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, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from..........to..........
Commission file number 1-13664
THE PMI GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3199675
(State of Incorporation) (IRS Employer Identification No.)
601 Montgomery Street,
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
(415) 788-7878
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No__
--
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Stock Par Value Date Number of Shares
- -------------- --------- ---- ----------------
Common Stock $0.01 07/31/01 44,487,953
THE PMI GROUP, INC.
Index to Quarterly Report on Form 10-Q
June 30, 2001
Part I - Financial Information Page
----
Item 1. Interim Consolidated Financial Statements and Notes (unaudited)
Consolidated Statements of Operations for the Three Months and
Six Months Ended June 30, 2001 and 2000 3
Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 35
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds 36
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 6. Exhibits and Reports on Form 8-K 39
Signatures 40
Index to Exhibits 41
2
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------------- ----------------------------------
2001 2000 2001 2000
----------------- ---------------- ---------------- ----------------
(In thousands, except per share amounts)
Revenues
Premiums earned $ 177,565 $ 156,833 $ 347,698 $ 305,549
Net investment income 32,722 29,035 63,954 56,118
Net realized investment gains (losses) (1,674) 370 (2,665) 1,138
Other 8,008 1,655 12,207 4,506
----------------- ---------------- ---------------- ----------------
Total revenues 216,621 187,893 421,194 367,311
----------------- ---------------- ---------------- ----------------
Losses and Expenses
Losses and loss adjustment expenses 24,271 26,711 47,279 54,934
Amortization of deferred policy acquisition costs 19,731 20,416 40,114 40,814
Other underwriting and operating expenses 61,585 42,357 116,065 81,560
Interest expense 2,681 2,573 5,381 4,943
Distributions on preferred capital securities 2,078 2,077 4,155 4,155
----------------- ---------------- ---------------- ----------------
Total losses and expenses 110,346 94,134 212,994 186,406
----------------- ---------------- ---------------- ----------------
Income before income taxes 106,275 93,759 208,200 180,905
Income tax expense 31,078 28,780 61,472 55,936
----------------- ---------------- ---------------- ----------------
Net income $ 75,197 $ 64,979 $ 146,728 $ 124,969
================= ================ ================ ================
Per share data:
Basic net income $ 1.69 $ 1.47 $ 3.31 $ 2.82
================= ================ ================ ================
Diluted net income $ 1.66 $ 1.45 $ 3.24 $ 2.79
================= ================ ================ ================
Cash dividends declared $ 0.04 $ 0.04 $ 0.08 $ 0.08
================= ================ ================ ================
See accompanying notes to consolidated financial statements.
3
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
------------------- -------------------
(Unaudited)
(In thousands, except per share amounts)
Assets
Investments:
Available for sale, at fair value:
Fixed income securities
(amortized cost: $1,553,715; $1,536,291) $ 1,634,823 $ 1,613,330
Equity securities:
Common (cost: $53,749; $53,315) 73,582 81,726
Preferred (cost: $107,546; $108,743) 108,796 111,743
Common stock of affiliates, at underlying book value 149,917 131,849
Short-term investments, at fair value 212,549 139,577
------------------- -------------------
Total investments 2,179,667 2,078,225
Cash 24,829 21,969
Accrued investment income 26,037 23,494
Reinsurance recoverable and prepaid premiums 53,616 51,329
Premiums receivable 51,477 41,362
Receivable from affiliate 2,501 739
Deferred policy acquisition costs 71,764 67,009
Property and equipment, net 57,143 53,475
Other assets 67,433 55,055
------------------- -------------------
Total assets $ 2,534,467 $ 2,392,657
=================== ===================
Liabilities
Reserve for losses and loss adjustment expenses $ 294,503 $ 295,089
Unearned premiums 176,210 170,866
Long-term debt 135,350 136,819
Reinsurance balances payable 28,352 26,581
Deferred income taxes 73,389 74,981
Other liabilities and accrued expenses 87,490 90,001
------------------- -------------------
Total liabilities 795,294 794,337
------------------- -------------------
Company-obligated mandatorily redeemable preferred capital securities of
subsidiary trust holding solely junior subordinated
deferrable interest debenture of the Company 99,126 99,109
Shareholders' equity
Common stock - $.01 par value; 125,000,000 shares authorized,
and 52,793,777 issued 528 528
Additional paid-in capital 267,762 267,762
Accumulated other comprehensive income 54,367 62,501
Retained earnings 1,654,924 1,511,751
Treasury stock, at cost (8,324,198 and 8,484,082 shares) (337,534) (343,331)
------------------- -------------------
Total shareholders' equity 1,640,047 1,499,211
------------------- -------------------
Total liabilities and shareholders' equity $ 2,534,467 $ 2,392,657
=================== ===================
See accompanying notes to consolidated financial statements.
4
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-----------------------------------------
2001 2000
------------------- -------------------
(In thousands)
Cash flows from operating activities:
Net income $ 146,728 $ 124,969
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized investment (gains) losses 2,665 (1,138)
Equity in earnings of affiliates (7,429) (4,134)
Depreciation and amortization 6,265 7,649
Deferred income taxes 1,509 1,220
Changes in:
Reserve for losses and loss adjustment expenses (586) 9,735
Unearned premiums 5,344 (9,133)
Deferred policy acquisition costs (4,755) 809
Accrued investment income (2,543) (543)
Reinsurance balances payable 1,771 749
Reinsurance recoverable and prepaid premiums (2,287) (1,866)
Premiums receivable (10,115) (1,898)
Income tax payable (5,395) (2,602)
Receivable from affiliate (1,388) 490
Other (12,394) (11,190)
------------------- -------------------
Net cash provided by operating activities 117,390 113,117
------------------- -------------------
Cash flows from investing activities:
Proceeds from sales and maturities of fixed income securities 135,157 105,235
Proceeds from sales of equity securities 58,536 22,303
Investment purchases:
Fixed income securities (155,674) (137,667)
Equity securities (60,099) (82,958)
Net (increase) decrease in short-term investments (72,972) 18,343
Investment in affiliates (11,220) (19,506)
Purchases of property and equipment (8,724) (9,018)
------------------- -------------------
Net cash used in investing activities (114,996) (103,268)
------------------- -------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 5,797 1,168
Dividends paid to shareholders (5,331) (4,540)
Purchases of The PMI Group, Inc. common stock - (24,017)
------------------- -------------------
Net cash provided by (used in) financing activities 466 (27,389)
------------------- -------------------
Net increase (decrease) in cash 2,860 (17,540)
Cash at beginning of year 21,969 28,076
------------------- -------------------
Cash at end of period $ 24,829 $ 10,536
=================== ===================
See accompanying notes to consolidated financial statements.
5
THE PMI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying consolidated financial statements include The PMI Group, Inc.
("TPG" or "The PMI Group"), 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 Insurance Company Limited ("PMI Europe"), an Irish corporation; PMI
Mortgage Services Co. ("MSC"), a California corporation; and other insurance,
reinsurance and non-insurance companies. TPG and its subsidiaries are
collectively referred to as the "Company." TPG also 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. 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"),
which conduct residential mortgage insurance and reinsurance business; and
Fairbanks Capital Holding Corp. ("Fairbanks"), a special servicer of single-
family residential mortgages. 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.
The Company's unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
("GAAP") for interim financial information and the requirements of Form 10-Q and
Article 7 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation, have been included.
Interim results for the three months and six months ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. The financial statements should be read in conjunction with
the audited consolidated financial statements and footnotes included in The PMI
Group, Inc. 2000 Annual Report to Shareholders.
Note 2. Summary of Certain Significant Accounting Policies
Changes in Accounting Policy - Effective January 1, 2000, the Company changed
its accounting policy to report international subsidiaries and affiliates
operations on a one-month lag from domestic operations. Accordingly, the results
of PMI Ltd for the six months ended June 30, 2000 represented five months of
activity.
Deferred Policy Acquisition Costs - The Company defers certain costs of its
mortgage insurance operations relating to the acquisition of primary mortgage
insurance and amortizes these costs against related premium revenues 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").
The DPAC asset is amortized and charged against revenue in proportion to
estimated gross profits over the life of the policies using the guidance
provided by Statement of Financial Accounting Standards ("SFAS")
6
No. 97, Accounting and Reporting by Insurance Enterprises For Certain Long-
Duration Contracts and For Realized Gains and Losses From the Sale of
Investments.
DPAC is summarized as follows:
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------------- ----------------------------------
2001 2000 2001 2000
---------------- ----------------- ---------------- -----------------
(In Thousands) (In Thousands)
Beginning DPAC balance $ 67,270 $ 68,827 $ 67,009 $ 69,579
U.S. operations acquisition costs incurred
and deferred 22,688 18,387 41,398 37,319
U.S. operations amortization of deferred costs (18,898) (20,416) (38,328) (40,814)
International operations acquisition costs
incurred and deferred 1,719 2,590 3,698 3,817
International operations amortization of
deferred costs (833) (303) (1,786) (620)
Currency translation adjustment (182) (316) (227) (512)
------------- -------------- ------------- --------------
Ending DPAC balance $ 71,764 $ 68,769 $ 71,764 $ 68,769
============= ============== ============= ==============
Note 3. 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 the three months and six months ended June
30, 2001 and 2000 follows:
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------------- -------------------------------------
2001 2000 2001 2000
------------------- ----------------- ----------------- -------------------
Weighted Average Shares Outstanding
For basic EPS 44,394,372 44,094,069 44,359,722 44,248,927
For diluted EPS 45,407,712 44,736,476 45,255,216 44,748,719
7
Note 4. Comprehensive Income
The reconciliation of net income to comprehensive income for the three months
and six months ended June 30, 2001 and 2000 are as follow:
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------------- ----------------------------------
2001 2000 2001 2000
---------------- ----------------- ---------------- -----------------
(In thousands) (In thousands)
Net income $ 75,197 $ 64,979 $ 146,728 $ 124,969
Other comprehensive income, net of tax:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising
during period (7,156) 30,536 (7,033) 20,789
Less: reclassification adjustment for gains
(losses) included in net income (1,088) (241) (1,732) (740)
------------- -------------- ------------- --------------
Net unrealized holding gains (losses) (6,068) 30,295 (5,301) 20,049
Currency translation adjustment (1,883) (2,419) (2,155) (4,364)
Transition adjustment for implementation of
SFAS No.133 - - (1,009) -
Fair value adjustment of derivatives 773 - 331 -
------------- -------------- ------------- --------------
Other comprehensive income (loss), net of tax (7,178) 27,876 (8,134) 15,685
------------- -------------- ------------- --------------
Comprehensive income $ 68,019 $ 92,855 $ 138,594 $ 140,654
============= ============== ============= ==============
Note 5. Business Segments
The Company's reportable operating segments are U.S. Mortgage Insurance,
International Mortgage Insurance, Title Insurance and Other. The "Other" segment
includes the income and expenses of the holding company, the results from PMI
Mortgage Services Co. 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:
8
Three Months Ended June 30, 2001
---------------------------------------------------------------------------------
U.S. International
Mortgage Mortgage Title Consolidated
Insurance Insurance Insurance Other Total
------------------------------------------------------------------------------
(In thousands)
Premiums earned $ 133,575 $ 7,231 $ 36,759 $ - $ 177,565
============== ============== =========== ========== ===============
Net underwriting and operating
income (loss) before tax $ 82,085 $ 3,696 $ 2,869 $ (8,664) $ 79,986
Investment income & net realized
investment gains 20,715 4,370 503 1,682 27,270
Equity in earnings of affiliates 2,433 (96) - 1,441 3,778
Interest expense (8) (632) - (2,041) (2,681)
Distributions on preferred capital
securities - - - (2,078) (2,078)
-------------- -------------- ----------- ---------- ---------------
Income (loss) before income tax
expense 105,225 7,338 3,372 (9,660) 106,275
Income tax benefit (expense) (31,412) (1,933) (1,215) 3,482 (31,078)
-------------- -------------- ----------- ---------- ---------------
Net income (loss) $ 73,813 $ 5,405 $ 2,157 $ (6,178) $ 75,197
============== ============== =========== ========== ===============
Total assets $ 2,026,531 $ 300,741 $ 55,654 $ 151,541 $ 2,534,467
============== ============== =========== ========== ===============
Three Months Ended June 30, 2000
--------------------------------------------------------------------------------
U.S. International
Mortgage Mortgage Title Consolidated
Insurance Insurance Insurance Other Total
--------------------------------------------------------------------------------
(In thousands)
Premiums earned $ 124,972 $ 7,083 $ 24,778 - $ 156,833
============== ============== =========== ========== ==============
Net underwriting and operating
income (loss) before tax $ 69,586 $ 3,509 $ 2,537 $ (6,628) $ 69,004
Investment income & net realized
investment gains 21,531 3,468 457 1,348 26,804
Equity in earnings of affiliates 2,290 (210) - 521 2,601
Interest expense - (766) - (1,807) (2,573)
Distributions on preferred capital
securities - - - (2,077) (2,077)
-------------- -------------- ----------- ---------- --------------
Income (loss) before income tax
expense 93,407 6,001 2,994 (8,643) 93,759
Income tax benefit (expense) (28,483) (2,114) (1,068) 2,885 (28,780)
-------------- -------------- ----------- ---------- --------------
Net income (loss) $ 64,924 $ 3,887 $ 1,926 $ (5,758) $ 64,979
============== ============== =========== ========== ==============
Total assets $ 1,884,029 $ 177,481 $ 47,938 $ 116,080 $ 2,225,528
============== ============== =========== ========== ==============
9
Six Months Ended June 30, 2001
--------------------------------------------------------------------------------
U.S. International
Mortgage Mortgage Title Consolidated
Insurance Insurance Insurance Other Total
--------------------------------------------------------------------------------
(In thousands)
Premiums earned $ 265,591 $ 14,358 $ 67,749 $ - $ 347,698
=============== ================ ============ =========== =================
Net underwriting and operating
income (loss) before tax $ 160,051 $ 8,241 $ 4,636 $ (16,481) $ 156,447
Investment income & net realized
investment gains 43,032 6,512 1,021 3,295 53,860
Equity in earnings of affiliates 4,711 (181) - 2,899 7,429
Interest expense (9) (1,308) - (4,064) (5,381)
Distributions on preferred capital
securities - - - (4,155) (4,155)
--------------- ---------------- ------------ ----------- -----------------
Income (loss) before income tax
expense 207,785 13,264 5,657 (18,506) 208,200
Income tax benefit (expense) (62,855) (3,368) (2,000) 6,751 (61,472)
--------------- ---------------- ------------ ----------- -----------------
Net income (loss) $ 144,930 $ 9,896 $ 3,657 $ (11,755) $ 146,728
=============== ================ ============ =========== =================
Total assets $ 2,026,531 $ 300,741 $ 55,654 $ 151,541 $ 2,534,467
=============== ================ ============ =========== =================
Six Months Ended June 30, 2000
--------------------------------------------------------------------------------
U.S. International
Mortgage Mortgage Title Consolidated
Insurance Insurance Insurance Other Total
--------------------------------------------------------------------------------
(In thousands)
Premiums earned $ 245,507 $ 12,674 $ 47,368 $ - $ 305,549
=============== ================ ============ =========== =================
Net underwriting and operating
income (loss) before tax $ 129,114 $ 7,229 $ 4,068 $ (7,664) $ 132,747
Investment income & net realized
investment gains 42,621 6,795 914 2,794 53,124
Equity in earnings of affiliates 4,071 (210) - 273 4,134
Interest expense (13) (1,286) - (3,646) (4,945)
Distributions on preferred capital
securities - - - (4,155) (4,155)
--------------- ---------------- ------------ ----------- -----------------
Income (loss) before income tax
expense 175,793 12,528 4,982 (12,398) 180,905
Income tax benefit (expense) (53,384) (4,228) (1,666) 3,342 (55,936)
--------------- ---------------- ------------ ----------- -----------------
Net income (loss) $ 122,409 $ 8,300 $ 3,316 $ (9,056) $ 124,969
=============== ================ ============ =========== =================
Total assets $ 1,884,029 $ 177,481 $ 47,938 $ 116,080 $ 2,225,528
=============== ================ ============ =========== =================
Note 6. Adoption of a New Accounting Standard
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.
10
Gains and 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. In 1999, the
Company entered into an interest rate swap to hedge interest rate risk
associated with the debt in connection with the acquisition of PMI Ltd. Upon
adoption of SFAS No. 133, the Company recorded a $1.0 million liability for the
fair value of the interest rate swap in the Consolidated Balance Sheet. This
interest rate swap was terminated in July 2001 when the Company repaid the
associated debt, which resulted in a realized loss of $0.8 million.
Note 7. Short-term Investment
Included in the Company's short-term investments is a face value of $10.0
million commercial paper issued by Pacific Gas and Electric Company ("PG&E"),
which is currently in default. During the second quarter of 2001, the Company
analyzed this investment and determined that the investment's $3.2 million
decline in market value met the definition of an other-than-temporary impairment
in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Based on the Company's analysis, a $3.2 million realized loss
was recognized during the second quarter of 2001. The Company will reevaluate
this investment each quarter.
Note 8. Subsequent Event
Senior Convertible Debentures - In July 2001, the Company issued $360 million of
2.50% Senior Convertible Debentures due 2021 (the "Debentures") in a private
offering to qualified institutional buyers. The Company intends to use the net
proceeds of the offering for repayment or retirement of existing indebtedness,
depending upon market conditions, and for general corporate purposes. The
Debentures are due on July 15, 2021 and bear interest at a rate of 2.50% per
annum. The Company will pay interest on the Debentures on January 15 and July 15
of each year, beginning January 15, 2002. The Company will also pay additional
contingent interest for specified circumstances. For additional information
concerning the terms of the Debentures, see Part II, Item 2 of this Form 10-Q
and the Company's Current Report on Form 8-K, which was filed with the SEC on
July 18, 2001, including the exhibits attached thereto.
In July 2001, the Company repaid an outstanding bank note with Bank of America
from the proceeds of the Senior Convertible Debenture offering described above.
The repayment of the AUS$70.5 million bank note and was funded by the Company in
the amount of US$35.7 million. Concurrent with the repayment of the bank note, a
related interest rate swap was terminated, which resulted in a realized loss of
$0.8 million.
11
ITEM 2. 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 anticipation that negotiated bulk transactions will continue to be an
important acquisition channel for the residential mortgage insurance market
. Our expectation that there will be volatility in the market share of
individual companies, including PMI, as a result of bulk transactions
. Our expectation that the amount of GSE pool risk written will continue to
decrease in 2001
. Our belief 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 the growth of premiums written
. Our anticipation 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 and that such growth will reduce our net premiums
written and earned over the long-term
. Our anticipation that contract underwriting will continue to account for a
significant portion of PMI's acquisition costs
. Our belief that continued increases in the electronic origination and
delivery of our products should decrease our acquisition costs
. Our belief that we have sufficient cash to meet all of our short and
medium-term obligations
When a forward-looking statement includes an underlying assumption, we caution
that, while we believe the assumption to be reasonable and make it in good
faith, assumed facts almost always vary from actual results, and the difference
between assumed facts and actual results can be material. Where, in any
forward-looking statement, we express an expectation or belief as to future
results, there can be no assurance that the expectation or belief will result.
Our actual results may differ materially from those expressed in any
forward-looking statements made by us. Forward-looking statements involve a
number of risks of uncertainties including, but not limited to, the risks
described under the heading "Investment Considerations". All forward-looking
statements are qualified by and should be read in conjunction with those risk
factors. Except as may be required by applicable law, we undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
12
RESULTS OF CONSOLIDATED OPERATIONS:
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
Our consolidated net income was $75.2 million for the three months ended June
30, 2001, a 16% increase from the three months ended June 30, 2000. The gain was
primarily due to:
. an increase in premiums earned of 13%;
. an increase in net investment income of 13%;
. a decrease in losses and loss adjustment expenses of 9%; and
. an increase in other income of $6.4 million.
This gain was partially offset by:
. an increase in amortization of deferred policy acquisition costs and
other underwriting and operating expenses of 30%; and
. net realized investment losses of $1.7 million.
Diluted net income per share for the three months ended June 30, 2001 was $1.66,
an increase of 14% from the corresponding period in 2000. Diluted operating
earnings per share, excluding realized investment losses, increased 16% from the
comparable period of 2000 to $1.68. Consolidated revenues for the second quarter
of 2001 increased 15% to $216.6 million from the second quarter of 2000.
U.S. Mortgage Insurance Operations
Our primary operating subsidiary, PMI Mortgage Insurance Co., or PMI, generated
72% of our consolidated revenues for the three months ended June 30, 2001.
During the second quarter of 2001, the total principal amount of mortgages newly
insured by PMI, or PMI's new primary insurance written, increased 113% from the
second quarter of 2000 to $13.9 billion. PMI's new insurance written does not
include primary mortgage insurance placed upon loans more than 12 months after
loan origination or pool transactions. We believe the increase was primarily the
result of an increase in PMI's market share, and secondly due to an increase in
residential mortgage origination activity and the growth in the private mortgage
insurance market. As reported by Mortgage Bankers Association of America, the
total residential mortgage originations increased 73% in the second quarter of
2001 from the second quarter of 2000. As reported by the industry's trade
association, Mortgage Insurance Companies of America, the private mortgage
insurance industry experienced a 76% increase in total new insurance written to
$73.3 billion for the quarter ended June 30, 2001 compared to $41.7 billion for
the corresponding period in 2000.
Mortgage originations in connection with refinancing transactions represented
approximately 47% of total mortgage originations during the second quarter of
2001 compared to approximately 15% during the corresponding period in 2000,
according to the Mortgage Bankers Association of America. The shift from home
purchase to refinance activity historically decreases the private mortgage
insurance penetration rate, which is the percentage of total mortgage
originations insured by the private mortgage insurance industry. Based on
reports by Mortgage Bankers Association of America and Mortgage Insurance
Companies of America, we estimate that the private mortgage insurance
penetration rate was 15% for the second quarter of 2001 and was approximately
the same penetration rate for the corresponding period in 2000.
13
The private mortgage insurance industry's market share of the total insured
market, which includes insurance offered by private mortgage insurers, the
Federal Housing Administration and the Veterans Administration, increased to
64.3% for the three months ended June 30, 2001 from 60.3% for the corresponding
period in 2000 according to Mortgage Insurance Companies of America. We believe
that the increase was due primarily to market expansion through bulk
transactions. Bulk transactions are negotiated transactions in the secondary
market in which private mortgage insurance companies insure a large group of
loans or commit to insure new loans on agreed-upon terms. Secondarily, we
believe that this increase was due to an increase in 2001 of the maximum single-
family principal balance loan limit eligible for purchase by Fannie Mae and
Freddie Mac, or the GSEs, to $275,000. An increase in the GSEs' loan limit
generally increases the number of loans requiring mortgage insurance and the
size of the mortgage insurance market.
Based upon the industry's total new insurance written of $73.3 billion as
reported by Mortgage Insurance Companies of America, PMI's market share for the
second quarter increased to 19.0% from 15.6% for the corresponding period in
2000. On a combined basis with CMG Mortgage Insurance Company or CMG, PMI's
partially owned subsidiary, PMI's market share in the second quarter of 2001
increased to 20.4% from 17.1% in the comparable period of 2000. We believe that
the increase in our market share was due to a combination of market gains in
both traditional business and bulk transactions generated by PMI during the
second quarter of 2001. Bulk transactions with primary mortgage insurance
accounted for approximately 13% of our new insurance written during the quarter
ended June 30, 2001 and approximately 4% during the corresponding period in
2000. We anticipate that such transactions will continue to be an important
acquisition channel for 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 bulk transactions.
New insurance written was $13.9 billion for the three months ended June 30, 2001
compared to $6.5 billion for the three months ended June 30, 2000, an increase
of 113%. On a combined basis with CMG, new insurance written was $14.9 billion
for the second quarter of 2001 compared to $7.1 billion for the second quarter
of 2000. PMI's primary insurance in force increased 12% to $102.1 billion as of
June 30, 2001 from June 30, 2000. Primary 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, primary insurance in force grew by 13%
to $110.0 billion at June 30, 2001 from June 30, 2000 of $97.6 billion. PMI's
primary risk in force as of June 30, 2001 was $24.7 billion, an 11% increase
compared to June 30, 2000. 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 insurance coverage.
On a combined basis with CMG, primary risk in force grew by 12% to $26.6 billion
at June 30, 2001 from June 30, 2000 of $23.8 billion. The growth in primary
insurance in force and risk in force was due primarily to an increase in new
insurance written, partially offset by an increase in the cancellation of
policies. Cancellations of insurance in force increased by 123% during the
second quarter of 2001 to $9.6 billion from $4.3 billion during the comparable
period of 2000, primarily due to high refinance activity. PMI's new insurance
written from refinance activity as a percentage of total new insurance written
increased to approximately 37% for the quarter ended June 30, 2001 from
approximately 7% for the comparable period of 2000. PMI's persistency rate,
which refers to the percentage of insurance policies at the beginning of a
period that remain in force at the end of the period, decreased to 72.4% at June
30, 2001 compared to 78.8% at June 30, 2000.
Non-traditional loans, including Alternative A and less than A quality loans,
accounted for approximately 7.1% of PMI's new insurance written during the
second quarter of 2001, compared to 6.7% in the second quarter of 2000. Loan
characteristics, credit quality, loss development, pricing structures and
persistency related to these non-traditional loans can be significantly
different than PMI's traditional primary business. We expect higher
delinquencies and default rates and lower persistency for non-traditional loans,
and
14
incorporate these assumptions into our pricing. However, mortgage 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 $9.1 million for the three months ended June
30, 2001 compared to $20.1 million for the corresponding period in 2000. 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 June 30,
2001 was $803.6 million compared to $725.1 million at June 30, 2000. Old pool
risk in force, which represents mortgage pool policies written prior to 1994 and
are past their peak claim periods, was $1.37 billion as of June 30, 2001 and
$1.41 billion as of June 30, 2000.
PMI also provides structured insurance products that are not included in either
new primary insurance written, new GSE pool risk written, or primary insurance
and risk in force. These products vary significantly with individual investor
requests, and include modified pool products and second layer coverage products
that restructure primary risk. In addition to primary, GSE pool and old pool
risk in force, total other risk in force as of June 30, 2001 was $406.5 million
compared to $179.6 million as of June 30, 2000. Other risk written was $149.8
million for the quarter ended June 30, 2001 compared to $35.6 million for the
corresponding period in 2000.
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 the growth of premiums
written. PMI's average coverage percentage on insurance in force was 24.2% at
June 30, 2001 and 24.4% at June 30, 2000.
Net premiums written were $135.1 million for the three months ended June 30,
2001, a 10% increase from the three months ended June 30, 2000. This increase
was due, in large part, to the growth of insurance and risk in force as
discussed above. Net premiums written refers to the amount of premiums received
during a given period, net of refunds and premiums ceded under reinsurance
arrangements or risk-sharing programs, including captive mortgage reinsurance
agreements. Captive reinsurance is a reinsurance product in which a portion of
the risk insured by PMI is reinsured with the mortgage originator or investor
through an affiliated entity. During the second quarter of 2001, 45% of new
insurance written and 10% of total premiums were subject to captive reinsurance
agreements compared to 33% of new insurance written and 6% of total premiums
subject to captive reinsurance agreements during the corresponding period in
2000. We anticipate that the continued growth of captive reinsurance
arrangements will reduce our net premiums written and earned over the long-term.
Primary risk in force under risk-sharing programs with PMI's customers
represented 35% of primary risk in force as of June 30, 2001 compared 24% as of
June 30, 2000. 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. Ceded premiums written increased by 86% to $14.8 million
primarily as a result of the increase in captive reinsurance arrangements for
the quarter ended June 30, 2001. Refunded premiums increased 100% to $5.2
million in the second quarter of 2001, due to the increased policy
cancellations. The amount of premiums recognized as revenue for accounting
purposes, or premiums earned, increased by 7% to $133.6 million for the three
months ended June 30, 2001, primarily due to an increase in premiums written.
Losses and loss adjustment expenses decreased by 12% to $21.7 million for the
three months ended June 30, 2001, primarily due to improved loss mitigation
efforts resulting from a strong housing market. Loans
15
in default were 18,162 at June 30, 2001, a 20% increase from June 30, 2000,
primarily due to the maturation of the 1997, 1998 and 1999 books of business and
to a higher level of defaults on non-traditional loans in PMI's portfolio. 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 was 2.12% at June 30, 2001
compared to 2.21% at December 31, 2000 and 1.93% at June 30, 2000. Claims paid
on direct primary insurance increased by 13.9% to $18.4 million, due to an
increase in the number of claims paid in the second quarter of 2001 to 944 from
867 in the second quarter of 2000, and to an increase in the average claim size
to $19,446 for the second quarter of 2001 from $18,574 for the comparable period
of 2000.
Total expenses, including the amortization of policy acquisition costs and non-
acquisition related operating costs, decreased to $30.0 million for the three
months ended June 30, 2001 from $30.9 million for the three months ended June
30, 2000. This decrease was due primarily to a 4% decrease in amortization of
deferred acquisition costs to $18.9 million for the second quarter of 2001.
Total expenses incurred by PMI can be divided into two categories: (1)
amortization of deferred policy acquisition costs, which related directly to
acquiring, underwriting and processing new business; and (2) other general
operating expenses and corporate overhead. Policy acquisition costs include all
incurred underwriting, contract underwriting, field operations and sales related
expenses that are deferred and amortized over a 24-month period. Mortgage
insurance policy acquisition costs incurred and deferred increased by 23% to
$22.7 million for the second quarter of 2001 due to the increase in new
insurance written, partially offset by the efficiencies in PMI's electronic
commerce business. A significant portion of PMI's policy acquisition costs
relates to contract underwriting. New policies processed by contract
underwriters represented 28% of new insurance written during the second quarter
of 2001 compared to 24% during the corresponding period in 2000. We anticipate
that contract underwriting services will continue to account for a significant
portion of PMI's acquisition costs. However, we believe that continued increases
in the electronic origination and delivery of our products should decrease our
acquisition costs. In the second quarter of 2001, electronic delivery accounted
for 52% of PMI's commitments of insurance, an increase of 130% from the
corresponding period in 2000. Other operating expenses, which are all other
costs that are not accounted for as acquisition costs, are recorded as expenses
when incurred. Other operating expenses increased to $11.1 million, 6% over the
corresponding period of 2000, primarily due to increased payroll and related
expenses, offset by an increase in allocation to the holding company associated
with diversification efforts.
The mortgage insurance loss ratio, which is the ratio of losses and loss
adjustment expenses to net premiums earned for the second quarter of 2001,
decreased by 3.6 percentage points to 16.2% from the corresponding period in
2000. The decline was attributed to the decrease in losses and loss adjustment
expenses and to the increase in premiums earned as discussed above. The net
expense ratio for the second quarter of 2001 decreased by 2.9 percentage points
from the second quarter of 2000 to 22.2%, primarily due to the decrease in the
amortization of deferred policy acquisition costs and to the increase in net
premiums written. The net expense ratio is the ratio of amortization of
acquisition costs and other 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 6.5 percentage points to 38.4% for
the three months ended June 30, 2001.
International Mortgage Insurance Operations
International Mortgage Insurance operations include PMI Mortgage Insurance Ltd,
or PMI Ltd; and PMI Mortgage Insurance Company Limited, or PMI Europe. The
financial results of international operations are subject to currency rate risk.
The reported results of PMI Ltd were affected by the devaluation in the
Australian dollar from 2000 to 2001. The average AUD/USD exchange rate was 0.51
for the second quarter of 2001 compared to 0.59 for the second quarter of 2000,
a 14% decrease. Net income for PMI Ltd was $5.0 million for the three months
ended June 30, 2001 compared to $3.9 million for the three months ended June 30,
2000. PMI Ltd generated $12.8 million of net premiums written and $7.2 million
in net
16
premiums earned during the second quarter of 2001, compared to $12.6 million of
net premiums written and $7.1 million in net premiums earned during the second
quarter of 2000. Net investment income was $2.9 million for the first three
months of 2001 compared to $3.1 million for first three months of 2000. Losses
and loss adjustment expenses were $1.3 million for the quarter ended June 30,
2001 compared to $1.8 million for the corresponding period in 2000. Underwriting
and other expenses were $2.5 million for the second quarter of 2001 compared to
$2.6 million for the second quarter of 2000. In addition, PMI Europe generated
$0.4 million of net income, consisting primarily of net investment income, for
the three months ended June 30, 2001. Financial results for the operations in
Hong Kong were immaterial during the second quarter of 2001.
Title Insurance Operations
Net income for American Pioneer Title Insurance Company, or APTIC, was $2.2
million for the three months ended June 30, 2001 compared to $1.9 million for
the three months ended June 30, 2000. Title insurance premiums earned were $36.8
million in the second quarter of 2001, a 48% increase over the second quarter of
2000 due to continuing geographic expansion efforts and to the increase in
residential mortgage originations and refinance activity as discussed above.
APTIC is licensed in 45 states and the District of Columbia. During the second
quarter of 2001, 51% of APTIC's premiums earned was generated from the State of
Florida compared with 70% during the corresponding period in 2000. Underwriting
and other expenses in the second quarter of 2001 increased by 48% compared to
the second quarter of 2000 to $32.6 million, primarily 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 for the second quarter of 2001 increased by 2.4 percentage
point to 92.2% from the comparable period of 2000.
Other
Our net investment income, excluding realized investment gains and losses, was
$32.7 million for the three months ended June 30, 2001, a 13% increase from the
three months ended June 30, 2000. This increase was largely due to the growth in
our investment portfolio and an increase in equity earnings. Investments in
affiliates increased to $149.9 million as of June 30, 2001 from $115.8 million
as of June 30, 2000, due to new capital investments in unconsolidated
subsidiaries and their earnings. The pre-tax current portfolio book yield was
6.0% at June 30, 2001 and 6.1% at June 30, 2000. Net realized investment losses
were $1.7 million during the second quarter of 2001 including a realized loss of
$3.2 million resulted from revaluation of our short-term investment in Pacific
Gas and Electric Company. Interest expense for the second quarter of 2001
increased slightly to $2.7 million compared to the second quarter 2000 amount of
$2.6 million.
Other income, which was generated primarily by PMI Mortgage Services Co., or
MSC, was $7.8 million for the three months ended June 30, 2001 compared to $1.4
million for the three months ended June 30, 2000. This increase was primarily
attributed to an increase in contract underwriting services in connection with
higher residential mortgage originations and to an increase in billing rates for
contract underwriting services. Other expenses, which were incurred by the
holding company and MSC, increased to $16.5 million for the second quarter of
2001 from $8.0 million for the comparable period of 2000, primarily due to an
increase in contract underwriting activities, and to the increased expenses
related to international expansion and diversification efforts.
Our effective tax rate was 29.2% for the three months ended June 30, 2001
compared to 30.7% for the three months ended June 30, 2000. This decrease was
due primarily to the lower foreign effective tax rate contributing to the
reduction of overall effective tax rate, and partly due to an increase in the
proportion of tax-exempt investment income relative to total income.
17
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Our consolidated net income was $146.7 million for the six months ended June 30,
2001, a 17% increase from the six months ended June 30, 2000. The gain was
primarily due to:
. an increase in premiums earned of 14%;
. an increase in net investment income of 14%;
. a decrease in losses and loss adjustment expenses of 14%; and
. an increase in other income of $7.7 million.
This gain was partially offset by:
. an increase in amortization of deferred policy acquisition costs and
other underwriting and operating expenses of 28%; and
. net realized investment losses of $2.7 million.
Diluted net income per share for the six months ended June 30, 2001 was $3.24,
an increase of 16% from the corresponding period in 2000. Diluted operating
earnings per share, excluding realized investment losses, increased by 18% from
the comparable period of 2000 to $3.28. Consolidated revenues for the first half
of 2001 increased 15% to $421.2 million from the first half of 2000.
U.S. Mortgage Insurance Operations
Our primary operating subsidiary, PMI Mortgage Insurance Co., or PMI, generated
74% of our consolidated revenues for the six months ended June 30, 2001. During
the first half of 2001, PMI's new primary insurance written increased 113% from
the first half of 2000 to $21.3 billion. We believe the increase was primarily
the result of an increase in PMI's market share, and secondly due to an increase
in residential mortgage origination activity and the growth in the private
mortgage insurance market. As reported by Mortgage Bankers Association of
America, the total residential mortgage originations increased 83% in the first
six months of 2001 from the comparable period of 2000. As reported by the
industry's trade association, Mortgage Insurance Companies of America, the
private mortgage insurance industry experienced a 67% increase in total new
insurance written to $124.3 billion for the six months ended June 30, 2001
compared to $74.4 billion for the corresponding period in 2000.
Mortgage originations in connection with refinancing transactions represented
approximately 43% of total mortgage originations during the first six months of
2001 compared to approximately 16% during the corresponding period in 2000,
according to Mortgage Bankers Association of America.
According to Mortgage Insurance Companies of America, the private mortgage
insurance industry's market share of the total insured market increased to 63.0%
for the six months ended June 30, 2001 compared with 57.6% for the corresponding
period in 2000.
Based upon the industry's total new insurance written of $124.3 billion as
reported by Mortgage Insurance Companies of America, PMI's market share for the
first half of 2001 increased to 17.2% from 16.7% for
18
the corresponding period in 2000. On a combined basis with CMG Mortgage
Insurance Company or CMG, PMI's partially owned subsidiary, PMI's market share
in the first six months of 2001 was 18.5% compared to 18.1% in the comparable
period of 2000. We believe that the increase in our market share was due to a
combination of market gains in both traditional business and bulk transactions
generated by PMI during the first half of 2001. Bulk transactions with primary
mortgage insurance accounted for approximately 9% of our new insurance written
during the six months ended June 30, 2001 and approximately 11% during the
corresponding period in 2000.
New insurance written was $21.3 billion for the six months ended June 30, 2001
compared to $12.4 billion for the six months ended June 30, 2000, an increase of
71%. On a combined basis with CMG, new insurance written was $22.9 billion for
the first half of 2001 compared to $13.5 billion for the first half of 2000.
Cancellations of insurance in force increased by 100% during the first six
months of 2001 to $16.1 billion from $8.0 billion during the comparable period
of 2000, primarily due to high refinance activity. PMI's new insurance written
from refinance activity as a percentage of total new insurance written increased
to approximately 36% for the six months ended June 30, 2001 from approximately
9% for the corresponding period in 2000.
Non-traditional loans, including Alternative A and less than A quality loans,
accounted for approximately 7% of PMI's new insurance written during the first
half of 2001. In comparison, approximately 14% of new insurance written was
comprised of non-traditional loans during the first half of 2000.
GSE pool insurance risk written was $19.5 million for the six months ended June
30, 2001 compared to $44.4 million for the corresponding period in 2000. Other
risk written was $186.3 million for the first half of 2001 compared to $65.2
million for the first half of 2000.
Net premiums written were $264.9 million for the six months ended June 30, 2001,
a 10% increase from the six months ended June 30, 2000. This increase was due,
in large part, to the growth of insurance and risk in force as discussed above.
During the first half of 2001, 44% of new insurance written and 9% of total
premiums were subject to captive reinsurance agreements compared to 30% of new
insurance written and 6% of total premiums subject to captive reinsurance
agreements during the first half of 2000. Ceded premiums written increased by
72% to $27.7 million primarily as a result of the increase in captive
reinsurance arrangements during the first six months of 2001. Refunded premiums
increased 71% to $8.5 million in the first half of 2001, due to the increased
policy cancellations. The amount of premiums recognized as revenue for
accounting purposes, or premiums earned, increased by 8% to $265.6 million for
the six months ended June 30, 2001, primarily due to an increase in premiums
written.
Losses and loss adjustment expenses decreased by 18% to $42.9 million for the
six months ended June 30, 2001, primarily due to improved loss mitigation
efforts resulting from a strong housing market. Claims paid on direct primary
insurance increased by 6% to $36.6 million, due to an increase in the number of
claims paid in the first half of 2001 to 1,834 from 1,779 in the first half of
2000, and to an increase in the average claim size to $19,970 for the first six
months of 2001 from $19,453 for the comparable period of 2000.
Total expenses, including the amortization of policy acquisition costs and
non-acquisition related operating costs, decreased to $63.0 million for the six
months ended June 30, 2001 from $64.2 million for the comparable period of 2000.
This decrease was due primarily to a 4% decrease in amortization of deferred
acquisition costs to $38.3 million for the second quarter of 2001. Mortgage
insurance policy acquisition costs incurred and deferred increased by 11% to
$41.4 million for the first half of 2001 due to an increase in new insurance
written, partially offset by the efficiencies in PMI's electronic commerce
business. New policies processed by contract underwriters represented 30% of new
insurance written during the first six months of 2001 compared to 23% during the
corresponding period in 2000. In the first half of 2001,
19
electronic delivery accounted for 45% of PMI's commitments of insurance, an
increase of 120% from the corresponding period in 2000. Other operating expenses
increased to $24.7 million, 5% over the corresponding period of 2000, primarily
due to increased payroll and related expenses offset by an increase in
allocation to the holding company associated with diversification efforts.
The mortgage insurance loss ratio decreased by 5.2 percentage points to 16.1%
from the corresponding period in 2000. The decline was attributed to the
decrease in losses and loss adjustment expenses and to the increase in premiums
earned. The net expense ratio for the first half of 2001 decreased by 3.0
percentage points from the first half of 2000 to 23.8%, largely due to the
decrease in the amortization of deferred policy acquisition costs and to the
increase in net premiums written. The combined ratio decreased by 8.2
percentage points to 39.9% for the six months ended June 30, 2001.
International Mortgage Insurance Operations
International Mortgage Insurance operations include PMI Mortgage Insurance Ltd,
or PMI Ltd; and PMI Mortgage Insurance Company Limited, or PMI Europe. The
financial results of international operations are subject to currency rate risk.
The reported results of PMI Ltd were affected by the devaluation in the
Australian dollar from 2000 to 2001. The average AUD/USD exchange rate was 0.53
for the first half of 2001 compared to 0.62 for the first half of 2000, a 15%
decrease. Net income for PMI Ltd was $9.3 million for the six months ended June
30, 2001 compared to $8.3 million for the six months ended June 30, 2000. PMI
Ltd generated $23.2 million of net premiums written and $14.4 million in net
premiums earned during the first half of 2001, compared to $18.6 million of net
premiums written and $12.7 million in net premiums earned during the first half
of 2000. Net investment income was $5.3 million for the first six months of 2001
compared to $5.6 million for the first six months of 2000. Losses and loss
adjustment expenses were $2.3 million for the six months ended June 30, 2001
compared to $2.2 million for the corresponding period in 2000. Underwriting and
other expenses were $4.7 million for the first half of 2001 compared to $4.6
million for the first half of 2000. In addition, PMI Europe generated $0.6
million of net income, consisting primarily of net investment income, for the
six months ended June 30, 2001. Financial results for the operations in Hong
Kong were immaterial during the second quarter of 2001.
Title Insurance Operations
Net income for American Pioneer Title Insurance Company, or APTIC, was $3.7
million for the six months ended June 30, 2001 compared to $3.3 million for the
six months ended June 30, 2000. Title insurance premiums earned were $67.7
million in the first half of 2001, a 43% increase over the first half of 2000
due to continuing geographic expansion efforts and to the increase in
residential mortgage originations. APTIC is licensed in 45 states and the
District of Columbia. During the first six months of 2001, 52% of APTIC's
premiums earned was generated from the State of Florida compared with 69% during
the corresponding period in 2000. Underwriting and other expenses in the first
half of 2001 increased by 43% compared to the first half of 2000 to $61.1
million, primarily 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 for the first six
months of 2001 increased by 1.8 percentage points to 93.2% from the comparable
period of 2000.
Other
Our net investment income, excluding realized investment gains and losses, was
$64.0 million for the six months ended June 30, 2001, a 14% increase from the
six months ended June 30, 2000. This increase was largely due to the growth in
our investment portfolio and an increase in equity earnings. Net realized
20
investment losses were $2.7 million during the first half of 2001 including a
realized loss of $3.2 million resulted from revaluation of our short-term
investment in Pacific Gas and Electric Company. Interest expense was $5.4
million for the first six months of 2001, an increase of 9% from $4.9 million
for the corresponding period of 2000.
Other income, which was generated primarily by PMI Mortgage Services Co., or
MSC, was $11.8 million for the six months ended June 30, 2001 compared to $4.4
million for the six months ended June 30, 2000. This increase was primarily
attributed to an increase in contract underwriting services in connection with
higher residential mortgage originations and an increase in billing rates for
contract underwriting services. Other expenses, which were incurred by the
holding company and MSC, increased to $28.3 million for the first half of 2001
from $12.0 million for the comparable period of 2000, primarily due to an
increase in contract underwriting activities, and the increased expenses related
to international expansion and diversification efforts.
Our effective tax rate was 29.5% for the six months ended June 30, 2001 compared
to 30.9% for the six months ended June 30, 2000. This decrease was due primarily
to the lower foreign effective tax rate contributing to the reduction of overall
effective tax rate, and partly due to an increase 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 our holding
company, the PMI Group, than they are for PMI. The holding company's principal
sources of funds are dividends from PMI and APTIC, investment income, and funds
that may be raised from time to time in the capital markets.
PMI's ability to pay dividends to our holding company is affected by state
insurance laws, credit agreements, credit rating agencies and the discretion of
insurance regulatory authorities. The laws of Arizona, the state of PMI's
domicile for insurance regulatory purposes, provide 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. Under Arizona
law, based on the amount of its policyholders' surplus, PMI would be able to pay
dividends of approximately $16.0 million to us in 2001 without prior approval of
the Director of the Arizona Department of Insurance.
The laws of Florida limit the payment of dividends by APTIC to The PMI Group 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. Under Florida law,
APTIC would be able to pay dividends of $3.0 million to us in 2001 without prior
permission from the Florida Department of Insurance, all of which was paid in
the first half of 2001.
As of June 30, 2001, our long-term debt and other capital securities outstanding
was $235.4 million and was comprised of the following:
. $35.7 million Australian bank note used for the purchase of PMI Ltd;
. $99.7 million, at par, senior notes used for general corporate purposes; and
. $100.0 million Preferred Capital Securities.
In July 2001, we issued $360.0 million of our 2.50% Senior Convertible
Debentures in a private offering. For additional details with respect to this
offering, see Part II, Item 2 of this Form 10-Q. We applied $35.7 million of the
net proceeds of the offering to repay the above bank note. We expect to apply up
to approximately $100.0 million of the net proceeds of the offering to
repurchase our 6.75% notes and/or our preferred capital securities depending on
market conditions.
As of July 31, 2001, our principal amount of long-term debt and other capital
securities outstanding was $560.0 million and was comprised of the following:
21
. $360.0 million Senior Convertible Debentures;
. $100.0 million, at par, senior notes used for general corporate purposes;
and
. $100.0 million Preferred Capital Securities.
In addition, we have a bank credit line in the amount of $25.0 million with Bank
of America. There were no outstanding borrowings under the credit line. These
financial instruments contain certain financial covenants and restrictions,
including cross-default provisions, risk to capital ratios and minimum capital
and dividend restrictions.
The PMI Group'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 affiliates, the payment of distributions
on our preferred capital securities and the payment of interest and other
expenses incurred. The PMI Group had $97.8 million of available funds at June
30, 2001, which has decreased from the December 31, 2000 balance of $108.3
million. The decrease was primarily due to dividends to shareholders, interest
payments on our long-term debt and distribution on our preferred capital
securities. In November 1998, we announced a stock repurchase program in the
amount of $100.0 million authorized by our board of directors. No common stock
was repurchased during the first half of 2001, and $45.4 million remained
available under the 1998 authorization as of June 30, 2001. We believe that we
have sufficient cash to meet all of our short and medium-term obligations.
The PMI Group's invested assets at June 30, 2001 increased $101.4 million from
December 31, 2000 as a result of positive cash flows from consolidated
operations. Consolidated reserves for losses and loss adjustment expenses
decreased by $0.6 million from December 31, 2000 to $294.5 million at June 30,
2001, due to the decreases in the reserve balances for the primary and GSE pool
insurance books of business.
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 affiliates, and dividends to
our holding company.
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 and Australian subsidiaries, we have guaranteed the performance of
PMI's capital support obligations.
PMI's ratio of net risk in force to statutory capital, or statutory risk-to-
capital ratio, at June 30, 2001 was 13.7 to 1 compared to 14.1 to 1 at December
31, 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
22
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 is 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;
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. 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.
A decline in the volume of low down payment housing could reduce the demand
for private mortgage insurance and, therefore, our revenues.
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 we provide to our customers.
The adoption of a risk-based capital rule by the Office of Federal Housing
Enterprise Oversight could require us to obtain a claims-paying ability rating
of "AAA" and could cause our business to suffer.
On July 19, 2001, the Office of Federal Housing Enterprise Oversight
announced a risk-based capital rule that treats credit enhancements issued by
private mortgage insurance companies with claims-paying ability ratings of "AAA"
more favorably than those issued by mortgage insurance companies with "AA"
ratings. We do not have a "AAA" rating and may need to obtain such a rating as a
result of the rule. To obtain a claims-paying ability rating of "AAA" we may
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. Two of our direct competitors have "AAA" claims paying
ratings, with the balance being rated "AA". While we are currently considering
options to address the rule, we cannot be sure that we will be able to implement
any of the options that we have under consideration to address the risk-based
capital rule in a timely manner, or at all, or that these options, if
implemented, will be effective to address the capital differential contained in
the rule. If we are unable to address the capital differential contained in the
rule in a timely manner, or at all, our business could be seriously harmed.
Changes in the preferences of the GSEs for private mortgage insurance to other
forms of credit enhancement, or a tiering of mortgage insurers based on their
credit rating, as a result of the OFHEO rule could harm our financial condition
and results of operations.
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, or FHA, and to a
lesser degree the Veterans Administration, or VA;
. 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
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. captive reinsurance subsidiaries of national banks, savings
institutions and bank holding companies and other mortgage
lenders.
The OFHEO risk-based capital rule may allow large banks and brokerage
firms to provide or arrange for products that may efficiently substitute for
some of the capital relief provided to the GSEs by private mortgage insurance.
Many of these entities have significantly more capital than we have and a few
have "AAA" ratings. The ability of these companies to offer or arrange for the
products described above will be dependent upon, among other things, how the
OFHEO risk-based capital rule is interpreted and administered and the
willingness of the GSEs to utilize such forms of credit enhancement. We cannot
be sure that we will be able to compete successfully with our direct or indirect
competitors. If we are unable to compete successfully, our business will suffer.
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 FHA and
the VA;
. 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. The loan-to-value ratio is the ratio of the
original loan amount to the value of the property.
These alternatives, or new alternatives to private mortgage insurance that may
develop, could reduce the demand for private mortgage insurance and cause our
revenues and profitability to decline.
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 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 1.50% of the original loan
amounts. These and other legislative and regulatory changes have
25
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 39% of our new insurance written as of June 30, 2001. 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 parties. Secondary market bulk
transactions are negotiated transactions in which we insure a large group of
loans or commit to insure new loans on agreed-upon terms. 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 are the beneficiaries on a substantial majority
of the insurance policies we issue as a result of their purchases of home loans
from lenders or investors. 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, our premium revenue would decline
and our financial condition and results of operations could suffer.
New products introduced by Fannie Mae or Freddie Mac, if widely accepted, could
harm our profitability.
Fannie Mae and Freddie Mac have separately introduced new products for
which they will, upon receipt from lenders of loans with primary mortgage
insurance, restructure the mortgage insurance coverage by reducing the amount of
primary insurance coverage and adding a second layer of insurance coverage,
usually in the form of pool insurance. Pool insurance is a type of mortgage
insurance that covers
26
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. Under these
programs, Fannie Mae and Freddie Mac may provide services to the mortgage
insurer and the mortgage insurer may be required to pay fees to Fannie Mae or
Freddie Mac for the reduced insurance coverage or the services provided. These
new products may prove to be less profitable than PMI's traditional mortgage
insurance business. If these products prove to be less profitable than PMI's
traditional mortgage insurance business, and become widely accepted, our
financial condition and operating results could seriously suffer.
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. Such a result could severely harm our financial
condition and results of operation. 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 a number of other parties,
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.
27
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 June 30, 2001:
. 45% 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. Risk in force is the dollar amount equal to the product of
each individual insured mortgage loan's current principal balance and
the percentage specified in the insurance policy of the claim amount
that would be payable if a claim were made. 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.
. 0.4% 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.
. 8% 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 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 and
approximately 7% of our total new insurance written in the first half of 2001.
Loan characteristics, credit quality, loss development, pricing structures and
persistency, which is the percentage of insurance policies at the beginning of a
period that remain in force at the end of the period, 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, which is the percentage of insured loans in force that are in default,
for non-traditional loans. We cannot be sure 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.
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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 June 30,
2001:
. 13% of our total risk in force was on mortgages for homes located in
California, where the percentage of insured loans in force that were
in default, or default rate, on our policies was 2.13% on that date;
. 8% of our total risk in force was on mortgages for homes located in
Florida, where the default rate on our policies was 2.41% on that
date; 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% on that date.
This compares with a nationwide default rate on our policies of 2.12% as of
June 30, 2001. 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.
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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 June 30, 2001, approximately 78% 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, which is the percentage of loans
insured that have resulted in a paid claim, 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. There are 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, "Aa2" (excellent) by Moody's and "AA+" (very
strong) by Fitch. 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 the Debentures or our common stock
or outstanding debt. The rating agencies could lower or withdraw our ratings at
any time as a result of a number of factors, including:
. underwriting or investment losses;
30
. the necessity to make capital contributions to our subsidiaries
pursuant to capital support agreements;
. other adverse developments in PMI's financial condition or results of
operations; or
. changes in the views of rating agencies.
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 seriously harm 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 prevent us from being able to
maintain the capital resources required 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
31
Insurance determined we were not in compliance with Circular Letter No. 2, our
financial condition and results of operations could suffer.
If adopted, a proposed elimination of a federal tax deduction relating to
contingency reserves could harm our financial performance.
In April 2001, the Congressional Joint Committee on Taxation proposed the
elimination of a federal income tax deduction given for amounts added to
contingency reserves that are required to be established by mortgage insurers,
such as PMI, by state regulations. The deduction presently allows mortgage
insurers to deduct payments made to such reserves subject to limitations and
requirements, including the purchase of non-interest bearing tax and loss bonds
equal to the tax benefit of the deduction. The elimination of this deduction
could harm our financial condition.
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 the ratio of
net risk in force to statutory capital, or the risk-to-capital ratio. 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 Insurance
Company, or Allstate, our former parent company, 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 agreement; 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, we may be required to meet capital requirements that
are higher than statutory capital requirements to satisfy rating agency
requirements. Standard & Poor's has advised us that it is considering a change
to its methodology for computing the amount of capital we need in relation to
non-traditional loans. We do not know when Standard & Poor's will make a final
decision on its new methodology or how any new capital formulation will affect
our business and operations. If Standard & Poor's were to significantly increase
the capital PMI may be required to maintain against non-traditional loans, our
business and operations could suffer.
PMI has several alternatives available to help control its risk-to-capital
ratio, including:
. obtaining capital contributions from The PMI Group;
. purchasing additional quota share or excess of loss reinsurance; and
. reducing the amount of new business written.
32
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, impair PMI's ability to pay dividends to The PMI Group and
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;
. economic downturns in 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.
At June 30, 2001, we had investments in affiliates with a book value of
$149.9 million. The performance of our strategic investments in affiliates could
be harmed by:
. changes in the real estate, mortgage lending, mortgage servicing,
title and financial guaranty markets;
. future movements in interest rates;
33
. 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. Our business will suffer if we do not satisfy all
technological demands of our customers and keep pace with the technological
capabilities of our competitors.
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.
On December 17, 1999, A. Craig Baynham and Linnie Baynham, as plaintiffs,
filed a putative class action against us relating to claimed violations of,
among other things, the Real Estate Settlement Procedures Act, or RESPA. We have
entered into a settlement agreement with the plaintiffs in this lawsuit. A final
order approving the settlement was entered on June 25, 2001. An appeal has been
filed to overturn the District Court's decision to not allow certain individuals
to intervene in the case prior to the entry of the final order. If the appeal is
successful, such individuals could have standing to challenge the terms of the
settlement and final order. 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 agreed to participate in non-binding
mediation with our insurance carriers with respect to the amount of the payments
to be reimbursed to us and have completed one session of that mediation, without
achieving settlement. We believe further mediation sessions will be scheduled.
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.
34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our borrowings under credit facilities are subject to interest rates that are
variable. As of June 30, 2001, the effective duration of our investment
portfolio was 5.3 years. The result of a 100 basis points increase in interest
rates would be a 5.7% 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. At June 30, 2001, $35.7
million of our long-term debt and $204.0 million of our invested assets were
held by PMI Ltd and were denominated in Australian dollars, which has
experienced significant devaluation during the first six months of 2001 compared
to the corresponding period in 2000. In July 2001, the Company repaid an
outstanding bank note of AUS$70.5 million with Bank of America in the amount of
US$35.7 million.
35
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company sold $360 million aggregate principal amount of its 2.50% Senior
Convertible Debentures due 2021 (the "Debentures") in a private offering to
qualified institutional buyers in compliance with Rule 144A under the Securities
Act of 1933, resulting in net proceeds of approximately $350.8 million. The
closings of the offering took place on July 16, 2001 and July 18, 2001. The
initial purchasers of the Debentures were Banc of America Securities LLC and
Lehman Brothers Inc.
The Company used $35.7 million of the net proceeds of the offering to repay an
outstanding bank note with Bank of America. The Company intends to use the
remaining net proceeds of the offering for repayment or retirement of other
existing indebtedness, depending upon market conditions, and for general
corporate purposes.
The Debentures are due on July 15, 2021 and bear interest at a rate of 2.50% per
annum. The Company will pay interest on the Debentures on January 15 and July 15
of each year, beginning January 15, 2002. The Debentures will pay additional
contingent interest in specified circumstances.
The Debentures will be redeemable at the Company's option beginning in 2006, and
the Holders may require the Company to repurchase the Debentures on July 15,
2004, 2006, 2008, 2011 or 2016, and in certain other circumstances.
Holders of the Debentures may convert their Debentures prior to stated maturity
under any of the following circumstances:
. during any quarterly conversion period if the closing sale price of the
Company's common stock for a period of at least 20 trading days in the
period of 30 consecutive trading days ending on the first day of such
conversion period is more than 120% of the conversion price on that
thirtieth day;
. during the five business day period following any 10 consecutive trading-
day period in which the average of the trading prices (as defined in the
Indenture) for a Debenture was less than 105% of the average sale prices
(as defined in the Indenture) of the Company's common stock multiplied by
the number of shares into which such Debenture is then convertible;
. during such period, if any, after the 30th day following the initial
issuance of the Debentures that the credit rating assigned to the
Debentures by both Moody's Investors Service, Inc. and Standard & Poor's
Rating Services is below "Baa3" and "BBB-", respectively, or if neither
rating agency is rating the Debentures;
. if the Company has called those Debentures for redemption; or
. upon the occurrence of specified corporate transactions described in the
Indenture.
Holders may convert any of their outstanding Debentures (or portions of
outstanding Debentures) as described above into the Company's common stock
initially at the conversion price of $88.31 per share (equal to a conversion
rate of 11.324 shares per $1,000 principal amount of Debentures). The conversion
price (and the conversion rate) may be adjusted for certain reasons, but will
not be adjusted for accrued interest, if any. Upon conversion, holders will not
receive any cash payment representing accrued interest. Instead, accrued
interest will be deemed paid by the common stock received by holders on
conversion.
36
Debentures called for redemption may be surrendered for conversion
until the close of business one business day prior to the redemption date.
For additional information about the terms of the Debentures, including the
circumstances under which contingent interest will be payable, see the Company's
Current Report on Form 8-K, filed with the SEC on July 18, 2001, including the
exhibits attached thereto.
37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders on May 17, 2001, the following
individuals were elected to the Board of Directors:
Votes For Votes Withheld
----------------------------------
Mariann Byerwalter 35,032,107 60,991
Dr. James C. Castle 34,210,352 882,746
Donald C. Clark 33,637,375 1,455,723
W. Roger Haughton 34,368,780 724,318
Wayne E. Hedien 35,038,007 55,091
Louis G. Lower II 35,038,097 55,001
Raymond L. Ocampo Jr. 35,038,049 55,049
John D. Roach 35,038,227 54,871
Dr. Kenneth T. Rosen 35,038,147 54,951
Richard L. Thomas 35,030,282 62,816
Mary Lee Widener 35,037,950 55,148
Ronald H. Zech 35,038,277 54,821
The following proposals were approved at the Company's Annual Meeting:
Votes For Votes Against Abstain
----------------------------------------------------
Ratification of the appointment of
Ernst & Young LLP as independent
auditors for 2001 34,826,391 263,215 3,492
Approval of the amendment and
restatement of the Company's
Equity Incentive Plan 27,019,415 5,520,790 52,956
38
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits listed in the accompanying Index to Exhibits
are filed as part of this Form 10-Q.
(b) Reports on Form 8-K:
(i) On July 6, 2001, the Company filed a report on Form 8-K
relating to the RESPA class action lawsuit filed against PMI
Mortgage Insurance Co. by G. Craig Baynham and Linnie Baynham
on December 17, 1999.
(ii) On July 10, 2001, the Company filed a report on Form 8-K
relating to a press release issued by the Company on July 9,
2001 entitled, "PMI Announces Proposed Private Offering of
Senior Convertible Debentures."
(iii) On July 10, 2001, the Company filed a report on Form 8-K
relating to PMI Mortgage Insurance Co.'s new insurance
written, insurance in force, persistency rate and delinquency
rate during the three months ended June 30, 2001.
(iv) On July 11, 2001, the Company filed a report on Form 8-K
relating to a press release issued by the Company on July 10,
2001 entitled, "PMI Announces Sale of 2.50% Senior Convertible
Debentures due 2021."
(v) On July 16, 2001, the Company filed a report on Form 8-K
relating to a press release issued by the Company on July 16,
2001 entitled, "PMI Announces Exercise of Initial Purchasers'
Over-Allotment Option to Purchase an Additional $60 million of
2.50% Senior Convertible Debentures due 2021."
(vi) On July 18, 2001, the Company filed a report on Form 8-K
relating to the closing of the sale of $360 million aggregate
principal amount of its 2.50% Senior Convertible Debentures
due 2021.
(vii) On July 20, 2001, the Company filed a report on Form 8-K
relating to a press release issued by the Company on July 19,
2001 entitled, "PMI to Address OFHEO Regulations."
(viii) On July 26, 2001, the Company filed a report on Form 8-K
relating to the Company's second quarter 2001 earnings
conference call held on July 25, 2001.
39
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, in the City of
San Francisco, State of California, on the 13/th/ day of August, 2001.
The PMI Group, Inc.
/s/ John M. Lorenzen, Jr.
------------------------------
John M. Lorenzen, Jr.
Executive Vice President and
Chief Financial Officer
/s/ Brian P. Shea
----------------------
Brian P. Shea
Vice President, Controller and Assistant Secretary
Chief Accounting Officer
40
INDEX TO EXHIBITS
(Part II, Item 6)
Exhibit Number Description of Exhibit
- -------------- ----------------------
4.1 Indenture dated as of July 16, 2001 between The
PMI Group, Inc. and The Bank of New York, as
Trustee, incorporated by reference to Exhibit
4.1 to the Company's report on Form 8-K filed on
July 18, 2001.
4.2 Resale Registration Rights Agreements, dated as
of July 16, 2001, among The PMI Group, Inc.,
Bank of America Securities LLC and Lehman
Brothers Inc., incorporated by reference to
Exhibit 4.2 to the Company's report on Form 8-K
filed on July 18, 2001.
10.1 The PMI Group, Inc. Amended and Restated Equity
Incentive Plan, effective as of June 1, 2000,
incorporated by reference to Exhibit 4.1 to the
Company's Form S-8 Registration Statement (No.
333-63122) filed on June 15, 2001.
10.2 Amendment No. 1 to The PMI Group, Inc. Amended
and Restated Equity Incentive Plan, dated June
11, 2001, incorporated by reference to Exhibit
4.1 to the Company's Form S-8 Registration
Statement (No. 333-63122) filed on June 15,
2001.
10.3 Amendment No. 2 to The PMI Group, Inc. Stock
Plan for Non-Employee Directors (Amended and
Restated as of August 16, 1999), incorporated by
reference to Exhibit 4.1 to the Company's
Post-Effective Amendment No. 1 to Form S-8
Registration Statement (No. 33-99378) filed on
June 15, 2001.
11.1 Computation of Net Income Per Share
41