UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from...............to............................
Commission file number 1-13664
THE PMI GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3199675
(State of Incorporation) (IRS Employer Identification No.)
601 Montgomery Street,
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
(415) 788-7878
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No__
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Stock Par Value Date Number of Shares
- -------------- --------- ---- ----------------
Common Stock $0.01 04/30/00 44,082,070
THE PMI GROUP, INC.
Index to Quarterly Report on Form 10-Q
March 31, 2000
Part I - Financial Information Page
----
Item 1. Interim Consolidated Financial Statements and Notes (Unaudited)
Consolidated Statements of Operations for the Three Months Ended
March 31, 2000 and 1999 3
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Part II - Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Index to Exhibits 23
2
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months
Ended March 31,
---------------------
(In thousands except for per share amounts) 2000 1999
-------- --------
Revenues
Premiums earned $ 148,716 $ 128,768
Investment income, less investment expense 27,083 21,701
Realized capital gains, net 768 17
Other income 2,851 4,765
---------- ----------
Total revenues 179,418 155,251
---------- ----------
Losses and expenses
Losses and loss adjustment expenses 28,223 29,870
Amortization of policy acquisition costs 20,398 20,823
Underwriting and other operating expenses 39,204 38,903
Interest expense 2,370 1,790
Distributions on preferred capital securities 2,077 2,077
---------- ----------
Total losses and expenses 92,272 93,463
---------- ----------
Income before income taxes 87,146 61,788
Income tax expense 27,156 18,136
---------- ----------
Net income $ 59,990 $ 43,652
========== ==========
Per common share data:
Basic net income $ 1.36 $ 0.97
========== ==========
Diluted net income $ 1.34 $ 0.96
========== ==========
Cash dividends declared $ 0.04 $ 0.03
========== ==========
See accompanying notes to consolidated financial statements.
3
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(Dollars in thousands) 2000 1999
------------- ------------
(unaudited)
Assets
Investments
Available for sale, at market
Fixed income securities
(amortized cost $1,533,457 and $1,485,396) $ 1,548,973 $ 1,479,310
Equity securities
Common stock (cost $45,542 and $44,714) 88,090 83,890
Preferred stock (cost $22,654 and $17,660) 22,433 17,582
Stock of affiliates, at underlying book value 111,394 91,453
Short-term investments (at cost, which approximates market) 129,547 145,093
------------- ------------
Total investments 1,900,437 1,817,328
Cash 14,757 28,076
Accrued investment income 23,264 22,058
Reinsurance recoverable and prepaid premiums 55,507 50,714
Premiums receivable 30,387 30,659
Receivable from affiliates 708 2,996
Deferred policy acquisition costs 68,827 69,579
Property and equipment, net 41,772 40,462
Other assets 37,475 38,890
------------- ------------
Total assets $ 2,173,134 $ 2,100,762
============= ============
Liabilities
Reserve for losses and loss adjustment expenses $ 287,073 $ 282,000
Unearned premiums 174,949 182,089
Long-term debt 143,269 145,367
Reinsurance balances payable 28,391 25,415
Deferred income taxes 86,484 75,640
Other liabilities and accrued expenses 84,642 73,908
------------- ------------
Total liabilities 804,808 784,419
------------- ------------
Company-obligated mandatorily redeemable preferred capital
securities of subsidiary trust holding solely junior subordinated
deferrable interest debenture of the Company 99,083 99,075
Shareholders' equity
Preferred stock -- $.01 par value; 5,000,000 shares authorized - -
Common stock -- $.01 par value; 187,500,000 shares
authorized; 52,794,004 and 52,793,777 issued 528 528
Additional paid-in capital 265,828 265,828
Accumulated other comprehensive income 37,964 20,186
Retained earnings 1,316,831 1,258,617
Treasury stock (8,729,039 and 8,091,924 shares at cost) (351,908) (327,891)
------------- ------------
Total shareholders' equity 1,269,243 1,217,268
------------- ------------
Total liabilities and shareholders' equity $ 2,173,134 $ 2,100,762
============= ============
See accompanying notes to consolidated financial statements.
4
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months
Ended March 31,
------------------------
(In thousands) 2000 1999
-------- ---------
Cash flows from operating activities
Net income $ 59,990 $ 43,652
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized capital gains, net (768) (17)
Equity in earnings of affiliates (1,532) (1,532)
Depreciation and amortization 1,475 1,900
Changes in:
Reserve for losses and loss adjustment expenses 5,073 6,623
Unearned premiums (7,140) (7,163)
Deferred policy acquisition costs 751 (4,077)
Accrued investment income (1,206) (298)
Reinsurance balances payable 2,976 2,260
Reinsurance recoverable and prepaid premiums (4,793) (1,739)
Premiums receivable 272 (2,459)
Income taxes 922 2,195
Receivable from affiliates 2,288 1,271
Receivable from Allstate - (1,028)
Other 9,760 713
-------- ---------
Net cash provided by operating activities 68,068 40,301
-------- ---------
Cash flows from investing activities
Proceeds from sales of equity securities 24,880 9,487
Investment collections of fixed income securities 500 -
Proceeds from sales of fixed income securities 39,474 84,391
Investment purchases
Fixed income securities (98,697) (99,087)
Equity securities (15,405) (8,187)
Net decrease (increase) in short-term investments 15,546 (13,086)
Investment in affiliates (17,017) (555)
Purchase of property and equipment (2,777) (2,626)
-------- ---------
Net cash used in investing activities (53,496) (29,663)
-------- ---------
Cash flows from financing activities
Principal payments on long-term debt (2,098) -
Dividends paid to shareholders (1,776) (1,516)
Purchase of The PMI Group, Inc. common stock (24,017) (11,347)
-------- ---------
Net cash used in financing activities (27,891) (12,863)
-------- ---------
Net decrease in cash (13,319) (2,225)
Cash at beginning of period 28,076 9,757
-------- ---------
Cash at end of period $ 14,757 $ 7,532
======== =========
See accompanying notes to consolidated financial statements
5
THE PMI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(unaudited)
Note 1 - Basis of presentation
The accompanying unaudited consolidated financial statements include the
accounts of The PMI Group, Inc. ("TPG"), a Delaware corporation; its wholly-
owned subsidiaries, PMI Mortgage Insurance Co. ("PMI"), an Arizona corporation;
Residential Guaranty Co. ("RGC"), an Arizona corporation; American Pioneer Title
Insurance Company ("APTIC"), a Florida corporation; and PMI's wholly-owned
subsidiaries, PMI Mortgage Insurance Ltd. ("PMI Ltd."), an Australian mortgage
insurance company, PMI Mortgage Services Co. ("MSC"), a California corporation
which is engaged in the business of contract underwriting, and other insurance,
reinsurance and non-insurance subsidiaries of PMI and TPG. TPG and its
subsidiaries are collectively referred to as the "Company". All material
intercompany transactions and balances have been eliminated in consolidation. In
addition, PMI has equity interests in CMG Mortgage Insurance Company ("CMG"),
and CMG Reinsurance Company ("CMG Re") both of which conduct residential
mortgage insurance and reinsurance business and also Fairbanks Capital Holding
Corp. ("Fairbanks"), a special servicer of single-family residential mortgages.
TPG has an equity interest in RAM Holdings Ltd. and RAM Holdings II Ltd.
(collectively referred to as "RAM Re"), a financial guaranty reinsurance company
based in Bermuda. CMG, Fairbanks and Ram Re are accounted for on the equity
method in the Company's consolidated financial statements.
The Company's unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) for interim
financial information and with the requirements of Form 10-Q and Article 7 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation, have been included. Interim
results for the period ended March 31, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000. The
financial statements should be read in conjunction with the audited consolidated
financial statements and footnotes included in The PMI Group, Inc. 1999 Annual
Report to Shareholders.
Note 2 - Changes in Accounting Policy
Effective January 1, 2000 the Company changed its accounting policy for
international subsidiaries and affiliates to report operations on a one-month
lag from domestic operations. Accordingly, PMI Ltd.'s results include two months
of activity for the quarter ended March 31, 2000.
Note 3 - Earnings per Share
The weighted average common shares outstanding for computing basic earnings per
share ("EPS") were 44,403,785 and 45,231,657 for the three months ended March
31, 2000 and 1999, respectively. The weighted average common shares outstanding
for computing diluted EPS includes only stock options issued by the Company that
have a dilutive impact and are outstanding for the period, and had the potential
effect of increasing common shares to 44,767,197 and 45,338,463 for the three
months ended March 31, 2000 and 1999, respectively. Net income available to
common shareholders does not change for computing diluted EPS.
6
Note 4 - Comprehensive Income
The reconciliation of net income to comprehensive income for the three months
ended March 31, 2000 and 1999 are as follows:
Three Months
Ended March 31,
-------------------------------
(In thousands) 2000 1999
------------ -----------
Net income $ 59,990 $ 43,652
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 18,595 (5,309)
Less: reclassification adjustment for gains
included in net income (499) 11
Currency translation adjustment (318) --
------------ -----------
Other comprehensive income (loss), net of tax 17,778 (5,298)
------------ -----------
Comprehensive income $ 77,768 $ 38,354
============ ===========
Note 5 - Deferred Policy Acquisition Costs ("DAC")
PMI defers certain costs related to the acquisition of primary mortgage
insurance and amortizes these costs against related premium revenue in order to
match costs and revenues in accordance with GAAP. These acquisition costs vary
with, and are primarily related to, the acquisition of new business. Specific
costs PMI defers include all underwriting, contract underwriting and sales
related activities. To the extent PMI or any of its subsidiaries are compensated
by customers for contract underwriting, those underwriting costs are not
deferred.
The DAC asset is amortized and 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 following table reconciles beginning and ending DAC balance for the periods
indicated.
Three Months
Ended March 31,
---------------------------------
(In thousands) 2000 1999
-------------- ------------
Beginning DAC balance $ 69,579 $ 61,605
Acquisition costs incurred and deferred 19,646 24,900
Amortization of deferred costs (20,398) (20,823)
-------------- ------------
Ending DAC balance $ 68,827 $ 65,682
============== ============
7
Note 6 - Business Segments
The Company's reportable operating segments include Domestic Mortgage Insurance,
International Mortgage Insurance and Title Insurance. 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. 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 for the periods indicated:
Domestic International
Quarter ended March 31, 2000 Mortgage Mortgage Title Consolidated
(In thousands) Insurance Insurance Insurance Other Total
- ---------------------------------------------------------------------------------------------------------------------------
Premiums earned $ 120,536 $ 5,590 $ 22,590 $ - $ 148,716
========== ============= ========= ========= ============
Net underwriting income (expenses)
before tax - external customers $ 59,530 $ 3,718 $ 1,531 $ (1,037) $ 63,742
Investment and other income 21,089 3,328 457 1,201 26,075
Equity in earnings of affiliates 1,775 - - - 1,775
Interest expense (13) (519) - (1,837) (2,369)
Distributions on preferred capital securities - - - (2,077) (2,077)
---------- ------------- --------- --------- ------------
Income (loss) before income tax expense 82,381 6,527 1,988 (3,750) 87,146
Income tax expense (benefit) 24,901 2,114 598 (457) 27,156
---------- ------------- --------- --------- ------------
Net income (loss) $ 57,480 $ 4,413 $ 1,390 $ (3,293) $ 59,990
========== ============= ========= ========= ============
Total assets $1,938,982 $ 177,799 $ 47,785 $ 8,568 $ 2,173,134
========== ============= ========= ========= ============
Domestic
Quarter ended March 31, 1999 Mortgage Title Consolidated
(In thousands) Insurance Insurance Other Total
- ----------------------------------------------------------------------------------------------------------
Premiums earned $ 105,237 $ 23,531 $ - $ 128,768
========== ============= ========= ============
Net underwriting income (expenses)
before tax - external customers $ 43,341 $ 2,225 $ (1,629) $ 43,937
Investment and other income 19,151 367 939 20,457
Equity in earnings of affiliates 1,261 - - 1,261
Interest expense - - (1,790) (1,790)
Distributions on preferred capital securities - - (2,077) (2,077)
---------- ------------- --------- ------------
Income (loss) before income tax expense 63,753 2,592 (4,557) 61,788
Income tax expense (benefit) 18,647 937 (1,448) 18,136
---------- ------------- --------- ------------
Net income (loss) $ 45,106 $ 1,655 $ (3,109) $ 43,652
========== ============= ========= ============
Total assets $1,686,749 $ 39,394 $ 80,555 $ 1,806,698
========== ============= ========= ============
The Company did not have any major customers that accounted for more than 10% of
its consolidated revenues for any of the periods presented.
8
ITEM 2. 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. Forward-looking statements in this document
include: (i) management's expectation that bulk secondary market transactions
will become an increasing portion of MICA's total origination volume during 2000
and that this may cause significant volatility in the quarterly market share
results of individual companies; (ii) management's belief that loans with non-
conforming credit characteristics will perform differently from the standard
primary portfolio and generally will carry greater risk of default; (iii)
management's expectation that the amount of pool risk written in 2000 will be
less than the pool risk written in 1999, (iv) management's expectation that the
percentage of PMI's total risk related to risk-share programs (excluding GSE
pool risk) will continue to increase in 2000; (v) management's belief that if
interest rates remain stable or rise during 2000 the persistency rate will
continue to increase; (vi) management's anticipation that the percentage of new
insurance written subject to captive mortgage reinsurance agreements and other
risk-share programs will continue to increase and reduce the Company's net
premiums written and net premiums earned; (vii) management's belief that PMI's
default rate may increase by year-end due to the maturation of insurance in
force and seasonality; (viii) management's expectation that California will
continue to account for a significant portion of total claims paid during 2000;
(ix) management's expectation that with expected improvements in the California
economy, loss mitigation efforts and default reinstatement rates, California
claims paid as a percentage of total claims paid should continue to decline; and
(x) management's anticipation that contract underwriting will continue to
generate a significant percentage of PMI's new insurance written during 2000.
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 titled "Cautionary Statements and Investment
Considerations" ("IC# 1-16") 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 the Investment Considerations set forth below. 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.
9
RESULTS OF CONSOLIDATED OPERATIONS:
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Consolidated net income was $60.0 million in the three months ended March 31,
2000, a 37.3% increase over the corresponding period of 1999. The growth can be
attributed to increases in premiums earned of 15.5%, net investment income of
24.9% and to a decrease in losses and loss adjustment expenses of 5.7%,
partially offset by a decrease in other income of 39.6%, and an increase in
interest expense of 33.3%. Included in the 2000 financial results are the
operations from PMI Ltd., which was acquired in the third quarter of 1999 and
contributed $4.4 million of net income in the period ended March 31, 2000.
Diluted net income per share increased by 39.6% to $1.34 in 2000. Excluding
capital gains, operating earnings per share increased by 38.5% to $1.33.
Revenues in the first quarter of 2000 increased by 15.5% to $179.4 million
compared with the first quarter of 1999.
U.S. MORTGAGE INSURANCE OPERATIONS
The Company's primary operating subsidiary, PMI, generated approximately 90% of
consolidated net income in the first quarter of 2000. This was derived from
mortgage guaranty insurance written in the United States. PMI's new insurance
written ("NIW") decreased by 19.2% to $5.9 billion in the first quarter of 2000
compared with the corresponding period of 1999, primarily as a result of a
decline in total volume of the private mortgage insurance industry, partially
offset by an increase in PMI's market share.
The members of the private mortgage insurance industry, as reported by the
industry's trade association, Mortgage Insurance Companies of America ("MICA"),
experienced a decrease in total new insurance written of 34.7% to $32.7 billion
in the first quarter of 2000 from the corresponding period of 1999. This
decrease was primarily due to a decrease in total residential mortgage
originations, particularly in refinancing activity, brought on by the rising
interest rate environment. Total residential mortgage originations are
estimated at $197 billion compared with $351 billion in the corresponding period
of 1999. Refinancing as a percentage of PMI's NIW decreased to 8.2% in the
first quarter of 2000 from 37.2% in the corresponding period of 1999. The
private mortgage insurance companies' market share decreased to 54.5% of the
total low down-payment market (insurable loans) from 54.9% in the fourth Quarter
of 1999. Management believes that the private mortgage insurance companies'
decline in market share was the result of an increase in the maximum individual
loan amount that the FHA can insure. (See IC2)
PMI's market share of NIW increased to 18.1% in the first quarter of 2000
compared with 14.6% in the first quarter of 1999. On a combined basis with CMG,
market share increased to 19.5% in the first quarter of 2000 compared with 15.9%
in the first quarter of 1999. The increase in PMI's market share was primarily
the result of a bulk secondary market transaction representing approximately $1
billion in NIW from one customer consisting of loans with non-conforming credit
characteristics. Management expects these bulk-type transactions to become an
increasing portion of MICA's total origination volume during 2000. Accordingly,
management expects significant volatility in quarterly market share results of
individual companies, including PMI. In addition, management believes that
loans with non-conforming credit characteristics will perform differently from
the standard primary portfolio, and generally carry greater risk of default.
GSE pool risk written totaled $24 million for the first quarter of 2000,
compared with $42 million in the corresponding period of 1999. Management
expects the amount of pool risk written in 2000 to be less than the amount of
pool risk written in 1999. GSE pool risk in force was $705 million as of March
31, 2000, representing 3.3% of direct primary risk in force. Risk in force
under risk-share programs with PMI's customers, excluding pool insurance,
represented 21.9% of direct primary risk in force at March 31, 2000, compared to
13.6% at March 31, 1999, and consistent with the December 31, 1999 level.
During 2000, management anticipates the percentage
10
of PMI's risk related to risk-share programs (excluding GSE pool risk) to
continue to increase as a percent of total risk. (See IC10)
PMI's cancellations of primary insurance in force decreased by 42.4% to $3.8
billion in the quarter ended March 31, 2000 compared with the corresponding
period of 1999 primarily due to the decrease in refinancing activity previously
discussed. As a result of the decrease in cancellation activity, PMI's
persistency rate increased to 75.6% as of March 31, 2000 compared with 71.9% as
of December 31, 1999 and 66.0% as of March 31, 1999. Management believes that
if interest rates remain stable or rise during 2000, the persistency rate will
continue to increase.
Insurance in force increased by 9.2% to $88.9 billion at March 31, 2000 compared
with March 31, 1999. On a combined basis with CMG, insurance in force grew by
10.3% to $94.9 billion at March 31, 2000 compared with March 31, 1999. PMI's
risk in force increased by 11.3% to $21.7 billion at March 31, 2000 compared
with March 31, 1999. On a combined basis with CMG, risk in force grew by 11.6%
to $23.1 billion compared with March 31, 1999. The strong growth rates in
insurance and risk in force were primarily due to the increase in the
persistency rate and secondarily to the bulk transaction discussed above.
Consolidated U.S. mortgage insurance net premiums written grew by 18.9% to
$117.0 million in the first quarter of 2000 compared with the corresponding
period of 1999. This increase was primarily due to the growth of insurance and
risk in force of both primary and GSE pool insurance as discussed above, the
continued shift to deeper coverage for primary insurance, and to a recapture
agreement of an old pool business reinsurance arrangement in the third quarter
of 1999 (see Note 7 "Reinsurance" of the Notes to the 1999 Consolidated
Financial Statements included in The PMI Group, Inc. 1999 Annual Report to
Shareholders). The old pool risk in force was $1.4 billion at March 31, 2000.
Refunded premiums decreased by 54.7% to $2.4 million as a result of the decrease
in policy cancellations. Ceded premiums written increased by 13.6% to $8.9
million due to the increasing popularity and usage of captive reinsurance
arrangements. Approximately 25% of new insurance written in the first quarter of
2000 was subject to captive mortgage reinsurance agreements compared with
approximately 18% in the corresponding period of 1999. Management anticipates
that the percent of the 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 14.5% to $120.5 million in
the first quarter of 2000 primarily due to the increase in premiums written.
The percentage of PMI's insurance in force with deeper coverage continued to
increase. Mortgages with original loan-to-value ratios greater than 95% and
equal to or less than 97% ("97s") with 35% insurance coverage increased to 4.8%
of risk in force as of March 31, 2000, from 2.7% as of March 31, 1999. Mortgages
with original loan-to-value ratios greater than 90% and equal to or less than
95% ("95s") with 30% insurance coverage increased to 37.5% of risk in force as
of March 31, 2000, from 35.1% as of March 31, 1999. 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 March 31, 2000,
compared with 30.4% as of March 31, 1999.
Mortgage insurance losses and loss adjustment expenses decreased 6.8% to $27.6
million in the first quarter of 2000 compared with the first quarter of 1999
primarily due to the continuing economic expansion, improvement of the
nationwide housing markets, particularly California, and the corresponding
decrease in claim payments. Loans in default decreased by 3.2% to 15,400 at
March 31, 2000 compared with March 31, 1999 due to the above stated trends.
PMI's national default rate decreased by 0.21 percentage points to 2.01% at
March 31, 2000 compared with March 31, 1999, due to an increase in policies in
force and a decrease in loans in default. Management believes that PMI's default
rate may increase by year-end due to the maturation of insurance in force and
seasonality. (See IC12)
11
Direct primary claims paid in the first quarter of 2000 decreased by 16.5% to
$19.2 million when compared with the same period in 1999 due to an 8.5% decrease
in the average claim size to approximately $20,500 and a 8.9% decline in the
number of claims paid to 937. The reduction in the average claim 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.
Default rates on PMI's California policies decreased to 2.43% (representing
2,276 loans in default) at March 31, 2000, from 3.09% (representing 2,920 loans
in default) at March 31, 1999. Policies written in California accounted for
16.1% and 36.9% of the total dollar amount of claims paid in the first quarter
of 2000 and 1999, respectively. Management expects that California will
continue to account for a significant portion of total claims paid during 2000.
However, 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. (See IC13)
Mortgage insurance policy acquisition costs incurred and deferred decreased by
24.1% to $18.9 million in the first quarter of 2000 compared with the same
period in 1999 as a result of the 18.8% decrease in NIW. Amortization of policy
acquisition costs decreased by 2.0% to $20.4 million. A significant portion of
policy acquisition costs relates to contract underwriting. New policies
processed by contract underwriters represented 21.5% of PMI's NIW in the first
quarter of 2000 compared with 40.7% in the corresponding period of 1999.
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 percentage of PMI's NIW during 2000.
(See IC7) Other mortgage insurance operating expenses increased by 14.0% to
$13.0 million in the first quarter of 2000 compared with the first quarter of
1999. This was due to the lack of ceding commission in the first quarter of 2000
relating to the old pool recapture agreement in 1999, and to an increase in
payroll and related expense in 2000.
The mortgage insurance loss ratio declined by 5.3 percentage points to 22.9% in
the quarter ended March 31, 2000 compared with the corresponding period in 1999.
The decrease is attributed to the growth in premiums earned coupled with the
decrease in losses and loss adjustment expenses, as discussed above. The net
expense ratio decreased by 4.3 percentage points to 28.5% primarily due to the
increase in premiums written. Consequently, the combined ratio decreased by 9.6
percentage points to 51.4% in the first quarter of 2000 compared with the same
period 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 quarter ended March 31, 2000, PMI Ltd. generated $6.0 million of net
premiums written and $5.6 million in net premiums earned. Mortgage insurance
losses and loss adjustment expenses were $0.4 million and underwriting and other
expenses were $2.0 million for the first quarter 2000. Investment income for PMI
Ltd. was $3.3 million in the first quarter of 2000. NIW for PMI Ltd. was $796
million in the first quarter while insurance in force grew to $18.1 billion as
of quarter end. Financial results for the operations in Hong Kong were
immaterial during the first quarter of 2000.
TITLE INSURANCE OPERATIONS
Title insurance premiums earned decreased 3.8% to $22.6 million in the three
months ended March 31, 2000 compared with the same period in 1999 primarily due
to the decrease in residential mortgage originations as previously noted. In
the first quarter of 2000, approximately 69% of APTIC's premiums earned were
generated from the state of Florida, compared with approximately 68% in the
corresponding period of 1999. Underwriting
12
and other expenses decreased 1.4% to $20.8 million in the first quarter of 2000
compared with the same period in 1999 due to a decrease in agency fees and
commissions related to the decrease in premiums earned. The title insurance
combined ratio increased by 2.7 percentage points to 93.3%.
OTHER
Other income, which was generated primarily by MSC, decreased by 39.6% to $2.9
million in the first quarter of 2000 compared with the first quarter of 1999
primarily due to the decrease in contract underwriting revenues. Other expenses,
which were generated primarily by MSC, decreased by 39.1% to $3.9 million,
primarily due to the decrease in contract underwriting services provided to the
Company's mortgage insurance customers. The decrease in contract underwriting
activity is consistent with the decline in total residential mortgage
originations. (See IC7)
In the quarter ended March 31, 2000, the Company's net investment income
(including realized capital gains) increased by 28.2% million to $27.9 million
compared with the first quarter of 1999 primarily due to the growth in the
investment portfolio of $355 million over the first quarter of 1999. This
increase is due to the acquisition of PMI Ltd. and positive cash flows generated
by the Company. In addition, the investment yield increased to 6.1% at March
31, 2000 from 5.9% at March 31, 1999 primarily as a result of the increasing
interest rate environment.
The Company's effective tax rate increased to 31.2% in the first quarter of 2000
from 29.4% in the first quarter of 1999 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 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 10% of available and
accumulated surplus derived from realized net operating profits and net realized
capital gains. In addition to the dividend restrictions by state laws, the
Company's credit agreements 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 the
first quarter of 2000, APTIC declared a cash dividend of $3.0 million to TPG,
substantially the full amount of a dividend that can be paid by APTIC in 2000
without prior permission from the Florida Department of Insurance.
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 and other
expenses incurred by the holding company. 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 the first quarter of 2000, TPG purchased
$24.0 million of the Company's common stock. As of March 31, 2000 $45.3 million
remained under the current share repurchase authorization.
As of March 31, 2000, TPG had approximately $62.3 million of available funds.
This amount has decreased from the December 31, 1999 balance of $93.1 million
due primarily to the common stock repurchases in 2000. In
13
addition, TPG has two bank credit lines available totaling $50.0 million. At
March 31, 2000, there were no outstanding borrowings under the credit lines.
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 advance of the payment of
claims. Cash flows generated from PMI's operating activities totaled $67.9
million and $34.1 million in the three months ended March 31, 2000 and 1999,
respectively. The increase in cash flows during this period was the result of a
temporary timing difference relating primarily to the payment of income taxes in
1999 and to the increase in net income in 2000.
The Company's invested assets increased by $83.1 million at March 31, 2000
compared with December 31, 1999. This increase is due to positive cash flows
from consolidated operations of $68.1 million and an increase of $18.1 million
in the portfolio's market value, partially offset by the stock repurchases.
Consolidated reserves for losses and loss adjustment expenses increased by 1.8%
to $287.1 million in the first quarter of 2000 compared with December 31, 1999
primarily due to slight increases in the reserve balances for the primary and
GSE pool books of business, partially offset by a decrease in the old pool
reserve balance.
Consolidated shareholders' equity increased by 4.0% to $1.27 billion in the
first quarter of 2000, due primarily to increases of $60.0 million from net
income, and $17.8 million from other comprehensive income, partially offset by
the common stock repurchases and dividends declared of $1.7 million.
PMI's statutory risk-to-capital ratio at March 31, 2000 was 14.6 to 1, compared
with 14.8 to 1 at December 31, 1999. (See IC9)
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in market risk since December 31, 1999.
14
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/or 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 from lending institutions
that choose not to insure against borrower default, self-insure through
affiliates, or offer residential mortgage products that do not require mortgage
insurance.
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
authorize 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.
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 require the remaining 10% of the purchase price from a
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 an 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.
15
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
becomes widely accepted by mortgage lenders and their customers, the reduction
could harm the Company's financial condition and results of operations. The GSEs
also have separately introduced new "tiered primary" products pursuant to which
the GSEs, upon receipt from lenders of loans with traditional borrower paid
mortgage insurance, restructure the mortgage insurance coverage with reduced
amounts of primary coverage and deeper pool coverage. Wide acceptance by
lenders of the GSEs' "tiered primary" products could reduce levels of primary
coverage traditionally provided by PMI and, therefore, could have a material
adverse affect upon 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 credit enhancements
issued by private mortgage insurance companies with claims-paying ability
ratings of AAA or higher more favorably than those issued by companies with AA
or lower ratings. Shifts in the GSEs' preference 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.
INSURANCE IN FORCE (IC4)
A significant percentage of PMI's premiums earned is generated from 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 ("Act"), 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 of the Act's impact 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.
16
During a period 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 periods of low interest rate, 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).
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)
17
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 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 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 LTV's in excess of 90% and less than or equal to 95% ("95s"). At March 31,
2000, 46% of PMI's risk in force consisted of 95s, which, in PMI's experience,
have had a claims frequency approximately twice that of mortgages with LTV's
equal to or less than 90% and over 85% ("90s"). PMI also offers coverage for
mortgages with LTV's in excess of 95% and up to 97% ("97s"). At March 31, 2000,
5% of PMI's risk in force consisted of 97s that have even higher risk
characteristics than 95s and greater uncertainty as to pricing adequacy. In the
second quarter of 2000, PMI anticipates expanding coverage to certain mortgages
with LTV's in excess of 97%. This expanded coverage will have commensurately
higher risk characteristics and pricing uncertainty. PMI's NIW also includes
adjustable rate
18
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 $24 million
for the quarter ended March 31, 2000. This new pool insurance product may
provide coverage to loans with non-conforming credit characteristics which
generally possess a potentially higher risk of default, and therefore higher
risk characteristics. 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 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%, 7.4% and 7.2% of its risk in force concentrated and where the default
rate on all PMI policies in force is 2.43%, 2.85% and 1.93% compared with 2.01%
nationwide as of March 31, 2000.
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)
19
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.
INTERNATIONAL MORTGAGE INSURANCE; STRATEGIC INVESTMENTS (IC 16)
As the Company seeks to expand its business internationally, it increasingly
will be subject to risks associated with international operations, including:
the need for regulatory and third party approvals; challenges retaining key
foreign-based employees and key relationships with customers and business
partners in international markets; the economic strength of the foreign mortgage
origination markets targeted; changes in foreign regulations and laws; foreign
currency exchange; 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. In particular, the performance of the Company's Australian
subsidiary could be materially and adversely affected by various factors
affecting the Australian economy including, but not limited to, a weakening in
the demand for housing, interest rate volatility, and/or an increase in claims.
The performance of the Company's other strategic investments could materially
and adversely be affected by changes in the real estate, mortgage lending,
mortgage servicing, title and financial guaranty markets; future movements in
interest rates; those operations' future financial condition and performance;
the ability of those entities to execute future business plans; and PMI's
dependence upon management to operate those companies in which PMI does not own
a controlling share.
20
THE PMI GROUP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
March 31, 2000
Item 1 - Legal Proceedings
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Form 10-Q
(b) Reports on Form 8-K:
(i) On February 23, 2000, the Company filed a report
on Form 8-K to announce that on February 17, 2000,
its Board of Directors approved the engagement of
Ernst & Young LLP as its independent auditors for
the fiscal year ending December 31, 2000 to
replace the firm of Deloitte & Touche LLP. There
were no "reportable events" as that term is
described in Item 304(a)(1)(v) of Regulation S-K).
(ii) On May 2, 2000 the Company filed a report on Form
8-K to amend the "Cautionary Statement" contained
in the April 26, 2000 press release relating to
projected operating earnings for the year 2001.
21
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on May 11, 2000.
The PMI Group, Inc.
/s/ John M. Lorenzen, Jr.
--------------------------
John M. Lorenzen, Jr.
Executive Vice President and
Chief Financial Officer
/s/ Brian P. Shea
------------------
Brian P. Shea
Vice President, Controller
and Chief Accounting Officer
22
INDEX TO EXHIBITS
(Part II, Item 6)
Exhibit
Number Description of Exhibit
- ------ ----------------------
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule
23