EXHIBIT 13.1
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Item 6. Selected Financial Data
ELEVEN-YEAR SUMMARY OF FINANCIAL DATA
(Dollars in thousands, except per share data Year ended December 31,
or otherwise noted)
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2000 1999 1998 1997 1996 1995
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Summary of consolidated operations
Net premiums written $ 639,062 $ 571,253 $ 489,100 $ 432,052 $ 403,020 $ 314,021
==================================================================================
Premiums earned $ 634,362 $ 558,623 $ 491,226 $ 453,948 $ 412,738 $ 328,756
Investment income 119,199 95,142 84,681 83,136 67,442 62,041
Net realized capital gains (losses) 432 509 24,636 19,584 14,296 11,934
Other Income 8,578 15,850 20,366 7,979 6,948 2,309
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Total revenues 762,572 670,124 620,909 564,647 501,424 405,040
Total losses and expenses (1) 388,706 380,038 353,961 321,780 279,318 224,499
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Income from continuing operations before taxes 373,866 290,086 266,948 242,867 222,106 180,541
Income (loss) from discontinued operations - - - - - -
Income tax expense (benefit) (2) 113,654 85,620 76,588 67,558 64,188 45,310
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Net Income $ 260,212 $ 204,466 $ 190,360 $ 175,309 $ 157,918 $ 135,231
==================================================================================
U.S Mortgage Insurance Operating Ratios
Loss ratio 18.9% 24.7% 32.8% 38.2% 41.9% 38.5%
Net expense ratio (3) 25.3% 29.2% 25.5% 22.7% 18.4% 24.9%
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Combined ratio 44.2% 53.9% 58.3% 60.9% 60.3% 63.4%
==================================================================================
Consolidated Balance Sheet Data
Total assets $ 2,392,657 $ 2,100,762 $ 1,777,870 $ 1,686,603 $ 1,509,919 $ 1,304,440
Reserve for losses and loss
adjustment expenses $ 295,089 $ 282,000 $ 215,259 $ 202,387 $ 199,774 $ 192,087
Long-term debt $ 136,819 $ 145,367 $ 99,476 $ 99,409 $ 99,342 $ -
Preferred capital securities of
subsidiary trust $ 99,109 $ 99,075 $ 99,040 $ 99,006 $ - $ -
Shareholders' equity $ 1,499,211 $ 1,217,268 $ 1,097,515 $ 1,061,180 $ 986,862 $ 870,503
Shares outstanding (4) 44,309,922 44,702,080 45,417,902 48,691,871 51,764,729 52,514,841
(Dollars in thousands, except per share data Year ended December 31,
or otherwise noted)
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1994 1993 1992 1991 1990
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Summary of consolidated operations
Net premiums written $ 277,747 $ 291,089 $ 208,602 $ 143,305 $ 120,532
======================================================================
Premiums earned $ 296,345 $ 268,554 $ 173,039 $ 120,195 $ 101,913
Investment income 56,774 45,733 40,847 40,402 38,261
Net realized capital gains (losses) 3,064 1,229 686 1,335 (524)
Other Income 3,802 - - - -
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Total revenues 359,985 315,516 214,572 161,932 139,650
Total losses and expenses (1) 221,434 202,543 119,912 39,879 78,979
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Income from continuing operations before taxes 138,551 112,973 94,660 122,053 60,671
Income (loss) from discontinued operations - (28,863) 6,726 3,709 1,562
Income tax expense (benefit) (2) 32,419 24,305 (10,911) 69,661 9,649
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Net Income $ 106,132 $ 59,805 $ 112,297 $ 56,101 $ 52,584
======================================================================
U.S Mortgage Insurance Operating Ratios
Loss ratio 40.5% 41.4% 33.2% 3.1% 47.4%
Net expense ratio (3) 30.1% 28.2% 27.0% 25.3% 25.5%
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Combined ratio 70.6% 69.6% 60.2% 28.4% 72.9%
======================================================================
Consolidated Balance Sheet Data
Total assets $ 1,097,421 $ 985,129 $ 815,136 $ 663,215 $ 569,550
Reserve for losses and loss
adjustment expenses $ 173,885 $ 135,471 $ 94,002 $ 78,045 $ 115,805
Long-term debt $ - $ - $ - $ - $ -
Preferred capital securities of
subsidiary trust $ - $ - $ - $ - $ -
Shareholders' equity $ 687,178 $ 575,300 $ 513,583 $ 399,489 $ 338,632
Shares outstanding (4) $52,500,000 $52,500,000 $52,500,000 $52,500,000 $52,500,000
Per Share Data
Net income
Operating (3) $ 5.85 $ 4.51 $ 3.69 $ 3.23 $ 2.83
Basic $ 5.88 $ 4.55 $ 4.04 $ 3.50 $ 3.01
Diluted $ 5.78 $ 4.52 $ 4.02 $ 3.49 $ 3.00
Shareholders' equity $ 33.83 $ 27.23 $ 24.16 $ 21.79 $ 19.06
Price/Earnings Ratio (5) 11.7 10.8 8.9 14.9 13.0
Stock price (6) : Close 67.69 48.81 32.92 48.20 36.92
High 74.94 55.50 57.00 49.32 40.00
Low 33.50 26.67 22.00 31.83 26.58
Cash dividends declared $ 0.16 $ 0.14 $ 0.13 $ 0.13 $ 0.13
PMI Operating and Statutory Data
Number of policies in force 820,213 749,985 714,210 698,831 700,084
Default rate 2.21% 2.12% 2.31% 2.38% 2.19%
Persistency 80.3% 71.9% 68.0% 80.8% 83.3%
Primary insurance in force (in millions) $ 96,914 $ 86,729 $ 80,682 $ 77,787 $ 77,312
Primary risk in force (in millions) $ 23,559 $ 21,159 $ 19,324 $ 18,092 $ 17,336
Statutory capital $ 1,617,519 $ 1,372,273 $ 1,193,899 $ 1,114,342 $ 988,475
Risk-to-capital ratio 14.1:1 14.8:1 14.9:1 14.6:1 15.9:1
New insurance written $27,294,908 $28,732,505 $27,820,065 $15,307,147 $17,882,702
Policies issued 206,493 219,038 211,161 119,190 142,900
New insurance written market share 16.7% 16.3% 14.8% 12.7% 14.1%
Return on equity 19.9% 18.5% 19.0% 18.3% 17.8%
Tax rate 30.4% 29.5% 28.7% 27.8% 28.9%
Total PMI Employee 1,117 1,113 1,016 916 586
Per Share Data
Net income
Operating (3) $ 2.43 $ 1.98 $ 1.12 $ 2.13 $ 1.05
Basic $ 2.58 $ 2.02 $ 1.14 $ 2.14 $ 1.07
Diluted $ 2.57 $ 2.02 $ 1.14 $ 2.14 $ 1.07
Shareholders' equity $ 16.58 $ 13.09 $ 10.96 $ 9.78 $ 7.61
Price/Earnings Ratio (5) 12.5 - - - -
Stock price (6) : Close 30.17 - - - -
High 35.67 - - - -
Low 24.00 - - - -
Cash dividends declared $ 0.10 $ - $ - $ - $ -
PMI Operating and Statutory Data
Number of policies in force 657,800 612,806 543,924 428,745 347,232
Default rate 1.98% 1.88% 1.81% 2.03% 2.38%
Persistency 86.4% 83.6% 70.0% 74.6% 85.2%
Primary insurance in force (in millions) $ 71,43 $ 65,982 $ 56,991 $ 43,698 $ 31,982
Primary risk in force (in millions) $ 15,130 $ 13,243 $ 11,267 $ 8,676 $ 6,481
Statutory capital $ 824,156 $ 659,402 $ 494,621 $ 456,931 $ 372,568
Risk-to-capital ratio 15.8:1 17.7:1 20.8:1 19.0:1 18.8:1
New insurance written $14,459,260 $18,441,612 $25,469,907 $19,463,000 $8,663,000
Policies issued 119,631 156,055 207,356 161,893 75,095
New insurance written market share 13.2% 14.0% 18.6% 19.4% 15.9%
Return on equity 18.1% 17.3% 11.0% 24.6% 15.2%
Tax rate 25.1% 23.4% 21.5% -11.5% 57.1%
Total PMI Employee 578 586 632 529 410
Per Share Data
Net income
Operating (3) $ 1.01
Basic $ 1.00
Diluted $ 1.00
Shareholders' equity $ 6.45
Price/Earnings Ratio (5) -
Stock price (6) : Close -
High -
Low -
Cash dividends declared $ -
PMI Operating and Statutory Data
Number of policies in force 313,035
Default rate 2.38%
Persistency 86.5%
Primary insurance in force (in millions) $ 26,938
Primary risk in force (in millions) $ 5,554
Statutory capital $ 314,037
Risk-to-capital ratio 18.6:1
New insurance written $ 5,795,000
Policies issued 49,943
New insurance written market share 14.9%
Return on equity 16.8%
Tax rate 15.9%
Total PMI Employee 400
(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 judgment was overturned, and the
company re-evaluated its tax balances and reduced its tax liabilities
and income tax expense by $30.9 million.
(3) Excludes litigation settlement charges of $5.7 million pre-tax and
$0.08 per share after-tax.
(4) Per Share Data and shares outstanding adjusted to reflect 3-for-2 stock
split.
(5) Based on the closing price as of December 31, and on trailing twelve-
month operating earnings.
(6) Closing price as of December 31. High and low price for trailing
twelve-month period.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
A number of written and oral statements made or incorporated by reference from
time to time by us or our 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 federal securities laws.
Forward-looking statements in this document include:
. our belief that the refinancing trend may continue to increase in the
first half of 2001 and cause the penetration rate to decline;
. our anticipation that negotiated bulk transactions will continue to be an
increasing portion of total origination volume and cause volatility in the
market share of mortgage insurers, including PMI Mortgage Insurance Co.,
or PMI, our primary operating subsidiary;
. our expectation that the persistency rate will decrease in the first half
of 2001;
. our expectation that non-traditional loans insured by PMI will have higher
delinquency and default rates;
. our expectation that the amount of GSE pool risk written will continue to
decrease in 2001;
. our anticipation that the continued growth of captive reinsurance
arrangements will reduce PMI's net premiums written and earned over the
long-term;
. our anticipation that the percentage of PMI's risk related to risk-share
programs will continue to increase as a percentage of total risk in 2001;
and
. our anticipation that contract underwriting will continue to account for a
significant portion of PMI's acquisition costs.
When a forward-looking statement includes a statement of the assumptions or
bases underlying the forward-looking statement, we caution that, while it
believes such assumptions or bases are reasonable and has made them in good
faith, assumed facts or bases may 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, we or our management
expresses an expectation or belief as to future results, there can be no
assurance that the statement of expectation or belief will result or be achieved
or accomplished. Our actual results may differ materially from those expressed
in any forward-looking statements made by us. These forward-looking statements
involve a number of risks or uncertainties including, but not limited to, the
items addressed in the section titled "Investment Considerations" set forth
below and other risks referred to from time to time in our periodic filings with
the Securities and Exchange Commission.
All forward-looking statements made by us are qualified by and should be read in
conjunction with the Investment Considerations set forth below and in our other
periodic filings with the Securities and Exchange Commission. Except as may be
required by applicable law, we and our management undertake 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:
2000 versus 1999
Our consolidated net income was $260.2 million for the year ended December 31,
2000, a 27.3% increase from 1999. The growth was due to:
. an increase in premiums earned of 13.6%;
. an increase in net investment income of 25.3%; and
. a decrease in losses and loss adjustment expenses of 8.5%.
This growth was partially offset by:
. an increase in underwriting and other operating expenses of 6.6%;
. an increase in interest expense of 19.4%; and
. a decrease in other income of 45.9%.
Diluted net income per share increased by 27.9% to $5.78. Diluted operating
earnings per share, excluding realized capital gains and a one-time litigation
settlement charge, increased by 29.7% to $5.85. Consolidated revenues increased
by 13.8% to $762.6 million in 2000.
U.S. Mortgage Insurance Operations
Our primary operating subsidiary, PMI Mortgage Insurance Co., or PMI, generated
approximately 78% of our consolidated revenues for the year ended December 31,
2000. During 2000, the total principal amount of mortgages newly insured by PMI,
or PMI's new insurance written, decreased by 5.0% to $27.3 billion. The decrease
was primarily the result of a decline in total residential mortgage origination
activity and a corresponding decline in the total volume of the private mortgage
insurance market, partially offset by a gain in PMI's market share.
As reported by the industry's trade association, Mortgage Insurance Companies of
America, the private mortgage insurance industry experienced a 13.6% decrease
from 1999 in total new insurance written to $163.1 billion in 2000. According to
Inside Mortgage Finance, this decrease was primarily the result of the decline
in total residential mortgage originations from $1.3 trillion in 1999 to $1.1
trillion in 2000. Total mortgage originations are driven significantly by
interest rate fluctuations in the residential mortgage market. As mortgage rates
rose during the first half of 2000, mortgage refinancing activity decreased,
while originations of mortgages with respect to home purchases increased
slightly. The shift from refinancing to purchase activity generally increases
the private mortgage insurance penetration rate, which is the percentage of
total mortgage originations insured by the private mortgage insurance industry.
During the fourth quarter of 2000, declining mortgage rates resulted in
increased mortgage refinancing activity. The private mortgage insurance
penetration rate increased to 15.6% in 2000 from 14.7% in 1999. We believe that
the refinancing trend may continue to increase in the first half of 2001 due to
the expected low interest rate environment, which could cause the penetration
rate to decline.
As reported by Mortgage Insurance Companies of America, the private mortgage
insurance industry's market share of the total insured market increased to 58.6%
from 52.4% in 1999. We believe the increase
was due primarily to market expansion through secondary market bulk
transactions. Secondary market bulk transactions are negotiated transactions in
which we insure a large group of loans or commit to insure new loans on agree
upon terms. Secondarily, we believe that this increase was due to the increase
in 2000 of the maximum single-family principal balance loan limit eligible for
purchase by Fannie Mae and Freddie Mac, or the GSEs, to $252,700. An increase in
the GSEs' loan limit increases the number of loans eligible for mortgage
insurance and the size of the mortgage insurance market. According to Inside
Mortgage Finance, PMI's market share of new insurance written increased to 16.7%
in 2000 from 15.0% in 1999. On a combined basis with CMG Mortgage Insurance
Company, or CMG, PMI's partially owned subsidiary, PMI's market share increased
to 18.1% in 2000 from 16.3% in 1999 according to Inside Mortgage Finance. We
believe the increase in market share was due to risk-sharing products, which are
insurance products in which a portion of the risk is shared with the insured or
a party related to the insured, and negotiated secondary market bulk
transactions offered by PMI. Approximately 34% of new insurance written in 2000
was subject to captive mortgage reinsurance agreements, which are reinsurance
products in which a portion of the risk insured with PMI is reinsured with an
affiliate of the insured. In comparison, in 1999 approximately 25% of new
insurance written was subject to captive mortgage reinsurance agreements.
Negotiated bulk transactions with primary mortgage insurance accounted for
approximately 21% of new insurance written in 2000, compared to approximately 2%
in 1999. We anticipate that negotiated secondary market bulk transactions will
continue to be an increasing portion of total volume of insurance originated in
the residential mortgage insurance market. We also expect that there will be
volatility in the market share of individual companies, including PMI, as a
result of these transactions.
New insurance written was $27.3 billion in 2000 compared to $28.7 billion in
1999. PMI's new insurance written does not include primary mortgage insurance
placed upon loans more than 12 months after loan origination or pool
transactions. PMI's insurance in force increased by 11.7% to $96.9 billion as of
December 31, 2000. Insurance in force refers to the current principal balance of
all mortgage loans with primary insurance as of a given date. On a combined
basis with CMG, insurance in force grew by 12.4% to $104.0 billion at the end of
2000. PMI's primary risk in force at December 31, 2000 was $23.6 billion, an
11.3% increase from 1999. Primary risk in force is the dollar amount equal to
the product of each individual insured mortgage loan's current principal balance
multiplied by the percentage specified in the policy of the claim amount that
would be subject to payment in the event of a claim. On a combined basis with
CMG, risk in force increased by 12.1% to $25.3 billion as of December 31, 2000.
The growth in insurance in force and risk in force was due in part to a decrease
in the cancellation of insurance and a corresponding increase in the percentage
of insurance policies at the beginning of a period that remain in force at the
end of the period, which is referred to as persistency. Cancellations of
insurance in force decreased by 23.1% to $17.1 billion, primarily due to lower
refinancing activity in 2000 than in 1999. PMI's new insurance written from
refinancing activity as a percentage of total insurance written decreased to
10.1% in 2000 from 22.3% in 1999. As a result of the decrease in policy
cancellations, PMI's persistency rate increased to 80.3% at December 31, 2000
compared with 71.9% at December 31, 1999. Due to the anticipated declining
interest rate environment in the first half of 2001, we expect persistency to
decrease during that period.
Non-traditional loans, including Alternative A and less than A quality loans,
accounted for approximately 19% of PMI's new insurance written in 2000. In
comparison, less than 2% of new insurance written was non-traditional loans in
1999. Generally, non-traditional loans are insured through negotiated secondary
market bulk transactions. Loan characteristics, credit quality, loss
development, pricing structures and lower persistency related to these non-
traditional loans can be significantly different than PMI's traditional primary
business. We expect higher delinquencies and default rates for non-traditional
loans and incorporate these assumptions into our pricing. However, insurance on
non-traditional loans might not generate the same returns as the standard
business and the premiums generated by this insurance might not adequately
offset the associated risk.
GSE pool insurance risk written was $106.0 million in 2000 compared to $230.9
million in 1999. Pool insurance is a type of mortgage insurance that covers all
or a percentage of a loss on individual mortgage loans held within a group or
pool of loans up to an agreed aggregate limit for the pool. We expect that the
amount of GSE pool risk written will continue to decrease in 2001. GSE pool risk
in force at December 31, 2000 was $785.6 million and $681.4 million at December
31, 1999.
In 1995, the GSEs increased the amount of mortgage insurance coverage they
required lenders to maintain and, as a result, PMI's percentage of risk in force
with deeper coverage percentages increased and contributed to the growth in
premiums earned. The coverage percentage is the percentage of the total amount
of a loan subject to payment by mortgage insurance in the event of a claim. In
1999, the GSEs reduced the coverage percentage required for some loans approved
for purchase by the GSEs' automated loan underwriting systems. In addition, the
GSEs will further reduce the coverage percentage required on loans approved for
purchase by their automated underwriting systems if lenders pay a delivery fee
to the GSEs. We believe that the changes by the GSEs to mortgage insurance
coverage requirements, if widely accepted by lenders, could materially decrease
PMI's level of primary risk in force and growth of premiums written. PMI's
average coverage percentage on insurance in force was 24.3% at December 31, 2000
and 24.4% at December 31, 1999.
The GSEs also offer new products for which the GSEs restructure the primary
insurance coverage for insured loans they purchase by reducing primary insurance
coverage and adding a second layer of insurance coverage, usually in the form of
pool insurance. These programs may provide for the provision of services by the
GSEs to the mortgage insurer and payment of fees by the mortgage insurer to the
GSEs for the reduced coverage or the services provided.
Net premiums written was $498.3 million for the year ended December 31, 2000, an
8.5% increase from 1999. Net premiums written refers to the amount of premiums
received during a given period, net of refunds and premiums ceded under
reinsurance arrangements, including captive reinsurance arrangements. This
increase was primarily due to the growth of insurance and risk in force,
discussed above, offset by a one-time increase to net premiums written in the
third quarter of 1999 due to a recapture agreement of an old pool reinsurance
arrangement with Forestview and the increased ceded premiums written. This
agreement is discussed in more detail in Note 6 "Reinsurance" of the notes to
our consolidated financial statements. The old pool insurance in force was $1.39
billion as of December 31, 2000 and $1.41 billion as of December 31, 1999. Ceded
premiums written increased by 13.1% to $39.9 million resulting from the increase
in captive reinsurance arrangements during 2000. Refunded premiums decreased by
28.2% to $11.2 million due to the decrease in policy cancellations in 2000. We
anticipate that the continued growth of captive reinsurance arrangements will
reduce our net premiums written and earned over the long-term. The amount of
premiums recognized as revenue for accounting purposes, or premiums earned,
increased 12.6% to $503.7 million in 2000 primarily due to the increase in
premiums written. Primary risk in force under risk-sharing programs with PMI's
customers represented 28.3% of primary risk in force at December 31, 2000
compared to 20.2% at December 31, 1999. We anticipate that the percentage of
PMI's risk in force related to risk-sharing programs will continue to increase
as a percentage of total risk in force in 2001.
Losses and loss adjustment expenses decreased by 13.7% to $95.3 million in 2000,
primarily due to the continuing improvement of the housing market nationwide,
and in particular California, and the corresponding decrease in claim payments.
Loans in default increased by 13.8% from 1999 to 18,093 at December 31, 2000,
primarily due to the maturation of the 1996, 1997 and 1998 books of business and
to a higher level of defaults on non-traditional loans. The default rate, which
is the percentage of insured loans in force that are in default at a given date,
for PMI's primary insurance increased slightly to 2.21% at December 31, 2000
from 2.12% at December 31, 1999.
Claims paid on direct, primary insurance decreased by 16.2% to $66.7 million,
due to a 6.0% decline in the average claim size to $18,973 and a 10.8% decline
in the number of claims paid to 3,518. The reduction in average claims size was
due in part to a reduced percentage of claims originating from the California
book of business, and strengthened loss reduction efforts by PMI and its
customers. The decrease in the number of claims paid was due to the improvement
of the national housing market and overall economic expansion.
The default rate on PMI's California portfolio decreased to 2.26% at December
31, 2000, from 2.59% at December 31, 1999. Claims paid for the policies written
in California accounted for approximately 13% of the total dollar amounts of
claims paid in 2000 compared to 29% in 1999.
Underwriting and other operating expenses, including amortization of policy
acquisition costs and non-acquisition related operating costs, decreased to
$131.7 million in 2000 from $134.3 million in 1999, due in part to an increase
in costs related to non-mortgage insurance operations allocated to the holding
company. Mortgage insurance policy acquisition costs incurred and deferred
decreased by 14.7% to $73.3 million in 2000 primarily due to the decrease in new
insurance written. Amortization of deferred policy acquisition costs decreased
by 3.6% to $77.3 million primarily due to the decrease in acquisition costs. A
significant portion of PMI's policy acquisition costs relates to contract
underwriting. New policies processed by contract underwriters represented
approximately 23% of new insurance written in 2000 compared to approximately 29%
in 1999. We anticipate that contract underwriting will continue to account for a
significant portion of PMI's acquisition costs. Other operating expenses
increased slightly due to the litigation settlement incurred in the fourth
quarter of 2000 and payroll-related expense, offset by the increased costs
allocated to the holding company.
The mortgage insurance loss ratio, which is the ratio of incurred losses to net
premiums earned, decreased by 5.8 percentage points to 18.9% in 2000. Incurred
losses are the total amount of estimated future claim payments, including a
number of related expenses. The decline was attributed primarily to the decrease
in losses and loss adjustment expenses coupled with the increase in premiums
earned. The net expense ratio decreased by 3.9 percentage points to 25.3% in
2000, primarily due to the decrease in the amortization of deferred policy
acquisition costs along with the increase in net premiums written. The net
expense ratio is the ratio of underwriting and operating expenses to the net
amount of premiums received during a given period. The combined ratio, which is
the sum of the loss ratio and the net expense ratio, decreased by 9.7 percentage
points to 44.2% in 2000.
On December 15, 2000, we announced that PMI had entered into an agreement to
settle the putative class action lawsuit filed against PMI in December 1999. To
account for the settlement, PMI took an after-tax charge against fourth quarter
2000 earnings of $0.08 per share, which represented the cost of settlement,
estimated to be between $20 million to $22 million, less anticipated insurance
recovery. We can not be sure that our estimate of the amount of insurance
payments that we will receive will be achieved. If we do not receive these
estimated insurance payments, our financial condition and results of operations
could suffer. If the Court does not approve the settlement, the litigation will
continue. In that event, there can be no assurance that the final outcome of the
litigation will not have a material adverse effect on the Company's financial
condition.
International Mortgage Insurance Operations
On August 6, 1999, we acquired PMI Ltd, a mortgage insurance operation in
Australia and New Zealand. Accordingly, our results of operations for 2000 are
not comparable to the prior year. Effective January 1, 2000, we changed our
accounting policy for international subsidiaries and affiliates to report
operations on a one-month lag from our domestic operations. Therefore, the
results of our foreign operations for the year ended December 31, 2000
represented eleven months of activity. In addition, the results of PMI Ltd were
affected by currency fluctuation in Australian dollars in 2000. Net income for
PMI Ltd was $16.4 million for the year ended December 31, 2000 compared to $6.7
million for the period from August 6 to December 31, 1999. PMI Ltd generated
$36.8 million of net premiums written and $26.6 million in net premiums
earned during 2000, compared to $12.1 million of net premiums written and $11.3
million in net premiums earned for the period from August 6 to December 31,
1999. Losses and loss adjustment expenses were $5.7 million in 2000 compared to
$1.2 million for the period from August 6 to December 31, 1999. Underwriting and
other expenses were $9.9 million in 2000 compared to $4.5 million for the period
from August 6 to December 31, 1999. Financial results for the operations in Hong
Kong were immaterial in 2000. In February 2001, PMI began its European operation
in Dublin, Ireland.
Title Insurance Operations
Net income for American Pioneer Title Insurance Co., or APTIC, was $6.2 million
for the year ended December 31, 2000 compared to $8.1 million in 1999. Title
insurance premiums earned increased 3.9% to $104.0 million in 2000, primarily
due to continued geographic expansion efforts, offset by the decrease in
residential mortgage originations. APTIC is licensed in 44 states and the
District of Columbia. During 2000, approximately 64% of APTIC's premiums earned
was generated from the State of Florida compared with 73% in 1999. Underwriting
and other expenses increased by 6.9% to $94.3 million primary due to an increase
in agency fees and commissions related to the increase in premiums earned and to
the costs associated with expansion efforts. The combined ratio for our title
insurance operations increased by 3.6 percentage points to 92.7% in 2000.
Other
Our net investment income, excluding realized capital gains was $119.2 million,
a 25.3% increase from 1999. This increase was primarily due to the growth in our
investment portfolio of $260.9 million and an increase in equity earnings of
$4.6 million to $11.6 million in 2000. Investments in affiliates increased to
$131.8 million at December 31, 2000 from $91.5 million at December 31, 1999, due
primarily to additional capital investments in unconsolidated subsidiaries and
their earnings. The pre-tax current portfolio book yield was 5.9% in 2000 and
6.0% in 1999. Net realized capital gains decreased slightly to $0.4 million in
2000. Interest expense increased by $1.7 million to $10.2 million due to a full
year of interest incurred for 2000 on the bank note issued in connection with
the acquisition of PMI Ltd.
Other income, which was generated primarily by PMI Mortgage Services Co., or
MSC, decreased to $8.2 million in 2000 from $15.8 million in 1999, primarily due
to a decrease in contract underwriting services and to an IRS tax refund in
1999. Other expenses, which were incurred by the holding company and MSC,
increased by 36.5% to $33.9 million in 2000. This increase was primarily due to
the increased expense allocation to the holding company related to international
expansion and diversification efforts as well as increased salaries and bonuses.
Our effective tax rate increased to 30.4% in 2000 from 29.5% in 1999 as a result
of the increase in domestic and international underwriting operations relative
to tax-exempt investment income.
1999 versus 1998
Consolidated net income was $204.5 million in 1999, a 7.4% increase over 1998.
The growth was due to increases in premiums earned of 13.7% and in net
investment income of 12.4% as well as a decrease in losses and loss adjustment
expenses of 17.0%. This was 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 included the operations of PMI Ltd
from the acquisition date of August 6 through December 31, 1999, which
contributed $6.7 million to net income. Diluted net earnings per share increased
by 12.4% to $4.52 in 1999. Excluding realized 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
PMI generated over 90% of our consolidated net income, which was derived from
mortgage guaranty insurance written in the United States. During 1999, PMI's new
insurance written 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, or mortgages insured over one year after the closing date,
not included in new insurance written.
The private mortgage insurance industry, as reported by the industry's trade
association, Mortgage Insurance Companies of America, 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 by Inside Mortgage Finance, at $1.3 trillion
compared with $1.5 trillion in 1998. 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 originations relating to home
purchases. This shift from refinance activity to purchase money generally
increases the percent of total mortgage originations insured by private mortgage
insurance. This percentage increased to 14.7% in 1999 from 12.4% in 1998. The
increase in new insurance written was partially offset by the decline in the
private mortgage insurance companies' market share to 52.4% of loans with low
down payments from 56.3% in 1998. We believe the decrease resulted in part from
the increase in the maximum individual loan amount the FHA can insure.
PMI's market share of new insurance written increased to 15.0% in 1999 from
14.8% in 1998 according to Inside Mortgage Finance. On a combined basis with
CMG, PMI's 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 as of December 31, 1999 and $450.0 million
as of December 31, 1998. Primary risk in force under risk-sharing programs with
PMI's customers, excluding pool insurance, represented 20.2% of PMI's total risk
in force at December 31, 1999, compared with 10.2% at December 31, 1998.
PMI's cancellations of insurance in force decreased by 10.8% to $22.2 billion in
1999 primarily due to a decrease in refinancing activity that resulted from the
increase in interest rates during the second half of the year. 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, PMI's 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% according to 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 PMI's risk in force was greater
than that of its insurance in force as a number of terminating policies were
replaced by new policies with higher coverage percentages.
Mortgage insurance net premiums written 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 percentages 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. 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. 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.
The percentage of PMI's insurance in force with deeper coverage percentages
continued to increase despite new product offerings by Fannie Mae and Freddie
Mac. Mortgages with ratios of the original loan amount to the value of the
property, referred to as loan-to-value ratios, greater than 95% and equal to or
less than 97% 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% 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% 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.
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. The decrease in the number of claims paid was 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% of the total dollar amount of claims paid in 1999 compared
to 48.2% in 1998.
Mortgage insurance policy acquisition costs incurred and deferred increased by
2.3% to $85.9 million in 1999 primarily as a result of the 3.3% increase in new
insurance written. Amortization of policy acquisition costs increased 33.2% to
$80.3 million primarily due to 1998 and 1999 deferrals. See Note 2 of the notes
to our consolidated financial statements for a description of these deferrals. A
significant portion of policy acquisition costs relates to contract
underwriting. New policies processed by contract underwriters represented 28.8%
of PMI's new insurance written in 1999 compared with 35.0% in 1998. 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 obsolete
computer equipment and operating systems associated with remediation efforts
associated with computer hardware and software relating to the processing of
date information after January 1, 2000, 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 was attributed to the growth in premiums earned coupled with
the decrease in losses and loss adjustment expenses. 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 premiums ceded in connection with
captive reinsurance arrangements contributed to the increase in the expense
ratio. The combined ratio decreased by 4.4 percentage points to 53.9% in 1999.
International Mortgage Insurance Operations
During 1999, we commenced operations in Australia and Hong Kong. Our 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. Since the
acquisition, PMI Ltd.'s mortgage insurance loss expenses were $1.2 million and
its underwriting and other expenses were $4.5 million. Financial results for the
operations in Hong Kong were immaterial during 1999.
Title Insurance Operations
Title insurance premiums earned increased 26.2% to $100.1 million in 1999
primarily due to APTIC's 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. APTIC's 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 in 1999, the
title insurance combined ratio increased by 1.2 percentage points to 89.1%.
Other
In 1999, our consolidated net investment income, excluding realized capital
gains, increased by $10.4 million to $95.1 million. This increase was primarily
due to an increase in the investment portfolio of approximately $250 million,
including $160.9 million as a result of the acquisition 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 in 1999 due to the restructuring of the investment
portfolio in 1998.
Other income, primarily contract underwriting revenues generated by 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 1999. 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 1999.
Our 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.
Liquidity, Capital Resources and Financial Condition
Liquidity and capital resource considerations are different for us than they are
for PMI. Our 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 us is affected by state insurance laws, our
credit agreements, credit rating agencies and the discretion of insurance
regulatory authorities. Arizona law provides that PMI may pay out of any
available surplus account without prior approval of the Director of the Arizona
Department of Insurance dividends during any 12-month period not to exceed the
lesser of 10% of policyholders' surplus as of the preceding year end, or the
last calendar year's investment income. Other state insurance laws restrict the
payment of dividends from the unassigned surplus account only. In July 2000, the
Arizona
Department of Insurance approved a return of capital of $50.0 million from PMI
to us, which was paid by PMI in the second half of 2000.
The laws of Florida limit the payment of dividends by APTIC to us in any one
year to 10% of available and accumulated surplus derived from realized net
operating profits and net realized capital gains. As with PMI, the various
credit rating agencies and insurance regulatory authorities have broad
discretion to affect the payment of dividends to us by APTIC. During 2000, APTIC
declared and paid a cash dividend of $3.0 million to us, substantially the full
amount of a dividend that can be paid by APTIC in 2000 without prior permission
from the Florida Department of Insurance.
Included in our long-term debt is a $37.2 million (A$70.5 million) bank note
issued in connection with our acquisition of PMI Ltd. The note provides that
. our consolidated net worth shall not be less than $600 million;
. PMI's statutory capital shall not be less than $675 million;
. PMI's risk to capital ratio shall not exceed 23 to 1; and
. our consolidated debt to capital ratio shall not exceed 0.40 to 1.0.
Failure to maintain these financial covenants or debt restrictions may be deemed
an event of default.
On November 15, 1996, we issued $100 million in principal amount of our 6 3/4%
senior notes maturing on November 15, 2006. In addition, we have a bank credit
line in the amount of $25.0 million with Bank of America. As of December 31,
2000, there were no outstanding borrowings under the credit line. The credit
line and the bank note issued in connection with our acquisition of PMI Ltd
contain cross-default provisions, which provide for the acceleration and payment
of all outstanding amounts in the event of default under any of our
indebtedness of more than $10 million. A separate credit agreement with Chase
Manhattan Bank expired on February 1, 2001, and there were no outstanding
borrowings under that credit agreement at any time.
Our holding company'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. In November 1998, we announced a stock repurchase
program in the amount of $100.0 million authorized by our board of directors.
During 2000, we purchased $24.0 million of our common stock. As of December 31,
2000, $45.4 million remained available under the 1998 authorization. We had
$108.3 million of available funds at December 31, 2000, which has increased from
the December 31, 1999 balance of $92.7 million, primarily due to a return of
capital of $50.0 million from PMI, a dividend payment of $3.0 million from ATPIC
and investment income. These increases were partially offset by the common stock
repurchases of $24.0 million, dividends to shareholders and interest payments on
our long-term debt.
As of December 31, 2000, our invested assets increased by $260.9 million as a
result of positive cash flows from consolidated operations. Consolidated
reserves for losses and loss adjustment expenses increased by 4.6% in 2000 to
$295.1 million, primarily due to the increases in the reserve balances for the
primary and GSE pool insurance books of business, partially offset by a decrease
in the old pool reserve balance in connection with the recapture agreement with
Forestview. Consolidated shareholders' equity increased by $281.9 million in
2000. The increase resulted from $260.2 million of net income, $1.9 million of
proceeds from stock grants, and $42.3 million of other comprehensive income net
of unrealized gains on
investments. These increases were partially offset by net purchases of our
common stock and stock option activity of $15.4 million, and dividends declared
of $7.1 million.
The principal sources of funds for PMI are premiums received on new and renewal
business and amounts earned from its investment portfolio. The principal uses of
funds by PMI are policy acquisition costs, payment of claims and related
expenses, other operating expenses, investment in subsidiaries, and dividends to
us. Cash flows generated from PMI's operating activities decreased to $190.9
million in 2000 from $237.3 million in 1999, due primarily to the funds received
in 1999 related to the reinsurance recapture agreement with Forestview.
PMI has entered into capital support agreements with its European and Australian
subsidiaries that could require PMI to make additional capital contributions to
those subsidiaries in order to maintain their credit ratings. With respect to
the European subsidiary, we have guaranteed PMI's capital support obligations.
PMI's ratio of net risk in force to statutory capital, or statutory risk-to-
capital ratio, at December 31, 2000 was 14.1 to 1 compared to 14.8 to 1 at
December 31, 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our borrowings under credit facilities are subject to interest rates that are
variable. As of December 31, 2000, the effective duration of our investment
portfolio was 4.9 years. The result of a 100 basis points increase in interest
rates would be a 5.8% decrease in the value of our investment portfolio, while
the result of a 100 basis points decrease in interest rates would be a 4.5%
increase in the value of our investment portfolio. $37.2 million of our long-
term debt and $162.1 million of our invested assets are held by PMI Ltd and are
denominated in Australian dollars, which has experienced significant devaluation
during 2000.
INVESTMENT CONSIDERATIONS
General economic factors may adversely affect our loss experience and the demand
for mortgage insurance.
Losses result from events, such as unemployment, that reduce a borrower's
ability to continue to make mortgage payments. The amount of the loss, if any,
depends in part on whether the home of a borrower who defaults on a mortgage can
be sold for an amount that will cover unpaid principal and interest and the
expenses of the sale. Favorable economic conditions generally reduce the
likelihood that borrowers will lack sufficient income to pay their mortgages and
also favorably affect the value of homes, reducing and in some cases even
eliminating a loss from a mortgage default. We believe that our loss experience
could materially increase as a result of:
. national or regional economic recessions;
. declining values of homes;
. higher unemployment rates;
. deteriorating borrower credit;
. interest rate volatility;
. shortages of electric power in California or other states; or
. combinations of these factors.
These factors could also materially reduce the demand for housing and,
consequently, the demand for mortgage insurance.
If interest rates decline, home values increase or mortgage insurance
cancellation requirements change, the length of time that our policies remain in
force and our revenues could decline.
A significant percentage of the premiums we earn each year are generated from
insurance policies that we have written in previous years. As a result, the
length of time insurance remains in force is an important determinant of our
revenues. The policy owner or servicer of the loan may cancel insurance coverage
at any time. In addition, the Home Owners Protection Act of 1998 provides for
the automatic termination or cancellation of mortgage insurance upon a
borrower's request if specified conditions are satisfied. Factors that tend to
reduce the length of time our insurance remains in force include:
. current mortgage interest rates falling below the rates on the mortgages
underlying our insurance in force, which frequently results in borrowers
refinancing their mortgages and canceling their existing mortgage insurance;
. the rate of appreciation in home values experienced by the homes underlying
the mortgages of the insurance in force, which can result in the cancellation
of mortgage insurance; and
. changes in the mortgage insurance cancellation policies of mortgage lenders
and investors.
Although we have a history of expanding our business during periods of low
interest rates, the resulting increase of new insurance written may not be
adequate to compensate us for our loss of insurance in force arising from policy
cancellations.
If the volume of low down payment home mortgage originations declines, the
amount of insurance that we write could also decline, which could result in a
decline in our future revenue.
The factors that affect the volume of low down payment mortgage originations
include:
. the level of home mortgage interest rates;
. the health of the domestic economy as well as conditions in regional and
local economies;
. housing affordability;
. population trends, including the rate of household formation;
. the rate of home price appreciation, which in times of heavy refinancing
affects whether refinance loans have loan-to-value ratios that require
private mortgage insurance; and
. government housing policy encouraging loans to first-time homebuyers.
We cannot cancel mortgage insurance policies or adjust renewal premiums to
protect from unanticipated claims, which could harm our financial performance.
We cannot cancel the mortgage insurance coverage that we provide. In addition,
we generally establish renewal premium rates for the life of the mortgage
insurance policy when the policy is issued. As a result, the impact of
unanticipated claims generally cannot be offset by premium increases on policies
in force or limited by nonrenewal of insurance coverage. The premiums we charge
may not be adequate to compensate us for the risks and costs associated with the
insurance coverage provided to our customers.
Because we compete with private mortgage insurers, governmental agencies and
others in an industry that is highly competitive, our revenues and profits could
decline substantially as we respond to competition or if we lose market share.
The principal sources of our direct and indirect competition include:
. other private mortgage insurers, some of which are subsidiaries of well
capitalized, diversified public companies with direct or indirect capital
reserves that provide them with potentially greater resources than we have;
. federal and state governmental and quasi-governmental agencies, principally
the Federal Housing Administration and to a lesser degree the Veterans
Administration;
. mortgage lenders that choose not to insure against borrower default, self-
insure through affiliates, or offer residential mortgage products that do not
require mortgage insurance; and
. captive reinsurance subsidiaries of national banks, savings institutions and
bank holding companies and other mortgage lenders.
If mortgage lenders and investors select alternatives to private mortgage
insurance, the amount of insurance that we write could decline significantly,
which could reduce our revenues and profits.
Alternatives to private mortgage insurance include:
. government mortgage insurance programs, including those of the Federal
Housing Administration and the Veterans Administration;
. investors holding mortgages in their portfolios and self-insuring;
. investors using credit enhancements other than private mortgage insurance or
using other credit enhancements in conjunction with reduced levels of private
mortgage insurance coverage; and
. mortgage lenders structuring mortgage originations to avoid private mortgage
insurance, such as a first mortgage with an 80% loan-to-value ratio and a
second mortgage with a 10% loan-to-value ratio, which is referred to as an
80-10-10 loan, rather than a first mortgage with a 90% loan- to-value ratio.
In October 1999, the Federal Housing Finance Board authorized each Federal Home
Loan Bank to offer programs to purchase single-family conforming mortgage loans
originated by participating member institutions under the single-family member
mortgage assets program. In July 2000, the Federal Housing Finance Board gave
permanent authority to each Federal Home Loan Bank to purchase these loans from
member institutions without any volume cap. Under the Board's rules, member
institutions are also
authorized to provide credit enhancement for eligible loans. Any expansion of
the Federal Home Loan Banks' ability to use alternatives to mortgage insurance
could reduce the demand for private mortgage insurance and harm our financial
condition and results of operations.
Legislation and regulatory changes may reduce demand for private mortgage
insurance, which could harm our business.
Increases in the maximum loan amount that the Federal Housing Authority, or FHA,
can insure can reduce the demand for private mortgage insurance. Effective
January 1, 2001, the maximum individual loan amount that the FHA can insure was
increased to $239,250. In addition, the FHA has streamlined its down-payment
formula and made FHA insurance more competitive with private mortgage insurance
in areas with higher home prices. As of January 1, 2001, the FHA reduced the
up-front mortgage insurance premiums it charges on loans from 2.25% to 1.5% of
the original loan amounts. These and other legislative and regulatory changes
have caused, and may cause in the future, demand for private mortgage insurance
to decrease and this could harm our financial condition and results of
operations.
As a result of the enactment of The Gramm-Leach-Bliley Act, we expect to
experience increased competition from mortgage insurance companies owned by
large, well capitalized financial services companies, which could significantly
harm our business.
The Gramm-Leach-Bliley Act allows bank holding companies to engage in a
substantially broader range of activities, including insurance underwriting,
than those companies could previously engage in and allows insurers and other
financial service companies to acquire banks. Bank holding companies are now
permitted to form insurance subsidiaries that issue insurance products,
including mortgage insurance, directly to consumers. We expect that, over time,
consumers will have the ability to shop for their insurance, banking and
investment needs at one financial services company. We believe that this new law
may lead to increased competition in the mortgage insurance industry by
facilitating the development of new savings and investment products, resulting
in mortgage lenders offering mortgage insurance directly to home borrowers
rather than through captive reinsurance arrangements with us and encouraging
large, well-capitalized financial service companies to enter the mortgage
insurance business.
We depend on a small number of customers and our business and financial
performance could suffer if we were to lose the business of a major mortgage
lender.
We are dependent on a small number of customers. Our top ten customers were
responsible for 40% of our new insurance written as of December 31, 2000. The
concentration of business with our customers may increase as a result of mergers
or other factors. These customers may reduce the amount of business currently
given to us or cease doing business with us altogether. Our master policies and
related lender agreements do not, and by law cannot, require our lenders to do
business with us. The loss of business from any major customer could seriously
harm our business and results of operations.
We acquire a significant percentage of our new business through secondary market
"bulk" transactions with a limited number of investors. Our business could be
harmed if these investors substitute other types of credit enhancement for
private mortgage insurance.
We could lose premium revenue if Fannie Mae or Freddie Mac continue to reduce
the level of private mortgage insurance coverage required for low down payment
mortgages.
Fannie Mae and Freddie Mac offer programs that require less mortgage insurance
coverage on mortgages approved by their automated underwriting systems. Fannie
Mae and Freddie Mac might further reduce coverage requirements. If the
reduction in required levels of mortgage insurance becomes widely accepted
by mortgage lenders, we would lose premium revenue and our financial condition
and results of operations could suffer.
New products introduced by Fannie Mae or Freddie Mac could cause us to lose
premium revenue if those products are successful.
Fannie Mae and Freddie Mac have separately introduced new products pursuant to
which they will, upon receipt from lenders of loans with primary mortgage
insurance, restructure the mortgage insurance coverage with reduced amounts of
primary coverage, usually deeper pool coverage, and, in some instances, payment
of fees to Fannie Mae or Freddie Mac. If these products prove to be less
profitable than PMI's traditional mortgage insurance business, and become widely
accepted, they could have a material adverse effect upon the Company's financial
condition.
If Fannie Mae and Freddie Mac give mortgage lenders an incentive, such as a
reduced guarantee fee, to select a mortgage insurer that has a claims-paying
ability rating of "AAA," our business would be materially harmed unless we
are successful in obtaining a "AAA" rating.
In 1999 the Office of Federal Housing Enterprise Oversight announced proposed
risk-based capital regulations that would treat credit enhancements issued by
private mortgage insurance companies with claims-paying ability ratings of "AAA"
more favorably than those issued by companies with lower ratings. The Office of
Federal Housing Enterprise Oversight expects to publish final regulations in the
first half of 2001. We do not have a "AAA" rating. If the proposed capital rules
are adopted in a form that gives greater capital credit to private mortgage
insurers with "AAA" ratings, we may need to obtain a "AAA." To obtain a
claims-paying ability rating of "AAA" we would need to dedicate significant
capital to the mortgage insurance business that we might use in other ways and
we would also have additional costs that we would not otherwise incur. Changes
in the preferences of Fannie Mae and Freddie Mac for private mortgage insurance
to other forms of credit enhancement, or a tiering of mortgage insurers based on
their credit rating, could harm our financial condition and results of
operations.
Efforts by Fannie Mae and Freddie Mac to reduce the need for private mortgage
insurance could reduce our revenues.
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 October 2000, Fannie Mae announced its
intention to increase its share of revenue associated with the management of
mortgage credit risk and interest rate risk during the next three years by
retaining mortgage credit risk previously borne by its "risk-sharing partners,"
including mortgage insurers. Part of any attempt by Fannie Mae to increase its
share of revenue associated with mortgage credit risk could include a reduction
in the use or level of mortgage insurance, which could reduce our revenue.
Lobbying activities by large mortgage lenders calling for expanded federal
oversight and legislation relating to the role of Fannie Mae and Freddie Mac in
the secondary mortgage market could damage our relationships with those mortgage
lenders, Fannie Mae and Freddie Mac.
Together with Fannie Mae, Freddie Mac and mortgage lenders, we jointly develop
and make available various products and programs. These arrangements involve
the purchase of our mortgage insurance products and frequently feature
cooperative arrangements between the three parties. In 1999, a coalition of
financial services and housing related trade associations, including the
Mortgage Insurance Companies of America and several large mortgage lenders,
formed FM Watch, a lobbying organization that supports expanded federal
oversight and legislation relating to the role of Fannie Mae and Freddie Mac in
the
secondary mortgage market. Fannie Mae and Freddie Mac have criticized, and
lobbied against, FM Watch. These lobbying activities could, among other things,
polarize Fannie Mae, Freddie Mac and members of FM Watch as well as our
customers and us. As a result of this polarization, our relationships with
Fannie Mae and Freddie Mac may limit our opportunities to do business with some
mortgage lenders, particularly the large mortgage lenders that have formed FM
Watch. Conversely, our relationships with these large mortgage lenders may
limit our ability to do business with Fannie Mae and Freddie Mac. Either of
these outcomes could seriously harm our financial condition and results of
operations.
If we are unable to introduce and successfully market new products and programs,
our competitive position could suffer.
From time to time we introduce new mortgage insurance products or programs. Our
competitive position and financial performance could suffer if we experience
delays in introducing competitive new products and programs or if these products
or programs are less profitable than our existing products and programs.
Mortgage lenders increasingly require us to reinsure a portion of the mortgage
insurance default risk on mortgages that they originate with their captive
mortgage reinsurance companies, which will reduce our net premiums written.
Our customers have indicated an increasing demand for captive mortgage
reinsurance arrangements. Under these arrangements, a reinsurance company,
which is usually an affiliate of the mortgage lender, assumes a portion of the
mortgage insurance default risk on mortgage loans originated by the lender in
exchange for a portion of the insurance premiums. An increasing percentage of
our new insurance written is being generated by customers with captive
reinsurance companies, and we expect that this trend will continue. An increase
in captive mortgage reinsurance arrangements will decrease our net premiums
written which may negatively impact the yield that we obtain on net premiums
earned for customers with captive mortgage reinsurance arrangements. If we do
not provide our customers with acceptable risk-sharing structured transactions,
including potentially increasing levels of premium cessions in captive mortgage
reinsurance arrangements, our competitive position may suffer.
Our risk in force consists of mortgage loans with high loan-to-value ratios,
which generally result in more claims than mortgage loans with lower loan-to-
value ratios.
At December 31, 2000:
. 46% of our risk in force consisted of mortgages with loan-to-value ratios
greater than 90% but less than or equal to 95%, which we refer to as "95s". In
our experience 95s have claims frequency rates approximately twice that of
mortgages with loan-to-value ratios greater than 85% but less than or equal to
90%, which we refer to as "90s."
. 6% of our risk in force consisted of mortgages with loan-to-value ratios
greater than 95% but less than or equal to 97%, which we refer to as "97s". In
our experience 97s have higher claims frequency rates than 95s and greater
uncertainty as to pricing adequacy.
. 0.1% of our risk in force consisted of mortgages with loan-to-value ratios
greater than 97%, which in our experience have claims frequency rates higher
than 97s.
. 9% of our risk in force consisted of adjustable rate mortgages, which we refer
to as "ARMs." In our experience ARMs, although priced higher, have claims
frequency rates that exceed the rates associated with our book of business as
a whole.
The premiums we charge for mortgage insurance on non-traditional loans, and the
associated investment income, may not be adequate to compensate us for future
losses from these products.
Our new insurance written in 2000 includes non-traditional, Alternative A and
less than A loans, which we refer to as "non-traditional loans." Non-traditional
loans represented approximately 19% of our total new insurance written in 2000.
Loan characteristics, credit quality, loss development, pricing structures and
persistency on non-traditional loans can be significantly different than our
traditional prime business. In addition, non-traditional loans generally do not
meet the standard underwriting guidelines of Fannie Mae and Freddie Mac. We
expect higher delinquency rates and default rates for non-traditional loans. We
cannot be assured that this book of business will generate the same returns as
our standard business or that the premiums that we charge on non-traditional
loans will adequately offset the associated risk.
Paying a significant number of claims under the pool insurance we write could
harm our financial performance.
We offer pool insurance that is generally used as an additional credit
enhancement for secondary market mortgage transactions. Pool insurance provides
coverage for non-conforming loans, and is generally considered riskier than
primary insurance. Under primary insurance, an insurer's exposure is limited to
a specified percentage of any unpaid principal, delinquent interest and related
expenses on an individual loan. Under traditional pool insurance, there is an
aggregate exposure limit -- a "stop loss" -- on a pool of loans, which is
generally a percentage of the initial aggregate loan balance of the entire pool
of loans. Under our pool insurance, we could be required to pay the full amount
of every loan in the pool that is in default and upon which a claim is made
until the stop loss is reached, rather than a percentage of that amount. The
premiums that we charge for these policies may not adequately compensate us if
we experience higher delinquency and default rates than we anticipate at the
time we set the premiums for the policies. If we are required to pay a
significant number of claims under our pool insurance, then our financial
condition and results of operations could be seriously harmed.
The concentration of insurance in force in relatively few states could increase
claims and losses and harm our financial performance.
In addition to being affected by nationwide economic conditions, we could be
particularly affected by economic downturns in specific regions of the United
States where a large portion of our business is concentrated. As of December
31, 2000:
. 15% of our total risk in force was on mortgages for homes located in
California, where the default rate on our policies was 2.26% in 2000;
. 8% of our total risk in force was on mortgages for homes located in Florida,
where the default rate on our policies was 2.91% in 2000; and
. 7% of our total risk in force was on mortgages for homes located in Texas,
where the default rate on our policies was 2.13% in 2000.
This compares with a nationwide default rate on our policies of 2.21% in 2000.
Continued and prolonged adverse economic conditions in any of these states could
result in high levels of claims and losses. In addition, refinancing of
mortgage loans can have the effect of concentrating our insurance in force in
economically weaker areas, because mortgages in areas experiencing appreciation
of home values are less likely to require mortgage insurance at the time of
refinancing than are mortgages in areas experiencing limited or no appreciation
of home values.
We delegate underwriting authority to mortgage lenders that may cause us to
insure unacceptably risky mortgage loans, which could increase claims and
losses.
The majority of our new insurance written is underwritten pursuant to a
delegated underwriting program. Once a mortgage lender is accepted into our
delegated underwriting program, that mortgage lender may determine whether
mortgage loans meet our program guidelines and may commit us to issue mortgage
insurance. We expect to continue offering delegated underwriting to approved
lenders and may expand the availability of delegated underwriting to additional
customers. If an approved lender commits us to insure a mortgage loan, we may
not refuse to insure, or rescind coverage on, that loan even if we reevaluate
that loan's risk profile or the lender failed to follow our delegated
underwriting guidelines, except in very limited circumstances. In addition, our
ability to take action against an approved lender that fails to follow our
program guidelines and requirements is limited by access to data that would be
needed to assess the lender's compliance with those guidelines and requirements.
Therefore, an approved lender could cause us to insure a material amount of
mortgage loans with unacceptable risk profiles prior to our termination of the
lender's delegated underwriting authority.
We expect our loss experience to increase significantly as our policies continue
to age.
The majority of claims under private mortgage insurance policies have
historically occurred during the third through the sixth years after issuance of
the policies. As of December 31, 2000, approximately 72% of our risk in force
was written after December 31, 1997. This means that less than half of our risk
in force has reached the beginning of the expected peak claims period. As a
result, our loss experience is expected to increase significantly as our
policies continue to age. If the claim frequency on our risk in force
significantly exceeds the claim frequency that was assumed in setting our
premium rates, our financial condition and results of operations and cash flows
would be seriously harmed.
Our loss reserves may be insufficient to cover claims paid and loss-related
expenses incurred.
We establish loss reserves to recognize the liability for unpaid losses related
to insurance in force on mortgages that are in default. These loss reserves are
based upon our estimates of the claim rate and average claim amounts, as well as
the estimated costs, including legal and other fees, of settling claims. These
estimates are regularly reviewed and updated using currently available
information. Any adjustments, which may be material, resulting from these
reviews are reflected in our then current consolidated results of operations.
Our reserves may not be adequate to cover ultimate loss development on incurred
defaults. Our financial condition and results of operations could be seriously
harmed if our reserve estimates are insufficient to cover the actual related
claims paid and loss-related expenses incurred.
If we fail to properly underwrite mortgage loans under our contract underwriting
services, we may be required to assume the cost of repurchasing those loans.
We provide contract underwriting services for a fee. These services help enable
our customers to improve the efficiency and quality of their operations by
outsourcing all or part of their mortgage loan underwriting to us. As part of
our contract underwriting services, we generally provide remedies to our
customers in the event that our underwriters fail to properly underwrite the
mortgage loans. These remedies may include the assumption of the cost of
repurchasing loans that are not properly underwritten, a remedy not available
under our master primary insurance policies. Worsening economic conditions
could cause us to increase the number and severity of the remedies that we
offer, which could harm our financial condition. Due to the demand of contract
underwriting services, limitations on the number of available underwriting
personnel, and heavy price competition among mortgage insurance companies, our
inability to recruit and maintain a
sufficient number of qualified underwriters or any significant increase in the
cost we incur to satisfy our underwriting services obligations could harm our
financial condition and results of operations.
If our claims-paying ability is downgraded, then mortgage lenders and the
mortgage securitization market may not purchase mortgages or mortgage-backed
securities insured by us, which could materially harm our financial performance.
The claims-paying ability of PMI Mortgage Insurance Co., our largest wholly
owned subsidiary, which we refer to as "PMI", is currently rated "AA+"
(Excellent) by Standard and Poor's Rating Services, "Aa2" (Excellent) by Moody's
Investors Service, Inc., and "AA+" (Very Strong) by Fitch IBCA. These ratings
may be revised or withdrawn at any time by one or more of the rating agencies.
These ratings are based on factors relevant to PMI's policyholders and are not
applicable to our common stock or outstanding debt. Adverse developments in
PMI's financial condition or results of operations, whether by virtue of
underwriting or investment losses, the necessity to make capital contributions
to our subsidiaries pursuant to capital support agreements, changes in the views
of rating agencies, or other factors, could cause the rating agencies to lower
or withdraw their ratings. If PMI's claims-paying ability rating falls below
"AA-" from Standard and Poor's or "[Aa3]" from Moody's, then investors,
including Fannie Mae and Freddie Mac, will not purchase mortgages insured by us,
which would have a material and adverse effect on our financial condition and
results of operations.
Our ongoing ability to pay dividends to our stockholders and meet our
obligations primarily depends upon the receipt of dividends and returns of
capital from our insurance subsidiaries and our investment income.
Our principal sources of funds are dividends from our subsidiaries, investment
income and funds that may be raised from time to time in the capital markets.
Factors that may affect our ability to maintain and meet our capital and
liquidity needs include:
. the level and severity of claims experienced by our insurance subsidiaries;
. the performance of the financial markets;
. standards and factors used by various credit rating agencies;
. financial covenants in our 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 our ability to
maintain capital resources to meet our business needs.
Regulatory authorities in Illinois and New York are considering whether our
business has been conducted in compliance with applicable state law.
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. If the Illinois Department of
Insurance were to determine that we were not in compliance with Illinois law,
our financial condition and results of operations could suffer.
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. If the New York Department of
Insurance determined we were not in compliance with Circular Letter No. 2, our
financial condition and results of operations could suffer.
An increase in PMI's risk-to-capital ratio could prevent it from writing new
insurance, which would seriously harm our financial performance.
The State of Arizona, PMI's state of domicile for insurance regulatory purposes,
and other states limit the amount of insurance risk that may be written by PMI,
based on a variety of financial factors, primarily risk-to-capital ratios. 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 policyholders surplus, contingency reserves, 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:
. limitations under the runoff support agreement with Allstate, which
prohibit PMI from paying any dividends if, after the payment of the
dividend, PMI's risk-to-capital ratio would equal or exceed 23 to 1;
. our credit agreements and the terms of our guaranty of the debt incurred to
purchase PMI Mortgage Insurance Ltd, which is our insurance subsidiary in
Australia; and
. capital requirements necessary to maintain our credit rating and PMI's
claims-paying ability ratings.
Generally, the methodology used by the rating agencies to assign credit or
claims-paying ability ratings permits less capital leverage than under statutory
requirements. Accordingly, statutory capital requirements may be lower than the
capital necessary to satisfy rating agency requirements.
PMI has several alternatives available to help control its risk-to-capital
ratio, including:
. obtaining capital contributions from us;
. purchasing additional quota share or excess of loss reinsurance; and
. reducing the amount of new business written.
We may not be able to raise additional funds, or to do so on a timely basis, in
order to make a capital contribution to PMI. In addition, reinsurance may not
be available to PMI or, if available, may not be available on satisfactory
terms. A material reduction in PMI's statutory capital, whether resulting from
underwriting or investment losses or otherwise, or a disproportionate increase
in risk in force, could increase its risk-to-capital ratio. An increase in
PMI's risk-to-capital ratio could limit its ability to write new business. The
inability to write new business could seriously harm our financial condition and
results of operations.
Our international insurance subsidiaries subject us to numerous risks associated
with international operations.
We have subsidiaries in Australia and Europe and may commit significant
resources to expand our international operations. Accordingly, we are subject to
a number of risks associated with international business activities. These
risks include:
. the need for regulatory and third party approvals;
. challenges attracting and retaining key foreign-based employees, customers
and business partners in international markets;
. the economic strength of the foreign mortgage origination markets targeted,
particularly the economies of Australia and Europe;
. interest rate volatility in a variety of countries;
. unexpected changes in foreign regulations and laws;
. burdens of complying with a wide variety of foreign laws;
. potentially adverse tax consequences;
. restrictions on the repatriation of earnings;
. foreign currency exchange rate fluctuations;
. potential increases in the level of defaults and claims on policies insured
by foreign-based subsidiaries;
. the need to integrate our domestic insurance subsidiaries' risk management
technology systems and products with those of our foreign operations;
. the need to successfully develop and market products appropriate to the
foreign market, including the development and marketing of credit enhancement
products to European lenders and mortgage securitizations;
. risks related to global economic turbulence; and
. political instability.
The performance of our strategic investments could harm our financial results.
The performance of our strategic investments could be harmed 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
. our dependence upon management to operate those companies in which we do not
own a controlling share.
In addition, our ability to engage in additional strategic investments is
subject to the availability of capital and maintenance of our claims-paying
ability ratings by rating agencies.
Our failure or inability to keep pace with the technological demands of our
customers or with the technology-related products and services offered by our
competitors could significantly harm our business and financial performance.
Participants in the mortgage lending and mortgage insurance industries
increasingly rely on e-commerce and other technology to provide and expand their
products and services. An increasing number of our customers require that we
provide our products and services electronically via the Internet or electronic
data transmission, and the percentage of our new insurance written delivered
electronically is increasing. We expect this trend to continue and, accordingly,
believe that it is essential that we continue to invest substantial resources on
maintaining electronic connectivity with our customers and, more generally, on
e-commerce and technology.
If we are not reimbursed by our insurance carriers for costs incurred by us in
connection with our settlement of the Baynham litigation, we may be required to
take an additional charge against earnings.
We have entered into a settlement agreement with the plaintiffs in the putative
class action lawsuit filed against us. We currently estimate that the gross
amount of the settlement will be between $20 million and $22 million. To account
for the settlement, we took a pre-tax charge against fourth quarter 2000
earnings of $5.7 million. This charge represented our estimate of the cost of
settlement less our estimate of insurance payments we will receive from our
insurance carriers as reimbursement for costs incurred by us in connection with
our defense and settlement of the action. We have agreed to participate in non-
binding mediation with our insurance carriers with respect to the amount of the
payments to be reimbursed to us. If we do not realize our estimated amount of
insurance proceeds, we could be required to take an additional charge against
earnings and this could harm our financial condition and results of operations.
Consolidated Statements of Operations
Year Ended December 31,
(In thousands, except per share amounts) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues Premiums earned $ 634,362 $ 558,623 $ 491,226
Investment income 119,199 95,142 84,681
Net realized investment gains 432 509 24,636
Other 8,579 15,850 20,366
------------ ------------ ------------
Total revenues 762,572 670,124 620,909
------------ ------------ ------------
Losses and Losses and loss adjustment expenses 103,079 112,682 135,716
Expenses Amortization of deferred policy acquisition costs 77,337 80,252 60,280
Other underwriting and operating expenses 189,771 170,239 142,625
Interest expense 10,210 8,554 7,029
Distributions on preferred capital securities 8,309 8,311 8,311
------------ ------------ ------------
Total losses and expenses 388,706 380,038 353,961
------------ ------------ ------------
Income before income taxes 373,866 290,086 266,948
Income tax expense 113,654 85,620 76,588
------------ ------------ ------------
Net income $ 260,212 $ 204,466 $ 190,360
------------ ------------ ------------
Per Share Basic net income $ 5.88 $ 4.55 $ 4.04
------------ ------------ ------------
Diluted net income $ 5.78 4.52 $ 4.02
============ ============ ============
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets
As of December 31,
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
Assets Investments:
Available for sale, at fair value:
Fixed income securities
(amortized cost: $1,536,291; $1,485,396) $ 1,613,330 $ 1,479,310
Equity securities:
Common (cost: $53,315; $44,714) 81,726 83,890
Preferred (cost: $108,743; $17,660) 111,743 17,582
Common stock of affiliates (at underlying book value) 131,849 91,453
Short-term investments, at fair value 139,577 145,093
--------------- ---------------
Total investments 2,078,225 1,817,328
--------------- ---------------
Cash 21,969 28,076
Accrued investment income 23,494 22,058
Reinsurance recoverable and prepaid premiums 51,329 50,714
Premiums receivable 41,362 30,659
Receivable from affiliate 739 2,996
Deferred policy acquisition costs 67,009 69,579
Property and equipment, net 53,475 40,462
Other assets 55,055 38,890
--------------- ---------------
Total assets $ 2,392,657 $ 2,100,762
=============== ===============
Liabilities Reserve for losses and loss adjustment expenses $ 295,089 $ 282,000
Unearned premiums 170,866 182,089
Long-term debt 136,819 145,367
Reinsurance balances payable 26,581 25,415
Deferred income taxes 74,981 75,640
Other liabilities and accrued expenses 90,001 73,908
--------------- ---------------
Total liabilities 794,337 784,419
--------------- ---------------
Commitments and contingencies
Company-obligated mandatorily redeemable preferred capital
securities of subsidiary trust holding solely junior
subordinated deferrable interest debenture of the Company 99,109 99,075
Shareholders' Equity Preferred stock - $.01 par value; 5,000,000 shares authorized
and none issued or outstanding - -
Common stock - $.01 par value; 187,500,000 shares
authorized, and 52,793,777 issued 528 528
Additional paid-in capital 267,762 265,828
Accumulated other comprehensive income 62,501 20,186
Retained earnings 1,511,751 1,258,617
Treasury stock, at cost (8,484,082 and 8,091,924 shares) (343,331) (327,891)
--------------- ---------------
Total shareholders' equity 1,499,211 1,217,268
--------------- ---------------
Total liabilities and shareholders' equity $ 2,392,657 $ 2,100,762
=============== ===============
See accompanying notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity
Year Ended December 31,
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Common Balance, beginning of year $ 528 $ 352 $ 351
Stock 3 for 2 stock split in the form of a stock dividend - 176 -
Stock grants and exercise of stock options - - 1
----------- ------------- ------------
Balance, end of year 528 528 352
----------- ------------- ------------
Additional Balance, beginning of year 265,828 265,040 262,448
Paid-in 3 for 2 stock split in the form of a stock dividend - (176) -
Capital Stock grants and exercise of stock options 1,934 964 2,592
----------- ------------- ------------
Balance, end of year 267,762 265,828 265,040
----------- ------------- ------------
Accumulated Balance, beginning of year 20,186 74,462 71,936
----------- ------------- ------------
Other Unrealized gains on investments:
Comprehensive Unrealized holding gains (losses) arising during period
Income [net of tax (benefit) of $28,327, ($29,047), and $9,982] 50,575 (53,945) 18,539
Less: reclassification adjustment for gains (losses)
included in net income
[net of tax of $151, $178, and $8,623] (281) (331) (16,013)
----------- ------------- ------------
Net unrealized holding gains (losses) 50,294 (54,276) 2,526
Currency translation adjustment (7,979) - -
----------- ------------- ------------
Other comprehensive income (loss), net of tax 42,315 (54,276) 2,526
----------- ------------- ------------
Balance, end of year 62,501 20,186 74,462
----------- ------------- ------------
Retained Balance, beginning of year 1,258,617 1,060,724 876,588
Earnings Net income 260,212 204,466 190,360
Dividends declared (7,078) (6,573) (6,224)
----------- ------------- ------------
Balance, end of year 1,511,751 1,258,617 1,060,724
----------- ------------- ------------
Treasury Balance, beginning of year (327,891) (303,063) (150,143)
Stock Purchases of The PMI Group, Inc. common stock (15,440) (24,828) (152,920)
----------- ------------- ------------
Balance, end of year (343,331) (327,891) (303,063)
----------- ------------- ------------
Total shareholders' equity $ 1,499,211 $ 1,217,268 $ 1,097,515
=========== ============= ============
Comprehensive Net income $ 260,212 $ 204,466 $ 190,360
Income Other comprehensive income (loss), net of tax 42,315 (54,276) 2,526
----------- ------------- ------------
Comprehensive income $ 302,527 $ 150,190 $ 192,886
=========== ============= ============
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Year Ended December 31,
(In thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Cash Net income $ 260,212 $ 204,466 $ 190,360
Flows Adjustments to reconcile net income to net cash provided by
From operating activities:
Operating Realized capital gains (432) (509) (24,636)
Activities Equity in earnings of affiliates (11,643) (7,061) (3,225)
Depreciation and amortization 24,092 13,243 6,282
Deferred income taxes (28,834) 7,539 19,444
Changes in:
Reserve for losses and loss adjustment expenses 13,089 8,142 12,872
Unearned premiums (11,223) 13,526 736
Deferred policy acquisition costs 2,570 (7,973) (23,741)
Accrued investment income (1,436) (1,903) 644
Reinsurance balances payable 1,166 4,495 2,936
Reinsurance recoverable and prepaid premiums (615) 53,616 (10,426)
Premiums receivable (10,703) (6,292) (4,611)
Receivable from affiliate 2,095 3,170 (1,778)
Receivable from Allstate - 23,657 (6,835)
Other (16,372) 6,649 20,079
--------- --------- ---------
Net cash provided by operating activities 221,966 314,765 178,101
--------- --------- ---------
Cash Proceeds from sales and maturities of fixed income 193,141 231,673 174,778
securities
Flows Proceeds from sales of equity securities 53,370 42,647 75,181
from Investment purchases:
Investing Fixed income securities (267,346) (332,046) (207,686)
Activities Equity securities (145,258) (31,940) (53,092)
Net (increase) decrease in short-term investments 5,516 (84,508) 40,476
Investment in affiliates (26,827) (25,634) (40,024)
Purchase of PMI Ltd - (78,295) -
Purchase of Pinebrook Insurance Company - (22,577) -
Purchases of property and equipment (20,070) (12,528) (12,417)
--------- --------- ---------
Net cash used in investing activities (207,474) (313,208) (22,784)
--------- --------- ---------
Cash Issuance of long-term debt - 45,825 -
Flows Proceeds from exercise of stock grants and options 1,934 964 2,592
From Dividends paid to shareholders (7,093) (5,199) (6,333)
Financing Purchases of The PMI Group, Inc. common stock (15,440) (24,828) (152,920)
--------- --------- ---------
Activities Net cash provided by (used in) financing activities (20,599) 16,762 (156,661)
--------- --------- ---------
Net increase (decrease) in cash (6,107) 18,319 (1,344)
Cash at beginning of year 28,076 9,757 11,101
--------- --------- ---------
Cash at end of year $ 21,969 $ 28,076 $ 9,757
========= ========= =========
See accompanying notes to consolidated financial statements.
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of The
PMI Group, Inc. ("TPG"), a Delaware corporation; its direct and indirect 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; PMI Mortgage Insurance Ltd
("PMI Ltd"), an Australian mortgage insurance company; PMI Mortgage Services Co.
("MSC"), a California corporation; and other insurance, reinsurance and non-
insurance subsidiaries. TPG and its subsidiaries are collectively referred to
as the "Company". In addition, PMI has equity interests in CMG Mortgage
Insurance Company, CMG Mortgage Reinsurance Company and CMG Mortgage Assurance
Company (collectively referred to as "CMG"), conduct residential mortgage
insurance and reinsurance business, and also Fairbanks Capital Holding Corp.
("Fairbanks"), a special servicer of single-family residential mortgages. TPG
has equity interests in RAM Holdings Ltd. and RAM Holdings II Ltd. (collectively
referred to as "RAM RE"), two financial guaranty reinsurance companies based in
Bermuda. CMG, Fairbanks and Ram Re are accounted for on the equity method of
accounting in the Company's consolidated financial statements. All material
intercompany transactions and balances have been eliminated in consolidation.
NOTE 2. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - The Company, through PMI and PMI Ltd, primarily writes residential
mortgage guaranty insurance ("primary insurance") and mortgage pool insurance.
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 accounting principles generally accepted in the United States ("GAAP"), which
vary from statutory accounting practices prescribed or permitted by insurance
regulatory authorities. (See Note 14.) 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 fair
value with unrealized gains and losses, net of deferred income taxes, reported
as a component of accumulated other comprehensive income. The Company's short-
term investments are those investments when purchased have the maturity less
than 12 months.
Investments in 20% to 50% owned affiliates are accounted for on the equity
method and investments in less than 20% owned affiliates are accounted for on
the cost method.
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
$59.3 million and $51.4 million at December 31, 2000 and 1999, respectively.
Revenue Recognition - 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 GAAP 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, or single premium
plans, are amortized over the policy life in relation to the expiration of risk.
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.
Deferred Policy Acquisition Costs - The Company defers certain costs in its
mortgage insurance operations relating 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 and include
all underwriting, contract underwriting and sales related activities. To the
extent the Company is compensated by customers for contract underwriting, those
underwriting costs are not deferred. Costs associated with the acquisition of
mortgage insurance business are initially deferred and reported as deferred
policy acquisition costs ("DPAC"). Because SFAS 60 specifically excludes
mortgage guaranty insurance from its guidance relating to the amortization of
DPAC, 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.
DPAC is summarized as follows:
(In thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Beginning DPAC balance $ 69,579 $ 61,605 $ 37,864
Acquisition costs incurred and deferred 74,767 88,226 84,021
Amortization of deferred costs (77,337) (80,252) (60,280)
--------- -------- --------
Ending DPAC balance $ 67,009 $ 69,579 $ 61,605
========= ======== ========
Reserve For Losses and Loss Adjustment Expenses - 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 GAAP 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, 2000 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.
Earnings Per 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 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. Net income available to common shareholders does not change for
computing diluted EPS. Weighted average common shares outstanding for years
ended December 31, 2000, 1999 and 1998 follows:
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding
For basic EPS 44,253,619 44,893,250 47,090,673
For diluted EPS 45,018,501 45,244,060 47,299,065
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 Taxes - The Company accounts for income taxes using the liability method
in accordance with SFAS No. 109, Accounting for Income Taxes.
Derivatives - 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 and for hedging activities. These rules require that all
derivative instruments be reported in the consolidated financial statements at
fair value. Changes in the fair value of derivatives are to be recorded each
period in earnings or other comprehensive income, depending on whether the
derivative is designated and effective as part of a hedged transaction, and on
the type of hedge transaction. Gains or losses on derivative instruments
reported in other comprehensive income must be reclassified as earnings in the
period in which earnings are affected by the underlying hedged item, and the
ineffective portion of all hedges must be recognized in earnings in the current
period. The Company adopted this statement effective January 1, 2001. The
Company's use of derivative financial instruments is generally limited to
reducing its exposure to interest rate and currency exchange risk by utilizing
interest rate and currency swap agreements which are accounted for as hedges.
Hedge accounting requires a high correlation between changes in fair values or
cash flows of derivative financial instrument and the specific item being
hedged, both at inception and throughout the life of the hedge. 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 10. Management
determined that this cash flow hedge was effective as of December 31, 2000.
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 Ltd 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. Management anticipates that the adoption of this new statement will
not have a material impact on the financial position or results of operations of
the Company due to its limited use of derivative instruments.
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
that approximate weighted average exchange rates. The effects of translating
operations with a functional currency other than the reporting currency are
reported as a component of accumulated other comprehensive income.
Concentration of Risk - A substantial portion of PMI's business is generated
within the state of California. For the year ended December 31, 2000, 15.0% of
new insurance written was in California. In addition, California's book of
business represented 14.7% of total risk in force at December 31, 2000.
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 13.) Under APB 25, because the exercise price of the
stock options equal the market price of the underlying stock on the grant date,
no compensation expense is recognized.
Change 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, the
results of foreign operations for the twelve months ended December 31, 2000
represent eleven months of activity. The impact of this change is not material
to the consolidated financial statements.
Subsequent Event - On January 19, 2001, the Pacific Gas and Electric Company
("PG&E") defaulted on $10.0 million of commercial paper held by the Company at
par classified as short-term investments. Management believes that PG&E will
ultimately (directly or indirectly) redeem this obligation at par.
NOTE 3. ACQUISITIONS
On August 6, 1999, the Company, through PMI Mortgage Insurance Australia
(Holdings) Pty Limited ("PMI Holdings"), a newly formed and wholly owned
subsidiary of PMI, acquired all of the outstanding common stock of PMI Ltd for
approximately $78.3 million. The acquisition was financed in part by the
issuance of PMI Holdings debt of $45.8 million. The acquisition was accounted
for under the purchase method of accounting and, accordingly, the 1999
consolidated financial statements included 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 was approximately $21.7 million recorded
as negative goodwill being amortized over approximately 8 years. On February 14,
2001, the FASB issued an Exposure Draft, Combinations and Intangible Assets,
proposed to change the accounting treatment of Goodwill. If the Exposure Draft
becomes effective as proposed, the remaining balance of the Company's negative
goodwill will be recognized as extraordinary income in the period of
implementation. The balance of negative goodwill as of December 31, 2000 was
$11.7 million.
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 Insurance Company ("Allstate") for $22.6 million cash.
The purchase price approximated the book value of Pinebrook, which did not
differ significantly from fair value. This transaction has been accounted for
under the purchase method.
The pro-forma unaudited results of operations for the years ended December 31,
1999 and 1998, assuming the purchases had been consummated as of January 1,
1998, 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 and Unrealized Net Gains (Losses) on Investments - The amortized
cost and estimated fair values (based on quoted market prices) for fixed income
and equity securities and unrealized net gains and losses on investments
included in accumulated other comprehensive income are shown below:
Net
Amortized Fair Gross Unrealized Unrealized
-------------------------------
(In thousands) Cost Value Gains (Losses) Gains
- -------------------------------------------------------------------------------------------------------------------------
At December 31, 2000:
Fixed income securities
U.S. government and agencies $ 101,588 $ 103,088 $ 2,504 $ (1,004) $ 1,500
Municipals 1,268,775 1,349,160 82,692 (2,307) 80,385
Corporate bonds 165,928 161,082 2,400 (7,246) (4,846)
----------- ----------- ----------- ----------- -----------
Total fixed income securities 1,536,291 1,613,330 87,596 (10,557) 77,039
Equity securities
Common stocks 53,315 81,726 32,543 (4,132) 28,411
Preferred stocks 108,743 111,743 3,216 (216) 3,000
----------- ----------- ----------- ----------- -----------
Total equity securities 162,058 193,469 35,759 (4,348) 31,411
Investment in affiliates 130,747 131,849 1,101 - 1,101
Short-term investments 139,470 139,577 113 (6) 107
----------- ----------- ----------- ----------- -----------
Total investments $ 1,968,566 $ 2,078,225 $ 124,569 $ (14,911) $ 109,658
----------- ----------- ----------- -----------
Deferred income taxes (39,178)
Total unrealized gains, -----------
net of deferred tax $ 70,480
===========
At December 31, 1999:
Fixed income securities
U.S. government and agencies $ 87,223 $ 84,047 $ 387 $ (3,563) $ (3,176)
Municipals 1,260,409 1,261,308 31,337 (30,438) 899
Corporate bonds 137,764 133,955 49 (3,858) (3,809)
----------- ----------- ----------- ----------- -----------
Total fixed income securities 1,485,396 1,479,310 31,773 (37,859) (6,086)
Equity securities
Common stocks 44,714 83,890 40,812 (1,636) 39,176
Preferred stocks 17,660 17,582 157 (235) (78)
----------- ----------- ----------- ----------- -----------
Total equity securities 62,374 101,472 40,969 (1,871) 39,098
Investment in affiliates 93,283 91,453 - (1,830) (1,830)
Short-term investments 145,087 145,093 20 (14) 6
----------- ----------- ----------- ----------- -----------
Total investments $ 1,786,140 $ 1,817,328 $ 72,762 $ (41,574) $ 31,188
----------- ----------- ----------- -----------
Deferred income taxes (11,002)
-----------
Total unrealized gains,
net of deferred tax $ 20,186
===========
The difference between cost and fair value of the investment in affiliates
reflects net unrealized gains on the affiliates' investment portfolio. The
stated fair value does not necessarily represent the fair value of the
affiliates' common stock held by the Company. Short-term investments includes
$10.0 million of commercial paper issued by PG&E.
The change in net unrealized gains (losses), net of deferred income taxes,
included in other comprehensive income for investments are as follows:
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Fixed income securities $ 53,948 $ (61,376) $ 8,874
Equity securities (5,586) 8,758 (6,565)
Investment in affiliates 1,905 (1,662) 217
Short-term investments 27 4 -
--------- ---------- --------
Total net unrealized gains (losses) $ 50,294 $ (54,276) $ 2,526
========= ========== ========
Scheduled Maturities - The amortized cost and fair values of fixed income
securities at December 31, 2000, by contractual maturity, are as follows:
Amortized Fair
(In thousands) Cost Value
- ----------------------------------------------------------------------------------------------------------------
Due in one year or less $ 12,098 $ 12,321
Due after one year through five years 195,485 197,557
Due after five years through ten years 179,268 187,128
Due after ten years 1,090,041 1,156,748
Mortgage-backed securities 59,399 59,576
------------ -----------
Total fixed income securities $ 1,536,291 $ 1,613,330
============ ===========
Actual maturities may differ from those scheduled as a result of calls or
prepayments by the issuers prior to maturity.
Investment Concentration and Other Items - The Company maintains a diversified
portfolio of municipal bonds. At December 31, 2000 and 1999, 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.
2000 1999
- ----------------------------------------------------------------------------------------------------------
Illinois 14.1% 13.2%
Texas 12.6 12.2
Washington 11.2 11.5
New York 9.7 9.2
Massachusetts 7.5 6.3
California 5.6 6.1
Pennsylvania 5.5 5.5
At December 31, 2000, fixed income and short-term securities with a market value
of $15.6 million were on deposit with regulatory authorities as required by law.
Investment Income - Investment income by investment type is as follows:
(In thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Fixed income securities $ 94,794 $ 82,256 $ 76,427
Equity securities 4,841 2,400 2,466
Common stock of affiliates 11,643 7,061 3,225
Short-term investments 9,223 4,793 3,442
----------- ------------ ------------
Investment income, before expenses 120,501 96,510 85,560
Investment expense (1,302) (1,368) (879)
----------- ------------ ------------
Net investment income $ 119,199 $ 95,142 $ 84,681
=========== ============ ============
Realized Investment Gains and Losses - Net realized investment gains (losses) on
investments are as follows:
(In thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Fixed income securities
Gross gains $ 1,657 $ 535 $ 1,512
Gross losses (9,734) (3,610) (31)
----------- ----------- ------------
Net (8,077) (3,075) 1,481
Equity securities:
Gross gains 17,768 7,210 26,298
Gross losses (9,474) (3,636) (3,143)
----------- ----------- ------------
Net 8,294 3,574 23,155
Short-term investments
Gross gains 453 10 -
Gross losses (238) - -
----------- ----------- ------------
Net 215 10 -
----------- ----------- ------------
Net realized investment gains, before income taxes 432 509 24,636
Income taxes (151) (178) (8,623)
----------- ----------- ------------
Net realized investment gains, net of income taxes $ 281 $ 331 $ 16,013
=========== =========== ============
NOTE 5. LOSS RESERVES
The following table provides a reconciliation of the beginning and ending
reserve for losses and loss adjustment expenses for each of the last three
years:
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Balance, January 1 $ 282,000 $ 215,259 $ 202,387
Reinsurance recoverable (10,342) (6,782) (6,067)
----------- ---------- ----------
Net balance, January 1 271,658 208,477 196,320
Losses and loss adjustment expenses incurred (principally
In respect of defaults occurring in)
Current year 191,904 159,293 146,884
Prior years (88,825) (46,611) (11,168)
----------- ---------- ----------
Total losses and loss adjustment expenses 103,079 112,682 135,716
Losses and loss adjustment expense payments (principally
in respect of defaults occurring in)
Current year (4,825) (1,798) (12,503)
Prior years (84,034) (96,890) (111,056)
----------- ---------- ----------
Total payments (88,859) (98,688) (123,559)
Forestview reserves, at acquisition (Note 6) - 42,528 -
Pinebrook reserves, at acquisition - 1,093 -
PMI Ltd reserves, at acquisition - 4,473 -
----------- ---------- ----------
Net balance, December 31 285,878 270,565 208,477
Reinsurance recoverable 9,211 11,435 6,782
----------- ---------- ----------
Balance, December 31 $ 295,089 $ 282,000 $ 215,259
=========== ========== ==========
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 $88.8 million, $46.6 million and
$11.2 million in 2000, 1999 and 1998, respectively, due to the impact of a
favorable interest rate environment on loss mitigation activities and to lower
than expected claims 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. REINSURANCE
The Company utilizes 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. The Company's reinsurance
agreements provide for a recovery of a portion of losses and loss expenses from
reinsurers, and reinsurance recoverable are recorded as assets. The Company
remains liable if the reinsurers are unable to satisfy their obligations under
the agreements. Reinsurance 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.
Reinsurance recoverable on paid losses was $9.2 million and $11.4 million at
December 31, 2000 and 1999, respectively. Prepaid reinsurance premiums were $1.8
million and $1.7 million at December 31, 2000 and 1999, respectively.
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. 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.
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
SFAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts, and therefore is being reported in accordance with SOP
98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts
That Do Not Transfer Risk. The expense attributable to the expiration of
coverage provided under the contract was $2.2 million and $1.9 million in 2000
and 1999, 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) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Premiums written
Direct $ 676,777 $ 597,551 $ 518,101
Assumed 2,209 8,999 6,557
Ceded (39,924) (35,296) (35,558)
----------- ----------- -----------
Net premiums written $ 639,062 $ 571,254 $ 489,100
=========== =========== ===========
Premiums earned
Direct $ 671,602 $ 586,590 $ 521,338
Assumed 1,800 6,445 2,517
Ceded (39,040) (34,412) (32,629)
----------- ----------- -----------
Net premiums earned $ 634,362 $ 558,623 $ 491,226
=========== =========== ===========
Losses and loss adjustment expenses
Direct $ 106,301 $ 115,180 $ 131,692
Assumed (643) 3,109 838
Ceded (2,579) (5,607) 3,186
----------- ----------- -----------
Net losses and loss adjustment expenses $ 103,079 $ 112,682 $ 135,716
=========== =========== ===========
NOTE 7. INCOME TAXES
The components of income tax expense are as follows:
(In thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Current $ 37,565 $ 6,942 $ 7,302
Deferred 76,089 78,678 69,286
----------- ----------- -----------
Total income tax expense $ 113,654 $ 85,620 $ 76,588
=========== =========== ===========
The components of the income tax expense for 2000 include a foreign provision
for current tax expense of $4.7 million and deferred tax expense of $1.9 million
primarily 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:
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax-exempt income (6.0) (6.8) (7.2)
State income tax, net 0.4 0.5 0.4
Foreign income tax (0.3) 0.2 -
Other 1.3 0.6 0.5
---- ---- ----
Effective income tax rate 30.4% 29.5% 28.7%
---- ---- ----
Section 832(e) of the Internal Revenue Code permits mortgage guaranty insurers
to deduct, within certain limitations, additions to statutory contingency
reserves. (See Note 14.) 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 $103.4 million, $73.5 million and $47.4 million in 2000, 1999 and 1998,
respectively.
The Company paid income taxes of $12.5 million, $10.5 million and $8.4 million
in 2000, 1999 and 1998, respectively.
The components of the deferred income tax assets and liabilities at December 31
are as follows:
(In thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Discount on loss reserves $ 6,597 $ 6,253
Unearned premium reserves 1,265 4,867
Alternative minimum tax credit carryforward 49,414 39,911
Pension costs 6,065 4,406
Other assets 8,862 7,981
--------- ---------
Total deferred tax assets 72,203 63,418
Deferred tax liabilities:
Statutory contingency reserve 61,905 89,092
Deferred policy acquisition costs 22,154 23,549
Unrealized net gains on investments 36,976 11,001
Software development costs 12,071 7,570
Equity earnings of unconsolidated affiliates 6,640 3,493
Other liabilities 7,438 4,353
--------- ---------
Total deferred tax liabilities 147,184 139,058
--------- ---------
Net deferred tax liability $ 74,981 $ 75,640
========= =========
NOTE 8. BENEFIT PLANS
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 $170,000 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.
The following table presents certain information regarding the Company's Benefit
Plans as of December 31:
Pension Benefits Other Benefits
----------------------------------------- --------------------------------------
(In thousands, except percentages) 2000 1999 1998 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at January 1 $ 25,537 $ 18,376 $ 11,381 $ 3,952 $ 4,219 $ 3,112
Service cost 5,955 5,443 3,796 574 578 434
Interest cost 2,725 1,710 1,074 410 320 255
Actuarial loss (gain) 1,614 1,046 2,861 (92) (1,139) 435
Benefits paid (1,207) (1,038) (736) (30) (26) (17)
---------- ----------- --------- --------- --------- ---------
Benefit obligation at December 31 34,624 25,537 18,376 4,814 3,952 4,219
---------- ----------- --------- --------- --------- ---------
Change in plan assets
Fair value of plan assets at January 1 13,894 8,877 5,204 - - -
Actual return on plan assets 1,296 2,397 366 - - -
Company contribution 3,155 3,658 4,043 30 26 17
Benefits paid (1,209) (1,038) (736) (30) (26) (17)
---------- ----------- --------- --------- --------- ---------
Fair value of plan assets at December 31 17,136 13,894 8,877 - - -
---------- ----------- --------- --------- --------- ---------
Funded status
Funded (underfunded) status of plan at
December 31 (17,488) (11,643) (9,499) (4,814) (3,952) (4,219)
Unrecognized actuarial loss (gain) 4,357 2,891 3,583 (1,532) (1,460) (320)
Unrecognized prior service cost - - - 225 245 265
---------- ----------- --------- --------- --------- ---------
Accrued and recognized benefit cost $ (13,131) $ (8,752) $ (5,916) $ (6,121) $ (5,167) $ (4,274)
========== =========== ========= ========= ========= =========
Components of net periodic benefit cost
Service cost $ 5,954 $ 5,443 $ 3,796 $ 574 $ 578 $ 434
Interest cost 2,725 1,710 1,074 411 320 255
Expected return on assets (1,362) (893) (515) - - -
Prior service cost amortization - - - 20 20 20
Actuarial loss (gain) recognized 216 234 (68) (20) - (26)
---------- ----------- --------- --------- --------- ---------
Net periodic benefit cost $ 7,533 $ 6,494 $ 4,287 $ 985 $ 918 $ 683
========== =========== ========= ========= ========= =========
Weighted-average assumptions
Discount rate 7.75% 8.00% 6.75% 7.75% 8.00% 6.75%
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.
A one-percentage-point change in assumed health care cost trend rates would have
the following effects:
One-Percentage- One-Percentage-
(In thousands) Point Increase Point Decrease
- -------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 221 $ 171
Effect on accumulated postretirement benefit obligation 958 752
Savings and Profit Sharing Plans. Certain employees of the Company are 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 $2.4 million, $2.2
million, and $1.7 million for 2000, 1999 and 1998, respectively.
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.
2000 1999
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
(In thousands) Value Fair Value Value Fair Value
- ----------------------------------------------------------------------------------------------------------------------
6.75% Long-term debt $ 99,609 $ 99,859 $ 99,542 $ 92,252
8.309% Redeemable preferred capital securities $ 99,109 $ 94,992 $ 99,075 $ 90,041
7.00% Bank Note $ 37,210 $ 39,000 $ 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.
NOTE 10. 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 2000, 1999 and 1998.
Bank Note - 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 $37.2 million (A$70.5 million "Loan") at a 6-month adjustable
interest 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. Interest payments on the note of $3.0 million were
made during 2000 and no interest payments were made during 1999. Future
principal payments of the bank note are as follows:
(In thousands) Principal Payments
- --------------------------------------------------------------------------------
Year ending December 31:
2001 $ 3,721
2002 3,721
2003 3,721
2004 3,721
2005 3,721
2006 18,605
------------------
Total $ 37,210
==================
Lines of Credit - The Company has a line of credit agreement ("Line") with Bank
of America in the amount of $25.0 million and commitment fee of 8.0/6.5 basis
points. The line has final maturity of December 2001and may be used for general
corporate purposes. A Chase Manhattan Credit Agreement expired in February 2001.
There were no amounts outstanding on both Lines at December 31, 2000 and 1999.
NOTE 11. COMMITMENTS AND CONTINGENCIES
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, 2000 are as follows:
(In thousands) Lease Commitments
- --------------------------------------------------------------------------------
Year ending December 31:
2001 $ 9,938
2002 8,345
2003 6,169
2004 4,846
2005 574
Thereafter 1,169
------------------
Total $ 31,041
==================
The Company renewed its corporate headquarters lease for 5 years in 1999. On
December 29, 2000, the Company executed a purchase agreement for a seven story
commercial building to serve as the new World Headquarters. The total purchase
price was $74.0 million in cash, with an initial deposit of $4.5 million paid on
December 29, 2000 and the final progress payment due at closing, which is
expected to be in December 2001. The Company intends to sublease its current
corporate facilities after vacancy in the first quarter of 2002. The impact of
such a subleasing arrangement is not included in the above amounts.
Total rent expense for all leases was $11.3 million, $9.6 million and $9.0
million in 2000, 1999 and 1998, respectively.
Legal Proceedings - On December 15, 2000, the Company announced that PMI entered
into an agreement with the plaintiffs to settle the putative class action
litigation captioned Baynham et al. v. PMI Mortgage Insurance Company. PMI
denied all facts and allegations in the lawsuit that alleged violations of
Section 8 of the Real Estate Settlement Procedures Act (RESPA).
To account for the settlement, PMI took an after-tax charge against fourth
quarter 2000 earnings of $0.08 per share, which is the estimated cost of
settlement less anticipated insurance recovery. The charge is
based, in part, upon an estimate of insurance payments the Company will receive
from its insurance carriers as reimbursement for certain costs and expenses
incurred by, and to be incurred by, the Company in connection with its defense
and settlement of the action. The Company is currently negotiating with its
insurance carriers with respect to the amount of any such payments. There can be
no assurance that the Company's estimate of the amount of insurance payments
will be achieved and such an event could have an adverse effect on the Company's
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 12. 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 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
2000 and 1999, respectively.
NOTE 13. DIVIDENDS AND SHAREHOLDERS' EQUITY
Dividends - PMI's ability to pay dividends to TPG is limited by, among other
restrictions, state insurance laws including the laws of the state of Arizona.
Arizona law provides that PMI may pay out of any available surplus account
without prior approval of the Director of the Arizona Department of Insurance
dividends during any 12-month period not to exceed the lesser of 10% of
policyholders' surplus as of the preceding year end, or the last calendar year's
investment income. Other state insurance laws restrict the payment of dividends
from the unassigned surplus account only. 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 the ability (directly
or indirectly) 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. During
2000, PMI paid $50 million to TPG representing a return of capital, which was
approved by the Arizona Department of Insurance.
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 16), 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 1999, 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") 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 3,750 shares annually, after
an initial option of up to 6,000 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.
The following is a summary of the stock option activity in the Equity Incentive
Plan and the Directors Plan during 2000, 1999 and 1998:
2000 1999 1998
------------------------------ ----------------------------- -----------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Option Exercise Price Under Option Exercise Price Under Option Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 1,820,495 $ 30.74 1,375,051 $ 35.83 924,582 $ 28.20
Granted 644,667 39.06 588,756 29.54 549,975 47.36
Exercised (245,987) 59.22 (106,120) 25.07 (77,892) 23.78
Forfeited (93,373) 35.36 (37,192) 42.93 (21,614) 42.81
--------- --------- ---------
Outstanding at end of year 2,125,802 36.05 1,820,495 34.26 1,375,051 35.83
========= ========= =========
Exercisable at year end 879,514 $ 32.96 746,398 $ 30.74 604,467 $ 26.05
Weighted-average fair
market value of options
granted during the year $ 39.12 $ 29.54 $ 47.36
Reserved for future grants 1,746,581 - 2,304,749 - 597,218 -
Note: The weighted average remaining contractual life of shares under option was
7.4 years (for an exercise price between $19.66 and $63.94) in 2000; 8.0 years
($19.66 and $50.83) in 1999; and 8.0 years ($32.14 and $76.25) in 1998.
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 for 2000, 1999, and 1998, respectively:
dividend yield of 0.30%, 0.35% and 0.26%; expected volatility range of 29.15% to
33.44%, 30.77% to 32.52%, and 21.92% to 23.15%; risk-free interest rates of
6.33% to 5.09%, 5.12% to 5.79%, and 5.45% to 5.58%; and an expected life of four
years following the vesting. Forfeitures are recognized as they occur.
If the computed fair values of the 2000, 1999 and 1998 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) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
Net income:
As reported $ 260,212 $ 204,466 $ 190,360
Pro-forma 255,811 201,503 187,776
Basic earnings per share:
As reported $ 5.88 $ 4.55 $ 4.04
Pro-forma 5.78 4.49 3.99
Diluted earnings per share:
As reported $ 5.78 $ 4.52 $ 4.02
Pro-forma 5.68 4.45 3.97
Equity Stock Purchase Plan - In February 1999, the Company's Board of Directors
adopted the 1999 PMI Group, Inc. Employee Stock Purchase Plan ("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 23,638 and 13,578 shares in 2000 and 1999,
respectively. 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 2000.
NOTE 14. 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.
Currently, "prescribed" statutory accounting practices are interspersed
throughout state insurance laws and regulations, the National Association of
Insurance Commissioners' (NAIC) Accounting Practices and Procedures Manual and a
variety of other NAIC publications. "Permitted" statutory accounting practices
encompass all accounting practices that are not prescribed; such practices may
differ from state to state, may differ from company to company within a state,
and may change in the future.
The NAIC revised the Accounting Practices and Procedures Manual in process
referred to as Codification. The revised manual was adopted by the respective
states and will be effective January 1, 2001. The revised manual has changed,
to some extent, prescribed statutory accounting practices and will result in
changes to
the accounting practices that the Company's insurance subsidiaries use to
prepare their statutory-basis financial statements. The cumulative effect of
changes in accounting principles adopted to conform to the revised Accounting
Practices and Procedures Manual will be reported as an adjustment to surplus as
of January1, 2001. Management believes the impact of these changes will not
result in a significant reduction in the Company's insurance subsidiaries'
statutory-basis capital and surplus.
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) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Statutory net income $ 276,946 $ 270,301 $ 214,040
----------------- ----------------- ----------------
Statutory surplus $ 159,528 $ 134,133 $ 165,459
----------------- ----------------- ----------------
Contingency reserve liability $ 1,457,991 $ 1,238,140 $ 1,028,440
----------------- ----------------- ----------------
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.
NOTE 15. BUSINESS SEGMENTS
The Company's reportable operating segments include Domestic Mortgage Insurance,
International Mortgage Insurance, and Title Insurance. Key products and
accounting policies for each of the 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 MSC,
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 as of and
for the periods indicated:
International
Mortgage Mortgage
2000 Guaranty Guaranty Title Consolidated
(in thousands) Insurance Insurance Insurance Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums earned $ 503,750 $ 26,628 $ 103,984 $ - $ 634,362
------------- ----------------- ------------- ----------- ----------------
Net underwriting income (expenses)
before tax-external customers $ 277,043 $ 13,724 $ 7,628 $ (25,641) $ 272,754
Investment income & net realized capital
gains 87,197 12,126 1,890 6,775 107,988
Equity in earnings of affiliates 8,601 (237) - 3,279 11,643
Interest expense (19) (2,705) - (7,486) (10,210)
Distributions on preferred capital
securities - - - (8,309) (8,309)
------------- ----------------- ------------- ----------- ----------------
Income (loss) before income tax expense 372,822 22,908 9,518 (31,382) 373,866
Income tax benefit (expense) (114,234) (6,501) (3,274) 10,355 (113,654)
------------- ----------------- ------------- ----------- ----------------
Net income (loss) $ 258,588 $ 16,407 $ 6,244 $ (21,027) $ 260,212
------------- ----------------- ------------- ----------- ----------------
Total assets $ 2,052,814 $ 174,006 $ 53,275 $ 112,562 $ 2,392,657
------------- ----------------- ------------- ----------- ----------------
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 & net realized capital
gains 79,020 4,611 1,633 3,326 88,590
Equity in earnings of affiliates 5,567 - - 1,494 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 287,092 10,214 12,530 (19,750) 290,086
Income tax benefit (expense) (88,628) (3,469) (4,422) 10,899 (85,620)
------------- ----------------- ------------- ----------- ----------------
Net income (loss) $ 198,464 $ 6,745 $ 8,108 $ (8,851) $ 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 & net realized capital
gains 97,989 1,427 6,676 106,092
Equity in earnings of affiliates 2,900 - 325 3,225
Interest expense (3) - (7,026) (7,029)
Distributions on preferred capital
securities - - (8,311) (8,311)
------------- ----------------- ------------- ----------------
Income (loss) before income tax expense 273,300 11,033 (17,385) 266,948
Income tax benefit (expense) (78,732) (4,182) 6,326 (76,588)
------------- ----------------- ------------- ----------------
Net income (loss) $ 194,568 $ 6,851 $ (11,059) $ 190,360
============= ================= ============= ================
Total assets $ 1,643,482 $ 42,165 $ 92,223 $ 1,777,870
============= ================= ============= ================
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 16. 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 ("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
CUNA Mutual Investment Corp. 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, 2000, CMG's risk-to capital ratio was 15.4 to 1.
On June 6, 1999, a Capital Support Agreement was entered into between PMI and
PMI Ltd, whereby 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 A$50.0 million.
As of December 31, 2000, the Company was in compliance with all covenants
included in its capital support agreements.
NOTE 17. QUARTERLY RESULTS (UNAUDITED)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------------------- ------------------------- ------------------------- ------------------------
2000 1999 2000 1999 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Revenues $ 179,418 $ 155,251 $ 187,893 $ 156,173 $ 195,046 $ 178,194 $ 200,211 $ 180,506
---------- --------- --------- --------- --------- --------- --------- ---------
Net income $ 59,990 $ 43,652 $ 64,979 $ 49,459 $ 69,256 $ 54,503 $ 65,983 $ 56,852
---------- --------- --------- --------- --------- --------- --------- ---------
Basic EPS $ 1.36 $ 0.97 $ 1.47 $ 1.10 $ 1.57 $ 1.22 $ 1.49 $ 1.27
---------- --------- --------- --------- --------- --------- --------- ---------
Diluted EPS $ 1.34 $ 0.96 $ 1.45 $ 1.09 $ 1.53 $ 1.21 $ 1.46 $ 1.26
---------- --------- --------- --------- --------- --------- --------- ---------
Diluted operating EPS* $ 1.33 $ 0.96 $ 1.45 $ 1.09 $ 1.51 $ 1.20 $ 1.57 $ 1.26
---------- --------- --------- --------- --------- --------- --------- ---------
* Diluted operating earnings per share represents diluted earnings per share
excluding realized capital gains and their related income tax effect, and the
litigation settlement charges of $0.08 per share after tax in the fourth quarter
of 2000.
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 periods have been adjusted to reflect the
company's 3 for 2 stock split.
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
The PMI Group, Inc.
We have audited the accompanying consolidated balance sheet of The PMI Group,
Inc. and subsidiaries (the Company) as of December 31, 2000 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of the Company
as of December 31, 1999 and for the two years then ended were audited by other
auditors whose report dated January 20, 2000, expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 2000 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The PMI Group,
Inc. and subsidiaries at December 31, 2000, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Los Angeles, California
January 19, 2001
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of The PMI Group, Inc.:
We have audited the accompanying consolidated balance sheet of The PMI Group,
Inc. and subsidiaries as of December 31, 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 1999 and 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the PMI Group, Inc. and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the years ended December 31, 1999 and 1998, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
San Francisco, California
January 20, 2000