EXHIBIT 13.1
Item 6. Selected Financial Data
Eleven Year Summary of Financial and Operating Data
(Dollars in thousands, except per share data or otherwise noted)
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
Summary of Consolidated Operations:
Net premiums written ................... $ 571,253 $ 489,100 $ 432,052 $ 403,020 $ 314,021 $ 277,747
=========== =========== =========== =========== =========== ===========
Premiums earned ........................ $ 558,623 $ 491,226 $ 453,948 $ 412,738 $ 328,756 $ 296,345
Investment income, less
investment expense ................... 95,142 84,681 83,136 67,442 62,041 56,774
Realized capital gains, net ............ 509 24,636 19,584 14,296 11,934 3,064
Other income ........................... 15,850 20,366 7,979 6,948 2,309 3,802
----------- ----------- ----------- ----------- ----------- -----------
Total revenues ......................... 670,124 620,909 564,647 501,424 405,040 359,985
Total losses and expenses (1) .......... 380,038 353,961 321,780 279,318 224,499 221,434
----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations before taxes .............. 290,086 266,948 242,867 222,106 180,541 138,551
Income (loss) from
discontinued operations .............. -- -- -- -- -- --
Income tax expense (benefit) (2) ....... 85,620 76,588 67,558 64,188 45,310 32,419
----------- ----------- ----------- ----------- ----------- -----------
Net income ............................. $ 204,466 $ 190,360 $ 175,309 $ 157,918 $ 135,231 $ 106,132
=========== =========== =========== =========== =========== ===========
U.S. Mortgage Insurance Operating Ratios:
Loss ratio ............................. 24.7% 32.8% 38.2% 41.9% 38.5% 40.5%
Expense ratio .......................... 29.2% 25.5% 22.7% 18.4% 24.9% 30.1%
----------- ----------- ----------- ----------- ----------- -----------
Combined ratio ......................... 53.9% 58.3% 60.9% 60.3% 63.4% 70.6%
=========== =========== =========== =========== =========== ===========
Consolidated Balance Sheet Data:
Total assets ........................... $ 2,101,762 $ 1,777,870 $ 1,686,603 $ 1,509,919 $ 1,304,440 $ 1,097,421
Reserve for losses and loss
adjustment expenses .................. $ 282,000 $ 215,259 $ 202,387 $ 199,774 $ 192,087 $ 173,885
Long-term debt ......................... $ 145,367 $ 99,476 $ 99,409 $ 99,342 $ -- $ --
Preferred capital securities
of subsidiary trust .................. $ 99,075 $ 99,040 $ 99,006 $ -- $ -- $ --
Shareholders' equity ................... $ 1,217,268 $ 1,097,515 $ 1,061,180 $ 986,862 $ 870,503 $ 687,178
Shares Outstanding (thousands).......... 44,702 45,418 48,692 51,765 52,515 52,500
Per Share Data:
Net income
Operating ........................... $ 4.51 $ 3.69 $ 3.23 $ 2.83 $ 2.43 $ 1.98
Basic ............................... $ 4.55 $ 4.04 $ 3.50 $ 3.01 $ 2.58 $ 2.02
Diluted (3) ......................... $ 4.52 $ 4.02 $ 3.49 $ 3.00 $ 2.57 $ 2.02
Shareholders' equity ................... $ 27.23 $ 24.16 $ 21.79 $ 19.06 $ 16.58 $ 13.09
Price/Earnings Ratio (4) ............... 10.8 8.9 14.9 13.0 12.5 --
Stock Price(5): Close ................. 48 13/16 32 59/64 48 13/64 36 59/64 30 11/64 --
High .................. 55 1/2 57 49 21/64 40 35 43/64 --
Low ................... 26 43/64 22 31 53/64 26 37/64 24
Cash dividends declared ................ $ 0.14 $ 0.13 $ 0.13 $ 0.13 $ 0.10 $ --
PMI Operating and Statutory Data:
Number of policies in force ............ 749,985 714,210 698,831 700,084 657,800 612,806
Default rate ........................... 2.12% 2.31% 2.38% 2.19% 1.98% 1.88%
Persistency ............................ 71.9% 68.0% 80.8% 83.3% 86.4% 83.6%
Direct primary insurance
in force (in millions) ............... $ 86,729 $ 80,682 $ 77,787 $ 77,312 $ 71,430 $ 65,982
Direct primary risk in force
(in millions) ........................ $ 21,159 $ 19,324 $ 18,092 $ 17,336 $ 15,130 $ 13,243
Statutory capital ...................... $ 1,372,273 $ 1,193,899 $ 1,114,342 $ 988,475 $ 824,156 $ 659,402
Risk-to-capital ratio .................. 14.8:1 14.9:1 14.6:1 15.9:1 15.8:1 17.7:1
New insurance written (NIW) ............ $28,732,505 $27,820,065 $15,307,147 $17,882,702 $14,459,260 $18,441,612
Policies issued ........................ 219,038 211,161 119,190 142,900 119,631 156,055
Return on Equity ....................... 18.5% 19.0% 18.3% 17.8% 18.1% 17.3%
Tax Rate ............................... 29.5% 28.7% 27.8% 28.9% 25.1% 23.4%
NIW market share ....................... 16.3% 14.8% 12.7% 14.1% 13.2% 14.0%
Total PMI Employees ...................... 1,113 1,016 916 586 578 586
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Summary of Consolidated Operations:
Net premiums written ................... $ 291,089 $ 208,602 $ 143,305 $ 120,532 $ 102,940
============ ============ ========== =========== ===========
Premiums earned ........................ $ 268,554 $ 173,039 $ 120,195 $ 101,913 $ 91,447
Investment income, less
investment expense ................... 45,733 40,847 40,402 38,261 35,943
Realized capital gains, net ............ 1,229 686 1,335 (524) (437)
Other income ........................... -- -- -- -- --
------------ ------------ ---------- ----------- -----------
Total revenues ......................... 315,516 214,572 161,932 139,650 126,953
Total losses and expenses (1) .......... 202,543 119,912 39,879 78,979 86,572
------------ ------------ ---------- ----------- -----------
Income from continuing
operations before taxes .............. 112,973 94,660 122,053 60,671 40,381
Income (loss) from
discontinued operations .............. (28,863) 6,726 3,709 1,562 974
Income tax expense (benefit) (2) ....... 24,305 (10,911) 69,661 9,649 2,535
------------ ------------ ---------- ----------- -----------
Net income ............................. $ 59,805 $ 112,297 $ 56,101 $ 52,584 $ 38,820
============ ============ ========== =========== ===========
U.S. Mortgage Insurance Operating Ratios:
Loss ratio ............................. 41.4% 33.2% 3.1% 47.4% 61.8%
Expense ratio .......................... 28.2% 27.0% 25.3% 25.5% 29.2%
------------ ------------ ---------- ----------- -----------
Combined ratio ......................... 69.6% 60.2% 28.4% 72.9% 91.0%
============ ============ ========== =========== ===========
Consolidated Balance Sheet Data:
Total assets ........................... $ 985,129 $ 815,136 $ 663,215 $ 569,550 $ 493,853
Reserve for losses and loss
adjustment expenses .................. $ 135,471 $ 94,002 $ 78,045 $ 115,805 $ 125,210
Long-term debt ......................... $ -- $ -- $ -- $ -- $ --
Preferred capital securities
of subsidiary trust .................. $ -- $ -- $ -- $ -- $ --
Shareholders' equity ................... $ 575,300 $ 513,583 $ 399,489 $ 338,632 $ 286,591
Shares Outstanding ..................... $ 52,500 $ 52,500 $ 52,500 $ 52,500 $ 52,500
Per Share Data:
Net income
Operating ........................... $ 1.12 $ 2.13 $ 1.05 $ 1.01 $ 0.74
Basic ............................... $ 1.14 $ 2.14 $ 1.07 $ 1.00 $ 0.74
Diluted (3) ......................... $ 1.14 $ 2.14 $ 1.07 $ 1.00 $ 0.74
Shareholders' equity ................... $ 10.96 $ 9.78 $ 7.61 $ 6.45 $ 5.46
Price/Earnings Ratio (4) ............... $ -- $ -- $ -- $ -- $ --
Stock Price(5): Close ................. $ -- $ -- $ -- $ -- $ --
High .................. $ -- $ -- $ -- $ -- $ --
Low ................... $ -- $ -- $ -- $ -- $ --
Cash dividends declared ................ $ -- $ -- $ -- $ -- $ --
PMI Operating and Statutory Data:
Number of policies in force ............ 543,924 428,745 347,232 313,035 300,429
Default rate ........................... 1.81% 2.03% 2.38% 2.38% 2.46%
Persistency ............................ 70.0% 74.6% 85.2% 86.5% 85.9%
Direct primary insurance
in force (in millions) ............... $ 56,991 $ 43,698 $ 31,982 $ 26,938 $ 24,448
Direct primary risk in force
(in millions) ........................ $ 11,267 $ 8,676 $ 6,481 $ 5,554 $ 5,152
Statutory capital ...................... $ 494,621 $ 456,931 $ 372,568 $ 314,037 $ 272,687
Risk-to-capital ratio .................. 20.8:1 19.0:1 18.8:1 18.6:1 19.5:1
New insurance written (NIW) ............ $ 25,469,907 $ 19,463,000 $8,663,000 $ 5,795,000 $ 5,117,000
Policies issued ........................ 207,356 161,893 75,095 49,943 45,134
Return on Equity ....................... 11.0% 24.6% 15.2% 16.8% 13.5%
Tax Rate ............................... 21.5% -11.5% 57.1% 15.9% 6.3%
NIW market share ....................... 18.6% 19.4% 15.9% 14.9% 13.7%
Total PMI Employees ...................... 632 529 410 400 379
(1) In 1991, the Company significantly revised its estimate for losses and loss
adjustment expense, reducing total losses by $42.1 million and the loss
ratio by 35 percentage points, and increasing income from continuing
operations by $27.8 million
(2) During 1991, the Company increased its tax liabilities and income tax
expense by $40.9 million in light of an unfavorable judgment by the U. S.
Tax Court. In 1992, the 1991 judgement was overturned, and the Company re-
evaluated its tax balances and reduced its tax liabilities and income tax
expense by $30.9 million.
(3) Diluted earning per share per Statement of Financial Accounting Standards
No. 128. "Earnings per Share
(4) Based on closed price as of 12/31 on trailing twelve month operating.
(5) Close price as of 12/31. High and Low price for trailing twelve month period
adjusted for 3-for-2 stock split.
(6) Dividends adjusted to reflect 3-for-2 stock split.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement
Certain written and oral statements made or incorporated by reference from time
to time by the Company or its representatives in this document, other documents
filed with the Securities and Exchange Commission, press releases, conferences,
or otherwise that are not historical facts, or are preceded by, followed by or
that include the words "believes", "expects", "anticipates", "estimates", or
similar expressions, and that relate to future plans, events or performance are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements include the
following: (i) that statement that management believes this shift from refinance
activity to purchase money generally increases the private mortgage insurance
penetration rate; (ii) the statement that management anticipates that with
stable to increasing interest rates, the refinancing trend will continue to
decrease in 2000; (iii) the statement that management believes any increase in
the maximum FHA loan amount could have an adverse effect on the competitive
position of PMI and, consequently, could materially and adversely affect the
Company's financial condition and results of operations; (iv) the statement that
during 2000, management expects the percentage of PMI's risk related to risk-
share programs, excluding pool risk, to continue to increase as a percentage of
total risk; (v) the statement that management is uncertain about the amount of
new pool risk that will be written in 2000, but believes total new 2000 pool
risk will be less than in 1999; (vi) the statement that management expected the
Fannie Mae and Freddie Mac reduction in mortgage insurance coverage requirements
would have negatively impacted the growth rate of direct risk in force; however,
PMI's percentage of insurance in force with higher coverage percentages
continues to increase as mortgage lenders and investors continue to prefer MI
policies with higher coverage percentages; (vii) the statement that management
anticipates that the percentage of new insurance written ("NIW") subject to
captive mortgage reinsurance agreements and other risk-share programs will
continue to increase in 2000 and beyond. In addition, the anticipated continued
growth of captive reinsurance arrangements is expected to reduce the Company's
net premiums written and net premiums earned; (viii) the statement that
management anticipates the percentage of insurance in force with higher coverage
percentages will continue to increase due to greater acceptance of this product
by mortgage lenders and investors; (ix) the statement that although management
expects that California should continue to account for a significant portion of
total claims paid, management anticipates that with a continuing vibrant
California economy, loss mitigation efforts and improved default reinstatement
rates, California claims paid as a percentage of total claims paid should
continue to decline; (x) the statement that management believes that PMI's total
default rate could increase in 2000 due to the continued maturation of insurance
in force; (xi) the statement that management anticipates that contract
underwriting will continue to generate a significant, but
1
decreasing percentage of PMI's NIW in 2000; and (xii) the statement that
management expects international mortgage insurance operations to generate a
greater percentage of consolidated net income in 2000 and beyond. When a
forward-looking statement includes a statement of the assumptions or bases
underlying the forward-looking statement, the Company cautions that, while it
believes such assumptions or bases to be reasonable and makes them in good
faith, assumed facts or bases almost always vary from actual results, and the
difference between assumed facts or bases and actual results can be material,
depending on the circumstances. Where, in any forward-looking statement, the
Company or its management expresses an expectation or belief as to future
results, such expectations or belief is expressed in good faith and believed to
have a reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The Company's
actual results may differ materially from those expressed in any forward-looking
statements made by the Company. These forward-looking statements involve a
number of risks or uncertainties including, but not limited to, the items
addressed in the section captioned "Cautionary Statements and Investment
Considerations" ("IC# 1-15") set forth below and other risks detailed from time
to time in the Company's periodic filings with the Securities and Exchange
Commission.
All forward-looking statements of the Company are qualified by and should be
read in conjunction with such risk disclosure. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
RESULTS OF CONSOLIDATED OPERATIONS:
1999 versus 1998
Consolidated net income was $204.5 million in 1999, a 7.4% increase over 1998.
The growth can be attributed to increases in premiums earned of 13.7%, net
investment income of 12.4% and to a decrease in losses and loss adjustment
expenses of 17.0%, partially offset by an increase in acquisition, underwriting
and other operating expenses of 23.5% and a decrease in realized capital gains
of $24.1 million. These results include the operations of PMI Mortgage Insurance
Ltd. ("PMI Ltd.", see Footnote 3, "Acquisitions", of the Consolidated Financial
Statements) from the acquisition date of August 6 through December 31, 1999,
which contributed $6.7 million to net income. Diluted net earnings per share
(including realized capital gains) increased by 12.4% to $4.52 in 1999.
Excluding capital gains, diluted operating earnings per share increased by 22.2%
to $4.51. Consolidated revenues in 1999 increased by 7.9% to $670.1 million.
U.S. Mortgage Insurance Operations
The Company's primary operating subsidiary, PMI Mortgage Insurance Co. ("PMI"),
generated over 90% of consolidated net income, which was derived from mortgage
2
guaranty insurance written in the United States. During 1999, PMI's new
insurance written ("NIW") increased by 1.7% to $28.3 billion primarily as a
result of the growth in volume of the private mortgage insurance industry and
the increase in PMI's market share. During 1999, PMI wrote an additional $0.5
billion of seasoned insurance (mortgages insured over one year after the closing
date) not included in NIW.
The private mortgage insurance industry, as reported by the industry's trade
association, Mortgage Insurance Companies of America ("MICA"), experienced an
increase in total new insurance written of 0.8% to a new record level of $188.9
billion. This increase was the result of the second highest year of total
residential mortgage originations, estimated at $1.3 trillion compared with $1.5
trillion in 1998 (Source: Inside Mortgage Finance). Total mortgage originations
were driven primarily by continued low interest rates in the first half of the
year. During the second half of the year, interest rates began to rise, which
decreased refinance activity and increased the percentage of "purchase money"
originations. This shift from refinance activity to purchase money generally
increases the private mortgage insurance penetration rate (the percent of total
mortgage originations insured by MICA). MICA's penetration rate increased to
14.7% in 1999 from 12.4% in 1998. Management anticipates that with stable to
increasing interest rates, the refinancing trend will continue to decrease in
2000. The increase in new insurance written was partially offset by decline in
the private mortgage insurance companies' market share to 52.4% of the total low
downpayment market (insurable loans) from 56.3% in 1998. Management believes
the decrease resulted in part from the increase in the maximum individual loan
amount the FHA can insure. Any increase in the maximum FHA loan amount could
have an adverse effect on the competitive position of PMI and, consequently,
could materially and adversely affect the Company's financial condition and
results of operations.
PMI's market share of NIW increased to 15.0% in 1999 from 14.8% in 1998 (Source:
Inside Mortgage Finance). On a combined basis with CMG Mortgage Insurance
Company ("CMG"), market share increased to 16.3% in 1999 compared with 16.1% in
1998. The increases in market share were primarily due to the acceptance by its
customers of PMI's value added, risk sharing and GSE pool products. GSE pool
risk in force totaled $681.4 million and $450.0 million as of December 31, 1999
and 1998, respectively. Primary risk in force under risk-share programs with
PMI's customers, excluding pool insurance, represented 20.2% of total risk in
force at December 31, 1999, compared with 10.2% at December 31, 1998. During
2000, management expects the percentage of PMI's risk related to risk-share
programs, excluding pool risk, to continue to increase as a percent of total
risk. Management is uncertain about the amount of new pool risk that will be
written in 2000, but believes total new 2000 pool risk will be less than in
1999. Management expected the Fannie Mae and Freddie Mac reduction in mortgage
insurance coverage requirements would have negatively impacted the growth rate
of direct risk in force. However, PMI's percentage of insurance in force with
higher coverage percentages continues to increase as mortgage lenders and
investors continue to prefer MI policies with higher coverage percentages.
3
PMI's cancellations of insurance in force decreased by 10.8% to $22.2 billion in
1999 primarily due to the increase in interest rates during the second half of
the year causing the decrease in refinancing activity. As a result of the
decrease in policy cancellations, PMI's persistency rate increased to 71.9% as
of December 31, 1999, compared with 68.0% as of December 31, 1998.
Insurance in force increased by 7.4% to $86.7 billion at December 31, 1999. On a
combined basis with CMG, insurance in force grew by 9.0% to $92.5 billion at
December 31, 1999. PMI's market share of combined insurance in force increased
by 0.2 percentage points to 15.5% (Source: Inside Mortgage Finance). PMI's risk
in force increased by 9.5% and, when combined with CMG, grew by 10.8% to $22.6
billion. The growth rate of risk in force is greater than insurance in force and
is due to terminating policies being replaced by new policies with higher
coverage percentages.
Consolidated U.S. mortgage insurance net premiums written (which includes net
cessions and refunds) grew by 12.0% to $459.1 million in 1999. This increase was
primarily due to the growth of risk in force of both primary and pool insurance
and the continued shift to deeper coverage for primary insurance, the increase
in the persistency rate and to the recapture agreement of the Old Pool business
reinsured by Forestview Mortgage Insurance Company ("Forestview", see Footnote 7
"Reinsurance" of the Consolidated Financial Statements). The Forestview old pool
risk in force was $1.4 billion at December 31, 1999. Refunded premiums decreased
by 28.8% to $15.6 million as a result of the decrease in policy cancellations.
Ceded premiums written increased by 32.5% to $22.3 million due to the increasing
popularity and usage of captive reinsurance arrangements. Approximately 25% of
new insurance written in 1999 was subject to captive mortgage reinsurance
agreements. Management anticipates that the percent of NIW subject to captive
mortgage reinsurance agreements and other risk-share programs will continue to
increase in 2000 and beyond. In addition, the anticipated continued growth of
captive reinsurance arrangements is expected to reduce the Company's net
premiums written and net premiums earned. Mortgage insurance premiums earned
increased 8.6% to $447.2 million in 1999 primarily due to the increase in
premiums written, partially offset by an increase in unearned premiums related
to Forestview.
As discussed above, the percentage of PMI's insurance in force with deeper
coverage continued to increase despite new product offerings by Fannie Mae and
Freddie Mac. Mortgages with original loan-to-value ratios greater than 95% and
equal to or less than 97% ("97s") with 35% insurance coverage increased to 4.5%
of risk in force as of December 31, 1999, from 2.9% as of December 31, 1998.
Mortgages with original loan-to-value ratios greater than 90% and equal to or
less than 95% ("95s") with 30% insurance coverage increased to 37.6% of risk in
force as of December 31, 1999, from 34.4% as of December 31, 1998. Mortgages
with original loan-to-value ratios greater than 85% and equal to or less than
90% ("90s") with 25% insurance coverage increased to 31.8% of risk in force as
of December 31, 1999, compared with 29.2% as of December 31, 1998. Management
anticipates the percentage of insurance in force with higher
4
coverage percentages will continue to increase due to greater acceptance of this
product by mortgage lenders and investors.
Mortgage insurance losses and loss adjustment expenses decreased 18.2% to $110.5
million in 1999 primarily due to the continuing improvement of the nationwide
housing markets, particularly California, and the corresponding decrease in
claim payments. Loans in default decreased by 3.8% to 15,893 at December 31,
1999. PMI's national default rate decreased by 0.19 percentage points to 2.12%
at December 31, 1999, primarily due to an increase in policies in force, along
with the decrease in loans in default.
Direct primary claims paid decreased by 32.8% to $79.6 million due to a 13.3%
decrease in the average claim size to approximately $20,200 and a 22.3% decline
in the number of claims paid to 3,945 in 1999. The reduction in average claims
size is the result of a smaller percentage of claims originating from the
California book of business and to increased loss mitigation efforts by PMI and
lenders. If interest rates continue to rise in 2000, loss mitigation
opportunities may decrease. The decrease in the number of claims paid is due to
the improvement in nationwide housing markets and the overall national economic
expansion.
The default rate on PMI's California portfolio decreased to 2.59% (representing
2,382 loans in default) at December 31, 1999, from 3.15% (representing 3,067
loans in default) at December 31, 1998. Policies written in California accounted
for approximately 29.3% and 48.2% of the total dollar amount of claims paid in
1999 and 1998, respectively. Although management expects that California will
continue to account for a significant portion of total claims paid, management
anticipates that with a continuing vibrant California economy, loss mitigation
efforts and improved default reinstatement rates, California claims paid as a
percentage of total claims paid should continue to decline. Management believes
that PMI's total default rate could increase in 2000 due to the maturation of
insurance in force.
Mortgage insurance policy acquisition costs incurred and deferred (including,
among other field expenses, contract underwriting expenses) increased by 2.3% to
$85.9 million in 1999 primarily as a result of the 3.3% increase in NIW.
Amortization of policy acquisition costs increased 33.2% to $80.3 million
primarily due to 1998 and 1999 deferrals (See Note 6 "Deferred Acquisition
Costs" of Notes to Consolidated Financial Statements). A significant portion of
policy acquisition costs relates to contract underwriting. New policies
processed by contract underwriters represented 28.8% of PMI's NIW in 1999
compared with 35.0% in 1998. Contract underwriting is the preferred method among
many mortgage lenders for processing loan applications. Management anticipates
that contract underwriting will continue to generate a significant, but
decreasing, percentage of PMI's NIW in 2000. Underwriting and other mortgage
insurance operating expenses increased by 21.9% to $54.0 million in 1999 due
primarily to an increase in the amortization of certain obsolete computer
equipment and operating
5
systems associated with Y2K remediation efforts, and secondarily to increases in
payroll and related costs.
The mortgage insurance loss ratio declined by 8.1 percentage points to 24.7% in
1999. The decrease can be attributed to the growth in premiums earned coupled
with the decrease in losses and loss adjustment expenses, as discussed above.
The expense ratio increased by 3.7 percentage points to 29.2% primarily due to
the increase in the amortization of policy acquisition costs and the increase in
underwriting and other mortgage insurance expenses, partially offset by the
increase in net premiums written. In addition, the increase in captive
reinsurance premium cessions negatively affected the expense ratio. The combined
ratio decreased by 4.4 percentage points to 53.9% in 1999.
International Mortgage Insurance Operations
During 1999, the Company commenced operations in Australia and Hong Kong. The
Company's Australian affiliate, PMI Ltd., was acquired on August 6, 1999. For
the period beginning August 6, 1999 through December 31, 1999, PMI Ltd.
generated $12.1 million of net premiums written and $11.3 million in net
premiums earned. Mortgage insurance loss expenses since the acquisition were
$1.2 million and underwriting and other expenses were $4.5 million. Financial
results for the operations in Hong Kong were immaterial during 1999. Management
expects international mortgage insurance operations to generate a greater
percentage of consolidated net income in 2000 and beyond.
Title Insurance Operations
Title insurance premiums earned increased 26.2% to $100.1 million in 1999
primarily due to American Pioneer Title Insurance Company's ("APTIC") expansion
into new states. APTIC was licensed in 41 states at December 31, 1999. In 1999,
72.9% of APTIC's premiums earned came from its Florida operations, compared with
77.3% in 1998. Underwriting and other expenses increased 27.6% to $88.2 million
because of an increase in agency fees and commissions related to the increase in
premiums earned. The title insurance combined ratio increased by 1.2 percentage
points to 89.1%.
Other
In 1999, the Company's consolidated net investment income (excluding realized
capital gains) increased by $10.4 million to $95.1 million. This increase is
primarily due to an increase in the investment portfolio of approximately $250
million (including $160.9 million as a result of PMI Ltd.) and secondarily to an
increase in equity earnings of $3.8 million. Investments in affiliates
increased to $91.5 million at year-end 1999 from $60.5 million at year-end 1998.
The average book yield of the investment portfolio decreased from 6.1% in 1998
to 5.9% in 1999 due to a higher percentage of the portfolio invested in tax-free
municipal bonds. Realized capital gains decreased by $24.1 million to $0.5
million due to the restructuring of the investment portfolio in 1998.
6
Other income, primarily contract underwriting revenues generated by PMI Mortgage
Services Co. ("MSC"), decreased by 22.1% to $15.9 million in 1999. Contract
underwriting revenues decreased by 39.6% as a result of the decrease in
refinance activity in the second half of 2000. Operating expenses incurred by
MSC decreased by 35.6% to $18.3 million as a result of the decrease in refinance
activity in the second half of 2000.
The Company's effective tax rate increased to 29.5% in 1999 from 28.7% in 1998
as a result of a decrease in the proportion of tax-exempt investment income
relative to total income.
1998 Versus 1997
Consolidated net income was $190.4 million in 1998, an 8.6% increase over 1997.
The growth can be attributed to increases in premiums earned of 8.2% and other
income of 155.2% and to a decrease in losses and loss adjustment expenses of
10.9%, partially offset by an increase in other operating expenses, including
policy acquisition costs, of 30.8%. Including capital gains, diluted earnings
per share increased by 15.5% to $6.04 in 1998. Excluding capital gains, diluted
operating earnings per share increased by 14.0% to $5.53. Revenues in 1998
increased by 10.0% to $620.9 million.
Mortgage Insurance Operations
PMI's NIW increased by 81.7% primarily as a result of the growth in volume of
the private mortgage insurance industry as well as the increase in PMI's market
share and secondarily to a 2.6% increase in the average insured loan size to
$131,700.
The members of the private mortgage insurance industry, as reported by the
industry's trade association, MICA, experienced an increase in total new
insurance written of 55.0% to $187.4 billion, benefiting from the record year of
total residential mortgage originations, estimated at $1.5 trillion. (Source:
Inside Mortgage Finance) The increase was caused primarily by low interest
rates, which produced record levels of both refinance activity as well as new
and existing home sales. Refinancing as a percentage of PMI's NIW increased to
31.0% in 1998 from 13.8% in 1997. In addition, the private mortgage insurance
companies' market share increased to 56.3% of the total low downpayment market
(insurable loans) from 54.5% in 1997. (Source: Inside Mortgage Finance)
PMI's market share of NIW increased to 14.8% in 1998 from 12.7% in 1997. On a
combined basis with CMG, market share increased to 16.1% in 1998 compared with
13.8% in 1997. In the fourth quarter of 1998, combined market share increased to
16.4% compared with 13.7% in the fourth quarter of 1997. The increases in market
share were primarily due to contract underwriting services, pool insurance
products, and risk sharing programs offered by PMI. Pool risk totaled $450.3
million for the year. There was no pool risk written in 1997. Risk in force
under risk-share programs with PMI's customers,
7
represented approximately two percent of the $19.3 billion total primary risk in
force at December 31, 1998. Risk in force under risk-share programs with PMI's
customers, excluding pool insurance, represented 10.2% of total risk in force at
December 31, 1998, compared with 3.1% at December 31, 1997. During 1999,
management expects the percentage of PMI's risk related to risk-share programs
and represented by pool risk to continue to increase as a percent of total risk.
The Fannie Mae and Freddie Mac reduction in mortgage insurance coverage
requirements is expected to have a negative impact on the growth rate of direct
risk in force.
PMI's cancellations of insurance in force increased by 68.2% to $24.9 billion in
1998 primarily due to mortgage prepayments as a result of low interest rates
which caused high levels of refinancing activity. As a result of the higher
cancellation activity, PMI's persistency rate decreased to 68.0% as of December
31, 1998, compared with 80.8% as of December 31, 1997.
Insurance in force increased by 3.7% in 1998. On a combined basis with CMG,
insurance in force grew by 5.9% to $84.9 billion at December 31, 1998. PMI's
market share of insurance in force grew by 0.5 percentage points to 15.3%. PMI's
risk in force increased by 6.8% and, when combined with CMG, grew by 8.9% to
$20.4 billion. The growth rate of risk in force is greater than insurance in
force due to terminating policies being replaced by new policies with higher
coverage percentages.
Mortgage insurance net premiums written grew by 10.1% to $409.8 million in 1998
primarily due to the growth of risk in force of both primary and pool insurance
and the continued shift to deeper coverage for primary insurance partially
offset by an increase in refunded premiums of 39.2% to $21.9 million as a result
of the increase in policy cancellations. Mortgage insurance premiums earned
increased 4.5% to $411.9 million in 1998 primarily due to the increase in
premiums written. Ceded premiums were $18.3 million in 1998, increasing 15.2%
from prior year. Management anticipates ceded premiums will increase
substantially in the future as a result of the expected increase in risk-share
programs.
PMI's monthly product represented 71.6% of risk in force at December 31, 1998,
compared with 58.2% at December 31, 1997. Mortgages with original loan-to-value
ratios greater than 90% and equal to or less than 95% ("95s") with 30% insurance
coverage increased to 34.4% of risk in force as of December 31, 1998, from 28.8%
as of December 31, 1997. Mortgages with original loan-to-value ratios greater
than 85% and equal to or less than 90% ("90s") with 25% insurance coverage
increased to 29.2% of risk in force as of December 31, 1998, compared with 23.6%
as of December 31, 1997. Management anticipates the percentage of insurance in
force with higher coverage percentages will begin to decrease in 1999 and this
decrease should accelerate in the years following due to a reduction in required
mortgage insurance by Fannie Mae and Freddie Mac.
8
Mortgage insurance losses and loss adjustment expenses decreased 10.2% to $135.1
million in 1998 primarily due to the continuing improvement of the nationwide
housing markets, particularly California, and the corresponding decrease in
claim payments. Loans in default decreased by less than one percent to 16,526 at
December 31, 1998. PMI's national default rate decreased by 0.07 percentage
points to 2.31% at December 31, 1998, primarily due to an increase in policies
in force.
Direct primary claims paid decreased by 19.5% to $118.4 million due to an 11.6%
decrease in the average claim size to approximately $23,300 and an 8.9% decline
in the number of claims paid to 5,077 in 1998. The reduction in claims paid is
the result of a smaller percentage of claims originating from the California
book of business and to increased loss mitigation efforts by PMI and lenders.
Default rates on PMI's California policies decreased to 3.15% (representing
3,067 loans in default) at December 31, 1998, from 3.73% (representing 3,987
loans in default) at December 31, 1997. Policies written in California accounted
for approximately 48.2% and 64.5% of the total dollar amount of claims paid in
1998 and 1997, respectively. Although management expects that California will
continue to account for a significant portion of total claims paid, management
anticipates that with continued improvement in the California economy, increased
benefits of loss mitigation efforts and improved default reinstatement rates,
California claims paid as a percentage of total claims paid should continue to
decline. Management believes that PMI's total default rate could increase in
1999 due to the continued maturation of its 1994 and 1995 books of business.
Mortgage insurance policy acquisition costs incurred and deferred (including,
among other field expenses, contract underwriting expenses) increased by 69.3%
as a result of the 81.7% increase in NIW. Amortization of policy acquisition
costs increased 38.9%. (See Note 6 "Deferred Acquisition Costs" of Notes to
Consolidated Financial Statements) New policies processed by contract
underwriters represented 35.0% of PMI's NIW in 1998 compared with 21.6% in 1997.
Contract underwriting has become the preferred method among many mortgage
lenders for processing loan applications. Management anticipates that contract
underwriting will continue to generate a significant percentage of PMI's NIW.
Other mortgage insurance operating expenses increased by 8.0% to $44.3 million
in 1998 from $41.0 million in 1997 resulting from Year 2000 remediation costs of
$3.9 million, compared with $0.3 million of such costs in 1997. The mortgage
insurance loss ratio declined by 5.4 percentage points to 32.8% in 1998 due to
the growth in premiums earned coupled with the decrease in losses and loss
adjustment expenses, as discussed above. The expense ratio increased by 2.8
percentage points to 25.5% primarily due to the increase in policy acquisition
costs resulting from the growth in NIW and secondarily to Year 2000 remediation
costs. Excluding Year 2000 remediation expenses, the expense ratio was 24.6% for
1998 compared with 22.6% for 1997. The combined ratio decreased by 2.6% to
58.3% in 1998.
9
Title Insurance Operations
Title insurance premiums earned increased 32.3% to $79.3 million in 1998
primarily due to the record residential mortgage origination volumes, as
discussed above, and secondarily to APTIC's expansion into new states. APTIC was
licensed in 39 states at December 31, 1998, a 14.7% increase from December 31,
1997. In 1998, 77.3% of APTIC's premiums earned came from its Florida
operations, compared with 81.6% in 1997. Underwriting and other expenses
increased 30.1% to $69.1 million because of an increase in agency fees and
commissions related to the increase in premiums earned. The title insurance
combined ratio decreased by 3.9 percentage points to 87.9%.
Other
In 1998, the Company's net investment income increased by $1.5 million to $84.7
million primarily due to a $1.8 million increase in equity earnings. Investments
in affiliates increased to $60.5 million at year-end 1998 from $17.0 million at
year-end 1997. The average book value of the investment portfolio increased 1.2%
and the yield decreased from 6.14% in 1997 to 6.06% in 1998.
Other income, primarily contract underwriting revenues generated by MSC,
increased by 155.0% to $20.4 million in 1998 while other expenses, primarily
expenses incurred by MSC, increased by 27.6% to $142.6 million. These increases
are the result of increased contract underwriting services provided to the
Company's mortgage insurance customers.
The Company's effective tax rate increased to 28.7% in 1998 from 27.8% in 1997
as a result of a decrease in the proportion of tax-exempt investment income
relative to total income.
Liquidity, Capital Resources and Financial Condition
Liquidity and capital resource considerations are different for The PMI Group,
Inc. ("TPG") and PMI, its principal insurance operating subsidiary. TPG's
principal sources of funds are dividends from PMI and APTIC, investment income
and funds that may be raised from time to time in the capital markets.
PMI's ability to pay dividends to TPG is limited, among other restrictions,
under the insurance laws of Arizona. Such laws provide that: (i) PMI may pay
dividends out of available surplus and (ii) without prior approval of the
Arizona Insurance Director, such dividends during any 12-month period may not
exceed the lesser of 10% of policyholders' surplus as of the preceding year end,
or the last calendar year's investment income.
The laws of Florida limit the payment of dividends by APTIC to TPG in any one
year to the lesser of 10% of the policyholder surplus as of the preceding year
or the last calendar year's net income, not including realized capital gains.
10
The terms of the $45.8 million credit agreement dated August 3, 1999 executed
among TPG, PMI Mortgage Insurance Australia (Holdings) Pty Limited, and Bank of
America, N.A., ("Credit Agreement") in connection with the Company's acquisition
of PMI Ltd, provide in part that: (i) TPG's consolidated net worth shall not be
less than $600 million; (ii) PMI's statutory capital (as defined) shall not be
less than $675 million; (iii) the risk to capital ratio shall not exceed 23 to
1; and (iv) TPG's consolidated debt to capital ratio shall not exceed 0.40 to
1.0. Failure to maintain such financial covenants or debt restrictions may be
deemed an event of default. Pursuant to the guarantee executed by TPG in
connection with the Credit Agreement, if an event of default occurs under the
Credit Agreement or under any other indebtedness, all outstanding amounts under
the Credit Agreement may be accelerated and become immediately payable by TPG.
Further, pursuant to the terms of an indenture for $100 million 6 3/4% senior
notes ("Note") issued by TPG on November 15, 1996; and the terms of two lines of
credit agreements each in the amount of $25 million ("Credit Lines"), in the
event of default under any indebtedness, all outstanding amounts under the
Credit Lines and Note may be accelerated and become immediately payable by TPG.
At December 31, 1999, there were no outstanding borrowings under the credit
lines.
In addition to the dividend restrictions described above, the Company's Credit
Lines limit the payment of dividends by PMI, and various credit rating agencies
and insurance regulatory authorities have broad discretion to limit the payment
of dividends to TPG by PMI or APTIC. During 1999, APTIC declared and paid a cash
dividend of $3.0 million to TPG, substantially the full amount of a dividend
that can be paid by APTIC in 1999 without prior permission from the Florida
Department of Insurance. PMI declared and paid extraordinary dividends of $94.4
million to TPG in 1999.
TPG's principal uses of funds are common stock repurchases, the payment of
dividends to shareholders, funding of acquisitions, additions to its investment
portfolio, investments in subsidiaries, and the payment of interest. The company
announced a stock repurchase program in the amount of $100.0 million authorized
by the TPG Board of Directors in November 1998. During 1999, TPG purchased
$24.8 million of the Company's common stock.
As of December 31, 1999, TPG had approximately $95 million of available funds.
This amount has increased from the December 31, 1998 balance of $55 million due
to the receipt of dividends from PMI and APTIC, partially offset by an increase
in the investment of RAM Reinsurance Company Ltd. ("RAM Re") and common stock
repurchases.
The principal sources of funds for PMI are premiums received on new and renewal
business and amounts earned from the investment of this cash flow. The
principal uses of funds by PMI are the payment of claims and related expenses,
policy acquisition costs and other operating expenses, investment in
subsidiaries, and dividends to TPG. PMI generates positive cash flows from
operations as a result of premiums being received in
11
advance of the payment of claims. Cash flows generated from PMI's operating
activities totaled $237.3 million and $154.0 million in 1999 and 1998,
respectively.
The Company's invested assets increased by $285.1 million at December 31, 1999
due to cash flows from consolidated operations of $314.8 million and the
addition of PMI Ltd's investment portfolio of $160.9 million. This increase was
offset by a net unrealized loss of $80.2 million, the funds used in the
acquisition of PMI Ltd., the common stock repurchases and dividends paid of $5.2
million.
Consolidated reserves for losses and loss adjustment expenses increased by 31.0%
in 1999 to $282.0 million primarily due to the addition of Old Pool loss
reserves of $42.5 million in connection with the recapture agreement with
Forestview, and to increases in primary and GSE pool loss reserves.
Consolidated shareholders' equity increased by $119.8 million in 1999,
consisting of increases of $204.5 million from net income and $1.0 million from
stock option activity, offset by $54.3 million from other comprehensive losses
net of unrealized gains on investments, common stock repurchases of $24.8
million, and dividends declared of $6.6 million.
PMI's statutory risk-to-capital ratio at December 31, 1999 was 14.8:1, compared
with 14.9:1 at December 31, 1998.
CAUTIONARY STATEMENTS AND INVESTMENT CONSIDERATIONS
GENERAL ECONOMIC CONDITIONS (IC1)
Changes in economic conditions, including economic recessions, declining housing
values, higher unemployment rates, deteriorating borrower credit, rising
interest rates, increases in refinance activity caused by declining interest
rates, or combinations of these factors could reduce the demand for mortgage
insurance, cause claims on policies issued by PMI to increase, and increase
PMI's loss experience.
MARKET SHARE AND COMPETITION (IC2)
The Company's financial condition and results of operations could be harmed by a
decline in its market share, or a decline in market share of the private
mortgage insurance industry as a whole. Numerous factors bear on the relative
position of the private mortgage insurance industry versus government and quasi-
governmental competition as well as the competition of lending institutions that
choose to remain uninsured, self-insure through affiliates, or offer residential
mortgage products that do not require mortgage insurance.
12
The mortgage insurance industry is highly competitive. Several of the Company's
competitors in the mortgage insurance industry have greater direct or indirect
capital reserves that provide them with potentially greater flexibility than the
Company.
PMI also competes directly with federal and state governmental and quasi-
governmental agencies, principally the FHA and, to a lesser degree, the VA. In
addition, the captive reinsurance subsidiaries of national banks, savings
institutions, or bank holding companies could become significant competitors of
the Company in the future. Other mortgage lenders are also forming reinsurance
affiliates that compete with the Company. The Gramm-Leach-Bliley Act of 1999
could lead to additional significant competitors of the Company in the future.
On October 4 1999, the Federal Housing Finance Board adopted resolutions which
authorizes each Federal Home Loan Bank ("FHLB") to offer programs to fund or
purchase single-family conforming mortgage loans originated by participating
member institutions under the single-family member mortgage assets program
program. Under this program, each FHLB is also authorized to provide credit
enhancement for eligible loans. Any expansion of the FHLBs' ability to issue
mortgage insurance or use alternatives to mortgage insurance could reduce the
demand for private mortgage insurance and harm the Company's financial condition
and results of operations.
Certain lenders originate a first mortgage lien with an 80% LTV ratio, a 10%
second mortgage lien, and 10% of the purchase price from borrower's funds
("80/10/10"). This 80/10/10 product, as well as similar products, competes with
mortgage insurance as an alternative for lenders selling loans in the secondary
mortgage market. If the 80/10/10 product or a similar product becomes a widely
accepted alternative to mortgage insurance, the Company's financial condition
and results of operations could suffer.
Legislation and regulatory changes affecting the FHA have affected demand for
private mortgage insurance. In particular, increases in the maximum loan amount
that the FHA can insure can reduce the demand for private mortgage insurance.
For example, management believes the decline in the MICA members' share of the
mortgage insurance business from 56.3% at December 31, 1998 to approximately
52.4% at December 31, 1999 resulted in part from the increase in the maximum
individual loan amount the FHA can insure. The Department of Housing and Urban
Development has announced a proposed increase in the maximum individual loan
amount that FHA can insure to $219,849 from $208,800. If this increase is
approved, demand for private mortgage insurance could decrease. In addition,
the Omnibus Spending Bill of 1999, signed into law on October 21, 1998,
streamlined the FHA down-payment formula and made FHA insurance more competitive
with private mortgage insurance in areas with higher home prices.
13
FANNIE MAE AND FREDDIE MAC (IC3)
Fannie Mae and Freddie Mac are collectively referred to as government-sponsored
enterprises ("GSEs"). The GSEs are permitted by charter to purchase
conventional high-LTV mortgages from lenders who obtain mortgage insurance on
those loans. Fannie Mae and Freddie Mac have some discretion to increase or
decrease the amount of private mortgage insurance coverage they require on
loans, provided the minimum insurance coverage requirement is met. During 1999,
Fannie Mae and Freddie Mac separately announced programs where reduced mortgage
insurance coverage will be made available for lenders that deliver loans
approved by the GSEs' automated underwriting services. Although management has
not seen any significant movement towards the reduced coverage programs offered
by the GSEs' to date, if the reduction in required levels of mortgage insurance
were to become widely accepted by mortgage lenders and their customers, the
reduction could harm the Company's financial condition and results of
operations.
On April 13, 1999 the Office of Federal Housing Enterprise Oversight announced
proposed risk-based capital regulations, which could treat more favorably credit
enhancements issued by private mortgage insurance companies with a claims-paying
ability rating of AAA or higher compared with those companies with an AA or
lower rating. Any shifts in the GSE's preferences for private mortgage
insurance to other forms of credit enhancement, including a tiering of mortgage
insurers based on their credit rating, could harm the Company's financial
condition and results of operations.
Freddie Mac has made several announcements that it would pursue a permanent
charter amendment that would allow it to utilize alternative forms of default
loss protection or otherwise forego the use of private mortgage insurance on
higher loan-to-value mortgages. In addition, Fannie Mae announced it is
interested in pursuing new risk management approaches, which may include a
reduction in the use of mortgage insurance.
Under Fannie Mae and Freddie Mac regulations, PMI needs to maintain at least an
"AA-" or equivalent claims-paying ability rating in order to provide mortgage
insurance on loans purchased by the GSEs. A loss of PMI's existing eligibility
status, either due to a failure to maintain the minimum claims-paying ability
rating from the various rating agencies or non-compliance with other eligibility
requirements, would have a material, adverse effect on the Company's financial
condition and results of operations.
14
INSURANCE IN FORCE (IC4)
A significant percentage of PMI's premiums earned is generated from its existing
insurance in force and not from new insurance written. The policy owner or
servicer of the loan may cancel insurance coverage at any time. A decline in
insurance in force as a result of a decrease in persistency due to policy
cancellations of older books of business could harm the Company's financial
condition and results of operations.
The Home Owners Protection Act of 1998, effective on July 29, 1999, provides for
the automatic termination, or cancellation upon a borrower's request, of private
mortgage insurance upon satisfaction of certain conditions. Management is
uncertain about the impact of this act on PMI's insurance in force, but believes
any reduction in premiums attributed to the act's required cancellation of
mortgage insurance will not have a significant impact on the Company's financial
condition and results of operations.
During an environment of falling interest rates, an increasing number of
borrowers refinance their mortgage loans and PMI generally experiences an
increase in the prepayment rate of insurance in force, resulting from policy
cancellations of older books of business with higher rates of interest. Although
PMI has a history of expanding business during low interest rate environments,
the resulting increase of NIW may ultimately prove to be inadequate to
compensate for the loss of insurance in force arising from policy cancellations
RATING AGENCIES (IC5)
PMI's claims-paying ability is currently rated "AA+" (Excellent) by Standard and
Poor's Rating Services, "Aa2" (Excellent) by Moody's Investors Service, Inc.,
"AA+" (Very Strong) by Fitch IBCA, and "AA+" (Very High) by Duff & Phelps Credit
Rating Co. These ratings are subject to revisions or withdrawal at any time by
the assigning rating organization. The ratings by the organizations are based
upon factors relevant to PMI's policyholders, principally PMI's capital
resources as computed by the rating agencies, and are not applicable to the
Company's common stock or outstanding debt. On March 10, 2000, Standard & Poor's
affirmed the AA+ financial strength rating and claims-paying ability rating of
PMI. During June 1999, Moody's affirmed the Aa2 financial strength rating and
claims-paying ability rating of PMI. During March 1999, Moody's announced that
it changed PMI's and TPG's rating outlook from stable to negative, stating such
action was based on TPG's stock repurchases, PMI's writing of GSE pool and
diversification into new sectors.
A reduction in PMI's claims-paying ratings below AA-would seriously harm effect
the Company's financial condition and results of operations (See IC3).
15
LIQUIDITY (IC6)
TPG's principal sources of funds are dividends from PMI and APTIC, investment
income and funds that may be raised from time to time in the capital markets.
Numerous factors bear on the Company's ability to maintain and meet its capital
and liquidity needs, including the level and severity of claims experienced by
the Company's insurance subsidiaries, the performance of the financial markets,
standards and factors used by various credit rating agencies, financial
covenants in credit agreements, and standards imposed by state insurance
regulators relating to the payment of dividends by insurance companies. Any
significant change in these factors could adversely affect the Company's ability
to maintain capital resources to meet its business needs.
CONTRACT UNDERWRITING SERVICES; NEW PRODUCTS (IC7)
The Company provides contract underwriting services for a fee that enable
customers to improve the efficiency and quality of their operations by
outsourcing all or part of their mortgage loan underwriting. The Company also
generally agrees to assume the cost of repurchasing underwritten-deficient loans
that have been contract underwritten, a remedy not available under the Company's
master primary insurance policies. Due to the demand of contract underwriting
services, limitations on the number of available underwriting personnel, and
heavy price competition among mortgage insurance companies, PMI's inability to
recruit and maintain a sufficient number of qualified underwriters, or any
significant increase in the cost PMI incurs to satisfy its underwriting services
obligations, could harm the Company's financial condition and results of
operations.
TPG and PMI, from time to time, introduce new mortgage insurance products or
programs. The Company's financial condition and results of operations could
suffer if PMI or the Company experiences delays in introducing competitive new
products and programs or if these products or programs are less profitable than
the Company's existing products and programs.
INSURANCE REGULATORY MATTERS (IC8)
On January 31, 2000, the Illinois Department of Insurance issued a letter
addressed to all mortgage guaranty insurers licensed in Illinois. The letter
states that it may be a violation of Illinois law for mortgage insurers to offer
to Illinois mortgage lenders the opportunity to purchase certain notes issued by
a mortgage insurer or an affiliate, or to participate in loan guaranty programs.
The letter also states that a violation might occur if mortgage insurers offer
lenders coverage on pools of mortgage loans at a discounted or below market
premium in return for the lenders' referral of primary mortgage insurance
business. In addition, the letter stated that, to the extent a performance
guaranty actually transfers risk to the lender in return for a fee, the lender
may be deemed to be doing an insurance business in Illinois without
authorization. The letter announced that any
16
mortgage guaranty insurer that is participating in the described or similar
programs in the State of Illinois should cease such participation or
alternatively, provide the Department with a description of any similar
programs, giving the reason why the provisions of Illinois are not applicable or
not violated. PMI is reviewing the Illinois Letter. If the Illinois Department
of Insurance were to determine that PMI was not in compliance with Illinois law,
the Company's financial condition and results of operations could be harmed
In February 1999, the New York Department of Insurance stated in Circular Letter
No. 2, addressed to all private mortgage insurers licensed in New York that
certain pool risk-share and structured products and programs would be considered
to be illegal under New York law. PMI believes that it complies with the
requirements of Circular Letter No. 2 with respect to transactions that are
governed by it. In the event the New York Department of Insurance determined PMI
was not in compliance with Circular Letter No. 2, the Company's financial
condition and results of operations could suffer.
RISK-TO-CAPITAL RATIO (IC9)
The State of Arizona, PMI's state of domicile for insurance regulatory purposes,
and other regulators specifically limit the amount of insurance risk that may be
written by PMI, by a variety of financial factors. For example, Arizona law
provides that if a mortgage guaranty insurer domiciled in Arizona does not have
the amount of minimum policyholders position required, it must cease transacting
new business until its minimum policyholders position meets the requirements.
Under Arizona law, minimum policyholders position is calculated based on the
face amount of the mortgage, the percentage coverage or claim settlement option
and the loan to value ratio category, net of reinsurance ceded, but including
reinsurance assumed.
Other factors affecting PMI's risk-to-capital ratio include: (i) limitations
under the Runoff Support Agreement with Allstate, which prohibit PMI from paying
any dividends if, after the payment of any such dividend, PMI's risk-to-capital
ratio would equal or exceed 23 to 1; (ii) TPG's credit agreements and the terms
of its guaranty of the debt incurred to purchase PMI LTD; and (iii) TPG's and
PMI's credit or claims-paying ability ratings which generally require that the
rating agencies' risk-to-capital ratio not exceed 20 to 1.
Significant losses could cause a material reduction in statutory capital,
causing an increase in the risk-to-capital ratio and thereby limit PMI's ability
to write new business. The inability to write new business could harm the
Company's financial condition and results of operations.
CHANGES IN COMPOSITION OF INSURANCE WRITTEN; POOL INSURANCE (IC10)
The composition of PMI's NIW has included an increasing percentage of mortgages
with LTVs in excess of 90% and less than or equal to 95% ("95s"). At December
31, 1999, 46.7% of PMI's risk in force consisted of 95s, which, in PMI's
experience, have had a
17
claims frequency approximately twice that of mortgages with LTVs equal to or
less than 90% and over 85% ("90s"). PMI also offers coverage for mortgages with
LTVs in excess of 95% and up to 97% ("97s"). At December 31, 1999, 4.9% of PMI's
risk in force consisted of 97s that have even higher risk characteristics than
95s and greater uncertainty as to pricing adequacy. PMI's NIW also includes
adjustable rate mortgages ("ARMs"), which, although priced higher, have risk
characteristics that exceed the risk characteristics associated with PMI's book
of business as a whole.
Since the fourth quarter of 1997, PMI has offered a new pool insurance product,
which is generally used as an additional credit enhancement for certain
secondary market mortgage transactions. New pool risk written was $231 million
for the year ended December 31, 1999 and $450 million for the year ended
December 31, 1998. Although PMI charges higher premium rates for loans that
have higher risk characteristics, including ARMs, 95s, 97s and pool insurance
products, the premiums earned on these products, and the associated investment
income, may ultimately prove to be inadequate to compensate for future losses
from these products.
POTENTIAL INCREASE IN CLAIMS (IC11)
Mortgage insurance coverage and premiums generally cannot be canceled by PMI and
remains renewable at the option of the insured until required to be canceled
under applicable Federal or state laws for the life of the loan. As a result,
the impact of increased claims from policies originated in a particular year
generally cannot be offset by premium increases on policies in force or
mitigated by nonrenewal of insurance coverage. There can be no assurance,
however, that the premiums charged will be adequate to compensate PMI for the
risks and costs associated with the coverage provided to its customers.
LOSS RESERVES (IC12)
PMI establishes loss reserves based upon estimates of the claim rate and average
claim amounts, as well as the estimated costs, including legal and other fees,
of settling claims. Such reserves are based on estimates, which are regularly
reviewed and updated. There can be no assurance that PMI's reserves will prove
to be adequate to cover ultimate loss development on incurred defaults. The
Company's financial condition and results of operations could be materially and
adversely affected if PMI's reserve estimates are insufficient to cover the
actual related claims paid and expenses incurred.
REGIONAL AND INTERNATIONAL RISKS (IC13)
In addition to nationwide economic conditions, PMI could be particularly
affected by economic downturns in specific regions where a large portion of its
business is concentrated, particularly California, Florida, and Texas, where PMI
has 15.6%, 7.5% and 7.3% of its risk in force concentrated and where the default
rate on all PMI policies in force is 2.6%, 3.0% and 2.1% compared with 2.1%
nationwide as of December 31, 1999.
18
As the Company seeks to expand its business internationally, it will
increasingly be subject to risks associated with international operations,
including the need for regulatory and third party approvals, challenges
retaining key foreign-based employees and maintaining key relationships with
customers and business partners in international markets, the economic strength
of the mortgage origination markets in targeted foreign markets, including
Australia, New Zealand, and Hong Kong, changes in foreign regulations and laws,
foreign currency exchange and translation issues, potential increases in the
level of defaults and claims on policies insured by foreign-based subsidiaries,
and the need to integrate PMI's risk management technology systems and products
with those of its foreign operations.
CAPTIVE REINSURANCE ARRANGEMENTS; RISK-SHARING TRANSACTIONS (IC14)
PMI's customers have indicated an increasing demand for captive reinsurance
arrangements, which allow a reinsurance company, generally an affiliate of the
lender, to assume a portion of the mortgage insurance default risk in exchange
for a portion of the insurance premiums. An increasing percentage of PMI's NIW
is being generated by customers with captive reinsurance companies, and
management expects that this trend will continue. An increase in captive
reinsurance arrangements would decrease in net premiums written which may
negatively impact the yield obtained in the Company's net premiums earned for
customers with captive reinsurance arrangements. The inability of the Company to
provide its customers with acceptable risk-sharing structured transactions,
including potentially increasing levels of premium cessions in captive
reinsurance arrangements, would likely harm PMI's competitive position.
GRAMM-LEACH-BLILEY ACT (IC15)
On November 12, 1999, the President signed the Gramm-Leach-Bliley Act of 1999
(the "Act") into law. Among other things, the Act allows bank holding companies
to engage in a substantially broader range of activities, including insurance
underwriting, and allows insurers and other financial service companies to
acquire banks. The Act allows a bank holding company to form an insurance
subsidiary, licensed under state insurance law, to issue insurance products
directly, including mortgage insurance. The Company expects that, over time,
the Act will allow consumers the ability to shop for their insurance, banking
and investment needs at one financial services company. The Company believes
that the Act may lead to increased competition in the mortgage insurance
industry by facilitating the development of new savings and investment products,
resulting in the Company's customers offering mortgage insurance directly rather
than through captive reinsurance arrangements with the Company's insurance
subsidiaries and encouraging large, well-capitalized financial service companies
to enter the mortgage insurance business.
19
Consolidated Statements of
O p e r a t i o n s
Year Ended December 31,
(In thousands, except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Revenues Premiums earned $ 558,623 $ 491,226 $ 453,948
Investment income, less investment expense 95,142 84,681 83,136
Realized capital gains 509 24,636 19,584
Other income 15,850 20,366 7,979
-----------------------------------------------
Total revenues 670,124 620,909 564,647
-----------------------------------------------
Losses and Losses and loss adjustment expenses 112,682 135,716 152,257
Expenses Amortization of policy acquisition costs 80,252 60,280 43,395
Underwriting and other operating expenses 170,239 142,625 111,745
Interest expense 8,554 7,029 6,766
Distributions on preferred capital securities 8,311 8,311 7,617
-----------------------------------------------
Total losses and expenses 380,038 353,961 321,780
-----------------------------------------------
Income before income taxes 290,086 266,948 242,867
Income tax expense 85,620 76,588 67,558
-----------------------------------------------
Net income $ 204,466 $ 190,360 $ 175,309
==============================================
Per Share Basic net income per common share $ 4.55 $ 4.04 $ 3.50
===============================================
Diluted net income per common share $ 4.52 $ 4.02 $ 3.49
==============================================
See notes to consolidated financial statements
1
Consolidated
B a l a n c e S h e e t s
As of December 31,
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------
Assets Investments:
Available for sale, at fair value:
Fixed income securities (amortized
cost $1,485,396 and $1,268,625) $ 1,479,310 $ 1,356,869
Equity securities:
Common (cost $44,714 and $34,129) 83,890 58,785
Preferred (cost $17,660 and $17,240) 17,582 17,706
Common stock of affiliates, at underlying book value 91,453 60,450
Short-term investments 145,093 38,414
-------------------------------
Total investments 1,817,328 1,532,224
Cash 28,076 9,757
Accrued investment income 22,058 20,150
Reinsurance recoverable and prepaid premiums 50,714 42,102
Premiums receivable 30,659 24,367
Receivable from affiliate 2,996 2,229
Receivable from Allstate - 23,657
Deferred policy acquisition costs 69,579 61,605
Property and equipment, net 40,462 37,630
Other assets 38,890 24,149
-------------------------------
Total assets $ 2,100,762 $ 1,777,870
===============================
Liabilities Reserve for losses and loss adjustment expenses $ 282,000 $ 215,259
Unearned premiums 182,089 94,886
Long-term debt 145,367 99,476
Reinsurance balances payable 25,415 14,764
Deferred income taxes 75,640 96,730
Other liabilities and accrued expenses 73,908 60,200
-------------------------------
Total liabilities 784,419 581,315
-------------------------------
Commitments and contingent liabilities (Note 12) - -
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trust holding solely
junior subordinated deferrable interest debenture of
the Company 99,075 99,040
Shareholders' Preferred stock - $.01 par value; 5,000,000 shares
authorized - none issued - -
Equity Common stock - $.01 par value; 187,500,000 shares
authorized, 52,793,777 and 35,196,002 issued 528 352
Additional paid-in capital 265,828 265,040
Accumulated other comprehensive income 20,186 74,462
Retained earnings 1,258,617 1,060,724
-------------------------------
1,545,159 1,400,578
Less treasury stock (8,091,924 and 4,917,401 shares at cost) 327,891 303,063
-------------------------------
Total shareholders' equity 1,217,268 1,097,515
-------------------------------
Total liabilities and shareholders' equity $ 2,100,762 $ 1,777,870
===============================
See notes to consolidated financial statements
2
Consolidated Statements of
S h a r e h o l d e r s' E q u i t y
Year Ended December 31,
(In thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Common Balance, beginning of year $ 352 $ 351 $ 350
Stock 3 for 2 stock split in the form of a stock dividend 176 - -
Stock grants and exercise of stock options - 1 1
------------------------------------------
Balance, end of year 528 352 351
------------------------------------------
Additional Balance, beginning of year 265,040 262,448 258,059
Paid-in 3 for 2 stock split in the form of a stock dividend (176) - -
Capital Stock grants and exercise of stock options 964 2,592 4,389
------------------------------------------
Balance, end of year 265,828 265,040 262,448
------------------------------------------
Accumulated Balance, beginning of year 74,462 71,936 50,709
Other Unrealized gains on investments:
Comprehensive Income Unrealized holding gains (losses) arising during
period [net of tax (tax benefits) of ($29,047),
$9,982, and $18,285] (53,945) 18,539 33,957
Less: reclassification adjustment for gains
included in net income
(net of tax of $178, $8,623, and
$6,854) (331) (16,013) (12,730)
------------------------------------------
Other comprehensive income (loss), not of tax (54,276) 2,526 21,227
------------------------------------------
Balance, end of year 20,186 74,462 71,936
------------------------------------------
Retained Balance, beginning of year 1,060,724 876,588 707,885
Earnings Net income 204,466 190,360 175,309
Dividends declared (6,573) (6,224) (6,606)
-------------------------------------------
Balance, end of year 1,258,617 1,060,724 876,588
-------------------------------------------
Treasury Balance, beginning of year (303,063) (150,143) (30,141)
Stock Purchases of The PMI Group, Inc.
Common stock (24,828) (152,920) (120,002)
-------------------------------------------
Balance, end of year (327,891) (303,063) (150,143)
-------------------------------------------
Total shareholders' equity $1,217,268 $1,097,515 $ 1,061,180
===========================================
Comprehensive Net income $ 204,466 $ 190,360 $ 175,309
Income Other comprehensive income (loss), net of tax (54,276) 2,526 21,227
-------------------------------------------
Comprehensive income $ 150,190 $ 192,886 $ 196,536
===========================================
See notes to consolidated financial statements
3
Consolidated Statements of
C a s h F l o w s
Year Ended December 31,
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Cash Net income $ 204,466 $ 190,360 $ 175,309
Flows Reconciliation of net income to net cash provided by
from operating activities:
Operating Realized capital gains, net (509) (24,636) (19,584)
Activities Equity in earnings of affiliates (7,061) (3,225) (1,455)
Depreciation and amortization 13,243 6,282 4,679
Changes in:
Reserve for losses and loss adjustment
expenses 8,142 12,872 2,613
Unearned premiums 13,526 736 (22,801)
Deferred policy acquisition costs (7,973) (23,741) (6,231)
Accrued investment income (1,903) 644 (1,355)
Reinsurance balances payable 4,495 2,936 (1,467)
Reinsurance recoverable and prepaid premiums 53,616 (10,426) 51,703
Premiums receivable (6,292) (4,611) (5,109)
Income taxes 7,539 19,444 14,179
Receivable from affiliate 3,170 (1,778) 127
Receivable from Allstate 23,657 (6,835) -
Other 6,649 20,079 (4,070)
-------------------------------------------
Net cash provided by operating activities 314,765 178,101 186,538
-------------------------------------------
Cash Proceeds from sales of equity securities 42,647 75,181 82,008
Flows Investment collections of fixed income securities 3,000 54,374 13,590
from Proceeds from sales of fixed income securities 228,673 120,404 367,865
Investing Purchases of fixed income securities (332,046) (207,686) (573,627)
Activities Purchases of equity securities (31,940) (53,092) (33,010)
Net (decrease) increase in short-term investments (84,508) 40,476 2,986
Purchase of PMI Ltd. (78,295) - -
Purchase of Pinebrook Insurance Company (22,577) - -
Investment in affiliates (25,634) (40,024) (3,600)
Purchases of property and equipment (12,528) (12,417) (13,687)
-------------------------------------------
Net cash used in investing activities (313,208) (22,784) (157,475)
-------------------------------------------
Cash Issuance of redeemable preferred capital securities - - 99,000
Flows Issuance of long-term debt 45,825 - -
from Proceeds from exercise of stock options 964 2,592 3,181
Financing Dividends paid to shareholders (5,199) (6,333) (6,733)
Activities Purchases of The PMI Group, Inc. common stock (24,828) (152,920) (120,002)
-------------------------------------------
Net cash provided by (used in) financing
activities 16,762 (156,661) (24,554)
-------------------------------------------
Net increase (decrease) in cash 18,319 (1,344) 4,509
Cash at beginning of year 9,757 11,101 6,592
-------------------------------------------
Cash at end of year $ 28,076 $ 9,757 $ 11,101
===========================================
See notes to consolidated financial statements
4
NOTE 1. BASIS OF PRESENTATION
Basis of Presentation - The accompanying consolidated financial statements
include the accounts of The PMI Group, Inc. ("TPG"), its wholly owned
subsidiaries, PMI Mortgage Insurance Co. ("PMI"), Residential Guaranty Co.
("RGC"), American Pioneer Title Insurance Company ("APTIC"), PMI Mortgage
Guaranty Co. ("PMG"), Residential Insurance Co. ("RIC"), TPG Insurance Co.
("TIC"), TPG Segregated Portfolio Co. (Cayman) ("TSPC") and PMI Capital I
("PCI"), PMI's wholly owned subsidiaries PMI Mortgage Insurance Australia
(Holdings) Pty Limited ("PMI Holdings"), PMI Mortgage Services Co. ("MSC"),
Pinebrook Mortgage Insurance Company (PBK) and PMI Securities Co. ("SEC"),
collectively referred to as the "Company." All material intercompany
transactions and balances have been eliminated in consolidation.
Formation of Company - TPG was incorporated in December 1993. After obtaining
the required regulatory approvals, on November 28, 1994, Allstate Insurance
Company ("Allstate") contributed all of the outstanding common stock of PMI to
TPG. Allstate had previously been the direct owner of all of the common stock of
PMI. Allstate is a wholly owned subsidiary of The Allstate Corporation
("Allstate Corp.").
On April 18, 1995, Allstate, which had been the sole shareholder of the Company,
sold 36.75 million shares of the Company's common stock, representing 70% of the
outstanding shares of common stock, for approximately $784.0 million (net of
related underwriting discount) in an underwritten public offering registered
under the Securities Act of 1933. Concurrent with the stock offering, Allstate
Corp. sold a new issue of 6.76% exchangeable notes due in April 1998. On April
15, 1998, Allstate Corp. exchanged 12,903,975 shares of TPG common stock to
redeem the 6.76% exchangeable notes due April 15, 1998. After the exchange,
Allstate held approximately 2,846,025 shares of TPG common stock, which have
subsequently been sold by Allstate.
NOTE 2. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business -The Company, through PMI, primarily writes residential mortgage
guaranty insurance ("primary insurance"). During 1997, PMI also began offering a
mortgage pool insurance product, which differs in a number of respects from the
pool insurance products offered through 1993 ("Old Pool"--See Note 7). In
addition, the Company writes title insurance through APTIC. Primary mortgage
insurance provides protection to mortgage lenders against losses in the event of
borrower default and assists lenders in selling mortgage loans in the secondary
market. Pool insurance is generally used as an additional credit enhancement for
certain secondary market mortgage transactions. Title insurance protects the
insured party against losses resulting from title defects, liens and
encumbrances existing as of the effective date of the policy.
Basis of Accounting - The financial statements have been prepared on the basis
of generally accepted accounting principles ("GAAP"), which vary from statutory
accounting practices prescribed or permitted by insurance regulatory authorities
(See Note 15). The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Investments - The Company has designated its entire portfolio of fixed income
and equity securities as available for sale. Such securities are carried at
market value with unrealized gains and losses, net of deferred income taxes,
reported as a component of accumulated other comprehensive income.
In September 1994, PMI acquired 45% of the common stock of CMG Mortgage
Insurance Company ("CMG") from CUNA Mutual Investment Corp. ("CMIC"). CMG offers
mortgage guaranty insurance for loans originated by credit unions. On October 1,
1998, PMI increased its equity investment in CMG to 50% through the purchase of
additional shares of common stock at a total cost of $4.8 million. CMIC
continues to own the remaining 50% of the common stock of CMG. On August 31,
1999, PMI and CMIC capitalized CMG Reinsurance Company ("CMG Re") with each
party investing $1.5 million for a 50% ownership interest. In addition, TPG owns
22.3% of RAM Holdings Ltd. and RAM Holdings II Ltd. (collectively referred to as
"RAM Re"). Such affiliated investments are reported in accordance with the
equity method of accounting.
5
Investment income consists primarily of interest and dividends. Interest is
recognized on an accrual basis and dividends are recorded on the date of
declaration. Realized capital gains and losses are determined on a
specific-identification basis.
Property and Equipment - Property and equipment (including software) is carried
at cost less accumulated depreciation. The Company provides for depreciation
using the straight-line method over the estimated useful lives of the assets,
generally 3 to 10 years. Accumulated depreciation on property and equipment was
$51.4 million and $38.9 million at December 31, 1999 and 1998, respectively.
Capitalized Software - Effective in 1999, the Company adopted American Institute
of Certified Public Accountants Statement of Position ("SOP") 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use, which
requires capitalization of external and internal direct software development
costs incurred during the application development stage. Adoption of this SOP
did not have a significant effect as the Company's previous software
capitalization policy was substantially consistent with this guidance.
Insurance Accounting -Primary mortgage insurance policies are contracts that are
non-cancelable by the insurer, are renewable at a fixed price at the insured's
option, and provide for the payment of premiums on either a monthly, annual or
single payment basis. Upon renewal by the insured, the Company is not able to
re-underwrite or re-price its policies. Statement of Financial Accounting
Standards ("SFAS") No. 60, Accounting and Reporting for Insurance Enterprises,
specifically excludes mortgage guaranty insurance from its guidance relating to
the earning of insurance premiums. Consistent with generally accepted accounting
principles and industry accounting practices, premiums written on a single
premium and an annual premium basis are initially deferred as unearned premiums
and earned over the policy term. Premiums written on policies covering more than
one year (single premium plans) are amortized over the policy life in relation
to the expiration of risk. Premiums written on annual payment policies are
earned on a monthly pro rata basis. Premiums written on monthly payment policies
are earned in the period to which they relate, and any unreceived portion is
recorded in premiums receivable. Title insurance premiums are recognized as
revenue on the effective date of the title insurance policy. Fee income of the
non-insurance subsidiaries is earned as the services are provided.
Costs associated with the acquisition of mortgage insurance business, consisting
of compensation, premium taxes and other policy issuance and underwriting
expenses, are initially deferred and reported as deferred acquisition costs
("DAC"). Because SFAS 60 specifically excludes mortgage guaranty insurance from
its guidance relating to the amortization of deferred policy acquisition costs,
amortization of these costs for each underwriting year book of business are
charged against revenue in proportion to estimated gross profits over the life
of the policies using the guidance provided by SFAS No. 97, Accounting and
Reporting by Insurance Enterprises For Certain Long Duration Contracts and for
Realized Gains and Losses From the Sale of Investments. The estimate for each
underwriting year is updated annually to reflect actual experience and any
changes to key assumptions such as persistency or loss development. (See Note 6)
The reserve for losses and loss adjustment expenses is the estimated cost of
settling claims related to notices of default on insured loans that have been
reported to the Company as well as loan defaults that have occurred but have not
been reported. Estimates are based on an evaluation of claim rates, claim
amounts, and salvage recoverable. SFAS 60 specifically excludes mortgage
guaranty insurance from its guidance relating to the reserve for losses.
Consistent with generally accepted accounting principles and industry accounting
practices, the Company does not establish loss reserves for future claims on
insured loans that are not currently in default. Reserves for title insurance
claims are based on estimates of the amounts required to settle such claims,
including expenses for defending claims for which notice has been received and
an amount estimated for claims not yet reported.
Management believes that the reserve for losses and loss adjustment expenses at
December 31, 1999 is appropriately established in the aggregate and is adequate
to cover the ultimate net cost of reported and unreported claims arising from
losses which had occurred by that date. The establishment of appropriate
reserves is an inherently uncertain process. Such reserves are necessarily based
on estimates and the ultimate net cost may vary from such estimates. These
estimates are regularly reviewed and updated using the most current information
available. Any resulting adjustments, which may be material, are reflected in
current operations.
6
Stock split - The Company had a three-for-two stock split in 1999 in the form of
a 50% stock dividend. All earnings per share amounts and stock option
information prior to the stock split have been restated to reflect post-split
amounts.
Income per Common Share - Basic earnings per share (EPS) excludes dilution and
is computed by dividing net income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The weighted average common shares outstanding for computing basic EPS were
44,893,250 for 1999, 47,090,673 for 1998 and 50,078,742 for 1997. The weighted
average common shares outstanding for computing diluted EPS includes only stock
options issued by the Company which have a dilutive impact and are outstanding
for the period, and had the potential effect of increasing common shares to
45,244,060 for 1999, 47,299,065 for 1998 and 50,265,392 for 1997. Net income
available to common shareholders does not change for computing diluted EPS.
Income Taxes - The Company accounts for income taxes using the liability method,
whereby deferred tax assets and liabilities are recorded based on the difference
between the financial statement and tax bases of assets and liabilities at the
currently enacted tax rates. The principal assets and liabilities giving rise to
such differences are presented in Note 8.
Derivatives - In 1999, the Company entered into an interest rate swap to hedge
interest rate risk associated with the acquisition debt described in Note 3 and
11. During 1999, the Company also entered into a foreign currency exchange
contract to hedge the foreign currency exchange risk associated with the
purchase price of PMI Holdings, the Australia acquisition described in Note 3.
The gain on this contract, which was not material, was recognized as an
adjustment of the purchase price of the acquired company.
Foreign currency translation - The financial statements of foreign subsidiaries
have been translated into U.S. dollars in accordance with SFAS No. 52, Foreign
Currency Translation Assets and liabilities denominated in non-U.S. dollar
currencies are translated into U.S. dollar equivalents using year-end spot
foreign exchange rates. Revenues and expenses are translated monthly at amounts
which approximate weighted average exchange rates, with resulting gains and
losses included in income. The effects of translating operations with a
functional currency other than the U.S. dollar are included in accumulated other
comprehensive income. Such effects were not material in 1999.
Concentration of Risk - A substantial portion of PMI's business is generated
within the State of California. For the year ended December 31, 1999, 14.8% of
new insurance written was in California. In addition, California's book of
business represented 15.6% of total risk in force at December 31, 1999.
Stock-Based Compensation - The Company accounts for stock-based awards to
employees and directors using the intrinsic value method in accordance with
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees (See Note 14).
New Accounting Pronouncement - In June 1998, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which established accounting and reporting standards for
derivative instruments. The statement is effective for fiscal quarters beginning
after June 15, 2000. Because of the Company's minimal use of derivatives,
management anticipates that the adoption of this new statement will not have a
significant effect on earnings or the financial position of the Company.
Reclassification - Certain prior year amounts have been reclassified to conform
to current year presentation.
7
NOTE 3. ACQUISITIONS
On August 6, 1999, the Company, through PMI Holdings, a newly formed, wholly
owned subsidiary of PMI, acquired all of the outstanding common stock of PMI
Mortgage Insurance Ltd. ("PMI Ltd.") for approximately $78.3 million in cash.
PMI Ltd. (formerly MGICA, Ltd) is the second largest mortgage guaranty insurer
in Australia, as measured by annual insurance written. Substantially all of PMI
Ltd.'s mortgage insurance in force consists of single premium payment policies.
The acquisition was financed in part by the issuance of PMI Holdings debt of
$45.8 million (see Note 11). The acquisition was accounted for under the
purchase method of accounting and, accordingly, the consolidated financial
statements include the results of PMI Ltd.'s operations from the date of
acquisition. The excess of the estimated fair value of net assets acquired over
the purchase price of approximately $31.8 million first reduced the value of
noncurrent assets acquired, with the remaining $9.6 million of negative goodwill
being amortized over approximately 8 years.
On December 31, 1999, the Company acquired all of the outstanding common stock
of Pinebrook Mortgage Insurance Company ("Pinebrook"), which was a wholly owned
subsidiary of Allstate for $22.6 million cash. The purchase price approximates
the book value of Pinebrook, which does not differ significantly from fair
value. This transaction has been accounted for under the purchase method.
Proforma unaudited results of operations for 1999 and 1998 assuming the
acquisitions had occurred at the beginning of 1998 are as follows:
(In thousands, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------
Revenues $692,585 $583,298
Net income 220,679 215,212
Basic net income per common share 4.92 4.57
Diluted net income per common share 4.87 4.55
NOTE 4. INVESTMENTS
Fair Values - The amortized cost and estimated fair values (based on quoted
market values) for fixed income securities are shown below:
Amortized Gross Unrealized Market
----------------
(In thousands) Cost Gains (Losses) Value
- -----------------------------------------------------------------------------------------------------------
At December 31, 1999
U.S. government and agencies $ 87,223 $ 387 $ (3,563) $ 84,047
Municipals 1,260,409 31,337 (30,438) 1,261,308
Corporate bonds 137,764 49 (3,858) 133,955
----------- --------- --------- -----------
Total $ 1,485,396 $ 31,773 $ (37,859) $ 1,479,310
=========== ========= ========= ===========
At December 31, 1998
U.S. government and agencies $ 53,918 $ 2,060 $ -- $ 55,978
Municipals 1,110,665 83,363 (290) 1,193,738
Corporate Bonds 104,042 3,451 (340) 107,153
----------- --------- --------- -----------
Total $ 1,268,625 $ 88,874 $ (630) $ 1,356,869
=========== ========= ========= ===========
8
Scheduled Maturities - The scheduled maturities for fixed income securities are
as follows at December 31, 1999:
Amortized Market
(In thousands) Cost Value
- --------------------------------------------------------------------------------
Due in one year or less $ 13,218 $ 13,027
Due after one year through five years 154,726 151,460
Due after five years through ten years 202,274 204,500
Due after ten years 1,069,226 1,066,322
Other 45,952 44,001
---------------------------------------
Total $ 1,485,396 $ 1,479,310
---------------------------------------
Actual maturities may differ from those scheduled as a result of calls by the
issuers prior to maturity.
Investment Concentration and Other Items - The Company maintains a diversified
portfolio of municipal bonds. At December 31, 1999 and 1998, the following
states represented the largest concentrations in the portfolio (expressed as a
percentage of the carrying value of all municipal bond holdings). Holdings in no
other state exceed 5.0% of the portfolio at December 31, for the respective
years.
1999 1998
- ----------------------------------------------------------------------------
Illinois 13.2% 13.2%
Texas 12.2 12.0
Washington 11.5 12.0
New York 9.2 8.6
Massachusetts 6.3 7.3
California 6.1 6.5
Indiana - 6.1
Pennsylvania 5.5 5.5
At December 31, 1999, fixed income and short term securities with a market value
of $14.1 million were on deposit with regulatory authorities as required by law.
Unrealized Net Gains on Investments - Unrealized net gains on investments
included in accumulated other comprehensive income at December 31, 1999, are as
follows:
Gross Unrealized Net
Market ---------------------- Unrealized
(In thousands) Cost Value Gains (Losses) Gains
- ------------------------------------------------------------------------------------------------------------
Fixed income securities $ 1,485,396 $ 1,479,310 $ 31,773 $ (37,859) $ (6,086)
Common stocks 44,714 83,890 40,812 (1,636) 39,176
Preferred stocks 17,660 17,582 157 (235) (78)
Short term 145,087 145,093 20 (14) 6
Investment in affiliates 93,283 91,453 - (1,830) (1,830)
------------------------------------------------------------------------------
Total $ 1,786,140 $ 1,817,328 $ 72,762 $ (41,574) 31,188
---------------------------------------------------------------
Less defered income taxes 11,002
------------
Total $ 20,186
------------
The difference between cost and market value of the investment in affiliates
reflects net unrealized gains on the affiliates' investment portfolio. The
stated market value does not necessarily represent the fair value of the
affiliates' common stock held by the Company.
The change in net unrealized gains (losses), net of deferred income taxes,
included in other comprehensive income for fixed income securities and equity
securities are as follows:
9
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------
Fixed income securities $ (61,372) $ 8,874 $ 20,572
Equity securities 8,758 (6,565) 517
Investment in affiliates (1,662) 217 138
------------------------------------------------------
Total $ (54,276) $ 2,526 $ 21,227
------------------------------------------------------
Investment Income - Investment income by investment type is as follows:
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Fixed income securities $ 82,256 $ 76,427 $ 74,641
Equity securities 2,400 2,466 1,476
Common stock of affiliates 7,061 3,225 1,455
Short-term 4,793 3,442 6,332
------------------------------------------------------
Investment income, before expenses 96,510 85,560 83,904
Less investment expense 1,368 879 768
------------------------------------------------------
Investment income, less investment expense $ 95,142 $ 84,681 $ 83,136
------------------------------------------------------
Realized Capital Gains and Losses.
Net realized capital gains and (losses) on investments are as follows:
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Fixed income securities $ (4,547) $ 1,481 $ (777)
Equity securities 5,046 23,155 20,188
Short-term 10 - 173
------------------------------------------------------
Realized capital gains -- net, before taxes 509 24,636 19,584
Less income taxes 178 8,623 6,854
------------------------------------------------------
Realized capital gains, net of taxes $ 331 $ 16,013 $ 12,730
------------------------------------------------------
Gross realized capital gains and losses on investments are as follows:
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Gross realized capital gains $ 8,171 $ 27,810 $ 26,167
Gross realized capital losses (7,662) (3,174) (6,583)
------------------------------------------------------
Net realized capital gains $ 509 $ 24,636 $ 19,584
------------------------------------------------------
10
NOTE 5. LOSS RESERVES
The following table is a reconciliation of the beginning and ending reserve for
losses and loss adjustment expenses for each of the last three years:
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Balance, January 1 $ 215,259 $ 202,387 $ 199,774
Less reinsurance recoverable 6,782 6,067 5,287
------------------------------------------------
Net balance, January 1 208,477 196,320 194,487
------------------------------------------------
Losses and loss adjustment expenses incurred (principally
in respect of defaults occurring in)
Current year 159,293 146,884 158,147
Prior years (46,611) (11,168) (5,890)
------------------------------------------------
Total losses and loss adjustment expenses 112,682 135,716 152,257
------------------------------------------------
Losses and loss adjustment expense payments (principally in respect
of defaults occurring in)
Current year 1,798 12,503 27,700
Prior years 95,797 111,056 122,724
------------------------------------------------
Total payments 97,595 123,559 150,424
------------------------------------------------
Plus acquisition of Forestview Reserves 42,528 - -
Plus acquisition of Pinebrook Reserves 1,093 - -
Plus acquisition of PMI Ltd 4,473 - -
------------------------------------------------
Net balance, December 31 270,565 208,477 196,320
Plus reinsurance recoverable 10,342 6,782 6,067
------------------------------------------------
Balance, December 31 $ 282,000 $ 215,259 $ 202,387
------------------------------------------------
As a result of changes in estimates of ultimate losses resulting from insured
events in prior years, the provision for losses and loss adjustment expenses
(net of reinsurance recoverable) decreased by $46.6 million in 1999 due the
impact of a favorable interest rate environment on loss mitigation activities
and to lower than expected claims in California. The provision for losses and
loss adjustment expenses decreased by $11.2 million and $5.9 million in 1998 and
1997, respectively, due primarily to lower than expected losses in California.
Such estimates were based on management's analysis of various economic trends
(including the real estate market and unemployment rates) and their effect on
recent claim rate and claim severity experience.
NOTE 6. DEFERRED ACQUISITION COSTS ("DAC")
DAC is amortized against revenue in proportion to the estimated gross profits
for each underwriting year book of business over the life of the underlying
policies included in each book year. This amortization method is consistent with
the methodology outlined in SFAS No. 97, as described in Note 2.
The DAC asset is affected by: (a) acquisition costs deferred in a period, and
(b) amortization of previously deferred costs in such period. In periods where
there is growth in new business (and therefore acquisition costs), the DAC asset
will increase because the amount of acquisition costs being deferred exceeds the
amount being amortized to expense.
The following table reconciles beginning and ending DAC for the years ended
December 31, 1999, 1998 and 1997:
11
(In thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Beginning DAC balance $ 61,605 $ 37,864 $ 31,633
Accquisition costs incurred and deferred 88,226 84,021 49,626
Amortization of deferred costs (80,252) (60,280) (43,395)
------------ ------------ -------------
Ending DAC balance $ 69,579 $ 61,605 $ 37,864
============ ============ =============
NOTE 7. REINSURANCE
PMI cedes reinsurance to reduce net risk in force to meet regulatory
risk-to-capital requirements and to comply with the regulations that limit the
maximum coverage to 25% for any single risk. Certain of the Company's
reinsurance arrangements have adjustable features, such as contingent
commissions or sliding scale commission. Commission adjustments are dependent
upon the loss experience of the underlying business. Estimates are based on the
Company's actuarial analysis of the applicable business; amounts the Company
will ultimately recover could differ materially from amounts recorded in
reinsurance recoverable.
The reinsurance agreement with Capital Mortgage Reinsurance Company of New York
was terminated effective December 31, 1997 for policies issued by the company
prior to January 1, 1998. The reinsurance on these policies is in run-off
through December 31, 2006. As a result of the treaty termination, PMI no longer
cedes primary reinsurance to third party reinsurers (except under captive
reinsurance arrangements) on policies written after December 31, 1997.
In December 1993, PMI decided to cease writing Old Pool business (except for
honoring certain commitments in existence prior to the discontinuation of this
business). Concurrently, PMI entered into a reinsurance agreement with
Forestview Mortgage Insurance Co. ("Forestview"), a wholly owned subsidiary of
Allstate, to cede all future Old Pool premiums and net losses from PMI to
Forestview. As a result of this ceding agreement, along with another Old Pool
ceding agreement with an unaffiliated reinsurer, the Old Pool business had no
significant impact on the Company's results of operations for the years ended
December 31, 1998 and 1997. In accordance with accounting for discontinued
operations, since 1993 Old Pool insurance assets (unpaid losses recoverable and
paid claims receivable) and liabilities (loss reserves and premiums payable)
have been netted in the consolidated balance sheet at December 31, 1998
resulting in a net Old Pool receivable of $2.7 million which is included in
other assets.
In July of 1999, PMI and Forestview received regulatory approval of a Recapture
Agreement executed in March 1999 to commute the Old Pool reinsurance arrangement
retroactive to January 1, 1999. The Recapture Agreement also included the
commutation of an insignificant second lien primary insurance arrangement
between the parties. On August 13, 1999, PMI received a payment of $45.3 million
covering the following (in thousands):
Recapture of ceded loss reserves $42,528
Recapture of ceded unearned premiums 1,100
Other settlements 1,672
-------
Total payment received $45,300
=======
PMI established the recaptured ceded loss reserves and ceded unearned premiums
as liabilities upon receipt of the cash payment. The other settlements, which
primarily represent service fees for administering the Forestview book of
business, were included in other income as PMI has no future obligations to
provide services to Forestview.
As a result of the above Old Pool commutation, all Old Pool assets and
liabilities are shown on a gross basis at December 31, 1999.
During 1999, PMI entered into a reinsurance arrangement with three reinsurers to
provide coverage for a 10- year period in the event of catastrophic losses. PMI
paid the reinsurers a total one-time premium of $16.4 million of which a
substantial portion will be recovered by PMI should losses not reach
catastrophic levels. This agreement does not transfer risk in accordance with
FAS113 and therefore is being reported in accordance with SOP 98-7, Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Risk.
12
Reinsurance recoverable on paid losses from reinsurance was $11.4 million and
$6.8 million at December 31, 1999 and 1998 respectively. Prepaid reinsurance
premiums from non-affiliated reinsurers were $1.7 million and $2.1 million at
December 31, 1999 and 1998, respectively.
The effects of reinsurance on the primary premiums written, premiums earned and
losses and loss adjustment expenses of the Company's operations for the year
ended December 31 are as follows:
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
Premiums written
Direct $ 585,771 $ 498,828 $ 435,971
Assumed 8,999 7,141 1,383
Ceded (23,516) (16,869) (5,302)
---------- ---------- ---------
Premiums written, net of reinsurance $ 571,254 $ 489,100 $ 432,052
========== =========== =========
Premiums earned
Direct $ 574,451 $ 506,096 $ 458,972
Assumed 6,445 3,101 1,182
Ceded (22,273) (17,971) (6,206)
---------- ---------- ---------
Premiums earned net of reinsurance $ 558,623 $ 491,226 $ 453,948
========== =========== =========
Losses and loss adjustment expenses
Direct $ 124,704 $ 140,705 $ 157,012
Assumed 2,882 176 219
Ceded (14,904) (5,165) (4,974)
---------- ---------- ---------
Losses and loss adjustment expenses, net of reinsurance $ 112,682 $ 135,716 $ 152,257
========== =========== =========
Reinsurance ceding arrangements do not discharge the Company from its
obligations as the primary insurer in the event of default by the reinsurer.
NOTE 8. INCOME TAXES
The components of income tax expense are as follows:
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
Current $ 6,942 $ 7,302 $ 3,859
Deferred 78,678 69,286 63,699
---------- ---------- ---------
Total income tax expense $ 85,620 $ 76,588 $ 67,558
========== ========== =========
The components of the income tax expense for 1999 include a foreign provision
for current tax expense of $4.7 million and deferred tax benefit of $1.2
million related to PMI Ltd.
A reconciliation of the statutory federal income tax rate to the effective tax
rate reported on income before income taxes is as follows:
1999 1998 1997
- ------------------------------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0 35.0%
Tax-exempt income (6.8) (7.2) (7.5)
State income tax (net) 0.5 0.4 0.2
Other 0.8 0.5 0.1
------ ----- -----
Effective income tax rate 29.5% 28.7% 27.8%
====== ===== =====
On April 18, 1995 the Company and its subsidiaries separated from Allstate (See
Note 1). Effective April 11, 1995 the Company and its subsidiaries file a
consolidated income tax return. Prior to that date, the Company was part of the
consolidated return of Sears, Roebuck and Co. ("Sears"), the former parent
company of Allstate Corp. The Company's share of consolidated federal income tax
liability prior to April 11, 1995 was determined under a tax sharing agreement
as part of
13
the Sears tax group. Under the tax sharing agreement, the Company has
continuing rights and obligations to Allstate and Sears for the tax effect of
any changes in taxable income relating to the periods during which the Company
was part of the Sears tax group. In July 1999, the Company received payment for
income taxes receivable of $16.8 million (plus interest) from Allstate related
to the filing of an amended return for prior years.
Section 832(e) of the Internal Revenue Code permits mortgage guaranty insurers
to deduct, within certain limitations, additions to statutory contingency
reserves (See Note 15). This provision was enacted to enable mortgage guaranty
insurers to increase statutory unassigned surplus through the purchase of
non-interest bearing "tax and loss bonds" from the federal government. The tax
and loss bonds purchased are limited to the tax benefit of the deduction for
additions to the contingency reserve. The Company purchased tax and loss bonds
of $73.5 million, $47.4 million and $50.7 million in 1999, 1998 and 1997,
respectively.
The Company paid income taxes of $10.5 million, $8.4 million and $8.4 million in
1999, 1998 and 1997, respectively.
The components of the deferred income tax assets and liabilities at December 31
are as follows:
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------
Deferred tax assets:
Discount on loss reserves $ 6,253 $ 4,422
Unearned premium reserves 4,867 4,181
Alternative minimum tax credit carryforward 39,911 31,870
Pension costs 4,406 3,131
Other assets 7,981 4,355
----------------------------
Total deferred tax assets 63,418 47,959
----------------------------
Deferred tax liabilities:
Statutory contingency reserves 89,092 72,817
Policy acquisition costs 23,549 21,562
Unrealized net gains on investments 11,001 39,631
Software development costs 7,570 7,423
Other liabilities 7,846 3,256
----------------------------
Total deferred tax liabilities 139,058 144,689
----------------------------
Net deferred tax liability $ 75,640 $ 96,730
----------------------------
NOTE 9. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The estimated fair value
amounts of certain liabilities indicated below have been determined by using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value and, accordingly, the estimates presented herein are not
necessarily indicative of the amounts that could be realized in a current market
exchange.
1999 1998
- -------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(In thousands) Value Fair Value Value Fair Value
- ---------------------------------------------------------------------------- --------------------------------
8.247% Long-term debt $ 99,542 $ 92,252 $ 99,476 $ 103,997
9.322% Redeemable preferred
capital securities $ 99,075 $ 90,041 $ 99,040 $ 107,075
7.00% Long-term debt $ 45,825 $ 47,300 $ - $ -
A number of the Company's significant assets and liabilities, including deferred
policy acquisition costs, property and equipment, loss reserves, unearned
premiums and deferred income taxes are not considered financial instruments.
14
NOTE 10. BENEFIT PLANS
As of April 18, 1995, all full-time employees and certain part-time employees of
the Company participate in The PMI Group, Inc. Retirement Plan ("Plan"), a
noncontributory defined benefit plan. The Plan has been funded by the Company to
the fullest extent permitted by federal income tax rules and regulations. Also,
certain employees earning in excess of $160,000 per year participate in The PMI
Group, Inc. Supplemental Employee Retirement Plan, a noncontributory defined
benefit plan. Benefits under both plans are based upon the employee's length of
service, average annual compensation and estimated social security retirement
benefits.
The Company provides certain health care and life insurance benefits for retired
employees ("OPEB Plan"). Generally, qualified employees may become eligible for
these benefits if they retire in accordance with the Company's established
retirement policy and are continuously insured under the Company's group plans
or other approved plans for 10 or more years prior to retirement. The Company
shares the cost of the retiree medical benefits with retirees based on years of
service with the Company's share being subject to a 5% limit on annual medical
cost inflation after retirement. The Company has the right to modify or
terminate these plans.
Remainder of Page to Remain Blank
15
The following table presents certain information regarding the Plan and the OPEB
Plan as of December 31:
Pension Benefits Other Benefits
---------------- --------------
(In thousands, except percentages) 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Change in benefit obligation
Benefit obligation at January 1, $ 18,376 $ 11,381 $ 6,659 $ 4,219 $ 3,112 $ 2,782
Service cost 5,443 3,796 3,424 578 434 387
Interest cost 1,710 1,074 759 320 255 217
Actuarial loss (gain) 1,046 2,861 875 (1,139) 435 (269)
Benefits paid (1,038) (736) (336) (26) (17) (5)
------------------------------------------------------------------------
Benefit obligation at December 31, 25,537 18,376 11,381 3,952 4,219 3,112
------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at January 1, 8,877 5,204 2,896 - - -
Actual return on plan assets 2,397 366 180 - - -
Company contribution 3,658 4,043 2,464 26 17 5
Benefits paid (1,038) (736) (336) (26) (17) (5)
------------------------------------------------------------------------
Fair value of plan assets at December 31, 13,894 8,877 5,204 - - -
------------------------------------------------------------------------
Funded status
Funded status of plan at December 31, (11,643) (9,499) (6,177) (3,952) (4,219) (3,112)
Unrecognized actuarial loss (gain) 2,891 3,583 505 (1,460) (320) (781)
Unrecognized prior service cost - - - 245 265 284
------------------------------------------------------------------------
Accrued and recognized benefit cost $ (8,752) $ (5,916) $ (5,672) $ (5,167) $ (4,274) $ (3,609)
------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $ 5,443 $ 3,796 $ 3,424 $ 578 $ 434 $ 387
Interest cost 1,710 1,074 759 320 255 217
Expected return on assets (893) (515) (295) - - -
Prior service cost amortization - - - 20 20 20
Actuarial loss (gain) recognized 234 (68) (95) - (26) (28)
------------------------------------------------------------------------
Net periodic benefit cost $ 6,494 $ 4,287 $ 3,793 $ 918 $ 683 $ 596
------------------------------------------------------------------------
Weighted-average assumptions
Discount rate 8.00% 6.75% 7.25% 8.00% 6.75% 7.25%
Expected return on plan assets 8.50% 8.50% 8.50% N/A N/A N/A
Rate of compensation increase 5.50% 5.50% 5.50% N/A N/A N/A
Health care cost trend on covered charges N/A N/A N/A 6.00% 6.00% 6.00%
Sensitivity of retiree welfare results. Assumed health care cost trend rates
have a significant effect on the amounts reported for the health care plans.
16
A one-percentage-point change in assumed health care cost trend rates would have
the following effects:
I-Percentage- I-Percentage-
(In thousands) Point Increase Point Decrease
- -----------------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components 226 $ 171
Effect on accumulated postretirement benefit obligations 1,163 892
Savings and Profit Sharing Plans. As of April 18, 1995, certain employees of the
Company were eligible to participate in The PMI Group, Inc. Savings and Profit
Sharing Plan ("401K Plan") covering both salaried and hourly employees. Eligible
employees who participate in the 401K Plan receive, within certain limits,
matching Company contributions. Costs relating to the 401K Plan amounted to $2.7
million, $2.1 million, and $1.2 million for 1999, 1998 and 1997, respectively.
NOTE 11. DEBT AND CREDIT FACILITIES
Long-term Debt - On November 15, 1996, the Company issued unsecured debt
securities in the face amount of $100.0 million ("Notes"). The Notes mature and
are payable on November 15, 2006 and are not redeemable prior to maturity. No
sinking fund is required or provided for prior to maturity. Interest on the
Notes is 6.75% and is payable semiannually. Interest payments of $6.8 million
were made during 1999, 1998 and 1997.
On August 3, 1999, PMI Holdings, along with TPG as guarantor, entered into a
credit agreement with Bank of America, N.A. ("Bank"). PMI Holdings borrowed
$45.8 million ("Loan") at a six month adjustable rate which equals the Australia
Bank Bill Buying Rate plus a specified margin that is dependant on the TPG's
senior debt rating. The proceeds of the Loan were used to finance the purchase
of PMI Ltd. Principal payments in equal 10% installments are due annually
beginning August 3, 2001 and continue through August 3, 2005. The final 50%
principal payment is due August 3, 2006. Concurrently, on August 3, 1999, PMI
Holdings along with TPG as guarantor entered into a Swap Transaction ("Swap")
with the Bank. The Swap effectively fixed the interest rate on the Loan to 7.0%.
The net interest effect of the Swap is reported as an adjustment of interest
expense. The fair value of the Swap agreement is not recognized in the financial
statements. Other provisions of the Swap do not have a material effect on the
Loan. No interest payments were made during 1999.
The terms of the Loan, provide, in part, that (1) TPG's consolidated net worth
shall not be less than $600 million; (2) PMI's statutory capital (as defined)
shall not be less than $675 million; (3) the risk to capital ratio of PMI shall
not exceed 23 to 1; and (4) TPG's consolidated debt to capital ratio shall not
exceed 0.40 to 1.0. In addition, PMI's and PMI Ltd.'s ability to pay dividends
or incur additional indebtedness is restricted. Failure to maintain such
financial covenants or debt restrictions may be deemed an event of default.
Pursuant to the guarantee executed by TPG in connection with the Loan, if an
event of default occurs under the Loan, or under any other indebtedness, all
outstanding amounts under the credit agreement may be accelerated and become
immediately payable by TPG.
Lines of Credit - The Company has two lines of credit agreements ("Lines"), each
in the amount of $25.0 million. The Lines have final maturities of February 2001
and December 2001 and commitment fees of 8.0 and 6.5 basis points, respectively.
Both Lines may be used for general corporate purposes. There were no amounts
outstanding on the Lines at December 31, 1999 or 1998.
17
NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES
Leases - The Company leases certain office facilities and equipment. Minimum
rental commitments under non-cancelable operating leases with a remaining term
of more than one year as of December 31, 1999 are as follows:
(In thousands) Amount
- -----------------------------------------------------------
Year ending December 31:
2000 $ 8,842
2001 7,412
2002 6,416
2003 5,316
2004 4,550
-----------
Total $ 32,536
===========
The Company renewed its corporate headquarters lease for 5 years in 1999 with a
5 year renewal option. Such minimum expected rentals are included in the above
amounts.
Total rent expense for all leases was $9.6 million, $9.0 million and $7.6
million in 1999, 1998 and 1997, respectively.
Legal Proceedings - On December 17, 1999, G. Craig Baynham and Linnie Baynham
(collectively, the "Plaintiffs") filed a putative class action suit against PMI.
The complaint captioned G. Craig Baynham and Linnie Baynham v. PMI Mortgage
Insurance Co., (case no. CV199-241) was filed in the United States District
Court For The Southern District of Georgia, State of Georgia and alleges that
PMI entered into agreements or understandings with mortgage lenders that PMI
would provide pool insurance or other benefits to the lenders at preferential,
below market rates, in return for the lenders' designation of PMI as the
mortgage insurer for mortgages originated by the lenders. Based on the alleged
conduct, Plaintiffs assert a cause of action on behalf of the proposed class of
mortgage insurees against PMI for violation of section 8 of the Real Estate
Settlement Procedures Act ("RESPA") 12 U.S.C. (S)2607(a). Plaintiffs seek relief
under RESPA's treble damage provision, along with injunctive relief and
attorneys' fees and expenses. The complaint also seeks to certify a class of
persons who, on or after January 1, 1996 obtained or obtain federally related
mortgage loans for single-to four family homes, whose loans include primary
mortgage insurance, reinsurance contracts, contract underwriting services, or
financing agreements from PMI.
The Company understands that several other mortgage insurance companies have
been named as defendants in lawsuits with similar allegations recently filed in
the same federal court as the case pending against PMI. The Company intends to
contest this action vigorously and based on information presently available to
the Company, management believes that the ultimate outcome of this matter will
not have a material adverse effect on the Company's financial position or
results of operations.
Various other legal actions and regulatory reviews are currently pending that
involve the Company and specific aspects of its conduct of business. In the
opinion of management, the ultimate liability in one or more of these actions is
not expected to have a material effect on the financial condition or results of
operations of the Company.
NOTE 13. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST
DEBENTURE OF THE COMPANY
On February 4, 1997, TPG, through a wholly-owned trust, privately issued $100.0
million of 8.309% preferred capital securities, Series A ("Capital Securities").
The Capital Securities are redeemable after February 1, 2007, at a premium or
upon occurrence of certain tax events, and mature on February 1, 2027. The net
proceeds, totaling $99.0 million, were used for general corporate purposes,
including common stock repurchases and additions to the investment portfolio.
The Capital Securities were issued by PMI Capital I ("Issuer Trust"). The sole
asset of the Issuer Trust consists of $103.1 million principal amount of a
junior subordinated debenture ("Debenture") issued by TPG to the Issuer Trust.
The Debenture bears interest at the rate of 8.309% per annum and matures on
February 1, 2027. The amounts due to the Issuer Trust under the Debenture and
the related income statement amounts have been eliminated in the Company's
consolidated financial statements. Distributions on the Capital Securities occur
on February 1 and August 1 of each year. The obligations of TPG
18
under the Debenture and a related guarantee and expense agreement constitute a
full and unconditional guarantee by TPG of the Issuer Trust's obligations under
the Capital Securities. The Capital Securities are subject to mandatory
redemption under certain circumstances. Distribution payments of $8.3 million
were made in 1999 and 1998, respectively.
NOTE 14. DIVIDENDS AND SHAREHOLDERS' EQUITY
Shareholder Rights Plan - On January 13, 1998, the Company adopted a Shareholder
Rights Plan ("Rights Plan"). In general, rights issued under the plan will be
exercisable only if a person or group acquires 10% or more of the Company's
common stock or announces a tender offer for 10% or more of the common stock.
The Rights Plan contains an exception that would allow passive institutional
investors to acquire up to a 15% ownership interest before the rights would
become exercisable.
Dividends - The ability of the Company to pay dividends is dependent on business
conditions, income, cash requirements of the Company, receipt of dividends from
PMI, restrictions contained in the Company's credit agreements, indentures,
various credit rating agencies and other relevant factors. PMI's ability to pay
dividends to TPG is limited, among other restrictions, under Arizona law. The
payment of dividends by PMI without the prior approval of the Arizona State
Insurance Department is limited to formula amounts based on net income, net
investment income, and capital and surplus, including unassigned surplus,
determined in accordance with statutory accounting practices, as well as the
timing and amount of dividends paid in the preceding twelve months. Limitations
on PMI's risk-to-capital ratio also effectively limit PMI's ability to pay
dividends because the payment of dividends reduces statutory capital. Various
state regulatory authorities impose a limitation that the risk-to-capital ratio
may not exceed 25 to 1. In addition, under a support agreement with Allstate,
PMI is prohibited from paying any dividend that would cause its risk-to-capital
ratio to equal or exceed 23 to 1 (See Note 17). Management believes that PMI's
dividend restrictions have not had, and are not expected to have, a significant
impact on TPG's ability to meet its cash obligations. Under the most restrictive
dividend limitations, the maximum amount of dividends that PMI can distribute to
TPG at December 31, 1999, without prior regulatory approval is $13.4 million.
PMI paid ordinary and, after obtaining regulatory approval, extraordinary
dividends to TPG totaling $94.3 million and $100.0 million in the years ended
December 31, 1999 and 1998, respectively. APTIC paid ordinary dividends to TPG
totaling $3.0 million and $3.2 million in the years ended December 31, 1999 and
1998, respectively.
Preferred Stock - The Company's restated certificate of incorporation authorizes
the Board of Directors to issue up to 5,000,000 shares of preferred stock of TPG
in classes or series and to fix the designations, preferences, qualifications,
limitations or restrictions of any class or series with respect to the rate and
nature of dividends, the price and terms and conditions on which shares may be
redeemed, the amount payable in the event of voluntary or involuntary
liquidation, the terms and conditions for conversion or exchange into any other
class or series of the stock, voting rights and other terms. The Company may
issue, without the approval of the holders of common stock, preferred stock
which has voting, dividend or liquidation rights superior to the common stock
and which may adversely affect the rights of holders of common stock.
Pursuant to the Runoff Support Agreement (See Note 17), the Company has agreed
that, in the event that Allstate makes a payment contemplated by the Allstate
Support Agreements or the Runoff Support Agreement, Allstate will have the right
to receive preferred stock of TPG or PMI with a liquidation preference equal to
the amount of such payment. Such preferred stock will rank senior in right of
payment to the issuer's common stock and, so long as such preferred stock is
outstanding, the issuer thereof will be prohibited from paying any dividends or
making any other distributions on its common stock.
Equity Incentive Plan and Directors Plan - During 1998, the Company amended and
restated The PMI Group, Inc. Equity Incentive Plan ("Equity Incentive Plan") and
The PMI Group, Inc. Stock Plan for Non-Employee Directors ("Directors Plan") as
amended provide for an aggregate of 3,750,000 shares of common stock reserved
for issuance to directors, officers, and employees of TPG and its subsidiaries.
The Equity Incentive Plan provides for awards of both non-qualified stock
options and incentive stock options, stock appreciation rights, restricted stock
subject to forfeiture and restrictions on transfer, and performance awards
entitling the recipient to receive cash or common stock in the future following
the attainment of performance goals determined by the Board of Directors.
Generally, options are granted with an exercise price equal to the market value
on the date of grant, expire ten years from the date of grant and have a
three-year vesting period. The Directors Plan provides that each director who is
not an employee of the Company or its subsidiaries will receive an annual grant
of up to 450 shares of common stock and will receive stock options for 2,250
shares annually, after an initial option of up to 4,500 shares. The shares will
be granted on June 1 of each year or as soon as administratively practicable
after each anniversary of the director's commencement of service.
19
The following is a summary of activity in the Equity Incentive Plan and the
Directors Plan during 1999, 1998 and 1997:
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Option Exercise Price Under Option Exercise Price Under Option Exercise Price
------------ -------------- ------------ -------------- ------------ --------------
Options outstanding at
beginning of year 1,375,051 $ 35.83 924,582 $ 28.20 807,906 $ 24.27
Options granted 588,756 29.54 549,975 47.36 309,465 36.41
Options exercised (106,120) 25.07 (77,892) 23.78 (138,980) 22.89
Options forfeited (37,192) 42.93 (21,614) 42.81 (53,810) 28.79
----------------------------------- -------------------------------- ----------------------------
Outstanding at end of year 1,820,495 $ 34.26 1,375,051 $ 35.83 924,582 $ 28.20
----------------------------------- -------------------------------- ----------------------------
Exercisable at year end 746,398 $ 30.74 604,467 $ 26.05 345,497 $ 23.52
Reserved for future grants 45,654 - 597,218 - 1,115,159 -
- -------------------------------------------------------------------------------------------------------------------------------
Note: The weighted average remaining contractual life of shares under option was
8.0 years (for an exercise price between $19.66 and $50.83) in 1999, 8.0 years
($32.14 and $76.25) in 1998 and 8.0 years ($32.14 and $67.97) in 1997.
- -----------------------------------------------------------------------------------------------------------------------------------
As discussed in Note 2, the Company accounts for stock-based compensation under
APB No. 25 and its related interpretations. SFAS No. 123, Accounting for
Stock-Based Compensation, requires the disclosure of pro-forma net income and
earnings per share using the fair value method. The fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which differ
significantly from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: dividend yield of 0.35% for the 1999
options, 0.26% and 0.28% for the 1998 options, and 0.29% to 0.37% for the 1997
options; expected volatility range of 30.77% and 32.52% for the 1999 options,
21.92% and 23.15% for the 1998 options, and 20.61% to 21.90% for the 1997
options; risk-free interest rates of 5.12%, 5.25%, 5.55%, 5.81% and 5.79% for
the 1999 options, 5.45% and 5.58% for the 1998 options, and 6.06%, 6.43%, 6.36%,
6.18% and 5.86% for the 1997 options; and an expected life of four years
following the vesting. Forfeitures are recognized as they occur.
If the computed fair values of the 1999, 1998 and 1997 awards had been amortized
to expense over the vesting period of the awards, the Company's net income,
basic net income per share and diluted net income per share would have been
reduced to the pro forma amounts indicated below:
(In thousands, except per share amounts) 1999 1998 1997
- -------------------------------------------------- ------------- ---------------- ----------------
Net income: As reported $ 204,466 $ 190,360 $ 175,309
Pro-forma 201,553 187,776 174,487
Basic earnings per share: As reported $ 4.55 $ 4.04 $ 3.50
Pro-forma 4.49 3.99 3.49
Diluted earnings per share: As reported $ 4.52 $ 4.03 $ 3.49
Pro-forma 4.45 3.97 3.47
Equity Stock Purchase Plan - In February 1999, the Company's Board of Directors
adopted the 1999 PMI Group, Inc. Employee Stock Purchase Plan (the "ESPP") and
shareholder approval was granted during the Company's 1999 Annual Meeting. A
total of 300,000 shares of the Company's authorized but unissued common stock
has been made available under the ESPP. The ESPP allows eligible employees to
purchase shares of the Company's stock at a discount of 15 percent of the
beginning-of-period or end-of-period (each period being a six month enrollment
period) fair market value of the stock, whichever is lower. Under the ESPP, the
Company sold approximately 13,578 shares in 1999. The Company applies APB 25 in
accounting for the ESPP. The pro forma effect on the Company's net income and
earnings per share had compensation cost been determined under SFAS 123 was
deemed immaterial in 1999.
20
NOTE 15. STATUTORY ACCOUNTING
The Company's domestic insurance subsidiaries prepare statutory financial
statements in accordance with the accounting practices prescribed or permitted
by their respective state's Department of Insurance, which is a comprehensive
basis of accounting other than GAAP. The principles used in determining
statutory financial amounts differ from GAAP primarily for the following
reasons:
Under statutory accounting practices, mortgage guaranty insurance companies
are required to establish each year a contingency reserve equal to 50% of
premiums earned in such year. Such amount must be maintained in the
contingency reserve for 10 years after which time it is released to
unassigned surplus. Prior to 10 years, the contingency reserve may be
reduced with regulatory approval to the extent that losses in any calendar
year exceed 35% of earned premiums for such year. Under GAAP, the
contingency reserve is not permitted.
Under statutory accounting practices, insurance policy acquisition costs
are charged against operations in the year incurred. Under GAAP, these
costs are deferred and amortized in proportion to the estimated gross
profits over the life of the policies. (See Note 6, "Deferred Acquisition
Costs.")
Statutory financial statements only include a provision for current income
taxes due, and purchases of tax and loss bonds are accounted for as
investments. GAAP financial statements provide for deferred income taxes
including the purchase of tax and loss bonds, which are recorded as a
deferral of the income tax provision.
Under statutory accounting practices, certain assets, designated as
nonadmitted assets, are charged directly against statutory surplus. Such
assets are reflected on the GAAP financial statements.
Under statutory accounting practices, fixed maturity investments in good
standing are valued at amortized cost. Under GAAP, those investments which
the Company does not have the ability or intent to hold to maturity are
considered to be available for sale and are recorded at market, with the
unrealized gain or loss recognized, net of tax, as an increase or decrease
to accumulated other comprehensive income.
The statutory net income, statutory surplus and contingency reserve liability of
PMI as of and for the years ended December 31 are as follows:
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------
Statutory net income $ 270,301 $ 214,040 $ 227,148
======================================
Statutory surplus $ 134,133 $ 165,459 $ 274,864
======================================
Contingency reserve liability $1,238,140 $1,028,440 $ 839,478
======================================
The differences between the statutory net income and equity presented above for
PMI and the consolidated net income and equity presented on a GAAP basis
primarily represent the differences between GAAP and statutory accounting
practices as well as the results of operations and equity of other Company
subsidiaries.
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). The Codification, which is intended to standardize
regulatory accounting and reporting for the insurance industry, is proposed to
be effective January 1, 2001. However, statutory accounting principles will
continue to be established by individual state laws and permitted practices and
it is uncertain when various states will require adoption of Codification for
the preparation of statutory financial statements. PMI has not finalized the
quantification of the effects of Codification on its statutory financial
statements.
NOTE 16. BUSINESS SEGMENTS
The Company's reportable operating segments include Mortgage Guaranty Insurance,
International Mortgage Guaranty Insurance, and Title Insurance. The Mortgage
Guaranty Insurance segment includes PMI, RGC,RIC,PMG,TIC and TSP. The Title
Insurance segment consists of the results for APTIC. The International Mortgage
Guaranty Insurance segment consists of PMI Holdings and PMI Ltd. The Other
segment includes TPG, MSC, PCI, and SEC. Key products for each of the
21
reportable segments are disclosed in Note 2, "Business and Summary of
Significant Accounting Policies." The Other segment includes the income and
expenses of the holding company, the results from the business of contract
underwriting and software licensing, and the activity of an inactive
broker-dealer.
The accounting policies of the segments are the same as disclosed in Note 2,
"Business and Summary of Significant Accounting Policies." Intersegment
transactions are not significant. The Company evaluates performance primarily
based on segment net income.
The following tables present information about reported segment income (loss)
and segment assets as of and for the periods indicated.
International
Mortgage Mortgage
1999 Guaranty Guaranty Title Consolidated
(in thousands) Insurance Insurance Insurance Other Total
- --------------------------------------------------------------------------------------------------------------------------------
Premiums earned $ 447,214 $ 11,291 $ 100,118 $ - $ 558,623
------------ -------------- ---------- --------- ------------
Net underwriting income (expenses)
before tax-external customers $ 202,508 $ 6,910 $ 10,897 $ (9,015) $ 211,300
Investment income 79,020 4,611 1,633 3,326 88,590
Equity in earnings of affiliates - - - 7,061 7,061
Interest expense (3) (1,307) - (7,244) (8,554)
Distributions on preferred capital securities - - - (8,311) (8,311)
------------ -------------- ---------- --------- ------------
Income (loss) before income tax expense 281,525 10,214 12,530 (14,183) 290,086
Income tax expense (benefit) 88,628 3,469 4,422 (10,899) 85,620
------------ -------------- ---------- --------- ------------
Net income (loss) $ 192,897 $ 6,745 $ 8,108 $ (3,284) $ 204,466
------------ -------------- ---------- --------- ------------
Total assets $ 1,764,125 $ 182,586 $ 46,484 $ 107,567 $ 2,100,762
------------ -------------- ---------- --------- ------------
- --------------------------------------------------------------------------------------------------------------------------------
Mortgage
1998 Guaranty Title Consolidated
(in thousands) Insurance Insurance Other Total
- -------------------------------------------------------------------------------------------------------------
Premiums earned $ 411,922 $ 79,304 $ - $ 491,226
---------- ---------- ------------ ------------
Net underwriting income (expenses)
before tax-external customers $ 172,414 $ 9,606 $ (9,049) $ 172,971
Investment income 97,989 1,427 6,676 106,092
Equity in earnings of affiliates - - 3,225 3,225
Interest expense (3) - (7,026) (7,029)
Distributions on preferred capital securities - - (8,311) (8,311)
---------- ---------- ------------ ------------
Income (loss) before income tax expense 270,400 11,033 (14,485) 266,948
Income tax expense (benefit) 78,732 4,182 (6,326) 76,588
---------- ---------- ------------ ------------
Net income (loss) $ 191,668 $ 6,851 $ (8,159) $ 190,360
---------- ---------- ------------ ------------
Total assets $1,643,482 $ 42,165 $ 92,223 $ 1,777,870
---------- ---------- ------------ ------------
- -------------------------------------------------------------------------------------------------------------
22
Mortgage
1997 Guaranty Title Consolidated
(in thousands) Insurance Insurance Other Total
- -------------------------------------------------------------------------------------------------------------
Premiums earned $ 394,010 $ 59,938 $ - $ 453,948
------------- ------------- ------------ ---------------
Net underwriting income (expenses)
before tax-external customers $ 159,360 $ 4,992 $ (9,822) $ 154,530
Investment and other income 93,625 1,257 6,383 101,265
Equity in earnings of affiliates - - 1,455 1,455
Interest expense - - (6,766) (6,766)
Distributions on preferred capital securities - - (7,617) (7,617)
------------- ------------- ------------ ---------------
Income (loss) before income tax expense 252,985 6,249 (16,367) 242,867
Income tax expense (benefit) 72,099 2,218 (6,759) 67,558
------------- ------------- ------------ ---------------
Net income (loss) $ 180,886 $ 4,031 $ (9,608) $ 175,309
------------- ------------- ------------ ---------------
Total assets $ 1,503,596 $ 37,050 $ 145,957 $ 1,686,603
------------- ------------- ------------ ---------------
- -------------------------------------------------------------------------------------------------------------
The Company did not have any major customers that accounted for more than 10% of
its consolidated revenues for any of the years presented.
NOTE 17. CAPITAL SUPPORT AGREEMENTS
PMI's claims-paying ratings from certain national rating agencies have, in the
past, been based in significant part on various capital support commitments from
Allstate and Sears ("Allstate Support Agreements"). On October 27, 1994, the
Allstate Support Agreements were terminated with respect to policies issued
after October 27, 1994, but continue in modified form (as so modified, the
"Runoff Support Agreement") for policies written prior to such termination.
Under the terms of the Runoff Support Agreement, Allstate may, at its option,
either directly pay or cause to be paid, claims relating to policies written
during the terms of the respective Allstate Support Agreements if PMI fails to
pay such claims or, in lieu thereof, make contributions directly to PMI or TPG.
In the event any amounts were so paid or contributed (which possibility
management believes is remote), Allstate would receive subordinated debt or
preferred stock of PMI or TPG in return. No payment obligations have arisen
under the Runoff Support Agreement. The Runoff Support Agreement provides PMI
with additional capital support for rating agency purposes.
The Runoff Support Agreement contains certain covenants, including covenants
that (i) PMI will write no new business after its risk-to-capital ratio equals
or exceeds 23 to 1; (ii) PMI will pay no dividends if, after the payment of any
such dividend, PMI's risk-to-capital ratio would equal or exceed 23 to 1; and
(iii) on the date that any of the following events occur: (A) PMI's
risk-to-capital ratio exceeds 24.5 to 1, (B) Allstate shall have paid any claims
relating to PMI policies directly to a policyholder or by paying an amount equal
to such claims to PMI (or to TPG for contribution to PMI) pursuant to the Runoff
Support Agreement, or (C) any regulatory order is issued restricting or
prohibiting PMI from making full or timely payments under policies, PMI will
transfer substantially all of its assets in excess of $50.0 million to a trust
account established for the payment of claims.
On September 30, 1999, a CMG Capital Support Agreement was executed by PMI and
CMIC whereby both parties agreed to contribute funds, under specified
conditions, so as to maintain CMG's risk-to-capital at or below 18.0 to 1. As a
50% owner of CMG, PMI's obligation under the agreement is limited to an
aggregate amount of $15 million, exclusive of capital contributions made prior
to September 30, 1999. The previous CMG Capital Support Agreement, dated June 6,
1996, was superceded by execution of the new agreement. On December 31, 1999,
CMG's risk-to capital ratio was 16.2 to 1.
On June 6, 1999 a Capital Support Agreement was entered into between PMI and PMI
Ltd, where by PMI agrees that it will provide funds necessary to ensure that PMI
Ltd is able to maintain a sufficient level of capital at all times. In addition,
the agreement states that in no event shall the net assets of PMI Ltd be less
than 2% of the net aggregate risk of PMI Ltd plus AUD $50,000,000.
As of December 31, 1999 the Company was in compliance with all covenants
included in its capital support agreements.
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NOTE 18. QUARTERLY RESULTS (UNAUDITED)
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------- -------------- ------------- ---------------
1999 1998 1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues 155,251 150,634 156,173 147,469 178,194 167,409 180,506 155,397
-------------------------------------------------------------------------------
Net income 43,652 45,768 49,459 46,787 54,503 53,728 56,852 44,077
-------------------------------------------------------------------------------
Basic EPS 0.97 0.94 1.10 0.98 1.22 1.16 1.27 0.97
-------------------------------------------------------------------------------
Diluted EPS 0.96 0.94 1.09 0.97 1.21 1.15 1.26 0.97
-------------------------------------------------------------------------------
Diluted operating EPS * 0.96 0.83 1.09 0.94 1.20 0.96 1.26 0.96
-------------------------------------------------------------------------------
* Diluted operating earnings per share represents diluted earnings per share
excluding realized capital gains and their related income tax effect.
Earnings per share is computed independently for the quarters presented.
Therefore, the sum of the quarterly earnings per share amounts may not equal the
total computed for the year. All period have been adjusted to reflect the
company's 3 for 2 stock split.
24