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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 September 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 9/30/96 34,953,239
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THE PMI GROUP, INC.
Index to Quarterly Report on Form 10-Q
September 30, 1996
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Interim Consolidated Financial Statements and Notes.
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1996 and 1995 (Unaudited). 3
Consolidated Balance Sheets as of September 30, 1996
(Unaudited) and December 31, 1995. 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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. 7-14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 15
Item 5. Other Information. 15
Item 6. Exhibits and Reports on Form 8-K. 15
SIGNATURES 16
INDEX TO EXHIBITS 17
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PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ------------------------
(In thousands except for per share amounts) 1996 1995 1996 1995
---- ---- ---- ----
(Unaudited)
REVENUES
Premiums earned $104,953 $ 83,849 $293,237 $241,285
Investment income, less investment expense 16,449 15,652 49,937 46,442
Realized capital gains, net 4,190 3,056 14,174 10,164
Other income 1,858 792 5,064 1,744
-------- -------- -------- --------
TOTAL REVENUES 127,450 103,349 362,412 299,635
-------- -------- -------- --------
LOSSES AND EXPENSES
Losses and loss adjustment expenses 36,770 28,216 100,273 83,092
Underwriting and other expenses 32,208 28,597 94,097 81,693
-------- -------- -------- --------
TOTAL LOSSES AND EXPENSES 68,978 56,813 194,370 164,785
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 58,472 46,536 168,042 134,850
INCOME TAX EXPENSE 17,192 11,421 48,552 33,459
-------- -------- -------- --------
NET INCOME $ 41,280 $ 35,115 $119,490 $101,391
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 35,100 35,093 35,101 35,075
======== ======== ======== ========
NET INCOME PER SHARE $ 1.18 $ 1.00 $ 3.40 $ 2.89
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
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THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
(Dollars in thousands) 1996 1995
---- ----
(Unaudited)
ASSETS
Investments:
Available for sale, at market:
Fixed income securities
(amortized cost $990,164 and $867,705) $ 1,023,977 $ 928,773
Equity securities:
Common stock (cost $80,590 and $85,088) 109,526 110,843
Preferred stock (cost $916 and $438) 1,058 505
Common stock of affiliate, at underlying book value 11,155 10,541
Short-term investments (at cost, which approximates market) 22,621 82,310
----------- -----------
TOTAL INVESTMENTS 1,168,337 1,132,972
Cash and equivalents 3,596 3,654
Accrued investment income 16,343 18,367
Reinsurance recoverable and prepaid premiums 94,094 78,007
Receivable from affiliates 20,017 7,579
Receivable from Allstate 16,584 14,733
Deferred policy acquisition costs 26,452 22,986
Property acquired as a result of claim settlements 696 2,101
Property and equipment, net 21,301 17,574
Other assets 21,726 6,467
----------- -----------
TOTAL ASSETS $ 1,389,146 $ 1,304,440
=========== ===========
LIABILITIES
Reserve for losses and loss adjustment expenses $ 199,497 $ 192,087
Unearned premiums 117,675 140,322
Reinsurance balances payable 22,726 18,741
Deferred income taxes 58,367 52,130
Other liabilities and accrued expenses 25,170 30,657
----------- -----------
TOTAL LIABILITIES 423,435 433,937
----------- -----------
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, 35,035,039 and 35,011,494 issued 350 350
Additional paid-in capital 257,329 256,507
Unrealized net gains on investments 41,075 56,761
Retained earnings 671,209 556,969
Treasury stock (81,800 and 2,000 shares at cost) (4,252) (84)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 965,711 870,503
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,389,146 $ 1,304,440
=========== ===========
See accompanying notes to consolidated financial statements.
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THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
(In thousands) 1996 1995
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 119,490 $ 101,391
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized capital gains, net (14,174) (10,164)
Equity in loss of affiliate 308 254
Depreciation and amortization 2,312 4,924
Changes in:
Reserves for losses and loss adjustment expenses 7,410 11,116
Unearned premiums (22,647) (13,583)
Deferred policy acquisition costs (3,466) 2,282
Accrued investment income 2,024 1,601
Reinsurance balances payable 3,985 6,272
Reinsurance recoverable and prepaid premiums (16,087) (12,350)
Income taxes 443 1,246
Property acquired as a result of claim settlements 1,405 (246)
Receivable from/payable to Allstate (1,851) (32,169)
Receivable from affiliates (12,438) 12,841
Other (6,048) 4,045
--------- ---------
Net cash provided by operating activities 60,666 77,460
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of equity securities 79,682 49,661
Investment collections of fixed income securities 31,503 49,854
Proceeds from sales of fixed income securities 143,598 -
Investment purchases:
Fixed income securities (292,617) (141,412)
Equity securities (64,713) (50,356)
Net decrease in short-term investments 59,688 15,002
Investment in affiliate (1,350) (1,847)
Purchase of property and equipment (7,920) (3,010)
--------- ---------
Net cash used in investing activities (52,129) (82,108)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders (5,250) (1,750)
Other financing activities (3,345) 90
--------- ---------
Net cash used in financing activities (8,595) (1,660)
--------- ---------
NET DECREASE IN CASH AND EQUIVALENTS (58) (6,308)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 3,654 11,412
--------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $ 3,596 $ 5,104
========= =========
See accompanying notes to consolidated financial statements.
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THE PMI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 subsidiaries, PMI
Mortgage Insurance Co. ("PMI"), Residential Guaranty Co. ("RGC", formerly PMI
Reinsurance Co.), American Pioneer Title Insurance Company ("APTIC") and PMI
Mortgage Guaranty Co. ("PMG"), and PMI's wholly owned subsidiaries 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 September 26, 1996, TPG's Board of Directors
resolved that the common stock of PMG be issued and purchased by TPG
for $3.0 million, and the transaction was completed on September 30, 1996.
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 September 30, 1996, and its consolidated statements of
operations and cash flows for the periods ended September 30, 1996 and 1995,
have been included. Interim results for the periods ended September 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.
NOTE 3 - REINSURANCE AGREEMENTS
On October 1, 1996, PMI notified Centre Reinsurance Company of New York and
Centre Reinsurance International Company (collectively, "Centre Re") that PMI
was terminating and commuting its reinsurance agreement with Centre Re effective
December 31, 1996. Had this agreement not been in effect as of September 30,
1996, PMI's risk to capital ratio at such date would have been 16.3 to 1,
compared to 15.0 to 1.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONSOLIDATED OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net income in the three months ended September 30, 1996 was $41.3 million, a
17.7% increase over net income of $35.1 million in the three months ended
September 30, 1995. The increase was primarily attributable to increases in
premiums earned and investment income (including capital gains) of 25.2% and
10.3%, respectively, partially offset by increases in losses and loss adjustment
expenses and operating expenses of 30.3% and 12.6%, respectively. Earnings per
share were $1.18 in the three months ended September 30, 1996, compared with
$1.00 in the corresponding period of 1995, an 18.0% increase. Excluding capital
gains, earnings per share were $1.10 in the third quarter of 1996, compared with
$0.94 in the third quarter of 1995, a 17.0% increase. Revenues in the third
quarter of 1996 were $127.5 million, a 23.4% increase over revenues of $103.3
million in the third quarter of 1995.
New mortgage insurance written totaled $5.0 billion in the third quarter of
1996, compared with $4.0 billion in the third quarter of 1995, a 25.0% increase.
The increase in new insurance written reflected a 20.8% increase in the number
of new mortgage insurance policies issued to 40,100 policies in the three months
ended September 30, 1996, from 33,200 policies in the corresponding period in
1995, and an increase in the average loan size to $125,550 from $121,900. Net
mortgage insurance written (after quota share reinsurance) increased by 41.2% to
$4.8 billion in the third quarter of 1996 from $3.4 billion in the third quarter
of 1995. A contributing factor in this increase was the reduction in certain
quota share reinsurance on new insurance writings. Effective for new policies
written in 1996, PMI reduced its percentage of quota share cessions from
approximately 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 third quarter of 1996 compared with the third
quarter of 1995. PMI's market share of new insurance written increased to 14.7%
in the third quarter of 1996 from 12.3% in the third quarter of 1995. (Including
business written by CMG Mortgage Insurance Company, market share reached 15.5%
in the third quarter of 1996.) This 14.7% third quarter 1996 share represents an
increase in mortgage insurance market penetration as compared with the second
and first quarters of 1996 and the fourth and third quarters of 1995 of 14.3%,
13.4%, 13.1% and 12.3%, respectively. 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 the prior year,
which was aided by increased refinancing activity in the first half of 1996.
However, the refinance market has retreated from the levels experienced in the
first two quarters and, accordingly, refinancing as a percentage of PMI's new
insurance written decreased by 2.8 percentage points, to 10.4% in the third
quarter of 1996 from 13.2% in the third quarter of 1995.
PMI's persistency rate (percentage of insurance remaining in force from one year
prior) decreased 4.4 percentage points as of September 30, 1996 from the
September 30, 1995 rate, to 82.8% from 87.2%. The persistency rate leveled off
in the second quarter of 1996 and increased slightly in the third quarter,
consistent with the drop in refinancing activity. The decreased persistency
contributed to slower growth of insurance in force, to a total of $76.0 billion
at September
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30, 1996, from $70.1 billion at September 30, 1995. The growth rate of insurance
in force from one year prior decreased to 8.4% at September 30, 1996 from 10.1%
at September 30, 1995.
Mortgage insurance net premiums written were $92.1 million in the third quarter
of 1996, compared with $69.7 million in the third quarter of 1995, an increase
of 32.1%. The increase is attributable to the increase in new insurance written
over the 1995 level, higher average premiums, higher average loan sizes and the
growth of insurance in force. New premiums written increased by 1.8% to $5.8
million in the third quarter of 1996 from $5.7 million in the third quarter of
1995, while renewal premiums increased by 25.0% to $93.4 million in the third
quarter of 1996 from $74.7 million in the third quarter of 1995. The substantial
shift of premiums written from new to renewal which PMI experienced as a result
of the introduction of the monthly premium product is now stabilizing. The
monthly premium plan as a percent of NIW has begun to level out, and represents
95.8% of new insurance written for the third quarter of 1996 compared with
88.3% for the corresponding period of 1995.
The increase in average premiums was caused by a continuing shift to 95s
(mortgages with loan-to-value ratios greater than 90% and equal to or less than
95%) with deeper coverage, coupled with a slight increase in the use of
adjustable rate mortgages (ARMs). 95s with 30% coverage increased to 43.6% of
new insurance written in the third quarter of 1996 compared with 40.6% in the
third 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
41.0% in the third quarter of 1996 compared with 37.7% in the third quarter of
1995. ARMs increased to 17.4% of new insurance written in the third quarter of
1996 compared with 13.4% in the third quarter of 1995.
Refunded premiums decreased in the third quarter of 1996 to $3.5 million from
$4.0 million in the third quarter of 1995 due primarily to the decrease in
policy cancellations related to the decrease in mortgage refinancing volume
during the third quarter of 1996. Ceded premiums written as a percentage of net
new, renewal and refunded premiums decreased to 3.3% in the third quarter of
1996 compared with 12.0% in the third quarter 1995. The decrease in ceding
percentages from 1995 was due to the elimination of approximately 10% of quota
share cessions for policies written in 1996 and a larger portion of premiums
remaining with the Company through the use of RGC as a reinsurer.
Mortgage insurance premiums earned increased 25.9% to $91.3 million in the third
quarter of 1996, from $72.5 million in the third 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 third quarter of 1996 was $16.4
million compared with $15.7 million in the third quarter of 1995, an increase of
4.5%. 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 slight decrease in the average
investment yield (pretax) to 6.0% during the third quarter of 1996 compared to
6.3% in the third quarter of 1995. Realized capital gains (net of losses)
increased 35.5% to $4.2 million in the third quarter of 1996 from $3.1 million
in the third quarter of 1995.
Mortgage insurance losses and loss adjustment expenses increased to $36.8
million in the third quarter of 1996 from $28.2 million in the third quarter of
1995, an increase of 30.5%. This increase was primarily the result of the growth
in insurance in force in recent years, increased claim amounts associated with
higher loan sizes and increased default rates in certain areas of the country.
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 76.0%
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of PMI's insurance in force at September 30, 1996, with the 1993 book of
business alone representing 24.0%. 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. Also, PMI
has been experiencing an acceleration in its claim payment process. This
acceleration is a result of Fannie Mae's and Freddie Mac's loss mitigation
efforts to make earlier determinations regarding claims. Management believes
that this is only an acceleration of the timing of payments, and will not
increase the number of claims ultimately paid by PMI. In addition to claim
increases, PMI's default rate has increased to 2.03% at September 30, 1996 from
the September 30, 1995 rate of 1.88%.
Default rates on PMI's California policies decreased to 3.63% at September 30,
1996, from 3.81% at September 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 more slowly than anticipated when those policies were issued, and, as a
result, California default rates for each of the policy years since 1989 may
continue to experience an average default rate higher than the national average
default rate. However, the default rate for California at September 30, 1996
improved over the June 30, 1996 and March 31, 1996 rates of 3.91% and 4.15%,
respectively. Management believes that such rates are likely to continue to
trend down closer to the national average default rate over time. See Cautionary
Statement on page 13.
Mortgage insurance underwriting and other expenses increased 2.4% to $17.1
million in the three months ended September 30, 1996, from $16.7 million in the
three months ended September 30, 1995. This marginal increase, in contrast to
the higher growth rate in new insurance written, is primarily the result of
management's focus on controlling expenses.
The mortgage insurance loss ratio increased to 39.9% in the three months ended
September 30, 1996, compared with 38.2% in the corresponding period of 1995,
while the expense ratio reported an improvement over 1995, dropping to 18.6% in
the third quarter of 1996 from 23.9% in the third quarter of 1995. This resulted
in a net decrease of 3.6 percentage points in the combined ratio to 58.5% in the
third quarter of 1996 compared to 62.1% in the third quarter of 1995. The
overall net decrease is the result of the strong growth in premiums in the third
quarter of 1996, partially offset by the increase in losses and loss adjustment
expenses discussed above.
Title insurance premiums earned increased 21.2% to $13.7 million in the third
quarter of 1996, compared with $11.3 million in the third 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 20.0% to $12.0 million in the third
quarter of 1996, compared with $10.0 million in the third quarter of 1995. This
increase is directly attributable to the increase in premiums earned. The title
insurance combined ratio decreased to 90.2% in 1996 from 93.2% in 1995, due to
the strong growth in premiums. 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 $1.9 million in
the third quarter of 1996 from $0.8 million in the third quarter of 1995. This
growth is primarily due to MSC's expansion of contract underwriting services.
The Company's effective tax rate increased to 29.4% in the third quarter of
1996, compared to 24.5% in the third 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
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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 transfer of APTIC to TPG in the form of a
dividend, and a shift in the mix of the investment portfolio to a greater
portion of taxable fixed income bonds.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net income in the nine months ended September 30, 1996 was $119.5 million, a
17.9% increase over net income of $101.4 million in the nine months ended
September 30, 1995. The increase was primarily attributable to increases in
premiums earned and investment income (including capital gains) of 21.5% and
13.3%, respectively, partially offset by increases in losses and loss adjustment
expenses and operating expenses of 20.7% and 15.2%, respectively. Earnings per
share were $3.40 in the nine months ended September 30, 1996, compared with
$2.89 in the corresponding period of 1995, a 17.6% increase. Excluding capital
gains, earnings per share were $3.14 in the nine months ended September 30,
1996, compared with $2.70 in the corresponding period of 1995, a 16.3% increase.
Revenues in the nine months ended September 30, 1996 were $362.4 million, a
21.0% increase over revenues of $299.6 million in the corresponding period of
1995.
New mortgage insurance written totaled $13.9 billion in the nine months ended
September 30, 1996, compared with $10.4 billion in the corresponding period of
1995, a 33.7% increase. The increase in new insurance written resulted from the
number of new mortgage insurance policies issued increasing by 28.7%, to 111,350
policies in the nine months ended September 30, 1996, from 86,550 policies in
the corresponding period in 1995, and an increase in the average loan size to
$125,000 from $120,000. Net mortgage insurance written (after quota share
reinsurance) increased by 50.0% to $13.2 billion in the nine months ended
September 30, 1996 from $8.8 billion in the nine months ended September 30,
1995. A contributing factor in this increase was the reduction in certain quota
share reinsurance on new insurance writings. Effective for new policies written
in 1996, PMI reduced its percentage of quota share cessions from approximately
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 nine months ended September 30, 1996 compared with
the nine months ended September 30, 1995. PMI's market share of new insurance
written increased to 14.2% in the first nine months of 1996 from 13.2% in the
corresponding period of 1995. 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 in 1996 compared with the corresponding period
of 1995, which was caused in part by increased refinancing activity in the first
half of 1996. Refinancing as a percentage of PMI's new insurance written
increased by 9.5 percentage points, to 18.6% in the nine months ended September
30, 1996 from 9.1% in the corresponding period of 1995.
Mortgage insurance net premiums written were $236.7 million in the nine months
ended September 30, 1996, compared with $199.6 million in the corresponding
period of 1995, an increase of 18.6%. 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
25.2% to $15.1 million in the nine months ended September 30, 1996 from $20.2
million in the corresponding period of 1995, while renewal premiums increased by
22.0% to $251.4 million in the nine months ended September 30, 1996 from $206.1
million in the corresponding period of 1995. The decrease in new premiums
written during 1996 resulted primarily from the continuing shift to the monthly
premium product, which represented 94.7% of new insurance written in the nine
months ended September 30, 1996 compared with 82.9% in the corresponding period
of 1995.
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The increase in 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 41.0% of new insurance written in the nine months
ended September 30, 1996 compared with 32.4% in the corresponding period of
1995. Similarly, 90s with 25% coverage increased to 42.1% in the nine months
ended September 30, 1996 compared with 30.0% in the corresponding period of
1995. ARMs decreased to 12.5% of new insurance written in the nine months ended
September 30, 1996 compared with 24.9% in the corresponding period of 1995.
Refunded premiums increased in the nine months ended September 30, 1996 to $12.3
million from $8.7 million in the nine months ended September 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 decreased to
7.0% in the nine months ended September 30, 1996 compared with 10.2% in the
corresponding period of 1995, primarily due to the increased amount of new
insurance written in 1996 falling under the 5% quota share treaty, rather than
the 15% quota share treaty in effect in 1995.
Mortgage insurance premiums earned increased 20.5% to $255.4 million in the nine
months ended September 30, 1996 from $212.0 million in the nine months ended
September 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 reduction in quota share cessions
during 1996.
The Company's net investment income in the nine months ended September 30, 1996
was $49.9 million compared with $46.4 million in the corresponding period of
1995, an increase of 7.5%. 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 (pretax) to 6.2% in the nine months ended September 30,
1996 from 6.4% in the corresponding period of 1995. Realized capital gains (net
of losses) reported a significant increase over 1995, up 39.2% to $14.2 million
in the nine months ended September 30, 1996 from $10.2 million in the
corresponding period of 1995.
Mortgage insurance losses and loss adjustment expenses increased to $99.0
million in the nine months ended September 30, 1996 from $81.7 million in the
corresponding period of 1995, an increase of 21.2%. This increase was primarily
the result of the growth in insurance in force in recent years, increased claim
amounts associated with the higher loan sizes and increased default rates in
certain areas of the country.
Mortgage insurance underwriting and other expenses increased slightly to $50.3
million in the nine months ended September 30, 1996, from $50.0 million in the
nine months ended September 30, 1995, or 0.6%. This marginal increase, in
contrast to the higher growth rate in new insurance written, is primarily the
result of management's focus on controlling expenses.
The mortgage insurance loss ratio increased to 38.8% in the nine months ended
September 30, 1996, compared with 38.6% in the corresponding period of 1995 due,
in part, to the increase in losses and loss adjustment expenses discussed above.
The expense ratio reported an improvement over 1995, dropping to 21.2% in the
nine months ended September 30, 1996 from 25.0% in the corresponding period of
1995, resulting in a combined ratio of 60.0% in 1996, 3.6 percentage points
better than the 1995 ratio of 63.6%.
Title insurance premiums earned increased 29.0% to $37.8 million in the nine
months ended September 30, 1996, compared with $29.3 million in the
corresponding 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
26.7% to $33.7 million in the nine
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months ended September 30, 1996, compared to $26.6 million in the corresponding
period of 1995. This increase is directly attributable to the increase in
premiums earned. The title insurance combined ratio decreased to 92.5% in 1996
from 95.6% in 1995.
Other income, primarily revenues generated by MSC, increased to $5.1 million in
the nine months ended September 30, 1996 from $1.7 million in the corresponding
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 28.9% in the nine months ended
September 30, 1996, compared to 24.8% in the corresponding 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 and
transfer of APTIC 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 and APTIC, 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 credit agreements totaling
$50.0 million. At September 30, 1996, $5.0 million in borrowings and at October
31, 1996, $15.0 million in borrowings were outstanding under one of the credit
agreements. These borrowings were used for the repurchase of TPG's common stock.
TPG's principal uses of funds are the payment of dividends to shareholders,
payment of operating expenses, repurchase of TPG's common stock and any
additional investments in the Company's current or future subsidiaries.
As of September 30, 1996, TPG had approximately $39.1 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 the $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.
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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 $54.9 million and $71.1
million in the nine months ended September 30, 1996 and 1995, respectively.
Operating cash flows decreased during 1996 due to the increased usage of the
monthly premium product. 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 $1,083.4 million at September 30, 1996, compared with $1,026.7 million at
September 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 $199.5 million at September 30, 1996, an
increase of $7.4 million, or 3.9%, 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 $117.7 million at September 30, 1996, a decrease of $22.6 million, or
16.1%. 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 $965.7 million at September 30, 1996, an increase of $95.2 million, or
10.9%. This increase consisted of $119.5 million of net income and stock options
exercised of $1.0 million, offset by a decrease of $15.7 million in net
unrealized gains on investments available for sale (net of tax), dividends
declared of $5.3 million and treasury stock purchases of $4.3 million during the
nine months ended September 30, 1996.
PMI's risk-to-capital ratio at September 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
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where PMI has over 20% of its risk in force concentrated and where the default
rate on all PMI policies in force is 3.63% compared to 2.03% nationwide, as of
September 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.
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THE PMI GROUP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
SEPTEMBER 30, 1996
(UNAUDITED)
ITEM 1 - LEGAL PROCEEDINGS
APTIC has been named as a defendant in a purported class action complaint filed
in the United States District Court for the Southern District of Florida. The
complaint alleges, among other things, violations of the Real Estate Settlement
Procedures Act ("RESPA"), intentional and negligent misrepresentations and
unfair trade practices in connection with payments and other consideration
purportedly paid to title agents. The complaint seeks damages under RESPA of
three times the amount of any charges for title insurance paid to APTIC by
purported class members, unspecified compensatory and punitive damages under
state law, attorneys' fees, court costs and injunctive relief. Management of
the Company believes that APTIC has meritorious defenses to such claims and
intends to defend the action vigorously. Based on information presently
available to the Company, management believes that the ultimate outcome of this
matter will not have a material adverse effect on the Company's financial
position or results of operations.
Various other legal actions and regulatory reviews are currently pending that
involve the Company and specific aspects of its conduct of business. In the
opinion of management, the ultimate liability or resolution in one or more of
the foregoing actions is not expected to have a material effect on the financial
condition or results of operations of the Company.
ITEM 5 - OTHER INFORMATION
PMI is pursuing various risk-sharing arrangements for certain of its customers,
including offering 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. While many factors are considered in
determining rates, there can be no assurance that the premiums charged will be
adequate to compensate PMI for the risks associated with the coverage provided
to its customers.
The Company named Victor Bacigalupi as Senior Vice President, General Counsel
and Secretary effective November 4, 1996, to replace George Breed who will be
retiring at the end of 1996. Prior to joining the Company, Mr. Bacigalupi was a
partner of Bronson, Bronson & McKinnon LLP, since February 1992.
PMI's ability to pay dividends is limited under Arizona law and, as PMI is
currently commercially domiciled in California, under California law. Due to a
change in California law, effective as of January 1, 1997, PMI will no longer be
deemed commercially domiciled in California. The insurance laws of Arizona
provide that (i) PMI may pay dividends out of available surplus and (ii) without
prior approval of the Arizona Insurance Director, such dividends during any
12-month period shall not exceed the lesser of 10% of policyholders' surplus as
of the preceding year end or the last calendar year's investment income.
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.
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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 November 5, 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
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INDEX TO EXHIBITS
(Item 6)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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10.3 The PMI Group, Inc. Stock Plan
for Non-Employee Directors
11.1 Computation of Net Income
Per Share