UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from................to................
Commission file number 1-13664
THE PMI GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3199675
(State of Incorporation) (I.R.S. Employer identification No.)
601 Montgomery Street,
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
(415) 788-7878
(Registrant's Telephone Number including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Stock Par Value Date Number of Shares
- -------------- --------- ---- ----------------
Common Stock $0.01 7/31/96 35,016,566
THE PMI GROUP, INC.
Index to Quarterly Report on Form 10-Q
June 30, 1996
Part I - Financial Information Page
----
Item 1. Interim Consolidated Financial Statements and Notes.
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 1996 and 1995 (Unaudited). 3
Consolidated Balance Sheets as of June 30, 1996 (Unaudited) and December
31, 1995. 4
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1996 and 1995 (Unaudited). 5
Notes to Consolidated Financial Statements (Unaudited). 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations. 7-13
Part II - Other Information
Item 1. Legal Proceedings. 14
Item 4. Submission of Matters to a Vote of Security Holders. 14
Item 5. Other Information. 15
Item 6. Exhibits and Reports on Form 8-K. 15
Signatures 16
Index to Exhibits 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
(In thousands except for per share amounts) 1996 1995 1996 1995
---- ---- ---- ----
Unaudited)
Revenues
Premiums earned $ 95,261 $ 79,115 $ 188,284 $ 157,436
Investment income, less investment expense 17,727 15,387 33,488 30,790
Realized capital gains, net 3,761 4,745 9,984 7,108
Other income 2,307 451 3,206 952
-------- --------- ---------- ----------
Total revenues 119,056 99,698 234,962 196,286
-------- --------- ---------- ----------
Losses and expenses
Losses and loss adjustment expenses 29,678 24,826 63,503 54,876
Underwriting and other expenses 31,350 25,993 61,889 53,096
-------- --------- ---------- ----------
Total losses and expenses 61,028 50,819 125,392 107,972
-------- --------- ---------- ----------
Income before income taxes 58,028 48,879 109,570 88,314
Income tax expense 16,808 12,458 31,360 22,038
-------- --------- ---------- ----------
Net income $ 41,220 $ 36,421 $ 78,210 $ 66,276
======== ========= ========== ==========
Weighted average shares outstanding 35,090 35,076 35,105 35,038
======== ========= ========== ==========
Net income per share $ 1.17 $ 1.04 $ 2.23 $ 1.89
======== ========= ========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
3
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(Dollars in thousands) 1996 1995
---- ----
(Unaudited)
Assets
Investments:
Available for sale, at market:
Fixed income securities
(amortized cost $974,779 and $867,705) $ 1,000,820 $ 928,773
Equity securities:
Common stock (cost $77,115 and $85,088) 104,943 110,843
Preferred stock (cost $916 and $438) 964 505
Common stock of affiliate, at underlying book value 11,001 10,541
Short-term investments (at cost, which approximates market) 13,896 82,310
----------- -----------
Total investments 1,131,624 1,132,972
Cash and equivalents 3,853 3,654
Accrued investment income 18,114 18,367
Reinsurance recoverable and prepaid premiums 82,528 78,007
Receivable from affiliates 9,933 7,579
Receivable from Allstate 16,517 14,733
Deferred policy acquisition costs 22,939 22,986
Property acquired as a result of claim settlements 769 2,101
Property and equipment, net 20,291 17,574
Other assets 24,974 6,467
------------ -----------
Total assets $ 1,331,542 $ 1,304,440
============ ===========
Liabilities
Reserve for losses and loss adjustment expenses $ 195,091 $ 192,087
Unearned premiums 117,287 140,322
Reinsurance balances payable 20,898 18,741
Deferred income taxes 43,448 52,130
Other liabilities and accrued expenses 31,280 30,657
------------ -----------
Total liabilities 408,004 433,937
------------ -----------
Commitments and contingent liabilities (Note 2) - -
Shareholders' equity
Preferred stock -- $.01 par value; 5,000,000 shares authorized - -
Common stock -- $.01 par value; 125,000,000 shares
authorized, 35,018,096 and 35,011,494 issued 350 350
Additional paid-in capital 256,754 256,507
Unrealized net gains on investments 35,040 56,761
Retained earnings 631,680 556,969
Treasury stock (6,800 and 2,000 shares at cost) (286) (84)
------------ -----------
Total shareholders' equity 923,538 870,503
------------ -----------
Total liabilities and shareholders' equity $ 1,331,542 $ 1,304,440
============ ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
4
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
---------------------------
(In thousands) 1996 1995
---- ----
(Unaudited)
Cash flows from operating activities
Net income $ 78,210 $ 66,276
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized capital gains, net (9,984) (7,108)
Equity in loss of affiliate 432 226
Depreciation and amortization 920 2,541
Changes in:
Reserves for losses and loss adjustment expenses 3,004 4,313
Unearned premiums (23,035) (11,382)
Deferred policy acquisition costs 47 1,770
Accrued investment income 253 (554)
Reinsurance balances payable 2,157 2,883
Reinsurance recoverable and prepaid premiums (4,521) (6,054)
Income taxes 3,034 (17,485)
Property acquired as a result of claim settlements 1,332 327
Receivable from Allstate (1,784) 11,945
Receivable from affiliates (2,354) (1,570)
Other (17,860) (13,780)
--------- ---------
Net cash provided by operating activities 29,851 32,348
--------- ---------
Cash flows from investing activities
Proceeds from sales of equity securities 53,921 43,802
Investment collections of fixed income securities 40,628 28,361
Proceeds from sales of fixed income securities 113,642 -
Investment purchases:
Fixed income securities (256,599) (75,115)
Equity securties (39,698) (41,225)
Net decrease in short-term investments 68,414 9,393
Investment in affiliates (1,350) (947)
Purchase of property and equipment (5,403) (1,438)
---------- ----------
Net cash used in investing activities (26,445) (37,169)
---------- ----------
Cash flows from financing activities
Dividends paid to shareholders (3,500) -
Other financing activities 293 90
---------- ----------
Net cash provided by (used in) financing activities (3,207) 90
---------- ----------
Net increase (decrease) in cash and equivalents 199 (4,731)
Cash and equivalents at beginning of period 3,654 11,412
---------- ----------
Cash and equivalents at end of period $ 3,853 $ 6,681
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
5
THE PMI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
Note 1 - Basis of presentation
The accompanying unaudited consolidated financial statements include the
accounts of The PMI Group, Inc. ("TPG"), its wholly owned Arizona domiciled
subsidiaries, PMI Mortgage Insurance Co. ("PMI") and Residential Guaranty Co.
("RGC", formerly PMI Reinsurance Co.), and PMI's wholly owned subsidiaries,
American Pioneer Title Insurance Company ("APTIC"), PMI Mortgage Services Co.
("MSC") and PMI Securities Co., collectively referred to as the "Company". All
material intercompany transactions and balances have been eliminated in
consolidation. On July 1, 1996, PMI transferred its ownership in APTIC to TPG
through a dividend. This transaction will have no material impact on the
consolidated financial statements.
The Company's unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the requirements of Form 10-Q. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of the Company's consolidated
financial condition at June 30, 1996, and its consolidated statements of
operations and cash flows for the periods ended June 30, 1996 and 1995, have
been included. Interim results for the periods ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. The financial statements should be read in conjunction with
the audited consolidated financial statements and footnotes included in The PMI
Group, Inc. 1995 Annual Report to Shareholders.
Note 2 - Commitments and contingencies
Various 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 or resolution 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.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Consolidated Operations
Three months ended June 30, 1996 and 1995
Net income in the three months ended June 30, 1996 was $41.2 million, a 13.2%
increase over net income of $36.4 million in the three months ended June 30,
1995. The increase was primarily attributable to increases in premiums earned
and investment income (including capital gains) of 20.4% and 6.7%, respectively,
partially offset by increases in losses and loss adjustment expenses and
operating expenses of 19.5% and 20.6%, respectively. Earnings per share were
$1.17 in the three months ended June 30, 1996, compared with $1.04 in the same
period of 1995, a 12.5% increase. Excluding capital gains, earnings per share
were $1.10 in the second quarter of 1996, compared with $0.95 in the second
quarter of 1995, a 15.8% increase. Revenues in the second quarter of 1996 were
$119.1 million, a 19.5% increase over revenues of $99.7 million in the second
quarter of 1995.
New mortgage insurance written totaled $5.0 billion in the second quarter of
1996, compared with $3.2 billion in the second quarter of 1995, a 56.3%
increase. The increase in new insurance written reflected an increase in the
number of new mortgage insurance policies issued of 49.0%, to 40,600 policies in
the three months ended June 30, 1996, from 27,250 policies in the same period in
1995, and an increase in the average loan size to $123,400 from $118,500. Net
mortgage insurance written (after quota share reinsurance) increased by 77.8% to
$4.8 billion in the second quarter of 1996 from $2.7 billion in the second
quarter of 1995. A contributing factor in this increase was the reduction in
quota share reinsurance on new insurance writings from 15% in 1995 to 5% in
1996.
One of the factors contributing to the increase in new policies issued was the
growth in market share in the second quarter of 1996 compared with the second
quarter 1995. PMI's market share of new insurance written increased to 14.3% in
the second quarter of 1996 from 13.2% in the second quarter of 1995. (Including
business written by CMG Mortgage Insurance Company, market share reached 14.9%
in the second quarter of 1996.) This 14.3% second quarter 1996 share represents
a continuing trend in increased mortgage insurance market penetration as
compared with the first quarter of 1996 and the fourth and third quarters of
1995 of 13.4%, 13.1% and 12.3%, respectively. Management expects this increasing
trend to continue throughout the remainder of 1996. See Cautionary Statement on
page 13. A second factor contributing to the increase in new policies issued was
the growth in the total number of loan originations in the mortgage insurance
industry compared with last year, which was fueled in part by increased
refinancing activity. Refinancing as a percentage of PMI's new insurance written
increased by 13 points, to 19.5% in the second quarter of 1996 from 6.5% in the
second quarter of 1995.
PMI's persistency rate (percentage of insurance remaining in force from one year
prior) decreased 6.1 points as of June 30, 1996 from the June 30, 1995 rate, to
82.3% from 88.4%. This decrease is primarily attributable to the increase in
policy cancellations from mortgage refinancing activity. The decreased
persistency contributed to a slower growth of insurance in force, to a total of
$73.7 billion at June 30,
7
1996, from $69.0 billion at June 30, 1995. The growth rate of insurance in force
from one year prior decreased to 6.9% at June 30, 1996 from 13.5% at June 30,
1995.
Mortgage insurance net premiums written were $77.7 million in the second quarter
of 1996, compared with $68.2 million in the second quarter of 1995, an increase
of 13.9%. The increase is attributable to the increase in new insurance written
over the 1995 level, higher average premiums resulting from the increasing shift
to deep coverage loans, higher average loan sizes and the growth of insurance in
force. New premiums written decreased by 29.6% to $5.0 million in the second
quarter of 1996 from $7.1 million in the second quarter of 1995, while renewal
premiums increased by 18.1% to $83.4 million in the second quarter of 1996 from
$70.6 million in the second quarter of 1995. The decrease in new premiums
written during 1996 resulted primarily from the continuing shift to the monthly
premium product, which represented 95.0% of new insurance written for the second
quarter of 1996 compared with 83.6% for the same period of 1995.
The increase in higher average premiums was caused by an increasing shift to 95s
(mortgages with loan-to-value ratios greater than 90% and equal to or less than
95%) with deeper coverage, partially offset by a decline in the use of
adjustable rate mortgages (ARMs). 95s with 30% coverage increased to 40.2% of
new insurance written in the second quarter of 1996 compared with 37.4% in the
second quarter of 1995. Similarly, 90s (mortgages with loan-to-value ratios
greater than 85% and equal to or less than 90%) with 25% coverage increased to
39.9% in the second quarter of 1996 compared with 31.7% in the second quarter of
1995. ARMs decreased to 11.6% of new insurance written in the second quarter of
1996 compared with 24.8% in the second quarter of 1995. Management expects the
increased deeper coverage product mix to continue throughout 1996 and,
therefore, have a greater impact on net premiums written in 1996 than during
1995. See Cautionary Statement on page 13.
Refunded premiums increased in the second quarter of 1996 to $4.7 million from
$2.7 million in the second quarter of 1995 due primarily to the increase in
policy cancellations related to the increase in mortgage refinancing volume
during the second quarter of 1996. Ceded premiums written as a percentage of net
new, renewal and refunded premiums decreased to 9.4% in the second quarter of
1996 compared with 9.8% in the second quarter 1995, primarily due to the high
level of new insurance written in 1996 falling under a 5% quota share treaty,
rather than 15% in 1995.
Mortgage insurance premiums earned increased 19.1% to $83.1 million in the
second quarter of 1996, from $69.8 million in the second quarter of 1995. This
increase is due primarily to the growth in insurance in force in 1996 over 1995,
the impact of higher premium rates resulting from the shift to deeper coverage
products and the reduction in 1996 quota share cessions.
The Company's net investment income in the second quarter of 1996 was $17.7
million compared with $15.4 million in the second quarter of 1995, an increase
of 14.9%. The increase was primarily attributable to the growth in the average
amount of invested assets, which resulted from positive cash flows generated by
operating activities, partially offset by a decrease in the average investment
yield to 6.1% during the second quarter of 1996 compared to 6.4% in the second
quarter of 1995. Also, investment income for the second quarter of 1996 includes
approximately $1.4 million in call premiums on pre-refunded tax-exempt
securities. Such call premiums had previously been deferred and recognized as
capital gains upon the ultimate payoff of the bonds. Realized capital gains (net
of losses) reported a decrease from the second quarter of 1995, down 19.1% to
$3.8 million in the second quarter of 1996 from $4.7 million in the second
quarter of 1995.
Mortgage insurance losses and loss adjustment expenses increased to $29.3
million in the second quarter of 1996 from $24.4 million in the second quarter
of 1995, an increase of 20.1%. This increase was primarily the result of the
growth in insurance in force in recent years and increased claim amounts
associated with the higher loan sizes, and an increase in default rates in
certain areas of the country, particularly California. However, as discussed
later, the default rates are beginning to show signs of improvement.
8
The majority of claims under PMI policies have historically occurred during the
third through the sixth years after issuance of the policies. Insurance written
by PMI since January 1, 1993, represented 73.8% of PMI's insurance in force at
June 30, 1996, with the 1993 book of business alone representing 25.9%. This
substantial volume of PMI's business is beginning to reach its expected peak
claim period. Consistent with increasing mortgage principal amounts, claim
amounts have risen in recent years. However, PMI's default rate has increased
only one basis point over the June 30, 1995 rate of 1.95% to 1.96% at June 30,
1996. Management believes PMI's default rate could rise slightly during the
remainder of 1996 due to the continued maturation of its insurance in force. See
Cautionary Statement on page 13.
Default rates on PMI's California policies increased to 3.91% at June 30, 1996,
from 3.79% at June 30, 1995. Policies written in southern California in the
years 1989 through 1993, which are in the historically highest claim period, are
also generally believed to have been written at the high point of southern
California real estate prices. The California economy continues to recover
slower than anticipated when those policies were issued, and, as a result,
California claim rates for each of the policy years since 1989 may continue to
experience an average claim rate higher than the national average claim rate.
However, the default rate for California at June 30, 1996 improved over the
March 31, 1996 rate of 4.15%, and management believes that such rates are likely
to continue to trend down closer to the national average claim rate over time.
See Cautionary Statement on page 13.
Mortgage insurance underwriting and other expenses increased 1.9% to $16.1
million in the three months ended June 30, 1996, from $15.8 million in the three
months ended June 30, 1995. This marginal increase, in contrast to the large
growth rate in new insurance written, is primarily the result of management's
focus on controlling expenses.
The mortgage insurance loss ratio increased to 35.3% in the three months ended
June 30, 1996, compared with 34.9% in the same period of 1995, while the expense
ratio reported an improvement over 1995, dropping to 20.7% in the second quarter
of 1996 from 23.1% in the second quarter of 1995. This resulted in a net
decrease of 2.0 points in the combined ratio, decreasing to 56.0% in the second
quarter of 1996 compared to 58.0% in the second quarter of 1995.
Title insurance premiums earned increased 31.2% to $12.2 million in the second
quarter of 1996, compared with $9.3 million in the second quarter of 1995. This
improvement was due to expansion efforts of the title business, as well as the
overall improvement in the volume of residential mortgage originations.
Underwriting and other expenses increased 29.8% to $10.9 million in the second
quarter of 1996, compared to $8.4 million in the second quarter of 1995. This
increase is directly attributable to the increase in premiums earned. The title
insurance combined ratio decreased to 92.2% in 1996 from 95.1% in 1995. The
title insurance industry expense ratios are much higher than those experienced
in the mortgage insurance industry primarily because the commission rates paid
to title agencies and attorneys are substantially higher than those paid to
mortgage insurance sales agents, and because of the lack of renewal business to
help absorb underwriting costs.
Other income, primarily revenues generated by MSC, increased to $2.3 million in
the second quarter of 1996 from $0.5 million in the second quarter of 1995. This
growth is primarily due to increased mortgage services operations resulting from
higher refinancing activity and the expansion of its contract underwriting
services.
The Company's effective tax rate increased to 29.0% in the second quarter of
1996, compared to 25.5% in the second quarter of 1995. The benefits of
tax-preference investment income and other permanent differences reduced the
effective rates below the statutory rate of 35% during both periods. The
increase
9
in the effective rate in 1996 over 1995 was due to a greater portion of
operating income generated from insurance operations rather than tax-free bond
income, the state tax effect of PMI's $25.0 million dividend to TPG and a shift
in the mix of the investment portfolio to a greater portion of taxable fixed
income bonds.
Six months ended June 30, 1996 and 1995
Net income in the six months ended June 30, 1996 was $78.2 million, a 17.9%
increase over net income of $66.3 million in the six months ended June 30, 1995.
The increase was primarily attributable to increases in premiums earned and
investment income (including capital gains) of 19.6% and 14.7%, respectively,
partially offset by increases in losses and loss adjustment expenses and
operating expenses of 15.7% and 16.6%, respectively. Earnings per share were
$2.23 in the six months ended June 30, 1996, compared with $1.89 in the same
period of 1995, an 18.0% increase. Excluding capital gains, earnings per share
were $2.04 in the six months ended June 30, 1996, compared with $1.76 in the
same period of 1995, a 15.9% increase. Revenues in the six months ended June 30,
1996 were $235.0 million, a 19.7% increase over revenues of $196.3 million in
the same period of 1995.
New mortgage insurance written totaled $8.9 billion in the six month ended June
30, 1996, compared with $6.3 billion in the same period of 1995, a 41.3%
increase. The increase in new insurance written resulted from the number of new
mortgage insurance policies issued increasing by 33.5%, to 71,250 policies in
the six months ended June 30, 1996, from 53,350 policies in the same period in
1995, and an increase in the average loan size to $124,700 from $118,800. Net
mortgage insurance written (after quota share reinsurance) increased by 57.4% to
$8.5 billion in the six months ended June 30, 1996 from $5.4 billion in the six
months ended June 30, 1995. A contributing factor in this increase was the
reduction in certain quota share reinsurance on new insurance writings from 15%
in 1995 to 5% in 1996.
One of the factors contributing to the increase in new policies issued was the
growth in the total number of loan originations in the mortgage insurance
industry compared with last year, which was primarily the result of the
increased refinancing activity. Refinancing as a percentage of PMI's new
insurance written increased by 16.0 points, to 23.2% in the six months ended
June 30, 1996 from 7.2% in the same period of 1995. However, PMI experienced a
slight drop in market share from one year prior. PMI's market share of new
insurance written decreased slightly to 13.9% in the six months ended June 30,
1996 from 14.0% in the same period of 1995.
Mortgage insurance net premiums written were $144.6 million in the six months
ended June 30, 1996, compared with $129.9 million in the same period of 1995, an
increase of 11.3%. The increase is attributable to the increase in new insurance
written over the 1995 level, higher average premiums resulting from the
increasing shift to deep coverage loans, higher average loan sizes and the
growth of insurance in force. A partial offset to the increase in net premiums
written was the cancellation of a small reinsurance assumption agreement in the
first quarter of 1996. New premiums written decreased by 35.9% to $9.3 million
in the six months ended June 30, 1996 from $14.5 million in the same period of
1995, while renewal premiums increased by 20.3% to $157.9 million in the six
months ended June 30, 1996 from $131.3 million in the same period of 1995. The
decrease in new premiums written during 1996 resulted primarily from the
continuing shift to the monthly premium product, which represented 94.2% of new
insurance written in the six months ended June 30, 1996 compared with 79.5% in
the same period last year.
The increase in higher average premiums was caused by an increasing shift to
policies with deeper coverage, partially offset by a decline in the use of ARMs.
95s with 30% coverage increased to 38.8% of
10
new insurance written in the six months ended June 30, 1996 compared with 27.1%
in the same period of 1995. Similarly, 90s with 25% coverage increased to 41.1%
in the six months ended June 30, 1996 compared with 25.2% in the same period of
1995. ARMs decreased to 9.9% of new insurance written in the six months ended
June 30, 1996 compared with 32.3% in the same period of 1995.
Refunded premiums increased in the six months ended June 30, 1996 to $8.8
million from $4.8 million in the six months ended June 30, 1995 due primarily to
the increase in policy cancellations related to the increase in mortgage
refinancing volume during the first half of 1996. Ceded premiums written as a
percentage of net new, renewal and refunded premiums increased to 9.4% in the
six months ended June 30, 1996 compared with 9.2% in the same period of 1995,
primarily due to an increased portion of the insurance in force of renewal years
falling under the higher percentage quota share treaties for years prior to
1996, and the cancellation of a small assumed quota share treaty in the first
quarter of 1996.
Mortgage insurance premiums earned increased 17.6% to $164.1 million in the six
months ended June 30, 1996 from $139.5 million in the six months ended June 30,
1995. This increase is due primarily to the growth in insurance in force in 1996
over 1995, the impact of higher premium rates resulting from the shift to deeper
coverage products and the reductions in quota share cessions during 1996.
The Company's net investment income in the six months ended June 30, 1996 was
$33.5 million compared with $30.8 million in the same period of 1995, an
increase of 8.8%. The increase was primarily attributable to the growth in the
average amount of invested assets, which resulted from positive cash flows
generated by operating activities, partially offset by a decrease in the average
investment yield to 6.1% in the six months ended June 30, 1996 from 6.5% in the
same period of 1995. Realized capital gains (net of losses) reported a
significant increase over 1995, up 40.8% to $10.0 million in the six months
ended June 30, 1996 from $7.1 million in the same period of 1995.
Mortgage insurance losses and loss adjustment expenses increased to $62.6
million in the six months ended June 30, 1996 from $54.0 million in the same
period of 1995, an increase of 15.9%. This increase was primarily the result of
the growth in insurance in force in recent years and increased claim amounts
associated with the higher loan sizes, and the increased default rates in
certain areas of the country, particularly California.
Mortgage insurance underwriting and other expenses decreased 0.3% to $33.2
million in the six months ended June 30, 1996, from $33.3 million in the six
months ended June 30, 1995. This decrease is primarily the result of
management's focus on controlling expenses.
The mortgage insurance loss ratio decreased to 38.1% in the six months ended
June 30, 1996, compared with 38.7% in the same period of 1995 due, in part, to
the strong growth of premiums earned. The expense ratio also reported an
improvement over 1995, dropping to 22.9% in the six months ended June 30, 1996
from 25.6% in the same period of 1995, resulting in a combined ratio of 61.0% in
1996, 3.3 points better than the 1995 ratio of 64.3%.
Title insurance premiums earned increased 33.9% to $24.1 million in the six
months ended June 30, 1996, compared with $18.0 million in the same period of
1995. This improvement was due to expansion efforts of the title business, as
well as the overall improvement in the volume of residential mortgage
originations. Underwriting and other expenses increased 31.3% to $21.8 million
in the six months ended June 30, 1996, compared to $16.6 million in the same
period of 1995. This increase is directly attributable to the increase in
premiums earned. The title insurance combined ratio decreased to 93.9% in 1996
from 97.0% in 1995.
11
Other income, primarily revenues generated by MSC, increased to $3.2 million in
the six months ended June 30, 1996 from $1.0 million in the same period of 1995.
This growth is primarily due to increased mortgage services operations resulting
from higher refinancing activity and expansion of its contract underwriting
services.
The Company's effective tax rate increased to 28.6% in the six months ended June
30, 1996, compared to 25.0% in the same period of 1995. The benefits of
tax-preference investment income and other permanent differences reduced the
effective rates below the statutory rate of 35% during both periods. The
increase in the effective rate in 1996 over 1995 was due to a greater portion of
operating income generated from insurance operations rather than tax-free bond
income, the state tax effect of PMI's $25.0 million dividend to TPG and a shift
in the mix of the investment portfolio to a greater portion of taxable fixed
income bonds.
Liquidity, Capital Resources and Financial Condition
Liquidity and capital resource considerations are different for TPG and PMI, its
principal insurance operating subsidiary, as discussed below.
TPG's principal sources of funds are dividends from PMI, cash and investment
income thereon and funds that may be raised from time to time in the capital
markets. TPG does not expect that RGC, TPG's reinsurance subsidiary, will be in
a position to pay dividends to TPG for at least the foreseeable future. Also, in
February 1996, TPG executed two line of credit agreements totaling $50.0
million, both of which were unused at June 30, 1996. As discussed in Footnote 1,
on July 1, 1996, PMI transferred its ownership in APTIC to TPG through a
dividend.
TPG's principal uses of funds are the payment of dividends to shareholders,
payment of operating expenses, repurchase of TPG's common stock (see Part II,
Item 5) and any additional investments in the Company's current or future
subsidiaries.
TPG has approximately $43.2 million of unrestricted funds available for the
payment of future dividends to shareholders, corporate expenses and other costs.
This amount has increased substantially from the December 31, 1995 amount due to
the receipt of a $25.0 million dividend from PMI, less a $7.0 million capital
contribution to RGC.
The principal sources of funds for PMI and RGC are premiums received on new,
renewal and assumed business, commissions on ceded business and reimbursement of
losses from reinsurers, and amounts earned from the investment of this cash
flow. The principal uses of funds by PMI and RGC are the payment of claims and
related expenses, reinsurance premiums, other operating expenses and, for PMI,
dividends to TPG.
In the mortgage guaranty insurance industry, liquidity refers to the ability of
an enterprise to generate adequate amounts of cash from its normal operations,
including premiums received and investment income, in order to meet its
financial commitments, which are principally obligations under the insurance
policies it has written. Liquidity requirements are influenced significantly by
the level and severity of claims. The Company's operations generally do not
require significant amounts of capital expenditures.
PMI generates substantial cash flows from operations as a result of premiums
being received in advance of the time when claim payments are required. Cash
flows generated from PMI's operating activities totaled $25.3 million and $33.0
million in the six months ended June 30, 1996 and 1995, respectively. Operating
cash flows decreased during 1996 due to the increased usage of the monthly
premium product.
12
These positive operating cash flows, along with that portion of the investment
portfolio that is held in cash and highly-liquid securities, have historically
met the liquidity requirements of PMI, as evidenced by the growth in its
investment portfolio. PMI's investment portfolio was $1,052.4 million at June
30, 1996, compared with $989.4 million at June 30, 1995. Significant increases
in claims, which could result from adverse economic conditions, could create
increased liquidity requirements for PMI. Should PMI experience any temporary
cash flow shortfall due to significantly higher than anticipated claims, or for
other reasons, management anticipates funding such shortfall through sales of
investments. In addition to claim requirements, management has committed
approximately $10 million over a three year period for systems development and
enhancement. This cash requirement will be provided by operating activities.
Consolidated reserve for losses and loss adjustment expenses increased from
$192.1 million at December 31, 1995, to $195.1 million at June 30, 1996, an
increase of $3.0 million, or 1.6%, primarily due to increasing defaults
resulting from the growth in mortgage insurance in force discussed above.
Consolidated unearned premiums decreased from $140.3 million at December 31,
1995, to $117.3 million at June 30, 1996, a decrease of $23.0 million, or 16.4%.
This decrease was primarily a result of the increase of mortgage insurance in
force written under the monthly premium plan, which does not generate
significant unearned premiums.
Consolidated shareholders' equity increased from $870.5 million at December 31,
1995, to $923.5 million at June 30, 1996, an increase of $53.0 million, or 6.1%.
This increase consisted of $78.2 million of net income, offset by a decrease of
$21.7 million in net unrealized gains on investments available for sale (net of
tax) and dividends declared of $3.5 million during the six months ended June 30,
1996.
PMI's risk-to-capital ratio at June 30, 1996, was 15.0:1, compared to 15.8:1 at
December 31, 1995.
Cautionary Statement
Cautionary Statement for purposes of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. The statements above that relate to
future plans, events or performance are forward-looking statements that involve
a number of risks or uncertainties. Set forth below are certain important
factors that could cause the Company's actual results to differ materially from
those expressed in any forward-looking statements made by the Company.
A number of factors affecting PMI and the mortgage insurance industry in general
could cause claims on policies issued by PMI to increase and, thus, could
materially adversely affect the Company's financial condition and results of
operations. The Company believes that the loss experience of PMI would be
materially and adversely affected by economic recessions, falling housing
values, rising unemployment rates, interest rate volatility or combinations of
such factors. Such economic events could also materially adversely impact the
demand for housing and, consequently, mortgage insurance.
In addition to nationwide economic conditions, PMI could be particularly
affected by economic downturns in specific regions where a large portion of its
business is concentrated, particularly California where PMI has 22.5% of its
risk in force concentrated and where the default rate on all PMI policies in
force is 3.91% compared to 1.96% nationwide, as of June 30, 1996.
Several other factors that may influence the amount of new insurance written
include mortgage insurance industry volumes of new business, the impact of
competitive underwriting criteria and products, and changes in the performance
of the financial markets and the demand for and acceptance of the Company's
products, and other risk factors listed from time to time in the Company's
Securities and Exchange Commission filings.
13
THE PMI GROUP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
June 30, 1996
(Unaudited)
Item 1 - Legal Proceedings
The information contained in Note 2 of The PMI Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, included herein in Part I, is hereby
incorporated by reference.
Item 4 - Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 17, 1996, the
following individuals were elected to the Board of Directors:
1. Election of Directors
Votes For Votes Withheld
--------- --------------
W. Roger Haughton 30,458,943 259,750
Wayne E. Hedien 30,458,943 259,750
Edward M. Liddy 30,467,643 251,050
Kenneth T. Rosen 30,475,193 243,500
Mary Lee Widener 30,458,743 259,950
Donald C. Clark 30,576,693 142,000
The following proposals were approved at the Company's Annual Meeting:
Affirmative Negative Votes
Votes Votes Withheld
----------- -------- --------
2. Appointment of Deloitte & Touche LLP
as independent auditors
30,691,103 12,640 14,790
3. Approval of the amendment and
restatement of the Equity Incentive Plan
29,606,098 1,074,455 37,980
4. Approval of the amendment and
restatement of The Stock Plan for Non-
Employee Directors
30,070,270 604,743 43,520
14
Item 5 - Other Information
Certain private mortgage insurers compete by offering lower premium rates than
other companies in general. PMI, on a case-by-case basis or for certain types of
business, offers various premium rates based on the risk characteristics, loss
performance or class of business of the loans to be insured, or the costs
associated with doing such business. During the second quarter of 1996, PMI
began offering a new product, which provides an additional layer of mortgage
insurance coverage for loans sold by particular lenders to Fannie Mae.
On July 26, 1996, TPG's Board of Directors authorized the repurchase of up to
$150 million of TPG's outstanding common stock. The Board of Directors
authorized management to repurchase shares from time to time in open-market
transactions. The timing and the amount of the repurchased shares will depend on
market conditions and corporate requirements. The repurchase program is
authorized to commence immediately and the repurchased shares will be held as
treasury stock and be available for general corporate purposes.
On July 25, 1996, TPG's Board of Directors increased the size of the board from
6 members to 7 members and elected Richard L. Thomas to the board. Mr. Thomas,
age 65, is the retired chairman of First Chicago NBD Corporation and its
principal subsidiary, The First National Bank of Chicago. He is a director of
Sara Lee Corporation and CNA Financial Corporation. Mr. Thomas is a member of
the Audit Committee.
On August 1, 1996, Richard D. Bryan, age 50, joined PMI as Senior Vice President
and Chief Information Officer, a newly created position. Mr. Bryan was most
recently Executive Vice President, Servicing at Freddie Mac. He first joined
Freddie Mac in 1984, serving as Senior Vice President, Information Services and
previously held the positions of Executive Vice President, Operations and Acting
National Sales Director.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Form 10-Q
(b) Reports on Form 8-K
No Reports on Form 8-K have been filed.
15
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on August 12, 1996.
The PMI Group, Inc.
/s/ John M. Lorenzen, Jr.
--------------------------
John M. Lorenzen, Jr.
Executive Vice President and
Chief Financial Officer
/s/ William A. Seymore
-----------------------
William A. Seymore
Vice President and Chief
Accounting Officer
16
INDEX TO EXHIBITS
(Item 6)
Exhibit Page Number
Number Description of Exhibit in Form 10-Q
------ ---------------------- ------------
11.1 Computation of Net Income 18
Per Share
17