cause. If, during the Severance Period, the Executive's employment is terminated by the Company or any Subsidiary other than pursuant to Section 3(a)(i), 3(a)(ii) or 3(a)(iii), the Executive will be entitled to the benefits provided by Section 4 hereof. (b) In the event of the occurrence of a Change in Control, the Executive may terminate employment with the Company and any Subsidiary during the Severance Period with the right to severance compensation as provided in Section 4 upon the occurrence of one or more of the following events (regardless of whether any other reason, other than Cause as hereinabove provided, for such termination exists or has occurred, including without limitation other employment): (i) Failure to elect or reelect or otherwise to maintain the Executive in the office or the position, or a substantially equivalent office or position, of or with the Company and/or a Subsidiary, as the case may be, which the Executive held immediately prior to a Change in Control, or the removal 5 of the Executive as a Director of the Company (or any successor thereto) if the Executive shall have been a Director of the Company immediately prior to the Change in Control; (ii) (A) A significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position with the Company and any Subsidiary which the Executive held immediately prior to the Change in Control, (B) a reduction in the aggregate of the Executive's Base Pay and Incentive Pay received from the Company and any Subsidiary, or (C) the termination or denial of the Executive's rights to Employee Benefits or a reduction in the scope or value thereof (except that the level of any such Employee Benefits may be reduced in the event of a corresponding reduction generally applicable to all recipients of or participants in such Employee Benefits), any of which is not remedied by the Company within 10 calendar days after receipt by the Company of written notice from the Executive of such change, reduction or termination, as the case may be; (ii) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer or otherwise) to which all or substantially all of its business and/or assets have been transferred (directly or by operation of law) assumed all duties and obligations of the Company under this Agreement pursuant to Section 11(a); or (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto. (d) A termination by the Company pursuant to Section 3(a) or by the Executive pursuant to Section 3(b) will not affect any rights that the Executive may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits, which rights shall be governed by the terms thereof. 4. SEVERANCE COMPENSATION. (a) If, following the occurrence of a Change in Control, the Company terminates the Executive's employment during the Severance Period other than pursuant to Section 3(a), or if the Executive terminates his employment pursuant to Section 3(b), the Company will pay to the Executive the following amounts within thirty business days after the Termination Date and continue to provide to the Executive the following benefits: (i) A lump sum payment in an amount equal to three (3) times the Base Pay (at the highest rate in effect for any period prior to the Termination Date). 6 (ii) For a period of two years following the Termination Date (the "Continuation Period"), the Company will arrange to provide the Executive with Employee Benefits that are welfare benefits (but not stock option, stock purchase, stock appreciation or similar compensatory benefits) substantially similar to those that the Executive was receiving or entitled to receive immediately prior to the Termination Date (or, if greater, immediately prior to the reduction, termination, or denial described in Section 3(b)(ii)), except that the level of any such Employee Benefits to be provided to the Executive may be reduced in the event of a corresponding reduction generally applicable to all recipients of or participants in such Employee Benefits. If and to the extent that any benefit described in the immediately preceding sentence is not or cannot be paid or provided under any policy, plan, program or arrangement of the Company or any Subsidiary, as the case may be, then the Company will itself pay or provide for the payment to the Executive, his dependents and beneficiaries, of such Employee Benefits. Without otherwise limiting the purposes or effect of Section 5, Employee Benefits otherwise receivable by the Executive pursuant to the first sentence of this Section 4(a)(ii) will be reduced to the extent comparable welfare benefits are actually received by the Executive from another employer during the Continuation Period following the Executive's Termination Date, and any such benefits actually received by the Executive shall be reported by the Executive to the Company. (b) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided hereunder on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite "prime rate" as quoted from time to time during the relevant period in the Northeast Edition of THE WALL STREET JOURNAL. Such interest will be payable as it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. (c) Notwithstanding any provision of this Agreement to the contrary, the parties' respective rights and obligations under this Section 4 and under Sections 5 and 7 will survive any termination or expiration of this Agreement or the termination of the Executive's employment following a Change in Control for any reason whatsoever. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, but subject to Section 5(h), in the event that this Agreement shall become operative and it shall be determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of the Executive paid or payable or distributed or distributable pursuant to the terms of this Agreement (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the 7 Internal Revenue Code of 1986, as amended (the "Code") (or any successor provision thereto) by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"). The Gross-Up Payment shall be in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of Section 5(f), all determinations required to be made under this Section 5, including whether an Excise Tax is payable by the Executive and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to the Executive and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Executive in his sole discretion. The Executive shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Executive within 30 calendar days after the Termination Date, if applicable, and any such other time or times as may be requested by the Company or the Executive. If the Accounting Firm determines that any Excise Tax is payable by the Executive, the Company shall pay the required Gross-Up Payment to the Executive within fifteen business days after receipt of such determination and calculations with respect to any Payment to the Executive. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 5(f) and the Executive thereafter is required to make a payment of any Excise Tax, the Executive shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Executive as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, the Executive within fifteen business days after receipt of such determination and calculations. 8 (c) The Company and the Executive shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by Section 5(b). Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Executive. (d) The federal, state and local income or other tax returns filed by the Executive shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by the Executive. The Executive shall make proper payment of the amount of any Excise Payment, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Executive's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, the Executive shall within fifteen business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 5(b) shall be borne by the Company. If such fees and expenses are initially paid by the Executive, the Company shall reimburse the Executive the full amount of such fees and expenses within fifteen business days after receipt from the Executive of a statement therefor and reasonable evidence of his payment thereof. (f) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than 10 business days after the Executive actually receives notice of such claim and the Executive shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Executive). The Executive shall not pay such claim prior to the earlier of (i) the expiration of the 30-calendar-day period following the date on which he gives such notice to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; 9 (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Executive, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 5(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 5(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that the Executive may participate therein at his own cost and expense) and may, at its option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the Company directs the Executive to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and PROVIDED FURTHER, HOWEVER, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (g) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(f), the Executive receives any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 5(f)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by the Executive of an amount advanced 10 by the Company pursuant to Section 5(f), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial or refund prior to the expiration of 30 calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to the Executive pursuant to this Section 5. (h) Notwithstanding any provision of this Agreement to the contrary, if (i) but for this sentence, the Company would be obligated to make a Gross-Up Payment to the Executive, (ii) the aggregate "present value" of the "parachute payments" to be paid or provided to the Executive under this Agreement or otherwise does not exceed 1.15 multiplied by three times the Executive's "base amount," and (iii) but for this sentence, the net after-tax benefit to the Executive of the Gross-Up Payment would not exceed $50,000 (taking into account both income taxes and any Excise Tax) as compared to the maximum net after-tax benefit to the Executive of parachute payments the present value of which is not equal to or greater than three times the Executive's base amount, then the payments and benefits to be paid or provided under this Agreement will be reduced to the minimum extent necessary (but in no event to less than zero) so that no portion of any payment or benefit to the Executive, as so reduced, constitutes an "excess parachute payment." For purposes of this Section 5(h), the terms "excess parachute payment," "present value," "parachute payment," and "base amount" will have the meanings assigned to them by Section 280G of the Code. The determination of whether any reduction in such payments or benefits to be provided under this Agreement is required pursuant to the preceding sentence will be made at the expense of the Company, if requested by the Executive or the Company, by the Accounting Firm. The fact that the Executive's right to payments or benefits may be reduced by reason of the limitations contained in this Section 5(h) will not of itself limit or otherwise affect any other rights of the Executive other than pursuant to this Agreement. In the event that any payment or benefit intended to be provided under this Agreement or otherwise is required to be reduced pursuant to this Section 5(h), the Executive will be entitled to designate the payments and/or benefits to be so reduced in order to give effect to this Section 5(h). The Company will provide the Executive with all information reasonably requested by the Executive to permit the Executive to make such designation. In the event that the Executive fails to make such designation within 10 business days of the Termination Date, the Company may effect such reduction in any manner it deems appropriate. 6. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will be difficult and may be impossible for the Executive to find reasonably comparable employment following the Termination Date and that the non- competition covenant contained in Section 8 will further limit the employment opportunities for the Executive. Accordingly, the payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement is hereby acknowledged by the Company to 11 be reasonable, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise, except as expressly provided in the last sentence of Section 4(a)(ii). 7. LEGAL FEES AND EXPENSES. It is the intent of the Company that the Executive not be required to incur legal fees and the related expenses associated with the interpretation, enforcement or defense of Executive's rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of Executive's choice, at the expense of the Company as hereafter provided, to advise and represent the Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive's entering into an attorney-client relationship with such counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. Without respect to whether the Executive prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys' and related fees and expenses incurred by the Executive in connection with any of the foregoing. 8. COMPETITIVE ACTIVITY. During a period ending one year following the Termination Date, if the Executive shall have received or shall be receiving benefits under Section 4, and, if applicable, Section 5, the Executive shall not, without the prior written consent of the Company, which consent shall not be unreasonably withheld, engage in any Competitive Activity. 9. EMPLOYMENT RIGHTS. Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company or any Subsidiary prior to or following any Change in Control. Any termination of employment of the Executive or the removal of the Executive from the office or position in the Company or any Subsidiary following the commencement of any discussion with a third person that ultimately results in a Change in Control shall be deemed to be a termination or removal of the Executive after a Change in Control for purposes of this Agreement. 12 10. WITHHOLDING OF TAXES. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 11. SUCCESSORS AND BINDING AGREEMENT. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 11(a) and 11(b). Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 11(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 12. NOTICES. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as Federal Express, UPS, or Purolator, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to the Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 13 13. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Illinois, without giving effect to the principles of conflict of laws of such State. 14. VALIDITY. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 15. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. 14 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. Amerin Corporation By: /S/Randolph C. Sailer II ________________________ Senior Vice President /s/ GERALD L. FRIEDMAN _________________________ Gerald L. Friedman EX-10.9 3 EXHIBIT 10.9 SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT (this "Agreement"), dated as of September 17, 1997, is made and entered by and between Amerin Corporation, a Delaware corporation (the "Company"), and Roy J. Kasmar (the "Executive"). WITNESSETH: WHEREAS, the Executive is a senior executive of the Company or one or more of its Subsidiaries and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth and financial strength of the Company; WHEREAS, the Company recognizes that, as is the case for most publicly held companies, the possibility of a Change in Control (as defined below) exists; WHEREAS, the Company desires to assure itself of both present and future continuity of management and desires to establish certain minimum severance benefits for certain of its senior executives, including the Executive, applicable in the event of a Change in Control; WHEREAS, the Company wishes to ensure that its senior executives are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change in Control; and WHEREAS, the Company desires to provide additional inducement for the Executive to continue to remain in the ongoing employ of the Company; NOW, THEREFORE, the Company and the Executive agree as follows: 1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Base Pay" means the Executive's annual base salary at a rate not less than the Executive's annual fixed or base compensation as in effect for Executive immediately prior to the occurrence of a Change in Control or such higher rate as may be determined from time to time by the Board or a committee thereof. (b) "Board" means the Board of Directors of the Company. (c) "Cause" means that, prior to any termination pursuant to Section 3(b), the Executive shall have committed: (i) an intentional act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company or any Subsidiary; (ii) intentional wrongful damage to property of the Company or any Subsidiary; (iii) intentional wrongful disclosure of secret processes or confidential information of the Company or any Subsidiary; or (iv) intentional wrongful engagement in any Competitive Activity; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act or failure to act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for "Cause" hereunder unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the Board then in office at a meeting of the Board called and held for such purpose, after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel (if the Executive chooses to have counsel present at such meeting), to be heard before the Board, finding that, in the good faith opinion of the Board, the Executive had committed an act constituting "Cause" as herein defined and specifying the particulars thereof in detail. Nothing herein will limit the right of the Executive or his beneficiaries to contest the validity or propriety of any such determination. (d) "Change in Control" means the occurrence during the Term of any of the following events: (i) The Company is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of the Company immediately prior to such transaction; (ii) The Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than [a majority] of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; or 2 (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) other than an Original Investor has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 25% or more of the combined voting power of the then-outstanding Voting Stock of the Company; Notwithstanding the foregoing provisions of Section 1(d)(iii), unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" shall not be deemed to have occurred for purposes of Section 1(d)(iii) solely because (A) the Company, (B) a Subsidiary, or (C) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company or any Subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 25% or otherwise, or because the Company reports that a change in control of the Company has occurred or will occur in the future by reason of such beneficial ownership. (e) "Competitive Activity" means the Executive's participation, without the written consent of an officer of the Company, in the management of any other mortgage guaranty insurance company or any majority or sole owner of any mortgage guaranty insurance company, including becoming an employee, owner (except for passive investments of not more than one percent of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter security market), officer, agent, consultant or director of any such company or owner thereof. (f) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Executive is entitled to participate, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter by the Company, providing perquisites, benefits and service credit for benefits at least as great in the aggregate as are payable thereunder prior to a Change in Control. 3 (g) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (h) "Incentive Pay" means an annual amount equal to not less than the highest aggregate annual bonus, incentive or other payments of cash compensation, in addition to Base Pay, made or to be made in regard to services rendered in any calendar year during the three calendar years immediately preceding the year in which the Change in Control occurred pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Company, or any successor thereto providing benefits at least as great as the benefits payable thereunder prior to a Change in Control. (i) "Original Investor" means any of the five institutional investors which owned any capital stock of the Company as of November 1, 1995. (j) "Severance Period" means the period of time commencing on the date of the first occurrence of a Change in Control and continuing until the earliest of (i) the second anniversary of the occurrence of the Change in Control, (ii) the Executive's death, or (iii) the Executive's attainment of age 65. (k) "Subsidiary" means an entity in which the Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock. (l) "Term" means the period commencing as of the date hereof and expiring as of the later of (i) the close of business on December 31, 2002, or (ii) the expiration of the Severance Period; PROVIDED, HOWEVER, that (A) commencing on January 1, 2002 and each January 1 thereafter, the term of this Agreement will automatically be extended for an additional year unless, not later than September 30 of the immediately preceding year, the Company or the Executive shall have given notice that it or the Executive, as the case may be, does not wish to have the Term extended and (B) subject to the last sentence of Section 9, if, prior to a Change in Control, the Executive ceases for any reason to be an employee of the Company and any Subsidiary, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect. For purposes of this Section 1(k), the Executive shall not be deemed to have ceased to be an employee of the Company and any Subsidiary by reason of the transfer of Executive's employment between the Company and any Subsidiary, or among any Subsidiaries. (m) "Termination Date" means the date on which the Executive's employment is terminated, the effective date of which shall be the date of termination, or such other date that may be specified by the Executive if the termination is pursuant to Section 3(b). (n) "Voting Stock" means securities entitled to vote generally in the election of directors. 4 2. OPERATION OF AGREEMENT. This Agreement will be effective and binding immediately upon its execution, but, anything in this Agreement to the contrary notwithstanding, this Agreement will not be operative unless and until a Change in Control occurs. Upon the occurrence of a Change in Control at any time during the Term, without further action, this Agreement shall become immediately operative; PROVIDED, HOWEVER, that this Agreement shall not become operative and shall be of no force and effect if operation of this Agreement would cause the Company to be unable to use the pooling of interests method of accounting in connection with the transactions resulting in such Change in Control. 3. TERMINATION FOLLOWING A CHANGE IN CONTROL. (a) In the event of the occurrence of a Change in Control, the Executive's employment may be terminated by the Company during the Severance Period and the Executive shall be entitled to the benefits provided by Section 4 unless such termination is the result of the occurrence of one or more of the following events: (i) The Executive's death; (ii) If the Executive becomes permanently disabled within the meaning of, and begins actually to receive disability benefits pursuant to, the long-term disability plan in effect for, or applicable to, Executive immediately prior to the Change in Control; or (iii) Cause. If, during the Severance Period, the Executive's employment is terminated by the Company or any Subsidiary other than pursuant to Section 3(a)(i), 3(a)(ii) or 3(a)(iii), the Executive will be entitled to the benefits provided by Section 4 hereof. (b) In the event of the occurrence of a Change in Control, the Executive may terminate employment with the Company and any Subsidiary during the Severance Period with the right to severance compensation as provided in Section 4 upon the occurrence of one or more of the following events (regardless of whether any other reason, other than Cause as hereinabove provided, for such termination exists or has occurred, including without limitation other employment): (i) Failure to elect or reelect or otherwise to maintain the Executive in the office or the position, or a substantially equivalent office or position, of or with the Company and/or a Subsidiary, as the case may be, which the Executive held immediately prior to a Change in Control, or the removal of the Executive as a Director of the Company (or any successor thereto) if the Executive shall have been a Director of the Company immediately prior to the Change in Control; 5 (ii) (A) A significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position with the Company and any Subsidiary which the Executive held immediately prior to the Change in Control, (B) a reduction in the aggregate of the Executive's Base Pay and Incentive Pay received from the Company and any Subsidiary, or (C) the termination or denial of the Executive's rights to Employee Benefits or a reduction in the scope or value thereof (except that the level of any such Employee Benefits may be reduced in the event of a corresponding reduction generally applicable to all recipients of or participants in such Employee Benefits), any of which is not remedied by the Company within 10 calendar days after receipt by the Company of written notice from the Executive of such change, reduction or termination, as the case may be; (ii) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer or otherwise) to which all or substantially all of its business and/or assets have been transferred (directly or by operation of law) assumed all duties and obligations of the Company under this Agreement pursuant to Section 11(a); or (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto. (d) A termination by the Company pursuant to Section 3(a) or by the Executive pursuant to Section 3(b) will not affect any rights that the Executive may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits, which rights shall be governed by the terms thereof. 4. SEVERANCE COMPENSATION. (a) If, following the occurrence of a Change in Control, the Company terminates the Executive's employment during the Severance Period other than pursuant to Section 3(a), or if the Executive terminates his employment pursuant to Section 3(b), the Company will pay to the Executive the following amounts within thirty business days after the Termination Date and continue to provide to the Executive the following benefits: (i) A lump sum payment in an amount equal to three (3) times the Base Pay (at the highest rate in effect for any period prior to the Termination Date). (ii) For a period of two years following the Termination Date (the "Continuation Period"), the Company will arrange to provide the Executive with Employee Benefits that are welfare benefits (but not stock 6 option, stock purchase, stock appreciation or similar compensatory benefits) substantially similar to those that the Executive was receiving or entitled to receive immediately prior to the Termination Date (or, if greater, immediately prior to the reduction, termination, or denial described in Section 3(b)(ii)), except that the level of any such Employee Benefits to be provided to the Executive may be reduced in the event of a corresponding reduction generally applicable to all recipients of or participants in such Employee Benefits. If and to the extent that any benefit described in the immediately preceding sentence is not or cannot be paid or provided under any policy, plan, program or arrangement of the Company or any Subsidiary, as the case may be, then the Company will itself pay or provide for the payment to the Executive, his dependents and beneficiaries, of such Employee Benefits. Without otherwise limiting the purposes or effect of Section 5, Employee Benefits otherwise receivable by the Executive pursuant to the first sentence of this Section 4(a)(ii) will be reduced to the extent comparable welfare benefits are actually received by the Executive from another employer during the Continuation Period following the Executive's Termination Date, and any such benefits actually received by the Executive shall be reported by the Executive to the Company. (b) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided hereunder on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite "prime rate" as quoted from time to time during the relevant period in the Northeast Edition of THE WALL STREET JOURNAL. Such interest will be payable as it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. (c) Notwithstanding any provision of this Agreement to the contrary, the parties' respective rights and obligations under this Section 4 and under Sections 5 and 7 will survive any termination or expiration of this Agreement or the termination of the Executive's employment following a Change in Control for any reason whatsoever. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, but subject to Section 5(h), in the event that this Agreement shall become operative and it shall be determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of the Executive paid or payable or distributed or distributable pursuant to the terms of this Agreement (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any successor provision thereto) by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the 7 Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"). The Gross-Up Payment shall be in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of Section 5(f), all determinations required to be made under this Section 5, including whether an Excise Tax is payable by the Executive and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to the Executive and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Executive in his sole discretion. The Executive shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Executive within 30 calendar days after the Termination Date, if applicable, and any such other time or times as may be requested by the Company or the Executive. If the Accounting Firm determines that any Excise Tax is payable by the Executive, the Company shall pay the required Gross-Up Payment to the Executive within fifteen business days after receipt of such determination and calculations with respect to any Payment to the Executive. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 5(f) and the Executive thereafter is required to make a payment of any Excise Tax, the Executive shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Executive as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, the Executive within fifteen business days after receipt of such determination and calculations. (c) The Company and the Executive shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in 8 connection with the preparation and issuance of the determinations and calculations contemplated by Section 5(b). Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Executive. (d) The federal, state and local income or other tax returns filed by the Executive shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by the Executive. The Executive shall make proper payment of the amount of any Excise Payment, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Executive's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, the Executive shall within fifteen business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 5(b) shall be borne by the Company. If such fees and expenses are initially paid by the Executive, the Company shall reimburse the Executive the full amount of such fees and expenses within fifteen business days after receipt from the Executive of a statement therefor and reasonable evidence of his payment thereof. (f) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than 10 business days after the Executive actually receives notice of such claim and the Executive shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Executive). The Executive shall not pay such claim prior to the earlier of (i) the expiration of the 30-calendar-day period following the date on which he gives such notice to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; 9 (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Executive, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 5(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 5(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that the Executive may participate therein at his own cost and expense) and may, at its option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the Company directs the Executive to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and PROVIDED FURTHER, HOWEVER, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (g) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(f), the Executive receives any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 5(f)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(f), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial or refund prior to the expiration of 30 calendar days after such determination, then such advance shall be forgiven and shall not be required to be 10 repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to the Executive pursuant to this Section 5. (h) Notwithstanding any provision of this Agreement to the contrary, if (i) but for this sentence, the Company would be obligated to make a Gross-Up Payment to the Executive, (ii) the aggregate "present value" of the "parachute payments" to be paid or provided to the Executive under this Agreement or otherwise does not exceed 1.15 multiplied by three times the Executive's "base amount," and (iii) but for this sentence, the net after-tax benefit to the Executive of the Gross-Up Payment would not exceed $50,000 (taking into account both income taxes and any Excise Tax) as compared to the maximum net after-tax benefit to the Executive of parachute payments the present value of which is not equal to or greater than three times the Executive's base amount, then the payments and benefits to be paid or provided under this Agreement will be reduced to the minimum extent necessary (but in no event to less than zero) so that no portion of any payment or benefit to the Executive, as so reduced, constitutes an "excess parachute payment." For purposes of this Section 5(h), the terms "excess parachute payment," "present value," "parachute payment," and "base amount" will have the meanings assigned to them by Section 280G of the Code. The determination of whether any reduction in such payments or benefits to be provided under this Agreement is required pursuant to the preceding sentence will be made at the expense of the Company, if requested by the Executive or the Company, by the Accounting Firm. The fact that the Executive's right to payments or benefits may be reduced by reason of the limitations contained in this Section 5(h) will not of itself limit or otherwise affect any other rights of the Executive other than pursuant to this Agreement. In the event that any payment or benefit intended to be provided under this Agreement or otherwise is required to be reduced pursuant to this Section 5(h), the Executive will be entitled to designate the payments and/or benefits to be so reduced in order to give effect to this Section 5(h). The Company will provide the Executive with all information reasonably requested by the Executive to permit the Executive to make such designation. In the event that the Executive fails to make such designation within 10 business days of the Termination Date, the Company may effect such reduction in any manner it deems appropriate. 6. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will be difficult and may be impossible for the Executive to find reasonably comparable employment following the Termination Date and that the non-competition covenant contained in Section 8 will further limit the employment opportunities for the Executive. Accordingly, the payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement is hereby acknowledged by the Company to be reasonable, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive 11 hereunder or otherwise, except as expressly provided in the last sentence of Section 4(a)(ii). 7. LEGAL FEES AND EXPENSES. It is the intent of the Company that the Executive not be required to incur legal fees and the related expenses associated with the interpretation, enforcement or defense of Executive's rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of Executive's choice, at the expense of the Company as hereafter provided, to advise and represent the Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive's entering into an attorney-client relationship with such counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. Without respect to whether the Executive prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys' and related fees and expenses incurred by the Executive in connection with any of the foregoing. 8. COMPETITIVE ACTIVITY. During a period ending one year following the Termination Date, if the Executive shall have received or shall be receiving benefits under Section 4, and, if applicable, Section 5, the Executive shall not, without the prior written consent of the Company, which consent shall not be unreasonably withheld, engage in any Competitive Activity. 9. EMPLOYMENT RIGHTS. Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company or any Subsidiary prior to or following any Change in Control. Any termination of employment of the Executive or the removal of the Executive from the office or position in the Company or any Subsidiary following the commencement of any discussion with a third person that ultimately results in a Change in Control shall be deemed to be a termination or removal of the Executive after a Change in Control for purposes of this Agreement. 10. WITHHOLDING OF TAXES. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 12 11. SUCCESSORS AND BINDING AGREEMENT. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 11(a) and 11(b). Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 11(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 12. NOTICES. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as Federal Express, UPS, or Purolator, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to the Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 13. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of 13 the State of Illinois, without giving effect to the principles of conflict of laws of such State. 14. VALIDITY. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 15. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. 14 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. Amerin Corporation By: /s/ Randolph C. Sailer II _________________________ Senior Vice President /s/ Roy J. Kasmar _________________________ Roy J. Kasmar 15 EX-10.10 4 EXHIBIT 10.10 SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT (this "Agreement"), dated as of September 17, 1997, is made and entered by and between Amerin Corporation, a Delaware corporation (the "Company"), and Jerome J. Selitto (the "Executive"). WITNESSETH: WHEREAS, the Executive is a senior executive of the Company or one or more of its Subsidiaries and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth and financial strength of the Company; WHEREAS, the Company recognizes that, as is the case for most publicly held companies, the possibility of a Change in Control (as defined below) exists; WHEREAS, the Company desires to assure itself of both present and future continuity of management and desires to establish certain minimum severance benefits for certain of its senior executives, including the Executive, applicable in the event of a Change in Control; WHEREAS, the Company wishes to ensure that its senior executives are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change in Control; and WHEREAS, the Company desires to provide additional inducement for the Executive to continue to remain in the ongoing employ of the Company; NOW, THEREFORE, the Company and the Executive agree as follows: 1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Base Pay" means the Executive's annual base salary at a rate not less than the Executive's annual fixed or base compensation as in effect for Executive immediately prior to the occurrence of a Change in Control or such higher rate as may be determined from time to time by the Board or a committee thereof. (b) "Board" means the Board of Directors of the Company. (c) "Cause" means that, prior to any termination pursuant to Section 3(b), the Executive shall have committed: (i) an intentional act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company or any Subsidiary; (ii) intentional wrongful damage to property of the Company or any Subsidiary; (iii) intentional wrongful disclosure of secret processes or confidential information of the Company or any Subsidiary; or (iv) intentional wrongful engagement in any Competitive Activity; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act or failure to act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for "Cause" hereunder unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the Board then in office at a meeting of the Board called and held for such purpose, after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel (if the Executive chooses to have counsel present at such meeting), to be heard before the Board, finding that, in the good faith opinion of the Board, the Executive had committed an act constituting "Cause" as herein defined and specifying the particulars thereof in detail. Nothing herein will limit the right of the Executive or his beneficiaries to contest the validity or propriety of any such determination. (d) "Change in Control" means the occurrence during the Term of any of the following events: (i) The Company is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of the Company immediately prior to such transaction; (ii) The Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than [a majority] of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; or 2 (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) other than an Original Investor has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 25% or more of the combined voting power of the then-outstanding Voting Stock of the Company; Notwithstanding the foregoing provisions of Section 1(d)(iii), unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" shall not be deemed to have occurred for purposes of Section 1(d)(iii) solely because (A) the Company, (B) a Subsidiary, or (C) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company or any Subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 25% or otherwise, or because the Company reports that a change in control of the Company has occurred or will occur in the future by reason of such beneficial ownership. (e) "Competitive Activity" means the Executive's participation, without the written consent of an officer of the Company, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company and such enterprise's sales of any product or service competitive with any product or service of the Company amounted to 10% of such enterprise's net sales for its most recently completely fiscal year and if the Company's net sales of said product or service amounted to 10% of the Company's net sales for its most recently completed fiscal year. "Competitive Activity" will not include (i) the mere ownership of securities in any such enterprise and the exercise of rights appurtenant thereto or (ii) participation in the management of any such enterprise other than in connection with the competitive operations of such enterprise. (f) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Executive is entitled to participate, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist or any equivalent successor 3 policies, plans, programs or arrangements that may be adopted hereafter by the Company, providing perquisites, benefits and service credit for benefits at least as great in the aggregate as are payable thereunder prior to a Change in Control. (g) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (h) "Incentive Pay" means an annual amount equal to not less than the highest aggregate annual bonus, incentive or other payments of cash compensation, in addition to Base Pay, made or to be made in regard to services rendered in any calendar year during the three calendar years immediately preceding the year in which the Change in Control occurred pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Company, or any successor thereto providing benefits at least as great as the benefits payable thereunder prior to a Change in Control. (i) "Original Investor" means any of the five institutional investors which owned any capital stock of the Company as of November 1, 1995. (j) "Severance Period" means the period of time commencing on the date of the first occurrence of a Change in Control and continuing until the earliest of (i) the second anniversary of the occurrence of the Change in Control, (ii) the Executive's death, or (iii) the Executive's attainment of age 65. (k) "Subsidiary" means an entity in which the Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock. (l) "Term" means the period commencing as of the date hereof and expiring as of the later of (i) the close of business on December 31, 2002, or (ii) the expiration of the Severance Period; PROVIDED, HOWEVER, that (A) commencing on January 1, 2002 and each January 1 thereafter, the term of this Agreement will automatically be extended for an additional year unless, not later than September 30 of the immediately preceding year, the Company or the Executive shall have given notice that it or the Executive, as the case may be, does not wish to have the Term extended and (B) subject to the last sentence of Section 9, if, prior to a Change in Control, the Executive ceases for any reason to be an employee of the Company and any Subsidiary, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect. For purposes of this Section 1(k), the Executive shall not be deemed to have ceased to be an employee of the Company and any Subsidiary by reason of the transfer of Executive's employment between the Company and any Subsidiary, or among any Subsidiaries. (m) "Termination Date" means the date on which the Executive's employment is terminated, the effective date of which shall be the date of termination, or such other date that may be specified by the Executive if the termination is pursuant to Section 3(b). 4 (n) "Voting Stock" means securities entitled to vote generally in the election of directors. 2. OPERATION OF AGREEMENT. This Agreement will be effective and binding immediately upon its execution, but, anything in this Agreement to the contrary notwithstanding, this Agreement will not be operative unless and until a Change in Control occurs. Upon the occurrence of a Change in Control at any time during the Term, without further action, this Agreement shall become immediately operative; PROVIDED, HOWEVER, that this Agreement shall not become operative and shall be of no force and effect if operation of this Agreement would cause the Company to be unable to use the pooling of interests method of accounting in connection with the transactions resulting in such Change in Control. 3. TERMINATION FOLLOWING A CHANGE IN CONTROL. (a) In the event of the occurrence of a Change in Control, the Executive's employment may be terminated by the Company during the Severance Period and the Executive shall be entitled to the benefits provided by Section 4 unless such termination is the result of the occurrence of one or more of the following events: (i) The Executive's death; (ii) If the Executive becomes permanently disabled within the meaning of, and begins actually to receive disability benefits pursuant to, the long-term disability plan in effect for, or applicable to, Executive immediately prior to the Change in Control; or (iii) Cause. If, during the Severance Period, the Executive's employment is terminated by the Company or any Subsidiary other than pursuant to Section 3(a)(i), 3(a)(ii) or 3(a)(iii), the Executive will be entitled to the benefits provided by Section 4 hereof. (b) In the event of the occurrence of a Change in Control, the Executive may terminate employment with the Company and any Subsidiary during the Severance Period with the right to severance compensation as provided in Section 4 upon the occurrence of one or more of the following events (regardless of whether any other reason, other than Cause as hereinabove provided, for such termination exists or has occurred, including without limitation other employment): (i) Failure to elect or reelect or otherwise to maintain the Executive in the office or the position, or a substantially equivalent office or position, of or with the Company and/or a Subsidiary, as the case may be, which the Executive held immediately prior to a Change in Control, or the removal 5 of the Executive as a Director of the Company (or any successor thereto) if the Executive shall have been a Director of the Company immediately prior to the Change in Control; (ii) (A) A significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position with the Company and any Subsidiary which the Executive held immediately prior to the Change in Control, (B) a reduction in the aggregate of the Executive's Base Pay and Incentive Pay received from the Company and any Subsidiary, or (C) the termination or denial of the Executive's rights to Employee Benefits or a reduction in the scope or value thereof (except that the level of any such Employee Benefits may be reduced in the event of a corresponding reduction generally applicable to all recipients of or participants in such Employee Benefits), any of which is not remedied by the Company within 10 calendar days after receipt by the Company of written notice from the Executive of such change, reduction or termination, as the case may be; (ii) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer or otherwise) to which all or substantially all of its business and/or assets have been transferred (directly or by operation of law) assumed all duties and obligations of the Company under this Agreement pursuant to Section 11(a); or (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto. (d) A termination by the Company pursuant to Section 3(a) or by the Executive pursuant to Section 3(b) will not affect any rights that the Executive may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits, which rights shall be governed by the terms thereof. 4. SEVERANCE COMPENSATION. (a) If, following the occurrence of a Change in Control, the Company terminates the Executive's employment during the Severance Period other than pursuant to Section 3(a), or if the Executive terminates his employment pursuant to Section 3(b), the Company will pay to the Executive the following amounts within thirty business days after the Termination Date and continue to provide to the Executive the following benefits: (i) A lump sum payment in an amount equal to three (3) times the Base Pay (at the highest rate in effect for any period prior to the Termination Date). 6 (ii) For a period of two years following the Termination Date (the "Continuation Period"), the Company will arrange to provide the Executive with Employee Benefits that are welfare benefits (but not stock option, stock purchase, stock appreciation or similar compensatory benefits) substantially similar to those that the Executive was receiving or entitled to receive immediately prior to the Termination Date (or, if greater, immediately prior to the reduction, termination, or denial described in Section 3(b)(ii)), except that the level of any such Employee Benefits to be provided to the Executive may be reduced in the event of a corresponding reduction generally applicable to all recipients of or participants in such Employee Benefits. If and to the extent that any benefit described in the immediately preceding sentence is not or cannot be paid or provided under any policy, plan, program or arrangement of the Company or any Subsidiary, as the case may be, then the Company will itself pay or provide for the payment to the Executive, his dependents and beneficiaries, of such Employee Benefits. Without otherwise limiting the purposes or effect of Section 5, Employee Benefits otherwise receivable by the Executive pursuant to the first sentence of this Section 4(a)(ii) will be reduced to the extent comparable welfare benefits are actually received by the Executive from another employer during the Continuation Period following the Executive's Termination Date, and any such benefits actually received by the Executive shall be reported by the Executive to the Company. (b) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided hereunder on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite "prime rate" as quoted from time to time during the relevant period in the Northeast Edition of THE WALL STREET JOURNAL. Such interest will be payable as it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. (c) Notwithstanding any provision of this Agreement to the contrary, the parties' respective rights and obligations under this Section 4 and under Sections 5 and 7 will survive any termination or expiration of this Agreement or the termination of the Executive's employment following a Change in Control for any reason whatsoever. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, but subject to Section 5(h), in the event that this Agreement shall become operative and it shall be determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of the Executive paid or payable or distributed or distributable pursuant to the terms of this Agreement (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the 7 Internal Revenue Code of 1986, as amended (the "Code") (or any successor provision thereto) by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"). The Gross-Up Payment shall be in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of Section 5(f), all determinations required to be made under this Section 5, including whether an Excise Tax is payable by the Executive and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to the Executive and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Executive in his sole discretion. The Executive shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Executive within 30 calendar days after the Termination Date, if applicable, and any such other time or times as may be requested by the Company or the Executive. If the Accounting Firm determines that any Excise Tax is payable by the Executive, the Company shall pay the required Gross-Up Payment to the Executive within fifteen business days after receipt of such determination and calculations with respect to any Payment to the Executive. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 5(f) and the Executive thereafter is required to make a payment of any Excise Tax, the Executive shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Executive as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, the Executive within fifteen business days after receipt of such determination and calculations. 8 (c) The Company and the Executive shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by Section 5(b). Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Executive. (d) The federal, state and local income or other tax returns filed by the Executive shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by the Executive. The Executive shall make proper payment of the amount of any Excise Payment, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Executive's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, the Executive shall within fifteen business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 5(b) shall be borne by the Company. If such fees and expenses are initially paid by the Executive, the Company shall reimburse the Executive the full amount of such fees and expenses within fifteen business days after receipt from the Executive of a statement therefor and reasonable evidence of his payment thereof. (f) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than 10 business days after the Executive actually receives notice of such claim and the Executive shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Executive). The Executive shall not pay such claim prior to the earlier of (i) the expiration of the 30-calendar-day period following the date on which he gives such notice to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; 9 (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Executive, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 5(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 5(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that the Executive may participate therein at his own cost and expense) and may, at its option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the Company directs the Executive to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and PROVIDED FURTHER, HOWEVER, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (g) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(f), the Executive receives any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 5(f)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by the Executive of an amount advanced 10 by the Company pursuant to Section 5(f), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial or refund prior to the expiration of 30 calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to the Executive pursuant to this Section 5. (h) Notwithstanding any provision of this Agreement to the contrary, if (i) but for this sentence, the Company would be obligated to make a Gross-Up Payment to the Executive, (ii) the aggregate "present value" of the "parachute payments" to be paid or provided to the Executive under this Agreement or otherwise does not exceed 1.15 multiplied by three times the Executive's "base amount," and (iii) but for this sentence, the net after-tax benefit to the Executive of the Gross-Up Payment would not exceed $50,000 (taking into account both income taxes and any Excise Tax) as compared to the maximum net after-tax benefit to the Executive of parachute payments the present value of which is not equal to or greater than three times the Executive's base amount, then the payments and benefits to be paid or provided under this Agreement will be reduced to the minimum extent necessary (but in no event to less than zero) so that no portion of any payment or benefit to the Executive, as so reduced, constitutes an "excess parachute payment." For purposes of this Section 5(h), the terms "excess parachute payment," "present value," "parachute payment," and "base amount" will have the meanings assigned to them by Section 280G of the Code. The determination of whether any reduction in such payments or benefits to be provided under this Agreement is required pursuant to the preceding sentence will be made at the expense of the Company, if requested by the Executive or the Company, by the Accounting Firm. The fact that the Executive's right to payments or benefits may be reduced by reason of the limitations contained in this Section 5(h) will not of itself limit or otherwise affect any other rights of the Executive other than pursuant to this Agreement. In the event that any payment or benefit intended to be provided under this Agreement or otherwise is required to be reduced pursuant to this Section 5(h), the Executive will be entitled to designate the payments and/or benefits to be so reduced in order to give effect to this Section 5(h). The Company will provide the Executive with all information reasonably requested by the Executive to permit the Executive to make such designation. In the event that the Executive fails to make such designation within 10 business days of the Termination Date, the Company may effect such reduction in any manner it deems appropriate. 6. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will be difficult and may be impossible for the Executive to find reasonably comparable employment following the Termination Date and that the non- competition covenant contained in Section 8 will further limit the employment opportunities for the Executive. Accordingly, the payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement is hereby acknowledged by the Company to 11 be reasonable, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise, except as expressly provided in the last sentence of Section 4(a)(ii). 7. LEGAL FEES AND EXPENSES. It is the intent of the Company that the Executive not be required to incur legal fees and the related expenses associated with the interpretation, enforcement or defense of Executive's rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of Executive's choice, at the expense of the Company as hereafter provided, to advise and represent the Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive's entering into an attorney-client relationship with such counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. Without respect to whether the Executive prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys' and related fees and expenses incurred by the Executive in connection with any of the foregoing. 8. COMPETITIVE ACTIVITY. During a period ending one year following the Termination Date, if the Executive shall have received or shall be receiving benefits under Section 4, and, if applicable, Section 5, the Executive shall not, without the prior written consent of the Company, which consent shall not be unreasonably withheld, engage in any Competitive Activity. 9. EMPLOYMENT RIGHTS. Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company or any Subsidiary prior to or following any Change in Control. Any termination of employment of the Executive or the removal of the Executive from the office or position in the Company or any Subsidiary following the commencement of any discussion with a third person that ultimately results in a Change in Control shall be deemed to be a termination or removal of the Executive after a Change in Control for purposes of this Agreement. 12 10. WITHHOLDING OF TAXES. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 11. SUCCESSORS AND BINDING AGREEMENT. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 11(a) and 11(b). Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 11(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 12. NOTICES. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as Federal Express, UPS, or Purolator, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to the Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 13 13. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Illinois, without giving effect to the principles of conflict of laws of such State. 14. VALIDITY. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 15. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. 14 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. Amerin Corporation By: /s/ Randolph C. Sailer II ------------------------- Senior Vice President /s/ JEROME J. SELITTO -------------------------- Jerome J. Selitto EX-10.11 5 EXHIBIT 10.11 EXHIBIT 10.11 RELEASE AND SEPARATION AGREEMENT This is an Agreement between John F. Peterson ("Employee") of 214 Laurel, San Anselmo, California 94960, and Amerin Guaranty Corporation, an Illinois stock insurance company, including its officers, directors, employees, attorneys, benefit plans and plan administrators, affiliates, agents, successors and/or assigns (collectively, "Employer"). I. VALUABLE CONSIDERATION In exchange for his entering into this Agreement, Employer will provide Employee with the following consideration: 1. Continuation of Employee's medical insurance premiums under the Employer's medical plans for a period of twelve months from April 30, 1998. Premiums will be paid by Employer, but Employee must elect this benefit. 2. Acceleration of vesting of options to purchase 12, 874 shares of the Common Stock of Amerin Corporation at an exercise price per share of $5.26, which options were originally scheduled to vest in two equal installments of 6,437 on each of January 1, 1999, and 2000. Pursuant to this Agreement, such 12,874 options shall vest as of May 1, 1998, and must be exercised not later than July 31, 1998. In return for the acceleration of vesting of these options to purchase 12,874 shares, Employee agrees that he shall not be entitled to exercise the options to purchase 5,600 shares that would other wise become exercisable as of April 21, 1998. 3. In response to any written request for information from any prospective employer, Employer will provide only Employee's position and dates of employment as of the date of termination. Employee acknowledges the above consideration is over and above anything owed to Employee by law, contract or under the policies of Employer, and that it is provided to him expressly in exchange for entering into this Agreement. II. TERMINATION OF EMPLOYMENT Employee's employment with Employer in the capacity of Senior Vice President, Marketing, shall be terminated pursuant to resignation of Employee as of April 30, 1998. Employee acknowledges his continuing obligations with respect to non-competition, all as set forth in Equity Award Agreements previously entered into between Employee and Amerin Corporation. III. RELEASE AND WAIVER By signing this Agreement, Employee releases and waives all legal claims of any nature whatsoever which Employee has or may have against Employer as of the date of this Agreement is signed by him. This release and waiver includes but is not limited to: 1. any claims for wrongful termination, defamation or any other common law claims; 2. any claims for breach of any written or oral contract, including but not limited to any contract of employment; 3. any claims of discrimination, harassment or retaliation based on such things as age, national origin, race, religion, sex, sexual orientation, or physical or mental disability or medical condition; and 4. except for the severance amounts and benefits referenced in Paragraph I above, the payment of any accrued unused vacation to which Employee may be entitled by law, any claims for any compensation of any sort, including but not limited to salary, severance pay, benefits, commissions and bonuses. This release and waiver includes all claims that may arise by contract, under the common law and under all federal, state and local statutes, ordinances, rules, regulations and orders, including but not limited to any claim or cause of action based on the Fair Labor Standards Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Civil Rights Acts of 1866, 1871 and 1991, the Rehabilitation Act of 1973, the Employee Retirement Income Security Act of 1974, the Vietnam era Veterans' Readjustment Assistance Act of 1974, Executive Order 11246, the Illinois Wage Payment and Collection Act, the Illinois Human Rights Act, the Cook County Human Rights Ordinance and the Chicago Human Rights Ordinance, as each of them has been or may be amended. Employee warrants that he has not and will not institute any lawsuit, claim, action, charge, complaint, petition, appeal, accusatory pleading or proceeding of any kind against Employer, and Employee waives any right to any form of recovery or compensation from any legal action brought by him or on his behalf in connection with Employee's employment or the termination of his employment with Employer. Employee warrants that, at the time of execution of this Agreement, he has not instituted and has no present plans to institute any lawsuit, claim, action, or charge against Employer. IV. CONFIDENTIALITY Employee acknowledges that by reason of his employment by Employer he has had access to highly confidential business information of Employer, the misappropriation of which could harm the business interests of Employer, including but not limited to financial information, financing plans and arrangements, personnel information and records, customer records and information, business plans and marketing strategies. Employee hereby agrees not to use or disclose such confidential information at any time in the future. Employee hereby also acknowledges his statutory and common law 2 obligation to refrain from using, for himself or in the interests of others, and from disclosing to others, all such confidential information. Employee also agrees that he will keep the circumstances of his resignation and the existence and terms of this Agreement strictly confidential, and that he will not discuss them with or reveal them to anyone other than his legal representative(s) or as may be required by law. V. NON-DISPARAGEMENT Employee agrees that he has not and will not make any oral or written statements about Employer and/or its financial condition, personnel, business methods or otherwise, which are intended or reasonably likely to disparage Employer in the community or among its customers. VI. REMEDIES Employee acknowledges that his breach of Paragraph IV or V of this Agreement could result in irreparable harm to Employer, and that money damages would be an insufficient remedy. Therefore, the parties agree that Employer will be entitled to injunctive and other equitable relief should Employee breach Paragraph IV or V, as well as actual damages, costs and attorneys' fees. Employee also agrees that he will repay the severance payment amounts provided pursuant to Paragraph I(1), (2) and (3) of this Agreement should he breach this Agreement in any way. VII. KNOWING AND VOLUNTARY RELEASE Employee agrees that his signing of this Agreement has been knowing and voluntary and has not been coerced or threatened. Employee also agrees that he has been given sufficient time with an attorney before signing this Agreement. VIII. ENTIRE AGREEMENT AND SEVERABILITY The parties agree that this Agreement sets forth the entire agreement between them and supersedes any other written or oral understanding they may have had. The parties also agree and acknowledge that no other promises or agreements have been offered for this Agreement (other than those described above) and that no other promises or agreements between the parties will be binding unless they have been reduced to writing and signed by the parties. Employee and Employer further agree that, if any portion of this Agreement is held to be invalid or legally unenforceable, the remain portions of this Agreement will not be affected and will be given full force and effect. IX. NON-ADMISSION The parties acknowledge that this Agreement does not constitute any admission by Employee or Employer of any wrongdoing or liability whatsoever, but results from the desire of the parties to resolve all actual and potential disputes between them. X. APPLICABLE LAW All provisions of this Agreement will be construed and governed by Illinois law without regard to the laws of any other jurisdiction. Any suit, claim or other 3 legal proceeding arising out of or relating to Employee's employment, his termination from employment or this Agreement shall be brought exclusively in the federal or state courts located in Cook County, Illinois, and Employee and Employer hereby submit to personal jurisdiction in the State of Illinois and to venue in such courts. XI. RESOLUTION OF ALL MATTERS This Agreement resolves all matters between the parties relating to Employee's employment and his resignation and termination of employment with Employer. This Agreement becomes effective and binding when it is signed, witnessed and dated by Employee and delivered to Employer. AMERIN GUARANTY CORPORATION (Employer) By: /S/ROY J. KASMAR Date: March 1, 1998 ---------------------- Roy J. Kasmar President JOHN F. PETERSON (Employee) /S/ JOHN F. PETERSON Date: March 1, 1998 - ----------------------- 4 EX-23.1 6 CONSENT OF ERNST & YOUNG Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-826) pertaining to the 1992 Long-Term Stock Incentive Plan of Amerin Corporation of our report dated January 22, 1998, with respect to the consolidated financial statements and schedules of Amerin Corporation and subsidiaries included in its Annual Report on Form 10-K for the year ended December 31, 1997. ERNST & YOUNG LLP Chicago, Illinois March 26, 1998 EX-27.1 7 EXHIBIT 27-1
7 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 374,320 0 0 0 0 0 377,720 4,456 0 7,776 415,301 31,280 23,352 0 0 0 0 0 262 349,893 415,301 92,329 18,607 1,167 0 30,272 10,520 14,643 56,668 15,909 40,759 0 0 0 40,759 1.56 1.54 18,730 29,196 1,076 4,537 13,185 31,280 0
EX-27.2 8 EXHIBIT 27-2
7 1,000 YEAR YEAR DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 308,076 151,021 0 0 0 0 0 0 0 0 0 0 328,793 296,982 1,176 1,054 0 0 5,569 4,419 354,824 316,328 18,730 7,092 20,525 12,710 0 0 0 0 0 0 0 0 0 0 261 260 300,348 273,877 354,824 316,328 62,349 27,559 16,871 7,612 161 491 0 0 20,681 7,757 8,485 6,641 10,623 42,656 39,592 (21,392) 11,363 1,419 28,229 (22,811) 0 0 0 0 0 0 28,229 (28,098) 1.08 (2.32) 1.07 (2.32) 7,092 262 20,344 7,037 337 720 3,821 520 5,222 407 18,730 7,092 0 0
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