-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A10XcxS3CpBWyTmS2JVX+em7JAhmIownmx/G9f3kVQLflnB/VcrNlDhwtqXzT9sP JFcuK4LPU22tv22eEaoNSw== 0000929624-98-001395.txt : 19980814 0000929624-98-001395.hdr.sgml : 19980814 ACCESSION NUMBER: 0000929624-98-001395 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PMI GROUP INC CENTRAL INDEX KEY: 0000935724 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 943199675 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13664 FILM NUMBER: 98686658 BUSINESS ADDRESS: STREET 1: 601 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4157887878 MAIL ADDRESS: STREET 1: 601 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94111 10-Q 1 FORM 10-Q 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, 1998 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 7/31/98 31,290,045 THE PMI GROUP, INC. Index to Quarterly Report on Form 10-Q JUNE 30, 1998 PART I - FINANCIAL INFORMATION PAGE ---- Item 1. Interim Consolidated Financial Statements and Notes. Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 1998 and 1997............................................ 3 Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997................................ 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997....................... 5 Notes to Consolidated Financial Statements................. 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 8-21 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................ 21 PART II - OTHER INFORMATION Item 1. Legal Proceedings........................................... 22 Item 4. Submission of Matters to a Vote of Security Holders......... 22 Item 5. Other Information........................................... 22 Item 6. Exhibits and Reports on Form 8-K............................ 23 SIGNATURES............................................................ 24 INDEX TO EXHIBITS..................................................... 25 2 PART I - FINANCIAL INFORMATION ITEM 1. INTERIM FINANCIAL STATEMENTS THE PMI GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, --------------------- --------------------- (In thousands except for per share amounts) 1998 1997 1998 1997 ------ ------ ------ ------ REVENUES Premiums earned $118,327 $109,906 $235,173 $217,997 Investment income, less investment expense 21,139 20,752 42,716 40,747 Realized capital gains, net 2,226 546 10,191 18,814 Other income 5,777 1,705 10,023 2,897 -------- -------- -------- -------- TOTAL REVENUES 147,469 132,909 298,103 280,455 -------- -------- -------- -------- LOSSES AND EXPENSES Losses and loss adjustment expenses 30,588 34,235 68,675 73,750 Underwriting and other expenses 48,319 35,959 92,496 70,374 Interest expense 1,797 1,687 3,503 3,375 Distributions on redeemable preferred capital securities 2,078 2,079 4,157 3,464 TOTAL LOSSES AND EXPENSES -------- -------- -------- -------- 82,782 73,960 168,831 150,963 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 64,687 58,949 129,272 129,492 INCOME TAX EXPENSE 17,900 16,670 36,717 38,041 -------- -------- -------- -------- NET INCOME $ 46,787 $ 42,279 $ 92,555 $ 91,451 ======== ======== ======== ======== BASIC NET INCOME PER SHARE $ 1.47 $ 1.26 $ 2.88 $ 2.70 ======== ======== ======== ======== DILUTED NET INCOME PER SHARE $ 1.46 $ 1.25 $ 2.86 $ 2.69 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 3 THE PMI GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, (Dollars in thousands) 1998 1997 ----------------- ----------------- ASSETS Investments Available for sale, at market Fixed income securities (amortized cost $1,239,164 and $1,234,178) $1,316,078 $1,308,768 Equity securities Common stock (cost $49,722 and $38,221) 86,273 73,596 Preferred stock (cost $22,235 and $12,049) 22,320 12,360 Common stock of affiliates, at underlying book value 43,080 16,987 Short-term investments (at cost, which approximates market) 29,056 78,890 ---------- ---------- TOTAL INVESTMENTS 1,496,807 1,490,601 Cash 8,862 11,101 Accrued investment income 19,900 20,794 Reinsurance recoverable and prepaid premiums 35,021 31,676 Premiums receivable 21,105 19,756 Receivable from affiliates 5,966 8,605 Receivable from Allstate 21,600 16,822 Deferred policy acquisition costs 47,966 37,864 Property and equipment, net 34,161 31,393 Other assets 14,443 17,991 ---------- ---------- TOTAL ASSETS $1,705,831 $1,686,603 ========== ========== LIABILITIES Reserve for losses and loss adjustment expenses $ 201,726 $ 202,387 Unearned premiums 81,071 94,150 Long-term debt 99,442 99,409 Reinsurance balances payable 13,432 11,828 Deferred income taxes 80,427 76,395 Other liabilities and accrued expenses 58,485 42,248 ---------- ---------- TOTAL LIABILITIES 534,583 526,417 ---------- ---------- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURE OF THE COMPANY 99,023 99,006 SHAREHOLDERS' EQUITY Preferred stock -- $.01 par value; 5,000,000 shares authorized - - Common stock -- $.01 par value; 125,000,000 shares authorized; 35,194,275 and 35,145,247 issued 352 351 Additional paid-in capital 264,324 262,448 Unrealized net gains on investments 74,078 71,936 Retained earnings 965,941 876,588 Treasury stock (3,751,600 and 2,684,000 shares at cost) (232,470) (150,143) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 1,072,225 1,061,180 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,705,831 $1,686,603 ========== ==========
See accompanying notes to consolidated financial statements. 4 THE PMI GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, ------------------------------------ (In thousands) 1998 1997 ---------------- ------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 92,555 $ 91,451 Adjustments to reconcile net income to net cash provided by operating activities: Realized capital gains, net (10,191) (18,814) Equity in earnings of affiliates (1,119) (659) Depreciation and amortization 3,093 2,052 Changes in: Reserve for losses and loss adjustment expenses (661) (1,485) Unearned premiums (13,079) (17,261) Deferred policy acquisition costs (10,102) (2,156) Accrued investment income 894 (1,169) Reinsurance balances payable 1,604 (3,219) Reinsurance recoverable and prepaid premiums (3,345) 59,940 Premiums receivable (1,349) (1,842) Income taxes 2,879 1,653 Receivable from affiliates 2,639 196 Receivable from Allstate (4,778) -- Other 19,803 (7,314) -------- --------- Net cash provided by operating activities 78,843 101,373 -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of equity securities 25,688 74,665 Investment collections of fixed income securities 17,672 7,500 Proceeds from sales of fixed income securities 58,538 232,113 Investment purchases Fixed income securities (81,096) (376,785) Equity securities (37,333) (22,136) Net (increase) decrease in short-term investments 49,834 (47,828) Investment in affiliates (24,953) (2,700) Purchase of property and equipment (5,736) (5,576) -------- --------- Net cash provided by (used in) investing activities 2,614 (140,747) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of redeemable preferred capital securities -- 99,000 Proceeds from exercise of stock options 1,875 2,078 Dividends paid to shareholders (3,244) (3,398) Purchase of The PMI Group, Inc. common stock (82,327) (59,908) -------- --------- Net cash provided by (used in) financing activities (83,696) 37,772 -------- --------- NET DECREASE IN CASH (2,239) (1,602) CASH AT BEGINNING OF PERIOD 11,101 6,592 -------- --------- CASH AT END OF PERIOD $ 8,862 $ 4,990 ======== =========
See accompanying notes to consolidated financial statements. 5 THE PMI GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of The PMI Group, Inc. ("TPG"), its wholly-owned subsidiaries, PMI Mortgage Insurance Co. ("PMI"), Residential Guaranty Co., American Pioneer Title Insurance Company ("APTIC"), PMI Mortgage Guaranty Co., Residential Reinsurance Co., PMI Capital I and TPG Financial Insurance, and PMI's wholly-owned subsidiaries, PMI Mortgage Services Co. ("MSC") and PMI Securities Co., collectively referred to as the "Company." All material intercompany transactions and balances have been eliminated in consolidation. In addition, PMI owns 45% of CMG Mortgage Insurance Company ("CMG") and TPG owns 22.3% of RAM Holdings Ltd. and RAM Holdings II Ltd. (collectively referred to as "RAM Re"). These companies are accounted for on the equity method in the Company's consolidated financial statements. The Company's unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the requirements of Form 10-Q. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company's consolidated financial condition at June 30, 1998, and its consolidated statements of operations and cash flows for the periods ended June 30, 1998 and 1997, have been included. Interim results for the periods ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. The financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in The PMI Group, Inc. 1997 Annual Report to Shareholders. NOTE 2 - EARNINGS PER SHARE The weighted average common shares outstanding for computing basic earnings per share ("EPS") were 31,918,220 for the three months ended June 30, 1998, 33,617,783 for the three months ended June 30, 1997, 32,173,226 for the six months ended June 30, 1998, and 33,919,981 for the six months ended June 30, 1997. The weighted average common shares outstanding for computing diluted EPS includes only stock options issued by the Company that have a dilutive impact and are outstanding for the period, and had the potential effect of increasing common shares to 32,119,224 for the three months ended June 30, 1998, 33,715,966 for the three months ended June 30, 1997, 32,361,101 for the six months ended June 30, 1998, and 34,026,349 for the six months ended June 30, 1997. Net income available to common shareholders does not change for computing diluted EPS. NOTE 3 - COMPREHENSIVE INCOME In 1998, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130 requires that an enterprise report, by major component and as a single total, the change in its net assets during the period from non-owner sources. The reconciliation of net income to comprehensive income for the three months and six months ended June 30, 1998 and June 30, 1997 are as follows: 6
Three Months Six Months ended June 30 ended June 30 ---------------------- ---------------------- 1998 1997 1998 1997 ------ ------- -------- -------- (In thousands) COMPREHENSIVE INCOME Net Income $46,787 $42,279 $ 92,555 $ 91,451 Other comprehensive income, net of tax: Unrealized gains on securities: Unrealized holding gains arising during period 3,213 22,147 8,766 9,754 Less: reclassification adjustment for gains included in net income (1,447) (355) (6,624) (12,229) ------- ------- -------- -------- Other comprehensive income (loss), net of tax 1,766 21,792 2,142 (2,475) ------- ------- -------- -------- COMPREHENSIVE INCOME $48,553 $64,071 $ 94,697 $ 88,976 ======= ======= ======== ========
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENT In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Adoption of SFAS No. 131 will not impact the Company's financial condition, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. The statement is effective for 1998 and is not required for interim financial statements in the initial year of application. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF CONSOLIDATED OPERATIONS THREE MONTHS ENDED JUNE 30, 1998 AND 1997 Consolidated net income in the three months ended June 30, 1998 was $46.8 million, a 10.6% increase over net income of $42.3 million in the corresponding period of 1997. The increase was primarily due to increases in premiums earned, other income, and realized capital gains of $8.4 million, $4.1 million, and $1.7 million respectively, and secondarily to a decrease in losses and loss adjustment expenses of $3.6 million, partially offset by an increase in underwriting and other expenses of $12.4 million. Diluted earnings per share were $1.46 in the three months ended June 30, 1998, compared with $1.25 in the corresponding period of 1997, a 16.8% increase. Excluding capital gains, diluted earnings per share were $1.41 in the second quarter of 1998 compared with $1.24 in the second quarter of 1997, a 13.7% increase. Revenues in the second quarter of 1998 were $147.5 million, an 11.0% increase over revenues of $132.9 million in the second quarter of 1997. MORTGAGE INSURANCE OPERATIONS PMI's new insurance written ("NIW") totaled $6.9 billion in the second quarter of 1998, compared with $3.6 billion in the second quarter of 1997, a 91.7% increase. The increase in NIW resulted primarily from the number of new mortgage insurance policies issued increasing to 52,900 policies in the three months ended June 30, 1998 from 28,400 policies in the corresponding period of 1997, an 86.3% increase, and secondarily from an increase in the average loan size to $130,800 from $127,200. The primary factor contributing to the increase in new policies issued was the growth in the volume of insured loans in the private mortgage insurance industry in the second quarter of 1998 compared with the corresponding period of 1997. The private mortgage insurance industry experienced an increase in total new insurance written of 61.7% to $46.4 billion in the second quarter of 1998 from $28.7 billion in the corresponding period of 1997. The increase was caused primarily by the continued high levels of refinancing activity brought on by lower interest rates, and secondarily to a strong home purchase market. Refinancing as a percentage of PMI's NIW increased to 31.5% in the three months ended June 30, 1998 from 10.5% in the corresponding period of 1997. A secondary factor contributing to the increase in new policies issued was the growth in PMI's market share in the second quarter of 1998. PMI's market share of NIW increased to 14.9% in the three months ended June 30, 1998 from 12.6% in the corresponding period of 1997. On a combined basis with CMG, market share increased to 16.3% in the second quarter of 1998 compared with 13.7% in the corresponding period of 1997. The increase in market share was primarily due to the expansion of value-added products and services, primarily contract underwriting, offered to mortgage lenders and the offering of a government sponsored enterprises ("GSE") pool insurance product to selected lenders and entities sponsoring affordable housing initiatives during the fourth quarter of 1997 and the first half of 1998. New pool risk written was $38 million in the second quarter of 1998 compared with $14 million in the first quarter of 1998. Risk in force under risk-share programs with mortgage lenders represented less than one percent of total risk in force at June 30, 1998. Management expects new pool risk written and the percent of risk share programs to increase in the second half of 1998. See Cautionary Statement and Factors That May Affect Future Results and Market Price of Stock - Changes in Composition of Insurance Risk Written; Pool Insurance. PMI's cancellations of insurance in force were $6.7 billion in the second quarter of 1998 compared to $3.8 billion in the corresponding period of 1997. The increase in policy cancellations is primarily due to mortgage 8 prepayments as a result of the continued high levels of refinancing activity experienced by PMI as discussed above. As a result of the higher cancellation activity, PMI's persistency rate decreased to 73.9% as of June 30, 1998 compared with 77.6% as of March 31, 1998, 80.8% as of December 31, 1997, and 83.9% as of June 30, 1997. The drop in persistency resulted in a decrease in insurance in force to $77.6 billion at June 30, 1998 compared with $77.8 billion at December 31, 1997. However, insurance in force increased by $0.2 billion compared with $77.4 billion at March 31, 1998. On a combined basis with CMG, insurance in force grew to $80.9 billion at June 30, 1998 compared with $80.1 billion at March 31, 1998, and $80.2 billion at December 31, 1997. As a result of the cancellations of older, lower coverage policies (with lower premium rates) being replaced by higher coverage loans (with higher premium rates), risk in force has been experiencing faster growth rates than insurance in force. Risk in force grew by $0.2 billion to $18.3 billion at June 30, 1998 compared with $18.1 billion at March 31, 1998 and December 31, 1997, and grew by $0.6 billion compared with $17.7 billion at June 30, 1997. On a combined basis with CMG, risk in force was $19.1 billion at June 30, 1998 compared with $18.8 billion at March 31, 1998, and $18.7 billion at December 31, 1997. Mortgage insurance net premiums written were $99.4 million in the second quarter of 1998 compared with $92.1 million in the corresponding period of 1997, an increase of 7.9%. The increase is attributable to the growth of risk in force and higher average premium rates. The increase in premium rates is caused by two factors: higher coverage percentages, and the continuing shift of PMI's policies in force to the monthly product with a higher premium rate. PMI's monthly product represented 64.7% of risk in force at June 30, 1998 compared with 52.3% at June 30, 1997. Mortgages with original loan-to-value ratios greater than 90% and equal to or less than 95% ("95s") with 30% insurance coverage increased to 31.6% of risk in force as of June 30, 1998 from 25.2% as of June 30, 1997. Similarly, mortgages with original loan-to-value ratios greater than 85% and equal to or less than 90% ("90s") with 25% insurance coverage increased to 26.4% of risk in force as of June 30, 1998 compared with 21.6% as of June 30, 1997. Mortgage insurance premiums earned increased 4.6% to $100.7 million in the second quarter of 1998 from $96.3 million in the second quarter of 1997. The increase is attributable to the increase in premiums written, offset by increases in refunded and ceded premiums. Refunded premiums increased to $6.1 million in the second quarter of 1998 from $3.8 million in the second quarter of 1997, due primarily to the increase in policy cancellations as discussed above. Ceded premiums increased to $4.5 million in the second quarter of 1998 from $4.1 million in the second quarter of 1997 due to the continued expansion of reinsurance arrangements under risk-share programs with affiliates of customers. Mortgage insurance losses and loss adjustment expenses decreased to $30.7 million in the second quarter of 1998 from $33.9 million in the second quarter of 1997, a decrease of 9.4%. This decrease was due primarily to the continuing improvement of the California housing markets and the corresponding decrease in the number of loans in default and claim payments. Loans in default decreased to 14,965 loans at June 30, 1998 from 15,368 loans at June 30, 1997. Direct primary claims paid by PMI decreased to $34.4 million in the second quarter of 1998 from $35.6 million in the second quarter of 1997 due to a decrease in the average claim size in the second quarter of 1998 compared to the corresponding period of 1997, partially offset by an increase in the number of claims filed. The improved claim results are due primarily to a smaller percentage of claims originating from the California book of business, and also to increased loss mitigation efforts by PMI. 9 PMI's default rate has decreased to 2.16% at June 30, 1998 from the June 30, 1997 rate of 2.20%. This decrease was due primarily to the continuing improvement in the California real estate market. Management believes that PMI's total default rate could increase in 1998 due to the continued maturation of its 1994 and 1995 books of business. See Cautionary Statement and Factors That May Affect Future Results and Market Price of Stock - Regional Concentration. Default rates on PMI's California policies continue to improve, decreasing to 3.20% (representing 3,252 loans in default) at June 30, 1998, from 3.65% (representing 4,041 loans in default) at June 30, 1997. Policies written in California accounted for approximately 49.1% and 65.5% of the total dollar amount of claims paid in the second quarters of 1998 and 1997, respectively. Although management expects that California should continue to account for a significant portion of total claims paid, management anticipates that with continued improvement in the California economy, increased benefits of loss mitigation efforts and improved default reinstatement rates, California claims paid as a percentage of total claims paid should continue to decline. See Cautionary Statement and Factors That May Affect Future Results and Market Price of Stock - Loss Reserves and Regional Concentration. Mortgage insurance underwriting and other expenses increased 27.1% to $26.3 million in the second quarter of 1998 from $20.7 million in the second quarter of 1997. This increase was primarily attributable to the growth in mortgage origination volume which caused increases in policy acquisition costs, including contract underwriting expenses. New policies processed by contract underwriters represented 33.6% of PMI's NIW in the second quarter of 1998 compared with 18.2% in the corresponding period of 1997. Contract underwriting is more expensive on a per application basis than underwriting a mortgage insurance application in PMI's field offices, and has become the preferred method among many mortgage lenders for processing loan applications. Management anticipates that contract underwriting will continue to generate a significant percentage of PMI's NIW and that customer demand for contract underwriting services will increase. In addition, management anticipates that the rate of growth of policy acquisition costs will exceed the growth rate of premiums, if any, for the remainder of the year. See Cautionary Statement and Factors That May Affect Future Results and Market Price of Stock - Contract Underwriting Services; New Products. The mortgage insurance loss ratio improved to 30.4% in the second quarter of 1998 compared to 35.2% in the second quarter of 1997 due primarily to the growth in premiums earned coupled with the decrease in losses and loss adjustment expenses. The expense ratio increased to 26.4% in the second quarter of 1998 from 22.5% in the second quarter of 1997 due primarily to the increase in policy acquisition costs resulting from the growth in NIW. The combined ratio decreased to 56.8% in the second quarter of 1998 from 57.7% in the second quarter of 1997. TITLE INSURANCE OPERATIONS Title insurance premiums earned increased 29.4% to $17.6 million in the second quarter of 1998 compared with $13.6 million in the second quarter of 1997. This increase was primarily attributable to the continuing growth in residential mortgage originations resulting from the continued high levels of refinancing activity and a strong new home purchase market in the states where APTIC operates. Underwriting and other expenses increased 28.9% to $15.6 million in the second quarter of 1998 compared to $12.1 million in the second quarter of 1997. This increase is directly attributable to an increase in agency fees and commissions related to the increase in premiums earned. The title insurance combined ratio decreased to 88.3% in the second quarter of 1998 from 91.9% in the second quarter of 1997. OTHER The Company's net investment income increased by 1.4% to $21.1 million in the second quarter of 1998 from $20.8 million in the second quarter of 1997. The increase was primarily attributable to the growth in the average amount of invested assets, partially offset by a slight decrease in the average investment yield (pretax) to 6.1% in 10 the second quarter of 1998 from 6.2% in the second quarter of 1997. Realized capital gains (net of losses) increased to $2.2 million in the second quarter of 1998 from $0.5 million in the second quarter of 1997. Other income, primarily contract underwriting revenues generated by MSC, increased to $5.8 million in the second quarter of 1998 from $1.7 million in the second quarter of 1997. Other expenses, primarily expenses incurred by MSC, increased to $6.4 million in the second quarter of 1998 compared with $3.1 million in the second quarter of 1997. These increases are primarily due to increased contract underwriting services provided to the Company's mortgage insurance customers, and secondarily to other ancillary services. See discussions above and Cautionary Statement and Factors That May Affect Future Results and Market Price of Stock - Contract Underwriting Services; New Products. The Company's effective tax rate decreased to 27.7% in the second quarter of 1998 compared to 28.3% in the second quarter of 1997. The year over year decrease in the effective rate was caused primarily by an increase in the percentage of tax exempt income included in income before taxes during the second quarter of 1998, offset by the increase in realized capital gains. SIX MONTHS ENDED JUNE 30, 1998 AND 1997 Consolidated net income in the six months ended June 30, 1998 was $92.6 million, a 1.2% increase over net income of $91.5 million in the corresponding period of 1997. The increase was primarily due to increases in premiums earned of $17.2 million and other income of $7.1 million, to a decrease in losses and loss adjustment expenses of $5.1 million, offset by an increase in underwriting and other expenses of $22.1 million and a decrease in realized capital gains of $8.6 million. Diluted earnings per share were $2.86 in the six months ended June 30, 1998, compared with $2.69 in the corresponding period of 1997, a 6.3% increase. Excluding capital gains, diluted earnings per share were $2.66 in the six months ended June 30, 1998 compared with $2.33 in the six months ended June 30, 1997, a 14.2% increase. Revenues in the six months ended June 30, 1998 were $298.1 million compared with $280.5 million in the corresponding period of 1997, a 6.3% increase. MORTGAGE INSURANCE OPERATIONS PMI's new insurance written ("NIW") totaled $11.7 billion in the six months ended June 30, 1998 compared with $6.7 billion in the six months ended June 30, 1997, a 74.6% increase. The increase in NIW resulted primarily from the number of new mortgage insurance policies issued increasing to 89,550 policies in the six months ended June 30, 1998 from 52,550 policies in the corresponding period of 1997, a 70.4% increase, and secondarily from an increase in the average loan size to $131,100 from $127,200. The primary factor contributing to the increase in new policies issued was the growth in the volume of insured loans in the private mortgage insurance industry in the six months ended June 30, 1998 compared with the corresponding period of 1997. The private mortgage insurance industry experienced an increase in total new insurance written of 51.0% to $81.4 billion in the six months ended June 30, 1998 from $53.9 billion in the corresponding period of 1997. The secondary factor contributing to the increase in new policies issued was the growth in PMI's market share in the second quarter of 1998. PMI's market share of NIW increased to 14.4% in the six months ended June 30, 1998 from 12.4% in the corresponding period of 1997. On a combined basis with CMG, market share increased to 15.8% in the six months ended June 30, 1998 compared with 13.4% in the corresponding period of 1997. These increases in market share were primarily due to the expansion of value-added products and services, primarily contract underwriting, offered to mortgage lenders, and the offering of a GSE pool insurance product to selected lenders and entities sponsoring affordable housing initiatives during the fourth quarter of 1997 and the first half of 1998. New pool risk written was $52 million in the six months ended June 30, 1998. 11 Mortgage insurance net premiums written were $188.4 million in the six months ended June 30, 1998 compared with $175.5 million in the corresponding period of 1997, an increase of 7.4%. The increase is attributable to the growth of risk in force and to higher average premium rates. The increase in premium rates is attributable to higher coverage percentages, and the continuing shift of PMI's policies in force to the monthly product with a higher premium rate as discussed under the results of consolidated operations for the second quarter. Mortgage insurance premiums earned increased 4.6% to $200.8 million in the six months ended June 30, 1998 from $192.0 million in the corresponding period of 1997. The increase is attributable to the increase in premiums written, offset by increases in refunded and ceded premiums. Refunded premiums increased to $11.2 million in the six months ended June 30, 1998 from $7.0 million in the corresponding period of 1997, due primarily to the increase in mortgage refinancing volume in the first half of 1998. Ceded premiums increased to $9.3 million in the six months ended June 30, 1998 from $7.2 million in the six months ended June 30, 1997 due to the continued expansion of reinsurance arrangements under risk-share programs with affiliates of customers. Mortgage insurance losses and loss adjustment expenses decreased to $68.5 million in the six months ended June 30, 1998 from $73.1 million in the six months ended June 30, 1997, a decrease of 6.3%. This decrease was due primarily to the continuing improvement of the California housing markets and the corresponding decrease in the inventory of loans in default and claim payments. Direct primary claims paid by PMI decreased to $67.3 million in the six months ended June 30, 1998 from $72.8 million in the corresponding period of 1997, a 7.6% decrease. Policies written in California accounted for approximately 52.2% and 68.4% of the total dollar amount of claims paid in the six months ended June 30, 1998 and 1997, respectively. Mortgage insurance underwriting and other expenses increased 23.0% to $50.2 million in the six months ended June 30, 1998 from $40.8 million in the six months ended June 30, 1997. This increase was primarily attributable to the growth in mortgage origination volume which caused increases in policy acquisition costs, including contract underwriting expenses, as discussed under the results of consolidated operations for the second quarter. New policies processed by contract underwriters represented 32.1% of PMI's NIW in the six months ended June 30, 1998 compared with 17.3% in the corresponding period of 1997. The mortgage insurance loss ratio improved to 34.1% in the six months ended June 30, 1998 compared to 38.1% in the corresponding period of 1997, due primarily to the growth in premiums earned coupled with the decrease in losses and loss adjustment expenses. The expense ratio increased to 26.7% in the six months ended June 30, 1998 from 23.2% in the six months ended June 30, 1997, due primarily to the increase in policy acquisition costs from the growth in NIW. The combined ratio decreased to 60.8% in the six months ended June 30, 1998 from 61.3% in the six months ended June 30, 1997. TITLE INSURANCE OPERATIONS Title insurance premiums earned increased 32.3% to $34.4 million in the six months ended June 30, 1998 compared with $26.0 million in the six months ended June 30, 1997. This increase was primarily attributable to the continuing growth in residential mortgage originations resulting from the continued high levels of refinancing activity and a strong new home purchase market in the states where APTIC operates. Underwriting and other expenses increased 29.8% to $30.5 million in the six months ended June 30, 1998 compared to $23.5 million in the six months ended June 30, 1997. This increase is directly attributable to the increase in agency fees and commissions paid related to the increase in premiums earned. The title insurance combined ratio decreased to 89.3% in the six months ended June 30, 1998 from 93.1% in the six months ended June 30, 1997. 12 OTHER The Company's net investment income in the six months ended June 30, 1998 was $42.7 million compared with $40.7 million in the six months ended June 30, 1997, an increase of 4.9%. The increase was primarily attributable to the growth in the average amount of invested assets. The Company's average investment yield (pretax) was 6.1% in the six months ended June 30, 1998 and 1997. Realized capital gains (net of losses) decreased to $10.2 million in the six months ended June 30, 1998 from $18.8 million in the six months ended June 30, 1997. Other income, primarily revenues generated by MSC, increased to $10.0 million in the six months ended June 30, 1998 from $2.9 million in the six months ended June 30, 1997. Other expenses, primarily expenses incurred by MSC, increased to $11.8 million in the six months ended June 30, 1998 compared with $6.1 million in the corresponding period of 1997. These increases are primarily due to increased contract underwriting services provided to the Company's mortgage insurance customers and secondarily to other ancillary services. See discussions above and Cautionary Statement and Factors That May Affect Future Results and Market Price of Stock - Contract Underwriting Services; New Products. The Company's effective tax rate decreased to 28.4% in the six months ended June 30, 1998, compared to 29.4% in the six months ended June 30, 1997. The year over year decrease in the effective rate was caused primarily by an increase in the percentage of tax exempt income included in income before taxes during the first half of 1998, and secondarily by the decrease in realized capital gains. LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION Liquidity and capital resource considerations are different for TPG and PMI, its principal insurance operating subsidiary, as discussed below. TPG's principal sources of funds are dividends from PMI and APTIC, investment income and funds that may be raised from time to time in the capital markets. During the first quarter of 1998, APTIC declared and paid a cash dividend of $3.2 million to TPG, substantially the full amount of a dividend that can be paid by APTIC in 1998 without prior permission from the Florida Department of Insurance. On March 24, 1998, the Arizona Department of Insurance authorized PMI to declare and pay an extraordinary dividend of $50 million to TPG, which was paid in cash on April 3, 1998. In addition, the Arizona Department of Insurance also authorized an extraordinary dividend of $50 million payable after the Department has reviewed the operating results of PMI for the six months ended June 30, 1998. It is not expected that PMI will declare and pay any dividends in 1998 in addition to those already authorized by the Arizona Department of Insurance. TPG has two bank credit lines available totaling $50.0 million. At June 30, 1998, there were no outstanding borrowings under the credit lines. TPG's principal uses of funds are common stock repurchases, the payment of dividends to shareholders, funding of acquisitions, additions to its investment portfolio, investments in subsidiaries, and the payment of interest. In November 1997, an additional $150 million stock buy-back program was authorized by the TPG Board of Directors. As of July 31, 1998, TPG has $57 million available to repurchase additional shares under the authorization. As of June 30, 1998, TPG had approximately $101.1 million of available funds. This amount has decreased from the December 31, 1997 balance of $134 million due primarily to the investment in RAM Re and the common stock repurchases in the first half of 1998, offset by dividends received from PMI and APTIC. 13 The principal sources of funds for PMI are premiums received on new and renewal business and amounts earned from the investment of this cash flow. The principal uses of funds by PMI are the payment of claims and related expenses, policy acquisition costs and other operating expenses, investment in subsidiaries and dividends to TPG. PMI generates positive cash flows from operations as a result of premiums being received in advance of the payment of claims. Cash flows generated from PMI's operating activities totaled $66.8 million and $102.1 million in the six months ended June 30, 1998 and 1997, respectively. The first half of 1997 included the collection of $53.6 million as a result of a termination and commutation of a reinsurance treaty. PMI has commenced a project to prepare the Company's operating and insurance systems for the year 2000 (See Factors That May Affect Future Results and Market Price of Stock - Year 2000 Issues). Management expects to complete this project in the first quarter of 1999 at a total cost of $3 million, which will be funded through operating cash flows. These costs are being expensed as they are incurred. The Company's invested assets increased to $1,496.8 million at June 30, 1998 from $1,490.6 million at December 31, 1997 primarily due to cash flows from operations of $78.8 million and an increase of $3.3 million in net unrealized gains on investments available for sale, offset by stock repurchases of $82.3 million, and dividends paid of $3.2 million. Consolidated reserve for losses and loss adjustment expenses decreased from $202.4 million at December 31, 1997, to $201.7 million at June 30, 1998. The decrease in the consolidated reserve for losses and loss adjustment expense is due primarily to the decrease in PMI's default inventory from December 31, 1997 which was the result of the improvements in PMI's California book of business. However, PMI's reserve per default was strengthened to $12,800 at June 30, 1998 from $11,600 at December 31, 1997. Consolidated shareholders' equity increased from $1,061.2 million at December 31, 1997, to $1,072.2 million at June 30, 1998. The change in shareholders' equity consisted of increases of $92.6 million from net income, an increase of $2.1 million in net unrealized gains on investments available for sale (net of tax), and $1.9 million from stock option activity, offset by common stock repurchases of $82.3 million, and dividends declared of $3.3 million. PMI's statutory risk-to-capital ratio at June 30, 1998 was 14.3:1, compared to 14.6:1 at December 31, 1997. See Factors That May Affect Future Results and Market Price of Stock - Rating Agencies and Risk-to-Capital Ratio. 14 CAUTIONARY STATEMENT Certain written and oral statements made or incorporated by reference from time to time by the Company or its representatives in this document, other documents filed with the Securities and Exchange Commission, press releases, conferences, or otherwise that are not historical facts, and that relate to future plans, events or performance are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include the following: (i) management expects new pool risk written and the percent of risk share programs to increase in the second half of 1998; (ii) management believes that PMI's total default rate could increase in 1998 due to the continued maturation of its 1994 and 1995 books of business; (iii) although management expects that California should continue to account for a significant portion of total claims paid, management anticipates that with continued improvement in the California economy, increased benefits of loss mitigation and improved default reinstatement rates, California claims paid as a percentage of total claims paid should continue to decline; and (iv) Management anticipates that contract underwriting will continue to generate a significant percentage of PMI's NIW and that customer demand for contract underwriting services will increase. In addition, management anticipates that the rate of growth of policy acquisition costs will exceed the growth rate of premiums, if any, for the remainder of the year. The Company's actual results may differ materially from those expressed in any forward-looking statements made by the Company. These forward-looking statements involve a number of risks or uncertainties including, but not limited to, the factors set forth below and in the Company's periodic filings with the Securities and Exchange Commission. FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK GENERAL CONDITIONS Several factors such as economic recessions, declining housing values, higher unemployment rates, deteriorating borrower credit, rising interest rates, increases in refinance activity caused by declining interest rates, legislation impacting borrowers' rights, or combinations of such factors might affect the mortgage insurance industry and demand for housing in general and could materially and adversely affect the Company's financial condition and results of operations. Such economic events could materially and adversely impact the demand for mortgage insurance, cause claims on policies issued by PMI to increase, and/or cause a similar adverse increase in PMI's loss experience. Other factors that may influence the amount of NIW by PMI include: mortgage insurance industry volumes of new business; the impact of competitive underwriting criteria and product offerings and services, including mortgage pool insurance and contract underwriting services; the ability to recruit and maintain a sufficient number of qualified underwriters; the effect of risk- sharing structured transactions; changes in the performance of the financial markets; PMI's claims-paying ability rating; general economic conditions that affect the demand for or acceptance of the Company's products; changes in government housing policy; changes in government regulations or interpretations regarding the Real Estate Settlement Procedures Act ("RESPA"); changes in the statutory charters, regulations, powers and coverage requirements of government sponsored enterprises ("GSEs"), banks and savings institutions; and customer consolidation. 15 MARKET SHARE AND COMPETITION The Company's financial condition and results of operations could be materially and adversely affected by a decline in its market share, or a decline in market share of the private mortgage insurance industry as a whole. Numerous factors bear on the relative position of the private mortgage insurance industry versus government and quasi-governmental competition as well as the competition of lending institutions that choose to remain uninsured, self-insure through affiliates, or offer residential mortgage products that do not require mortgage insurance. The impact of competitive underwriting criteria and product offerings, including mortgage pool insurance and contract underwriting, has a direct impact on the Company's market share. Further, several of the Company's competitors have greater direct or indirect capital reserves that provide them with potentially greater flexibility than the Company in addressing competitive issues. PMI competes directly with federal and state governmental and quasi-governmental agencies, principally the FHA and, to a lesser degree, the VA. Further, the Office of the Comptroller of the Currency has granted permission to certain national banks to form reinsurance companies as wholly-owned operating subsidiaries for the purpose of reinsuring mortgage insurance written on loans originated or purchased by such banks. In addition, the Federal Reserve Board and the Office of Thrift Supervision are in the process of considering whether similar activities are permitted for bank holding companies and savings institutions, respectively. The reinsurance subsidiaries of national banks, savings institutions, or bank holding companies could become significant competitors of the Company in the future. Mortgage lenders, other than banks, thrifts or their affiliates, are forming reinsurance affiliates that are typically regulated solely by the insurance authority of their state of domicile. Management believes that such reinsurance affiliates will increase competition in the mortgage insurance industry and may materially and adversely impact PMI's market share. Certain lenders originate a first mortgage lien with an 80 percent LTV ratio, a 10 percent second mortgage lien, and 10 percent of the purchase price from borrower's funds ("80/10/10"). This 80/10/10 product competes with mortgage insurance as an alternative for lenders selling loans in the secondary mortgage market. If the 80/10/10 product becomes a widely accepted alternative to mortgage insurance, it could have a material and adverse impact on the Company's financial condition and results of operations. Legislation and regulatory changes affecting the FHA and certain commercial banks that forego insurance have affected demand for private mortgage insurance. The maximum individual loan amount that the FHA can insure is currently $170,362 and the maximum individual loan amount that the VA can insure is $203,150. Recently, the Senate passed its Fiscal Year 1999 appropriations bill for the Department of Housing and Urban Development ("HUD") with provisions that would increase the maximum individual loan amount that the FHA can insure to $197,620 and simplify the downpayment formula. The streamlined downpayment formula for FHA loans would eliminate tiered minimum cash investment requirements and establish four maximum loan-to-values based on loan size and closing costs, making FHA insurance more competitive with private mortgage insurance in areas with higher home prices. Although management believes that it is too early to ascertain the impact of any final FHA provisions included in the Fiscal Year 1999 appropriations bill for HUD, any increase in the FHA loan limit, or other expansion of eligibility for the FHA and VA would likely have an adverse affect on the competitive position of PMI and consequently could materially and adversely affect the Company's financial condition and results of operations. INSURANCE IN FORCE A significant percentage of PMI's premiums earned is generated from its existing insurance in force and not from new insurance written. PMI's policies for insurance coverage typically have a policy duration of five to seven years. Insurance coverage may be canceled by the policy owner or servicer of the loan at any time. PMI has no 16 control over the owner's or servicer's decision to cancel insurance coverage and self-insure or place coverage with another mortgage insurance company. There can be no assurance that policies for insurance coverage originated in a particular year or for a particular customer will not be canceled at a later time or that the Company will be able to regain such insurance coverage at a later time. As a result, the Company's financial condition and results of operation could be materially and adversely affected by greater than anticipated policy cancellations or lower than projected persistency resulting in declines in insurance in force. During an environment of falling interest rates, an increasing number of borrowers refinance their mortgage loans. PMI and other mortgage insurance companies generally experience an increase in the prepayment rate of insurance in force, resulting from policy cancellations of older books of business. Although PMI has a history of expanding business during low interest rate environments, the resulting increase of NIW may ultimately prove to be inadequate to compensate for the loss of insurance in force arising from policy cancellations. Any significant decrease in PMI's insurance in force could materially and adversely affect the Company's financial condition and results of operations. Insurance in force as of June 30, 1998 was $77.6 billion compared with $77.8 billion as of December 31, 1997. The decrease in insurance in force is primarily due to higher policy cancellations caused by the refinancing activity in the first half of 1998. The decline in insurance in force will have an adverse impact on PMI's future renewal premiums. FANNIE MAE, FREDDIE MAC AND FHA PMI and other private mortgage insurers are affected by Fannie Mae and Freddie Mac. These GSEs are permitted by statute to purchase conventional high-LTV mortgages from lenders who obtain mortgage insurance on those loans. Fannie Mae and Freddie Mac have the discretion to reduce the amount of private mortgage insurance they require on loans. Any reduction in the amount of private mortgage insurance coverage could materially and adversely affect the Company's financial condition and results of operations. Fannie Mae and Freddie Mac have guidelines which give borrowers the right to request cancellation of mortgage insurance when specified conditions are met. PMI cannot generally cancel its mortgage insurance policies once issued, but must cancel mortgage insurance for a mortgage loan upon the request of the insured. Fannie Mae and Freddie Mac impose requirements on private mortgage insurers for such insurers to be eligible to insure loans sold to such agencies. Under Fannie Mae and Freddie Mac regulations, PMI needs to maintain at least an "AA-" or equivalent claims-paying ability rating in order to provide mortgage insurance on loans purchased by the GSEs. Failure to maintain such a rating would effectively cause PMI to be ineligible to provide mortgage insurance. A loss of PMI's existing eligibility status, either due to a failure to maintain a minimum claims-paying ability rating from the various rating agencies or non-compliance with other eligibility requirements, would have a material, adverse effect on the Company's financial condition and results of operations. RATING AGENCIES PMI's claims-paying ability is currently rated "AA+" (Excellent) by Standard and Poor's Rating Services, "Aa2" (Excellent) by Moody's Investors Service, Inc., "AA+" (Very Strong) by Fitch IBCA, and "AA+" (Very High) by Duff & Phelps Credit Rating Co. These ratings are subject to revisions or withdrawal at any time by the assigning rating organization. The ratings by the organizations are based upon factors relevant to PMI's policyholders and are not applicable to the Company's common stock or outstanding debt. Certain rating agencies have assessed capital charges on pool insurance policies based on 17 price and structure. The methodology for assessing the capital requirement for pool insurance is based on the real estate depression which occurred in oil producing states during the mid-1980's. Management believes the capital charge that is levied currently on pool insurance risk by the rating agencies is generally $1.00 of capital for each $1.40 of pool insurance risk. Regulators specifically limit the amount of insurance risk that may be written by PMI to a multiple of 25 times PMI's statutory capital (which includes the contingency reserve). The rating agencies could change their view as to the capital charges that are assessed on pool insurance products at any time. In the mortgage guaranty insurance industry, liquidity refers to the ability of an enterprise to generate adequate amounts of cash from its normal operations, including premiums received and investment income, in order to meet its financial commitments, which are principally obligations under the insurance policies it has written. Liquidity requirements are significantly influenced by the level and severity of claims. Management believes that a significant reduction in PMI's liquidity could adversely impact its claims- paying ratings which could have a material, adverse effect on the Company's financial condition and results of operations. CONTRACT UNDERWRITING SERVICES; NEW PRODUCTS The Company provides contract underwriting services that enable customers to improve the efficiency and quality of their operations by outsourcing all or part of their mortgage loan underwriting. Contract underwriting services have become increasingly important to mortgage lenders as they seek to reduce costs, including the cost of repurchasing loans from the GSEs and other investors which are not underwritten to relevant guidelines. As a part of its contract underwriting services, PMI provides remedies which may include the assumption of some of the costs of repurchasing insured and uninsured loans from the GSEs and other investors. Generally, the scope of these remedies exceed those contained in PMI's master primary insurance policies. Contract underwriting currently generates a significant percentage of PMI's NIW. Management anticipates that contract underwriting will continue to generate a significant percentage of PMI's NIW. Due to the increasing demand of contract underwriting services, the limited number of underwriting personnel available, and heavy price competition among mortgage insurance companies, PMI's inability to recruit and maintain a sufficient number of qualified underwriters could materially and adversely affect its market share and materially and adversely affect the Company's financial condition and results of operations. Based on the factors above, underwriter hourly rates increased in 1998 over 1997. TPG and PMI, from time to time, introduce new mortgage insurance products or programs. The Company's financial condition and results of operations could be materially and adversely affected if PMI or the Company experiences delays in introducing competitive new products and programs. In addition, for any introduced product, there can be no assurance that such products, including any mortgage pool type products, or programs will be as profitable as the Company's existing products and programs. YEAR 2000 ISSUES The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions in all phases of the Company's operations. Based on previous assessments, the Company determined that it will be required to modify or replace significant portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 Issue can be mitigated. However, if such modifications and conversions are not made, or are not completed in a timely manner, the Year 2000 Issue could have a material impact on the operations of the Company. 18 The Company has initiated formal communications with all of its significant suppliers and large customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 Issue. The Company's total Year 2000 project cost and estimates to complete include the estimated costs and time associated with assessing the impact of a third parties' Year 2000 Issues, and are based on presently available information. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. The Company is utilizing both internal and external resources to reprogram and test the software for Year 2000 modifications. The Company plans to complete the Year 2000 project in the first quarter of 1999 at a total cost of $3.0 million, which will be funded through operating cash flows and is being expensed as incurred. As of June 30, 1998, the Company has incurred and expensed approximately $1.3 million related to its Year 2000 project and the development of a remediation plan. The Company is currently assessing contingency plans that will address failure to remediate its Year 2000 Issue in a timely manner. Although it is highly unlikely given the assessments of the required modifications, PMI might need to process data manually if the Company's critical systems, such as the mortgage insurance system's origination or billing process, fail due to the Year 2000 Issue. In this event, PMI would procure clerical personnel from temporary recruitment firms. Additionally, duplicate records of critical data on Company maintained computer systems are maintained and stored at an offsite location as a routine procedure related to the Company's Disaster Recovery Program. These duplicate records would be available to restore operations disrupted by earthquake, fire or other natural disasters, and may assist in any Year 2000 contingency plan recovery operation. The failure of any of PMI's significant customers or vendors to remediate their Year 2000 Issue, however, is difficult if not impossible to fully address in any contingency plan. The costs of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. NEW YORK DEPARTMENT OF INSURANCE The Company offers a number of risk-share and structured products and programs that are designed to encourage quality originations and loss mitigation by its customers. To date, these products and programs do not represent a significant portion of the Company's revenues or a significant percent of PMI's NIW. In March 1997, the New York Department of Insurance stated in a letter addressed to all private mortgage insurers that certain risk-share and structured products and programs would be considered to be illegal under New York law. Representatives of the mortgage insurance industry have been in discussions with the New York Department of Insurance regarding its March 1997 letter. Management is unable to predict at this time the results of these discussions. RISK-TO-CAPITAL RATIO Regulators specifically limit the amount of insurance risk that may be written by PMI to a multiple of 25 times PMI's statutory capital (which includes the contingency reserve). Other factors affecting PMI's risk-to-capital ratio include: (i) regulatory review and oversight by the State of Arizona, PMI's state of domicile for insurance regulatory purposes; (ii) limitations under the Runoff Support Agreement with Allstate, which prohibit PMI from paying any dividends if, after the payment of any such dividend, PMI's risk-to-capital ratio would equal or exceed 23 to 1; (iii) TPG's credit agreements; and (iv) TPG's and PMI's credit or claims-paying ability ratings which require that the rating agencies' risk-to-capital ratio not exceed 20 to 1. Significant losses could cause a material reduction in statutory capital, causing an increase in the risk-to-capital ratio and thereby limit PMI's ability to write new business. The inability to write new business could materially and adversely affect the Company's financial condition and results of operations. CHANGES IN COMPOSITION OF INSURANCE WRITTEN; POOL INSURANCE The composition of PMI's NIW has included an increasing percentage of mortgages with LTVs in excess of 90% and less than or equal to 95% ("95s"). At June 30, 1998, 46.3% of PMI's risk in force consisted of 95s, which, in 19 PMI's experience, have had a claims frequency approximately twice that of mortgages with LTVs equal to or less than 90% and over 85% ("90s"). PMI also offers coverage for mortgages with LTVs in excess of 95% and up to 97% ("97s"). At June 30, 1998, 2.4% of PMI's risk in force consisted of 97s which have even higher risk characteristics than 95s and greater uncertainty as to pricing adequacy. PMI's NIW also includes adjustable rate mortgages ("ARMs"), which, although priced higher, have risk characteristics that exceed the risk characteristics associated with PMI's book of business as a whole. Since the fourth quarter of 1997, PMI has offered a pool insurance product to state housing finance authorities and certain lenders. Pool insurance is generally used as an additional credit enhancement for certain secondary market mortgage transactions and generally covers the loss on a defaulted mortgage loan that exceeds the claim payment under the primary coverage, if primary insurance is required on that mortgage loan. Pool insurance also generally covers the total loss on a defaulted mortgage loan which did not require primary insurance, in each case up to a stated aggregate loss limit. New pool risk written was $38 million in the second quarter of 1998, and $52 million in the six months ended June 30, 1998. Management expects new pool risk written to increase significantly throughout the year and into 1999. Although PMI charges higher premium rates for loans that have higher risk characteristics, including ARMs, 95s, 97s and pool insurance products, the premiums earned on such products, and the associated investment income, may ultimately prove to be inadequate to compensate for future losses from such products. Such losses could materially and adversely affect the Company's financial condition and results of operations. POTENTIAL INCREASE IN CLAIMS Mortgage insurance coverage generally cannot be canceled by PMI and remains renewable at the option of the insured for the life of the loan. As a result, the impact of increased claims from policies originated in a particular year generally cannot be offset by premium increases on policies in force or mitigated by nonrenewal of insurance coverage. There can be no assurance, however, that the premiums charged will be adequate to compensate PMI for the risks and costs associated with the coverage provided to its customers. LOSS RESERVES PMI establishes loss reserves based upon estimates of the claim rate and average claim amounts, as well as the estimated costs, including legal and other fees, of settling claims. Such reserves are based on estimates, which are regularly reviewed and updated. There can be no assurance that PMI's reserves will prove to be adequate to cover ultimate loss development on incurred defaults. The Company's financial condition and results of operations could be materially and adversely affected if PMI's reserve estimates are insufficient to cover the actual related claims paid and expenses incurred. REGIONAL CONCENTRATION In addition to nationwide economic conditions, PMI could be particularly affected by economic downturns in specific regions where a large portion of its business is concentrated, particularly California, Florida, and Texas, where PMI has 19.3%, 7.2%, and 6.8% of its risk in force concentrated and where the default rate on all PMI policies in force is 3.20%, 2.59% and 1.97% compared with 2.16% nationwide as of June 30, 1998. CONTINUING RELATIONSHIPS WITH ALLSTATE AND AFFILIATE In December 1993, PMI entered into a Reinsurance Treaty with Forestview Mortgage Insurance Company ("Forestview") whereby Forestview agreed to reinsure all liabilities (net of amounts collected from third party reinsurers and indemnitors) in connection with PMI's mortgage pool insurance business in exchange for 20 premiums received. In 1994, Forestview also agreed that as soon as practicable after November 1, 1994, Forestview and PMI would seek regulatory approval for the Reinsurance Treaty to be deemed to be an assumption agreement and that, upon receipt of the requisite approvals, Forestview would assume such liabilities. The parties are in the process of seeking regulatory approval to complete the assumption of the mortgage pool insurance policies. Until Forestview has assumed directly such mortgage pool insurance policies, PMI will remain primarily liable on the unassumed policies. Forestview's previous claims-paying ability rating of "AA" (Excellent) was withdrawn by Standard and Poor's Rating Services ("S&P"). Management is uncertain at this time what impact the withdrawal of the claims- paying ability rating will have on the parties' ability to timely consummate the assumption transaction. Pursuant to this agreement, PMI ceded $4.9 million of pool premiums to Forestview and Forestview reimbursed PMI for pool claims on the covered policies in the amount of $14.6 million in the six months ended June 30, 1998. It is anticipated that additional pool claims significantly in excess of pool premiums will be paid in 1998 and beyond. As of June 30, 1998, the Company has a $65.4 million reinsurance recoverable from Forestview, of which $59.7 million is related to estimated claims not yet received. The failure of Forestview to meet its contractual commitments would materially and adversely affect the Company's financial condition and results of operations. On October 28, 1994, TPG entered into a Runoff Support Agreement (the "Runoff Support Agreement") with Allstate Insurance Company ("Allstate") to replace various capital support commitments that Allstate had previously provided to PMI. Allstate agreed to pay claims on certain insurance policies issued by PMI prior to October 28, 1994, if PMI's financial condition deteriorates below specified levels, or if a third party brings a claim thereunder. Alternatively, Allstate may make contributions directly to PMI or TPG. In the event that Allstate makes payments or contributions under the Runoff Support Agreement (which possibility management believes is remote), Allstate would receive subordinated debt or preferred stock of PMI or TPG in return. No payment obligation arose under the Runoff Support Agreement in the first half of 1998. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. 21 THE PMI GROUP, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION JUNE 30, 1998 ITEM 1 - LEGAL PROCEEDINGS In the September 30, 1997 Quarterly Report on Form 10-Q, the Company reported the filing of a complaint in the Superior Court of Fulton County, State of Georgia, against The PMI Group, Inc. and PMI Mortgage Insurance Co. On December 18, 1997, The PMI Group, Inc. and PMI Mortgage Insurance Co. filed a counterclaim against BISYS Creative Solutions, Inc. On July 15, 1998, the parties executed a confidential settlement agreement and mutual release of the parties' counterclaims and all claims contained in the complaint captioned BISYS Creative Solutions, Inc., v. The PMI Group, Inc., and PMI Mortgage Insurance Co. (case#-62326). - ------------- ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Stockholders held on May 21, 1998, the following individuals were elected to the Board of Directors: 1. Election of Directors
Votes For Votes Withheld -------- -------------- James C. Castle 24,971,558 3,441,050 Donald C. Clark 24,971,858 3,440,750 W. Roger Haughton 24,972,017 3,440,591 Wayne E. Hedien 24,971,858 3,440,750 John D. Roach 24,972,133 3,440,475 Kenneth T. Rosen 24,972,133 3,440,475 Richard L. Thomas 24,971,488 3,441,120 Mary Lee Widener 24,974,087 3,438,521 Ronald H. Zech 24,971,758 3,440,850
The following proposal was approved at the Company's Annual Meeting: Votes for Votes against Votes withheld Broker Non-Vote ------------ -------------- ---------------- ------------------ 2. Appointment of Deloitte & Touche LLP as independent auditors of the Company for 1998 28,173,306 11,794 6,908 4,234,030
ITEM 5 - OTHER INFORMATION In accordance with Rule 14a-4(c)(1) promulgated by the Securities and Exchange Commission, shareholder proxies obtained by the Company in connection with the 1999 annual meeting of shareholders will confer on proxyholders discretionary authority to vote on any matter presented at the meeting, unless notice of the matter to be presented at the meeting is received by the Secretary of TPG not before February 20, 1999 or after March 22, 1999 in compliance with TPG's Bylaws. As stated in the 1998 proxy statement, any proposals intended to be presented at the 1999 annual meeting of shareholders must be received by the Secretary of the Company on or before December 22, 1998, in order to be considered for inclusion in the Company's proxy statement and form of proxy relating to such meeting. 22 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 None. 23 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on August 13, 1998. THE PMI GROUP, INC. /s/ John M. Lorenzen, Jr. -------------------------- John M. Lorenzen, Jr. Executive Vice President and Chief Financial Officer /s/ William A. Seymore ----------------------- William A. Seymore Vice President and Chief Accounting Officer 24 INDEX TO EXHIBITS (PART II, ITEM 6)
Exhibit Number DESCRIPTION OF EXHIBIT ------- ---------------------- 10.2* The PMI Group, Inc. Equity Incentive Plan as amended 10.3* The PMI Group, Inc. Stock Plan for Non-Employee Directors as amended 10.20* Supplemental Employee Retirement Plan as amended 10.31* The PMI Group, Inc. Directors' Deferred Compensation Plan as amended 11.1 Computation of Net Income Per Share 27.1 Financial Data Schedule
* Compensatory or benefit plan in which certain executive officers or Directors of The PMI Group, Inc. or its subsidiaries are eligible to participate. 25 EX-10.2 2 EQUITY INCENTIVE PLAN AMENDED & RESTATED EXHIBIT 10.2 THE PMI GROUP, INC. EQUITY INCENTIVE PLAN (AMENDED AND RESTATED. EFFECTIVE AS OF FEBRUARY 12, 1998) TABLE OF CONTENTS
Page 1. Purpose........................................................................ 1 2. Definitions.................................................................... 1 3. Scope of the Plan.............................................................. 6 (a) Number of Shares Available For Delivery Under the Plan.................. 6 (b) Effect of Expiration or Termination..................................... 6 (c) Treasury Stock.......................................................... 7 (d) Committee Discretion to Cancel Options.................................. 7 4. Administration................................................................. 7 (a) Committee Administration................................................ 7 (b) Board Reservation and Delegation........................................ 7 (c) Committee Authority..................................................... 7 (d) Committee Determinations Final.......................................... 8 5. Eligibility.................................................................... 8 6. Conditions to Grants........................................................... 9 (a) General Conditions...................................................... 9 (b) Grant of Replacement Options............................................ 9 (c) Grant of Options and Option Price....................................... 11 (d) Grant of Incentive Stock Options........................................ 11 (e) Grant of Reload Options................................................. 12 (f) Grant of Shares of Restricted Stock..................................... 13 (g) Grant of Unrestricted Stock............................................. 16 (h) Grant of Performance Shares............................................. 16 7. Non-transferability............................................................ 17 8. Exercise....................................................................... 17 (a) Exercise of Options..................................................... 17 (b) Special Rules for Section 16 Grantees................................... 18 (c) Permissible Shares Issued............................................... 18 (d) Vesting Upon Retirement, Death or Disability............................ 19 (e) Vesting Upon Change of Control.......................................... 19 9. Deferral....................................................................... 19 10. Loans and Guarantees........................................................... 20
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11. Notification under Section 83(b)............................................... 21 12. Mandatory Withholding Taxes.................................................... 21 13. Elective Share Withholding..................................................... 21 14. Termination of Employment...................................................... 22 (a) Restricted Stock.......................................................... 22 (b) Other Awards.............................................................. 22 (c) Maximum Extension......................................................... 23 15. Equity Incentive Plans of Foreign Subsidiaries................................. 23 16. Substituted Awards............................................................. 23 17. Securities Law Matters......................................................... 23 18. No Funding Required............................................................ 24 19. No Employment Rights........................................................... 24 20. Rights as a Stockholder........................................................ 24 21. Nature of Payments............................................................. 24 22. Non-Uniform Determinations..................................................... 25 23. Adjustments.................................................................... 25 24. Amendment of the Plan.......................................................... 25 25. Termination of the Plan........................................................ 25 26. No Illegal Transactions........................................................ 25 27. Controlling Law................................................................ 25 28. Severability................................................................... 26
II The Plan. The PMI Group, Inc., having established The PMI Group, Inc. -------- Equity Incentive Plan, hereby amends and restates the Plan, effective as of February 12, 1998. 1. Purpose. The primary purpose of the Plan is to provide a means by ------- which key employees of the Company and its Subsidiaries can acquire and maintain stock ownership, thereby strengthening their commitment to the success of the Company and its Subsidiaries and their desire to remain employed by the Company and its Subsidiaries. Another purpose of the Plan is to provide continuation of benefits and opportunities provided to former participants in any of the Sears Plans, or the Allstate Plan, which benefits and opportunities were lost, terminated, forfeited, canceled (with or without the consent of the granter) or reduced as a result of the Company's initial public offering ("IPO"), by providing for the grant of substitute Awards hereunder. The Plan also is intended to attract and retain key employees and to provide such employees with additional incentive and reward opportunities designed to encourage them to enhance the profitable growth of the Company and its Subsidiaries. 2. Definitions. ----------- As used in the Plan, terms defined parenthetically immediately after their use shall have the respective meanings provided by such definitions and the terms set forth below shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): (a) "Allstate Option" means an option granted under the Allstate Plan. (b) "Allstate Plan" means The Allstate Corporation Equity Incentive Plan. (c) "Award" means, individually or collectively, a grant under the Plan of options, restricted Stock, unrestricted Stock or performance shares. (d) "Award Agreement" means the written agreement by which an Award is evidenced. (e) "Board" means the board of directors of the Company. (f) "Change of Control" means: (a). The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (iv) any beneficial ownership maintained by (but not additional acquisitions by), The Allstate Corporation and its subsidiaries, and their respective successors ("Allstate"), pending such time that Allstate distributes or transfers its current ownership interest in the Outstanding Company Common Stock and Outstanding Company Voting Securities as contemplated by the Prospectus dated April 10, 1995, relating to the initial public offering of the common stock of the Company, or (v) any acquisition pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Article 2(f). Notwithstanding the foregoing, in its sole discretion, the Board may increase the 20% threshold set forth above in this subsection (a) prior to any acquisition of 20% or more beneficial ownership of the Outstanding Company Common Stock or the Outstanding Company Voting Securities; provided, that (i) such increased threshold shall apply only to the acquisition and maintenance of beneficial ownership by any Person eligible to report such beneficial ownership at the time of such acquisition on Schedule 13G under the Exchange Act, and (ii) in the event that any Person initially eligible to so report on Schedule 13G thereafter ceases to be eligible to so report on Schedule 13G, the occurrence of the event causing such Person no longer to be eligible to so report shall be deemed an acquisition by such Person of all of the Outstanding Company Common Stock and Outstanding Company Voting Securities beneficially owned by such Person immediately prior to such occurrence; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another entity (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who 2 were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because any Person acquires beneficial ownership of 20% or more of the Outstanding Company Voting Securities or Outstanding Company Common Stock as a result of the acquisition of such securities or stock by the Company, which acquisition reduces the number of the Outstanding Company Voting Securities or Outstanding Company Common Stock; provided, that if after such acquisition by the Company such Person (while such Person remains the beneficial owner of 20% or more of the Outstanding Company Voting Securities or Outstanding Company Common Stock) becomes the beneficial owner of additional shares of such Outstanding Company Voting Securities or Outstanding Company Common Stock (as the case may be), a Change of Control shall then occur. Capitalized terms used in this Article 2(f), not otherwise defined, shall have the meaning set forth in the form of change of control employment agreement approved at the February 12, 1998 meeting of the Board of Directors. (g) "Committee" means the committee of the Board appointed pursuant to Article 4. (h) "Company" means The PMI Group, Inc., a Delaware corporation. 3 (i) "Disability" means, as relates to the exercise of an incentive stock option after Termination of Employment, a permanent and total disability within the meaning of Section 22(e)(3) of the Internal Revenue Code, and for all other purposes, a mental or physical condition which, in the opinion of the Committee, renders a Grantee unable or incompetent to carry out the job responsibilities which such Grantee held or the duties to which such Grantee was assigned at the time the disability was incurred, and which is expected to be permanent or for an indefinite duration. (j) "Effective Date" means the date described in the first paragraph of the Plan. (k) "Fair Market Value" of the Stock means, as of any applicable date (other than the Effective Date) the mean between the high and low prices of the Stock as reported on the New York Stock Exchange Composite Tape, or if there were no sales on such date, on the next preceding date on which there was such a reported sale, provided, however, that if the Stock is acquired and sold in a simultaneous sale pursuant to the provisions of Article 8(a)(iv), Fair Market Value means the price received upon such sale. Solely as of the effective date of the IPO, Fair Market Value of the Stock means the price to the public pursuant to the form of final prospectus used in connection with the IPO, as indicated on the cover page of such prospectus or otherwise. (l) "Fiscal Year" means the fiscal year of the Company. (m) "Grant Date" means the date of grant of an Award determined in accordance with Article 6. (n) "Grantee" means an individual who has been granted an Award. (o) "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, and regulations and rulings thereunder. References to a particular section of the Internal Revenue Code shall include references to successor provisions. (p) "IPO" means such term as defined in the first paragraph of the Plan. (q) "Minimum Consideration" means the $.01 par value per share or such larger amount determined pursuant to resolution of the Board to be capital within the meaning of Section 154 of the Delaware General Corporation Law. (r) "Net Operating Income Per Share" means as to any Fiscal Year, (i) the Company's net income from operations, net of after-tax realized capital gains and losses, divided by (ii) the weighted average number of shares of Stock outstanding during the Fiscal Year, plus dilutive common equivalent shares calculated in accordance with Accounting Principles Board Opinion No. 15. Net Operating Income Per Share for a multi-Fiscal Year period means the average of Net Operating Income Per Share calculated separately for each Fiscal Year of such multi-Fiscal Year period. (s) "1934 Act" means the Securities Exchange Act of 1934, as amended. 4 (t) "Option Price" means the per share purchase price of (i) Stock subject to an option or (ii) restricted Stock subject to an option. (u) "Parent" means Allstate Insurance Company. (v) "Performance Goals" means the goal(s) (or combined goal(s)) determined by the Committee (in its discretion) to be applicable to a Grantee with respect to an Award. As determined by the Committee, the Performance Goals (if any) applicable to an Award may provide for a targeted level or levels of achievement using one or more of the following measures: (i) Net Operating Income per Share, (ii) Return on Equity, and (iii) Total Return. The Performance Goals may differ from Grantee to Grantee and from Award to Award. (w) "Plan" means The PMI Group, Inc. Equity Incentive Plan, as set forth in this instrument and as hereafter amended from time to time. (x) "PMI Group Grantee" means any individual who is employed on the Effective Date by The PMI Group, Inc. or any of its Subsidiaries. (y) "Reload Option" has the meaning specified in Article 6(e). (z) "Retirement" means a Termination of Employment occurring on or after an individual attains age 65, or a Termination of Employment approved by the Company as an early retirement; provided that in the case of a Section 16 Grantee, such early retirement must be approved by the Committee. (aa) "Return on Equity" means as to any Fiscal Year, the Company's net income after taxes expressed as a percentage of average stockholders' equity. For this purpose, average stockholders' equity shall be calculated as the average of stockholders' equity on the first and last days of the Fiscal Year, and excluding unrealized gains and losses. (bb) "Sears" means Sears, Roebuck and Co., a New York corporation. (cc) "Sears Option" means an option granted under a Sears Plan. (dd) "Sears Plans" means the following plans of Sears: the 1994 Employees Stock Plan, the 1990 Employees Stock Plan, the 1986 Employees Stock Plan, the 1982 Employees Stock Plan, the 1978 Employees Stock Plan and the 1979 Incentive Compensation Plan. (ee) "SEC" means the Securities and Exchange Commission. (ff) "Section 16 Grantee" means a person subject to potential liability with respect to equity securities of the Company under Section 16(b) of the 1934 Act. (gg) "Stock" means common stock of the Company, par value $.01 per share. 5 (hh) "Subsidiary" means a corporation as defined in Section 424(f) of the Internal Revenue Code, with the Company being treated as the employer corporation for purposes of this definition. (ii) "10% Owner" means a person who owns stock (including stock treated as owned under Section 424(d) of the Internal Revenue Code) possessing more than 10% of the Voting Power of the Company. (jj) "Termination of Employment" occurs the first day on which an individual is for any reason no longer employed by the Company or any of its Subsidiaries, or by the Parent or any of its subsidiaries, or with respect to an individual who is an employee of a Subsidiary or a subsidiary of the Parent, the first day on which the Company (or the Parent, as the case may be) no longer owns voting securities possessing at least 50% of the Voting Power of such Subsidiary (or subsidiary of the Parent, as the case may be). (kk) "Total Return" means as to any Fiscal Year or multi-Fiscal Year period, the total return (change in share price plus reinvestment of any dividends) of the Stock, as compared to the total return of an index or indexes selected by the Committee. For this purpose, the Committee shall choose from among (i) the Standard & Poor's 500 Composite Index, (ii) the Standard & Poor's Financial Miscellaneous Index, (iii) the Russell 1000 Index, and (iv) the Russell 1000 Financial Services Index. (ll) "Voting Power" means the combined voting power of the then- outstanding voting securities entitled to vote generally in the election of directors. 3. Scope of the Plan. ----------------- (a) Number of Shares Available For Delivery Under the Plan. A maximum ------------------------------------------------------ of 1,400,000 shares of Stock shall be authorized for issuance and delivery on account of the exercise of Awards, including Awards of Replacement Options. No more than an aggregate of 300,000 shares of the aforesaid 1,400,000 shares of Stock may be granted under Article 6(f) and (g). No more than 150,000 shares of Stock may be granted as stock options to any employee during the duration of the Plan. During any Fiscal Year, no Grantee shall be granted more than 20,000 performance shares. Shares of Stock issuable under the Plan may be either authorized but unissued shares of Stock or Treasury Stock. (b) Effect of Expiration or Termination. If and to the extent an ----------------------------------- Award shall expire or terminate for any reason without having been exercised in full (including, without limitation, a cancellation and regrant of an option pursuant to Article 4(c)(vii)), or shall be forfeited, without, in either case, the Grantee having enjoyed any of the benefits of stock ownership (other than voting rights or dividends that are likewise forfeited), the shares of Stock (including restricted Stock) associated with such Award shall become available for other Awards. Except in the case of a Reload Option granted to a Section 16 Grantee, the grant of a Reload Option shall not reduce the number of shares of Stock available for other Awards. 6 (c) Treasury Stock. The Committee shall have the authority to cause -------------- the Company to purchase from time to time shares of Stock to be held as treasury shares and used for or in connection with Awards. (d) Committee Discretion to Cancel Options. Except with respect to -------------------------------------- options granted pursuant to Article 6(b), the Committee may, in its discretion, elect at any time, should it determine it is in the best interest of the Company's stockholders to cancel any options granted hereunder, to cancel all or any of the options granted hereunder and pay the holders of any such options an amount (payable in such proportion as the Committee may determine in cash or in Stock (valued at the Fair Market Value of a share of Stock on the date of cancellation of such option)) equal to the number of shares of Stock subject to such canceled option, multiplied by the amount (if any) by which the Fair Market Value of Stock on the date of cancellation of the option exceeds the Option Price; provided that if the Committee should determine that not making payment of such amount to the holders of such option upon the cancellation would be in the best interests of stockholders of the Company (ignoring in such determination the cost of such payment and considering only other matters), the Committee may void options granted hereunder and declare that no payment shall be made to the holders of such options. 4. Administration. -------------- (a) Committee Administration. Subject to Article 4(b), the Plan shall ------------------------ be administered by the Committee, which shall consist of not less than two persons appointed by the Board, who are directors of the Company and not employees of the Parent, the Company or any of its Subsidiaries. Membership on the Committee shall be subject to such limitations (including, if appropriate, a change in the minimum number of members of the Committee) as the Board deems appropriate to permit transactions pursuant to the Plan to be exempt from potential liability under Section 16(b) of the 1934 Act and to comply with Section 162 (m) of the Internal Revenue Code. (b) Board Reservation and Delegation. The Board may, in its -------------------------------- discretion, reserve to itself or delegate to another committee of the Board any or all of the authority and responsibility of the Committee with respect to Awards to Grantees who are not Section 16 Grantees at the time any such delegated authority or responsibility is exercised. Such other committee may consist of one or more directors who may, but need not be, officers or employees of the Company or of any of its Subsidiaries. To the extent that the Board has reserved to itself or delegated the authority and responsibility of the Committee to such other committee, all references to the Committee in the Plan shall be to such other committee. (c) Committee Authority. The Committee shall have full and final ------------------- authority, in its sole and absolute discretion, but subject to the express provisions of the Plan, as follows: (i) to grant Awards, (ii) to determine (A) when Awards may be granted, and (B) whether or not specific Awards shall be identified with other specific Awards, and if so, whether they shall be exercisable cumulatively with, or alternatively to, such other specific Awards, 7 (iii) to interpret the Plan and to make all determinations necessary or advisable for the administration of the Plan, (iv) to prescribe, amend, and rescind rules and regulations relating to the Plan, including, without limitation, rules with respect to the exercisability and nonforfeitability of Awards upon the Termination of Employment of a Grantee, (v) to determine the terms and provisions of the Award Agreements, which need not be identical and, with the consent of the Grantee, to modify any such Award Agreement at any time, (vi) to cancel options in accordance with the provision of Section 3(d), (vii) except as provided in Section 4(c)(vi) hereof, to cancel, with the consent of the Grantee, outstanding Awards, and to grant new Awards in substitution thereof, (viii) to accelerate the exercisability of, and to accelerate or waive any or all of the restrictions and conditions applicable to, any Award, (ix) to authorize foreign Subsidiaries to adopt plans as provided in Article 15, (x) to make such adjustments or modifications to Awards to Grantees working outside the United States as are necessary and advisable to fulfill the purposes of the Plan, (xi) to authorize any action of or make any determination by the Company as the Committee shall deem necessary or advisable for carrying out the purposes of the Plan, (xii) to make appropriate adjustments to, cancel or continue Awards in accordance with Article 23, and (xiii) to impose such additional conditions, restrictions, and limitations upon the grant, exercise or retention of Awards as the Committee may, before or concurrently with the grant thereof, deem appropriate, including, without limitation, requiring simultaneous exercise of related identified Awards, and limiting the percentage of Awards which may from time to time be exercised by a Grantee. (d) Committee Determinations Final. The determination of the ------------------------------ Committee on all matters relating to the Plan or any Award Agreement shall be conclusive and final. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Award. 5. Eligibility. Awards may be granted to any employee of the Company or ----------- any of its Subsidiaries. In selecting the individuals to whom Awards may be granted, as well as in 8 determining the number of shares of Stock subject to, and the other terms and conditions applicable to, each Award, the Committee shall take into consideration such factors as it deems relevant in promoting the purposes of the Plan. 6. Conditions to Grants. -------------------- (a) General Conditions. ------------------ (i) In accordance with its powers under the Plan, the Committee may grant replacement options (including Reload Options) in accordance with this Article 6 to preserve those opportunities and benefits of PMI Group Grantees which were terminated, forfeited, canceled, or reduced in connection with the IPO. (ii) The Grant Date of an Award shall be the date on which the Committee grants the Award or such later date as specified in advance by the Committee. (iii) The term of each Award (subject to Article 6(b), with respect to replacement Awards and Articles 6(d) and 6(e) with respect to incentive stock options and Reload Options, respectively) shall be a period of not more than 12 years from the Grant Date, and shall be subject to earlier termination as herein provided. (iv) A Grantee may, if otherwise eligible, be granted additional Awards in any combination. (v) The Committee may grant Awards with terms and conditions which differ among the Grantees thereof. To the extent not set forth in the Plan, the terms and conditions of each Award shall be set forth in an Award Agreement. (b) Grant of Replacement Options. Subject to Article 3(a), the ---------------------------- Committee may grant options ("Replacement Options") under the Plan to each PMI Group Grantee who holds unexercised Sears Options (whether or not nonforfeitable) and unexercised Allstate Options (whether or not forfeitable) at the Effective Date; provided that such PMI Group Grantee's right to exercise any Sears Options and Allstate Options has been forfeited or canceled in connection with the IPO. The Award Agreement with respect to such Replacement Options shall provide that the Grantee may exercise a Replacement Option at the same time as he would have been able to exercise the Sears Option or Allstate Option it replaces, subject to Article 8(b), if applicable. (i) Replacement of Sears Options. ---------------------------- (A) The Option Price for a Replacement Option shall be determined by the following formula; provided that in no event shall the Option Price be less than the Minimum Consideration: Option Price = A x B ----- C 9 Any fraction of a cent shall be rounded down to the next full cent. (B) The number of shares of Stock for which the Replacement Option is exercisable shall be determined in accordance with the following formula: Number of Shares = C x D ----- B Any fractional share shall be rounded up to the next full share. (C) In the foregoing formulas, "A" is the option exercise price for a Sears Option being replaced, "B" is the Fair Market Value of a share of Stock as of the effective date of the IPO, "C" is the Fair Market Value of a Sears common share as of the effective date of the IPO, and "D" is the number of Sears common shares for which the Sears Option being replaced is exercisable. (D) Each Replacement Option shall have the same terms and conditions (other than the Option Price and the number of shares of Stock, but including any provision for Reload Options) as, and not give the Grantee any benefits he did not have, under the corresponding Sears Option. (ii) Replacement of Allstate Options. ------------------------------- (A) The Option Price for a Replacement Option shall be determined by the following formula; provided that in no event shall the Option Price be less than the Minimum Consideration: Option Price = A x B ----- C Any fraction of a cent shall be rounded down to the next full cent. (B) The number of shares of Stock for which the Replacement Option is exercisable shall be determined in accordance with the following formula: Number of Shares = C x D ----- B Any fractional share shall be rounded up to the next full share. 10 (C) In the foregoing formulas, "A" is the option exercise price for an Allstate Option being replaced, "B" is the Fair Market Value of a share of Stock as of the effective date of the IPO, "C" is the Fair Market Value of an Allstate common share as of the effective date of the IPO, and "D" is the number of Allstate common shares for which the Allstate Option being replaced is exercisable. (D) Each Replacement Option shall have the same terms and conditions (other than the Option Price and the number of shares of Stock, but including any provision for Reload Options) as, and not give the Grantee any benefits he did not have, under the corresponding Allstate Option. (c) Grant of Options and Option Price. Other than for purposes of --------------------------------- Replacement Options as set forth in Article 6(b) above, the Committee may, in its discretion, grant options (which may be options to acquire unrestricted Stock or restricted Stock) to any employee eligible under Article 5 to receive Awards. No later than the Grant Date of any option, the Committee shall determine the Option Price; provided that the Option Price shall, except as provided in subsection (d) below and in Article 16, not be less than 100% of the Fair Market Value of the Stock on the Grant Date. (d) Grant of Incentive Stock Options. At the time of the grant of any -------------------------------- option other than a Replacement Option, the Committee may designate that such option shall be made subject to additional restrictions to permit it to qualify as an "incentive stock option" under the requirements of Section 422 of the Internal Revenue Code. Any option designated as an incentive stock option: (i) shall have an Option Price of (A) not less than 100% of the Fair Market Value of the Stock on the Grant Date or (B) in the case of a 10% Owner, not less than 110% of the Fair Market Value of the Stock on the Grant Date; (ii) shall have a term of not more than 10 years (five years, in the case of a 10% Owner) from the Grant Date, and shall be subject to earlier termination as provided herein or in the applicable Award Agreement; (iii) shall not have an aggregate Fair Market Value (determined for each incentive stock option at its Grant Date) of Stock with respect to which incentive stock options are exercisable for the first time by such Grantee during any calendar year (under the Plan and any other employee stock option plan of the Grantee's employer or any parent (including but not limited to Allstate Insurance Company and Sears) or subsidiary thereof ("Other Plans")), determined in accordance with the provisions of Section 422 of the Internal Revenue Code, which exceeds $100,000 (the "$100,000 Limit"); 11 (iv) shall, if the aggregate Fair Market Value of Stock (determined on the Grant Date) with respect to all incentive stock options previously granted under the Plan and any Other Plans ("Prior Grants") and any incentive stock options under such grant (the "Current Grant") which are exercisable for the first time during any calendar year would exceed the $100,000 Limit, be exercisable as follows: (A) the portion of the Current Grant exercisable for the first time by the Grantee during any calendar year which would be, when added to any portions of any Prior Grants exercisable for the first time by the Grantee during such calendar year with respect to stock which would have an aggregate Fair Market Value (determined as of the respective Grant Date for such options) in excess of the $100,000 Limit shall, notwithstanding the terms of the Current Grant, be exercisable for the first time by the Grantee in the first subsequent calendar year or years in which it could be exercisable for the first time by the Grantee when added to all Prior Grants without exceeding the $100,000 Limit; and (B) if, viewed as of the date of the Current Grant, any portion of a Current Grant could not be exercised under the provisions of the immediately preceding sentence during any calendar year commencing with the calendar year in which it is first exercisable through and including the last calendar year in which it may by its terms be exercised, such portion of the Current Grant shall not be an incentive stock option, but shall be exercisable as a separate option at such date or dates as are provided in the Current Grant; (v) shall be granted within 10 years from the earlier of the date the Plan is adopted or the date the Plan is approved by the stockholders of the Company; and (vi) shall require the Grantee to notify the Committee of any disposition of any Stock issued pursuant to the exercise of the incentive stock option under the circumstances described in Section 421(b) of the Internal Revenue Code (relating to certain disqualifying dispositions), within 10 days of such disposition. Notwithstanding the foregoing and Article 4(c)(v), the Committee may take any action with respect to any option, including but not limited to an incentive stock option, without the consent of the Grantee, in order to prevent such option from being treated as an incentive stock option. (e) Grant of Reload Options. The Committee may provide in an Award ----------------------- Agreement, including an Award Agreement for the grant of a Replacement Option when the Replaced Sears Option or Replaced Allstate Option included a reload option for Sears shares or Allstate shares, respectively, as the case may be, that a Grantee who exercises all or any portion of an option for shares of Stock which have a Fair Market Value equal to not less than 100% of the Option Price for such options ("Exercised Options") and who paid the Option Price with shares of Stock shall be granted, subject to Article 3, an additional option ("Reload Option") for a number of shares of stock equal to the sum ("Reload Number") of the number of shares of Stock tendered to exercise the Exercised Options plus, if so provided by the Committee, the number of shares of 12 Stock, if any, retained by the Company in connection with the exercise of the Exercised options to satisfy any federal, state or local tax withholding requirements. Reload Options shall be subject to the following terms and conditions: (i) the Grant Date for each Reload Option shall be the date of exercise of the Exercised Option to which it relates; (ii) subject to Article 6(e)(iii) below, the Reload Option may be exercised at any time during the unexpired term of the Exercised Option (subject to earlier termination thereof as provided in the Plan and in the applicable Award Agreement); and (iii) the terms of the Reload Option shall be the same as the terms of the Exercised Option to which it relates, except that (A) the Option Price shall be the Fair Market Value of the Stock on the Grant Date of the Reload Option and (B) no Reload Option may be exercised within one year from the Grant Date thereof. (f) Grant of Shares of Restricted Stock. ----------------------------------- (i) The Committee may, in its discretion, grant shares of restricted Stock to any employee eligible under Article 5 to receive Awards. (ii) Before the grant of any shares of restricted Stock, the Committee shall determine, in its discretion: (A) whether the certificates for such shares shall be delivered to the Grantee or held (together with a stock power executed in blank by the Grantee) in escrow by the Secretary of the Company until such shares become nonforfeitable or are forfeited, (B) the per share purchase price of such shares, which may be zero provided, however, that (1) the per share purchase price of all such shares (other than treasury shares) shall not be less than the Minimum Consideration for each such share; and (2) if such shares are to be granted to a Section 16 Grantee, the per share purchase price of any such shares shall also be at least 50% of the Fair Market Value of the Stock on the Grant Date unless such shares are granted for no monetary consideration (in which case treasury shares are to be delivered) or with a purchase price per share equal to the Minimum Consideration for the Stock, and (C) the restrictions applicable to such grant; 13 (iii) Payment of the purchase price (if greater than zero) for shares of restricted Stock shall be made in full by the Grantee before the delivery of such shares and, in any event, no later than 10 days after the Grant Date for such shares. Such payment may, at the election of the Grantee, be made in any one or any combination of the following: (A) cash, (B) Stock valued at its Fair Market Value on the date of payment or, if the date of payment is not a business day, the next succeeding business day, or (C) with the approval of the Committee, shares of restricted Stock, each valued at the Fair Market Value of a share of Stock on the date of payment or, if the date of payment is not a business day, the next succeeding business day provided, however, that, in the case of payment in Stock or restricted Stock, (1) the use of Stock or restricted Stock in payment of such purchase price by a Section 16 Grantee is subject to the prior receipt by the Company of either a favorable opinion of counsel for the Company or a "no action" letter from the staff of the SEC with respect to the exemption of such use of stock from potential liability under Section 16(b) of the 1934 Act or the inapplicability of such Section; (2) in the discretion of the Committee and to the extent permitted by law, payment may also be made in accordance with Article 10; and (3) if the purchase price for restricted Stock ("New Restricted Stock") is paid with shares of restricted Stock ("Old Restricted Stock"), the restrictions applicable to the New Restricted Stock shall be the same as if the Grantee had paid for the New Restricted Stock in cash unless, in the judgment of the Committee, the Old Restricted Stock was subject to a greater risk of forfeiture, in which case a number of shares of New Restricted Stock equal to the number of shares of Old Restricted Stock tendered in payment for New Restricted Stock may in the discretion of the Committee be subject to the same restrictions as the Old Restricted Stock, determined immediately before such payment. (iv) The Committee may, but need not, provide that all or any portion of a Grantee's Award of restricted Stock shall be forfeited 14 (A) except as otherwise specified in the Award Agreement, upon the Grantee's Termination of Employment within a specified time period after the Grant Date, or (B) if the Company or the Grantee does not achieve specified performance goals within a specified time period after the Grant Date and before the Grantee's Termination of Employment, or (C) upon failure to satisfy such other restrictions as the Committee may specify in the Award Agreement. (v) If a share of restricted Stock is forfeited, then (A) the Grantee shall be deemed to have resold such share of restricted Stock to the Company at the lesser of (1) the purchase price paid by the Grantee (such purchase price shall be deemed to be zero dollars ($0) if no purchase price was paid) or (2) the Fair Market Value of a share of Stock on the date of such forfeiture; (B) the Company shall pay to the Grantee the amount determined under clause (A) of this sentence as soon as is administratively practical; and (C) such share of restricted Stock shall cease to be outstanding, and shall no longer confer on the Grantee thereof any rights as a stockholder of the Company, from and after the date of the Company's tender of the payment specified in clause (B) of this sentence, whether or not such tender is accepted by the Grantee. (vi) Any share of restricted Stock shall bear an appropriate legend specifying that such share is non-transferable and subject to the restrictions set forth in the Plan. If any shares of restricted Stock become nonforfeitable, the Company shall cause certificates for such shares to be issued or reissued without such legend and delivered to the Grantee or, at the request of the Grantee, shall cause such shares to be credited to a brokerage account specified by the Grantee (vii) Notwithstanding any contrary provision of the Plan, with respect to all outstanding restricted Stock and restricted Stock granted on or after May 21, 1998, 100% of any such outstanding restricted Stock shares shall be 100% vested in the Grantee upon the Grantee's Termination of Employment on account of Retirement, death or Disability. (viii) Notwithstanding any contrary provision of the Plan or of any Award Agreement in respect of any restricted Stock, immediately upon the occurrence of a Change of Control that occurs prior to a Grantee's Termination of Employment, 100% of any outstanding restricted Stock shares shall be 100% vested in the Grantee. Notwithstanding the preceding provisions of this Article 6(f)(viii), if the Committee 15 determines that the acceleration of vesting of restricted Stock following a Change of Control would cause a Change of Control transaction to be ineligible for pooling of interests accounting under APB No. 16, which transaction (but for such accelerated vesting) otherwise would have been eligible for such accounting treatment, the Committee, in its sole discretion, may determine that no such accelerated vesting shall occur. (g) Grant of Unrestricted Stock. The Committee may, in its --------------------------- discretion, grant shares of unrestricted Stock to any employee eligible under Article 5 to receive Awards. (h) Grant of Performance Shares. --------------------------- (i) The Committee may, in its discretion, grant performance shares to any employee eligible under Article 5 to receive Awards. (ii) Each performance share shall have an initial value equal to the Fair Market Value of a share of Stock on the date of grant. (iii) The Committee shall set performance objectives in its discretion which, depending on the extent to which they are met, will determine the number of performance shares that will be paid out to the Participants. The time period during which the performance objectives must be met shall be called the "Performance Period". (iv) The Committee may set performance objectives based upon the achievement of Company-wide, divisional, or individual goals, applicable Federal or state securities laws, or any other basis determined by the Committee in its discretion. For purposes of qualifying grants of performance shares as "performance-based compensation" under Section 162(m) of the Internal Revenue Code, the Committee, in its discretion, may determine that the performance objectives applicable to performance shares shall be based on the achievement of Performance Goals. The Performance Goals shall be set by the Committee on or before the latest date permissible to enable the performance shares to qualify as "performance- based compensation" under Section 162(m) of the Internal Revenue Code. In granting performance shares which are intended to qualify under Code Section 162(m), the Committee shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the performance shares under Internal Revenue Code Section 162(m) (e.g., in ---- determining the Performance Goals). (v) After the applicable Performance Period has ended, the Grantee shall be entitled to receive a payout of the number of performance shares earned over the Performance Period, to be determined as a function of the extent to which the corresponding performance objectives have been achieved. Payment of earned performance shares shall be made as soon as practicable after the expiration of the applicable Performance Period. The Committee, in its sole discretion, may pay earned performance shares in the form of cash, in shares of Stock (which have an aggregate Fair 16 Market Value equal to the value of the earned performance Shares at the close of the applicable Performance Period) or in a combination thereof. (vi) Notwithstanding any contrary provision of the Plan, with respect to all outstanding performance shares and performance shares granted on or after May 21, 1998, upon the Grantee's Termination of Employment on account of Retirement, death or Disability, 100% of any such outstanding performance shares shall be deemed to be earned and shall be immediately payable to the Grantee, or, in cases where a Grantee has received a target award of performance shares, 100% of the target amount shall vest. (vii) Notwithstanding any contrary provision of the Plan or of any Award Agreement in respect of any performance share, immediately upon the occurrence of a Change of Control that occurs prior to a Grantee's Termination of Employment, 100% of any outstanding performance shares shall be deemed to be earned and shall be immediately payable to the Grantee, or, in cases where a Grantee has received a target award of performance shares, 100% of the target amount shall vest. Notwithstanding the preceding provisions of this Article 6(h)(vii), if the Committee determines that the acceleration of vesting of performance shares following a Change of Control would cause a Change of Control transaction to be ineligible for pooling of interests accounting under APB No. 16, which transaction (but for such accelerated vesting) otherwise would have been eligible for such accounting treatment, the Committee, in its sole discretion, may determine that no such accelerated vesting shall occur. 7. Non-transferability. Each Award (other than unrestricted Stock) ------------------- granted hereunder shall by its terms not be assignable or transferable other than by will or the laws of descent and distribution and may be exercised, during the Grantee's lifetime, only by the Grantee. Each share of restricted Stock shall be non-transferable until such share becomes nonforfeitable. Notwithstanding the foregoing, the Grantee may, to the extent provided in the Plan and in a manner specified by the Committee, (a) designate in writing a beneficiary to exercise his options after the Grantee's death, and (b) transfer an option (other than an incentive stock option) by bona fide gift and not for any consideration, to a member of the Grantee's immediate family, or to a trust for the exclusive benefit of the Grantee and/or a member or members of the Grantee's immediate family. 8. Exercise. -------- (a) Exercise of Options. Subject to Articles 4, 6, 15 and 18, and ------------------- such terms and conditions as the Committee may impose, each option shall be exercisable in one or more installments commencing not earlier than the first anniversary of the Grant Date of such option; provided, however, that in the case of a Replacement Option, such option shall be exercisable commencing not earlier than the first anniversary of the grant date of the Sears Option or Allstate Option it replaces. Options shall not be exercisable for twelve months following a hardship distribution that is subject to Treasury Regulation (S)1.401(k)-1(d)(2)(iv)(B)(4), except to the extent permitted thereunder. Each option shall be exercised by delivery to the Company of written notice of intent to purchase a specific number of shares of Stock or restricted Stock subject to the option. The Option Price of any shares of Stock or restricted Stock as to which an option shall be 17 exercised shall be paid in full at the time of the exercise. Payment may, at the election of the Grantee, or if specified, as provided in the Award Agreement, be made in any one or any combination of the following forms: (i) check in such form as may be satisfactory to the Committee, (ii) Stock valued at its Fair Market Value on the date of exercise or, if the date of exercise is not a business day, the next succeeding business day; provided that for the exercise of a Replacement Option, such Stock must have been held for at least six months, valued at the Fair Market Value on the date of exercise, (iii) Except with respect to the exercise of a Replacement Sears Option, with the approval of the Committee, shares of restricted Stock, each valued at the Fair Market Value of a share of Stock on the date of exercise or, if the date of exercise is not a business day, the next succeeding business day, or (iv) Except with respect to the exercise of a Replacement Sears option, through simultaneous sale through a broker of shares of unrestricted Stock acquired on exercise, as permitted under Regulation T of the Federal Reserve Board. If restricted Stock ("Tendered Restricted Stock") is used to pay the Option Price for Stock, then a number of shares of Stock acquired on exercise of the option equal to the number of shares of Tendered Restricted Stock shall be subject to the same restrictions as the Tendered Restricted Stock, determined as of the date of exercise of the option. If the Option Price for restricted Stock is paid with Tendered Restricted Stock, and if the Committee determines that the restricted Stock acquired on exercise of the option is subject to restrictions ("Greater Restrictions") that cause it to have a greater risk of forfeiture than the Tendered Restricted Stock, then notwithstanding the preceding sentence, all the restricted Stock acquired on exercise of the option shall be subject to such Greater Restrictions. Shares of unrestricted Stock acquired by a Grantee on exercise of an option shall be delivered to the Grantee or, at the request of the Grantee, shall be credited directly to a brokerage account specified by the Grantee. (b) Special Rules for Section 16 Grantees. Subject to Articles 6 and ------------------------------------- 16, no option shall be exercisable by a Section 16 Grantee during the first six months after its Grant Date, except as exempted from Section 16(b) of the 1934 Act under Rule 16a-2(d) under the 1934 Act. This limitation shall not apply if the Grantee dies or incurs a Disability before the end of the six-month period. (c) Permissible Shares Issued. No shares of Stock shall be issued ------------------------- hereunder upon option exercise except shares of Stock available under Article 3(a). Each Grantee, by acceptance of an award, waives all rights to specific performance or injunctive or other equitable relief and acknowledges that he has an adequate remedy at law in the form of damages 18 (d) Vesting Upon Retirement, Death or Disability. Notwithstanding any -------------------------------------------- contrary provision of the Plan, with respect to all outstanding stock options, and options granted on or after May 21, 1998, the right to exercise each such option then outstanding shall accrue as to 100% of the shares of Stock subject to such option upon the Grantee's Termination of Employment on account of Retirement, death or Disability. (e) Vesting Upon Change of Control. Notwithstanding any contrary ------------------------------ provision of the Plan or of any Award Agreement in respect of an option, immediately upon the occurrence of a Change of Control that occurs prior to a Grantee's Termination of Employment, the right to exercise each option then outstanding shall accrue as to 100% of the shares of Stock then subject to such option. Notwithstanding the preceding provisions of this Article 8(e), if the Committee determines that the acceleration of vesting of options following a Change of Control would cause a Change of Control transaction to be ineligible for pooling of interests accounting under APB No. 16, which transaction (but for such accelerated vesting) otherwise would have been eligible for such accounting treatment, the Committee, in its sole discretion, may determine that no such accelerated vesting shall occur. 9. Deferral. -------- (a) Notwithstanding anything herein to the contrary, a Grantee of an option hereunder who is eligible to defer income under the Company's Officer Deferred Compensation Plan may elect, at the discretion of, and in accordance with rules which may be established by, the Committee, to defer delivery of the proceeds of exercise of an option which is exercised by means of an exchange of Stock as described in Article 8(a)(ii) or (iii), provided, in either such case, that shares of Stock tendered or applied in exercise of such option shall have been held by the Grantee for at least six months prior to such exercise. A Grantee's election as provided in the preceding sentence shall be irrevocable. Notwithstanding any other provision of this Article 9, a deferral election made by a Grantee hereunder shall be void and shall not be given effect unless (i) the Grantee's deferral election is made at least six full calendar months prior to the calendar month in which the option otherwise would expire, (ii) the Grantee's deferral election is made at least six full calendar months prior to the calendar month in which the option is exercised, and (iii) the Grantee is employed by the Company or any of its Subsidiaries on the date of exercise of the option. For purposes of either or both of clauses (i) or (ii) of the preceding sentence, rules established by the Committee may require an election earlier than the six calendar month period described therein. Upon exercise of an option to which a deferral election applies, the shares of Stock covered by such exercise shall not be issued or transferred to the Grantee, and instead, a number of Stock Units, as defined below, equal to the number of shares of Stock covered by such exercise and in respect of which the Grantee has made a deferral election, shall be credited to an account in the name of the Grantee on the books and records of the Company (a "Deferred Option Compensation Account") at the date of exercise. A separate Deferred Option Compensation Account shall be maintained with respect to each effective deferral election. (b) For purposes of this Article 9, a "Stock Unit" is a bookkeeping entry initially representing an amount equivalent to the fair market value of one share of Stock. Stock Units represent an unfunded and unsecured obligation of the Company, except as otherwise provided for by the Committee. Settlement of Stock Units shall be made by issuance of shares of 19 Stock on such date or dates or upon the occurrence of such event or events as the Committee may authorize the Grantee to designate at the time a deferral election is made hereunder, provided, however, that in no event shall settlement occur more than 60 days after a Grantee's Termination of Employment for any reason. The number of shares of Stock to be so distributed may be increased by dividend equivalents, which may be valued as if reinvested in shares of Stock. Until a Stock Unit is settled, the number of shares of Stock represented by a Stock Unit shall be subject to adjustment pursuant to Article 23. (c) Grantees have the status of general unsecured creditors of the Company with respect to their Deferred Option Compensation Accounts, and such accounts constitute a mere promise by the Company to make payments with respect thereto. (d) A Grantee's right to benefit payments with respect to the Deferred Option Compensation Accounts may not be anticipated, alienated, sold, transferred, assigned, pledged, encumbered, attached or garnished by creditors of the Grantee or the Grantee's beneficiary and any attempt to do so shall be void and shall not be given effect. (e) To the extent determined by the Committee, any amount deferred under this Article 9, and any Deferred Option Compensation Account, may be treated and held as a portion of the Company's Officer Deferred Compensation Plan, in which event the provisions of said plan shall govern the operation and administration of deferred amounts hereunder and Deferred Option Compensation Accounts, to the extent not inconsistent with the provisions of this Article 9. 10. Loans and Guarantees. The Committee may, in its discretion except -------------------- with respect to the Replacement of a Sears Option: (a) allow a Grantee to defer payment to the Company of all or any portion of (i) the Option Price of an option, (ii) the purchase price of a share of restricted Stock, or (iii) any taxes associated with a benefit hereunder which is not a cash benefit at the time such benefit is so taxable, or (b) cause the Company to guarantee a loan from a third party to the Grantee, in an amount equal to all or any portion of such option Price, purchase price, or any related taxes. Any such payment deferral or guarantee by the Company pursuant to this Article 10 shall be, on a secured or unsecured basis, for such periods, at such interest rates, and on such other terms and conditions as the Committee may determine. Notwithstanding the foregoing, a Grantee shall not be entitled to defer the payment of such Option Price, purchase price, or any related taxes unless the Grantee (i) enters into a binding obligation to pay the deferred amount and (ii) except with respect to treasury shares, pays upon exercise of an option or grant of shares of restricted Stock, as the case may be, an amount equal to or greater than the aggregate Minimum Consideration therefor. If the Committee has permitted a payment deferral or caused the Company to guarantee a loan pursuant to this Article 10, then the Committee may, in its discretion, require the immediate payment of such deferred amount or the immediate release of such guarantee upon the Grantee's Termination of Employment or if the Grantee sells or otherwise transfers the Grantee's shares of Stock purchased pursuant to such deferral or guarantee. 20 11. Notification under Section 83(b). The Committee may, on the Grant -------------------------------- Date or any later date, prohibit a Grantee from making the election described below. If the Committee has not prohibited such Grantee from making such election, and the Grantee shall, in connection with the exercise of any option, or the grant of any share of restricted Stock, make the election permitted under Section 83(b) of the Internal Revenue Code (i.e., an election to include in such Grantee's gross income in the year of transfer the amounts specified in Section 83(b) of the Internal Revenue Code), such Grantee shall notify the Company of such election within 10 days of filing notice of the election with the Internal Revenue Service, in addition to any filing and notification required pursuant to regulations issued under the authority of Section 83(b) of the Internal Revenue Code. 12. Mandatory Withholding Taxes. --------------------------- (a) Whenever under the Plan, cash or shares of Stock are to be delivered upon exercise or payment of an Award or upon a share of restricted Stock becoming nonforfeitable, or any other event with respect to rights and benefits hereunder, the Company shall be entitled to require as a condition of delivery (i) that the Grantee remit an amount sufficient to satisfy all federal, state, and local withholding tax requirements related thereto, (ii) the withholding of such sums from compensation otherwise due to the Grantee or from any shares of Stock due to the Grantee under the Plan or (iii) any combination of the foregoing. (b) If any disqualifying disposition described in Article 6(d)(vi) is made with respect to shares of Stock acquired under an incentive stock option granted pursuant to the Plan or any election described in Article 11 is made, then the person making such disqualifying disposition or election shall remit to the Company an amount sufficient to satisfy all federal, state, and local withholding taxes thereby incurred; provided that, in lieu of or in addition to the foregoing, the Company shall have the right to withhold such sums from compensation otherwise due to the Grantee or from any shares of Stock due to the Grantee under the Plan. 13. Elective Share Withholding. -------------------------- (a) Subject to the prior approval of the Committee and to Article 13(b), a Grantee may elect the withholding ("Share Withholding") by the Company of a portion of the shares of Stock otherwise deliverable to such Grantee upon the exercise or payment of an Award or upon a share of restricted Stock's becoming nonforfeitable (each a "Taxable Event") having a Fair Market Value equal to (i) the minimum amount necessary to satisfy required federal, state, or local withholding tax liability attributable to the Taxable Event; or (ii) with the Committee's prior approval, a greater amount, not to exceed the estimated total amount of such Grantee's tax liability with respect to the Taxable Event. (b) Each Share Withholding election by a Grantee shall be subject to the following restrictions: 21 (i) any Grantee's election shall be subject to the Committee's right to revoke its approval of Share Withholding by such Grantee at any time before the Grantee's election if the Committee has reserved the right to do so at the time of its approval; (ii) if the Grantee is a Section 16 Grantee, such Grantee's election shall be subject to the disapproval of the Committee at any time, whether or not the Committee has reserved the right to do so; (iii) the Grantee's election must be made before the date (the "Tax Date") on which the amount of tax to be withheld is determined; (iv) the Grantee's election shall be irrevocable; (v) a Section 16 Grantee may not elect Share Withholding to the extent that such Share Withholding is to occur within six months after the grant of the related option (except if the Grantee dies or incurs a Disability before the end of the six-month period); and (vi) a Section 16 Grantee must elect Share Withholding during the ten business day period beginning on the third business day after the release of the Company's quarterly or annual summary statement of sales and earnings. 14. Termination of Employment. ------------------------- (a) Restricted Stock. Except as otherwise provided by the Committee ---------------- on or after the Grant Date, a Grantee's shares of restricted Stock that are forfeitable shall be forfeited upon the Grantee's Termination of Employment. (b) Other Awards. If a Grantee has a Termination of Employment, then, ------------ unless otherwise provided in the Grant Agreement, any unexercised option to the extent exercisable on the date of the Grantee's Termination of Employment may be exercised by the Grantee, in whole or in part, at any time within three months following such Termination of Employment, except that (i) if the Grantee's Termination of Employment is on account of Disability, then any unexercised option (except a Replacement of a Sears Option) to the extent exercisable at the date of such Termination of Employment, may be exercised, in whole or in part, by the Grantee at any time within two years after the date of such Termination of Employment; and (ii) if the Grantee's Termination of Employment is on account of Retirement, then any unexercised option to the extent exercisable at the date of such Termination of Employment, may be exercised, in whole or in part, by the Grantee at any time within (a) two years after the date of such Termination of Employment, in the case of a Replacement Sears Option or (b) five years after the date of such Termination of Employment in the case of all other options. 22 (iii) if the Grantee's Termination of Employment is caused by the death of the Grantee or if the Grantee's death occurs during the period following Termination of Employment during which the option would be exercisable under the preceding clause of Article 14(b) or under Article 14(b)(i) or (ii), then any unexercised option to the extent exercisable on the date of the Grantee's death, may be exercised, in whole or in part, at any time within two years after the Grantee's death by the Grantee's personal representative or by the person to whom the option is transferred by will or the applicable laws of descent and distribution. (c) Maximum Extension. Notwithstanding the foregoing, no Award shall ----------------- be exercisable beyond the maximum term permitted under the original Award Agreement unless with respect to any option except a Replacement Sears option, the Committee explicitly extends such original term, in which case such term shall not be extended beyond the maximum term permitted by the Plan. 15. Equity Incentive Plans of Foreign Subsidiaries. The Committee may ---------------------------------------------- authorize any foreign Subsidiary to adopt a plan for granting Awards ("Foreign Equity Incentive Plan"). All awards granted under such Foreign Equity Incentive Plans shall be treated as grants under the Plan. Such Foreign Equity Incentive Plans shall have such terms and provisions as the Committee permits not inconsistent with the provisions of the Plan and which may be more restrictive than those contained in the Plan. Awards granted under such Foreign Equity Incentive Plans shall be governed by the terms of the Plan except to the extent that the provisions of the Foreign Equity Incentive Plans are more restrictive than the terms of the Plan, in which case such terms of the Foreign Equity Incentive Plans shall control. 16. Substituted Awards. Except with respect to Replacement Options, the ------------------ Committee may grant substitute awards for any canceled Award granted under this Plan or any plan of any entity acquired by the Company or any of its Subsidiaries in accordance with this Article 16. If the Committee cancels any Award (granted under this Plan, or any plan of any entity acquired by the Company or any of its Subsidiaries), and a new Award is substituted therefor, then the Committee may, in its discretion, determine the terms and conditions of such new Award, and may provide that the Grant Date of the canceled Award shall be the date used to determine the earliest date or dates for exercising the new substituted Award under Article 8 hereof so that the Grantee may exercise the substituted Award at the same time as if the Grantee had held the substituted Award since the Grant Date of the canceled Award. 17. Securities Law Matters. ---------------------- (a) If the Committee deems necessary to comply with the Securities Act of 1933, the Committee may require a written investment intent representation by the Grantee and may require that a restrictive legend be affixed to certificates for shares of Stock. (b) If based upon the opinion of counsel for the Company, the Committee determines that the exercise or nonforfeitability of, or delivery of benefits pursuant to, any Award could violate any applicable provision of (i) federal or state securities law or regulations or (ii) the listing requirements of any national securities exchange on which are listed any of the Company's 23 equity securities, then the Committee may postpone any such exercise, nonforfeitability or delivery, as the case may be, but the Company shall use its best efforts to cause such exercise, nonforfeitability or delivery to comply with all such provisions at the earliest practicable date. 18. No Funding Required. Benefits payable under the Plan to any person ------------------- shall be paid directly by the Company. The Company shall not be required to fund, or otherwise segregate assets to be used for payment of, benefits under the Plan. 19. No Employment Rights. Neither the establishment of the Plan, nor the -------------------- granting of any Award shall be construed to (a) give any Grantee the right to remain employed by the Company or any of its Subsidiaries or to any benefits not specifically provided by the Plan or (b) in any manner modify the right of the Company or any of its Subsidiaries to modify, amend, or terminate any of its employee benefit plans. 20. Rights as a Stockholder. A Grantee shall not, by reason of any Award ----------------------- (other than restricted Stock) have any right as a stockholder of the Company with respect to the shares of Stock which may be deliverable upon exercise or payment of such Award until such shares have been delivered to him. Shares of restricted Stock held by a Grantee or held in escrow by the Secretary of the Company shall confer on the Grantee all rights of a stockholder of the Company, except as otherwise provided in the Plan or the Award Agreement. The Committee, in its discretion, at the time of grant of restricted Stock, may permit or require the payment of cash dividends thereon to be deferred and, if the Committee so determines, reinvested in additional restricted Stock to the extent shares are available under Article 3, or otherwise reinvested in Stock. Stock dividends, deferred cash dividends and dividends in the form of property other than cash, issued with respect to restricted Stock shall, unless otherwise provided in the Award Agreement, be treated as additional shares of restricted Stock that are subject to the same restrictions and other terms as apply to the shares with respect to which such dividends are issued. The Committee may, in its discretion, provide for crediting and payment of interest on deferred cash dividends. 21. Nature of Payments. Any and all grants, payments of cash, or ------------------ deliveries of shares of Stock hereunder shall constitute special incentive payments to the Grantee and shall not be taken into account in computing the amount of salary or compensation of the Grantee for the purposes of determining any pension, retirement, death or other benefits under (a) any pension, retirement, profit-sharing, bonus, life insurance or other employee benefit plan of the Company or any of its Subsidiaries or (b) any agreement between the Company or any Subsidiary, on the one hand, and the Grantee, on the other hand, except as such plan or agreement shall otherwise expressly provide. 22. Non-Uniform Determinations. Neither the Committee's nor the Board's -------------------------- determinations under the Plan need be uniform and may be made by the Committee or the Board selectively among persons who receive, or are eligible to receive, Awards (whether or not such persons are similarly situated). Without limiting the generality of the foregoing, the Committee shall be entitled, among other things, to make non-uniform and selective determinations, to enter into non- uniform and selective Award Agreements as to (a) the identity of the Grantees, (b) the 24 terms and provisions of Awards, and (c) the treatment, under Article 14, of Termination of Employment. 23. Adjustments. Subject to Article 6, the Committee may make such ----------- provision with respect to Awards, including without limitation, equitable adjustment of (a) the aggregate numbers of shares of Stock available under Articles 3(a) and 3(b), (b) the number of shares of Stock or shares of restricted Stock covered by an Award, and (c) the Option Price, or the termination or continuation of an Award as it may determine to be appropriate and equitable to reflect a stock dividend, stock split, reverse stock split, share combination, recapitalization, merger, consolidation, acquisition of property or shares, separation, spin-off, reorganization, stock rights offering, liquidation, or similar event, of or by the Company. 24. Amendment of the Plan. The Board may from time to time in its --------------------- discretion amend or modify the Plan without the approval of the stockholders of the Company, except as such stockholder approval may be required (a) to permit transactions in Stock pursuant to the Plan to be exempt from potential liability under Section 16(b) of the 1934 Act, (b) to permit the Company to deduct, in computing its income tax liability pursuant to the provisions of the Internal Revenue Code, compensation resulting from Awards, (c) to retain incentive stock option treatment under Section 422 of the Internal Revenue Code, or (d) under the listing requirements of any securities exchange on which are listed any of the Company's equity securities. 25. Termination of the Plan. The Plan shall terminate on the tenth (10th) ----------------------- anniversary of the Effective Date or at such earlier time as the Board may determine. Any termination, whether in whole or in part, shall not affect (a) any Award then outstanding under the Plan, or (b) the Company's ability to make adjustments to or cancel or continue Awards in accordance with Article 23. 26. No Illegal Transactions. The Plan and all Awards granted pursuant to ----------------------- it are subject to all laws and regulations of any governmental authority which may be applicable thereto; and notwithstanding any provision of the Plan or any Award, Grantees shall not be entitled to exercise Awards or receive the benefits thereof and the Company shall not be obligated to deliver any Stock or pay any benefits to a Grantee if such exercise, delivery, receipt or payment of benefits would constitute a violation by the Grantee or the Company of any provision of any such law or regulation. 27. Controlling Law. The law of the State of Delaware except its law with --------------- respect to choice of law, shall be controlling in all matters relating to or arising out of the Plan or any Award. 25 28. Severability. If all or any part of the Plan is declared by any court ------------ or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate any portion of the Plan not declared to be unlawful or invalid. Any Article or part of an Article so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Article or part of an Article to the fullest extent possible while remaining lawful and valid. EXECUTION IN WITNESS WHEREOF, The PMI Group, Inc., by its duly authorized officer, has executed this Plan on the date indicated below. THE PMI GROUP, INC. Dated: July 28 1998 By /s/ CHARLES BROOM -------------------, ------------------------------ Title: AVP/HR 26 EX-10.3 3 STOCK PLAN FOR NON-EMPLOYEE DIRECTORS EXHIBIT 10.3 THE PMI GROUP, INC. STOCK PLAN FOR NON-EMPLOYEE DIRECTORS Amended and Restated as of July 23, 1998 TABLE OF CONTENTS
Page SECTION 1 PURPOSE.......................................................................... 1 1.1 Purpose of the Plan.............................................................. 1 SECTION 2 DEFINITIONS...................................................................... 1 SECTION 3 ADMINISTRATION................................................................... 2 3.1 The Committee.................................................................... 2 3.2 Authority of the Committee....................................................... 2 3.3 Decisions Binding................................................................ 3 SECTION 4 SHARES SUBJECT TO THE PLAN....................................................... 3 4.1 Number of Shares................................................................. 3 4.2 Lapsed Awards.................................................................... 3 4.3 Adjustments in Awards and Authorized Shares...................................... 3 SECTION 5 STOCK OPTIONS.................................................................... 3 5.1 Granting of Options.............................................................. 3 5.2 Terms of Options................................................................. 4 5.3 Payment.......................................................................... 4 5.4 Deferral of Option Proceeds...................................................... 5 5.5 Options are not Incentive Stock Options.......................................... 6 SECTION 6 RESTRICTED STOCK................................................................. 6 6.1 Grant of Restricted Stock to Directors Serving on the 1996 Grant Date............ 6 6.2 Grant of Restricted Stock for Directors first elected after the 1996 Grant Date.. 6 6.3 Restricted Stock Escrow.......................................................... 6 6.4 Voting and other Rights.......................................................... 7 6.5 Cash Payment for Income Taxes.................................................... 7 SECTION 7 MISCELLANEOUS.................................................................... 7 7.1 No Effect on Service............................................................. 7 7.2 Indemnification.................................................................. 7 7.3 Successors....................................................................... 7 7.4 Beneficiary Designations......................................................... 7 7.5 Nontransferability of Awards..................................................... 8 7.6 No Rights as Stockholder......................................................... 8
-i- TABLE OF CONTENTS (CONTINUED)
Page 7.7 Withholding Requirements......................................................... 8 SECTION 8 AMENDMENT, TERMINATION, AND DURATION............................................. 8 8.1 Amendment or Termination......................................................... 8 8.2 Duration of the Plan............................................................. 8 SECTION 9 LEGAL CONSTRUCTION............................................................... 8 9.1 Gender and Number................................................................ 8 9.2 Severability..................................................................... 8 9.3 Requirements of Law.............................................................. 8 9.4 Compliance with Rule 16b-3....................................................... 9 9.5 Governing Law.................................................................... 9 9.6 Captions......................................................................... 9
-ii- THE PMI GROUP, INC. STOCK PLAN FOR NON-EMPLOYEE DIRECTORS THE PMI GROUP, INC., hereby amends and restates The PMI Group, Inc. Stock Plan for Non-Employee Directors, as of July 23, 1998. SECTION 1 PURPOSE 1.1 Purpose of the Plan. The Plan is intended to closely align the ------------------- interests of the Non-Employee Directors with the interests of the Company's stockholders. This is achieved by making a significant portion of Non-Employee Director compensation directly related to the total return performance of the Shares. The Plan also is intended to encourage Share ownership on the part of Non-Employee Directors. SECTION 2 DEFINITIONS The following words and phrases shall have the following meanings unless a different meaning is plainly required by the context: 2.1 "Award" means, individually or collectively, a grant under the Plan of Options, Restricted Stock, or cash. 2.2 "Board" means the Board of Directors of the Company. 2.3 "Committee" means the committee appointed pursuant to Section 3.1 to administer the Plan. 2.4 "Company" means The PMI Group, Inc., a Delaware corporation, or any successor thereto. 2.5 "Director" means any individual who is a member of the Board. 2.6 "Disability" means a permanent and total disability, as determined by the Committee (in its discretion) in accordance with uniform and non- discriminatory standards adopted by the Committee from time to time. 2.7 "Exercise Price" means the price at which a Share may be purchased by a Participant pursuant to the exercise of an Option. 2.8 "Fair Market Value" means the arithmetic mean of the highest and lowest per share selling prices of the Shares, as quoted in the New York Stock Exchange Composite Transactions Index for the date in question. 2.9 "Grant Date" means, with respect to 1996 and each subsequent calendar year, the first business day in June of each such year. For example, for 1996, the Grant Date is June 3, 1996 (i.e., the first business day in June 1996). With respect to a particular Award, "Grant Date" means the particular Grant Date on which the Award was granted. Notwithstanding the preceding, a Non-Employee Director who is first elected or appointed on other than the first business day in June, shall have an initial Grant Date coincident with the date of their commencement of service on the Board. 2.10 "Non-Employee Director" means a Director who is an employee of neither the Company nor of any Subsidiary. 2.11 "Option" means an option to purchase Shares granted pursuant to Section 5. 2.12 "Option Agreement" means the written agreement setting forth the terms and provisions applicable to each Option granted under the Plan. 2.13 "Participant" means a Non-Employee Director who has an outstanding Award. 2.14 "Plan" means The PMI Group, Inc. Stock Plan for Non-Employee Directors, as set forth in this instrument and as hereafter amended from time to time. 2.15 "Restricted Stock" means an Award of Shares granted pursuant to Section 6. 2.16 "Shares" means the shares of the Company's common stock, $0.01 par value. 2.17 "Subsidiary" means any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 2.18 "Termination of Service" means a cessation of the Participant's service on the Board for any reason. SECTION 3 ADMINISTRATION 3.1 The Committee. The Plan shall be administered by the Committee. The ------------- Committee shall consist of one or more Directors who shall be appointed by, and serve at the pleasure of, the Company's Chief Executive Officer. The Committee shall be comprised solely of a Director or Directors who are not eligible to receive Awards under the Plan. 3.2 Authority of the Committee. It shall be the duty of the Committee to -------------------------- administer the Plan in accordance with the Plan's provisions. The Committee shall have all powers and discretion necessary or appropriate to administer the Plan and to control its operation, including, but not limited to, the power to (a) interpret the Plan and the Awards, (b) adopt rules for the administration, interpretation and application of the Plan as are consistent therewith, (c) interpret, amend or revoke any such rules, and (d) adopt such procedures and subplans as are necessary or appropriate to permit participation in the Plan by Non-Employee Directors who are foreign nationals or employed outside of the United States. 2 3.3 Decisions Binding. All determinations and decisions made by the ----------------- Committee shall be final, conclusive, and binding on all persons, and shall be given the maximum deference permitted by law. SECTION 4 SHARES SUBJECT TO THE PLAN 4.1 Number of Shares. Subject to adjustment as provided in Section 4.3, ---------------- the total number of Shares available for grant under the Plan shall not exceed 100,000. Shares granted under the Plan may be either authorized but unissued Shares or treasury Shares. 4.2 Lapsed Awards. If an Award terminates or expires for any reason, any ------------- Shares subject to such Award again shall be available to be the subject of an Award. 4.3 Adjustments in Awards and Authorized Shares. In the event of any ------------------------------------------- merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, Share combination, or other change in the corporate structure of the Company affecting the Shares, the Committee shall adjust the number and class of Shares which may be delivered under the Plan, and the number, class, and Exercise Price of Shares subject to outstanding Awards and future grants, in such manner as the Committee (in its sole discretion) shall determine to be appropriate to prevent the dilution or diminution of such Awards. Notwithstanding the preceding, the number of Shares subject to any Award always shall be a whole number. SECTION 5 STOCK OPTIONS 5.1 Granting of Options. ------------------- 5.1.1 Directors serving on the 1996 Grant Date. Each Non-Employee ---------------------------------------- Director who is such on the 1996 Grant Date, automatically shall receive, as of the 1996 Grant Date only, an Option to purchase 3,000 Shares. Each Non-Employee who has received an Option pursuant to the preceding sentence also automatically shall receive, as of each subsequent Grant Date, an Option to purchase 1,500 Shares, provided that the individual shall receive an Option on any such Grant Date only if he or she both (a) is a Non-Employee Director on the Grant Date, and (b) has served as a Non-Employee Director for the entire period since the last Grant Date. 5.1.2 Directors first elected or appointed after the 1996 Grant Date. -------------------------------------------------------------- Each Non-Employee Director who first becomes such after the 1996 Grant Date, automatically shall receive on his or her initial Grant Date only (a) an Option to purchase 1,500 Shares, plus (b) an option to purchase up to an additional 1,500 Shares (prorated based on the number of full months of service which remain until the next Grant Date). A Director joining the Board on or before the 15th day of the month will receive credit for service for the full month. Each such Non-Employee Director also shall automatically receive, as of each subsequent Grant Date, an Option to purchase 1,500 Shares annually, provided that the individual shall receive an Option on any such Grant Date only if he or she both (y) is a Non-Employee Director on the Grant Date, and (z) has served as a Non-Employee Director for the entire period since the last Grant Date. 3 5.2 Terms of Options. ---------------- 5.2.1 Option Agreement. Each Option granted pursuant to this Section ---------------- 5 shall be evidenced by a written Option Agreement (satisfactory to the Committee) which shall be executed by the Optionee and the Company. 5.2.2 Exercise Price. The Exercise Price for the Shares subject to -------------- each Option shall be 100% of the Fair Market Value of such Shares on the applicable Grant Date. 5.2.3 Exercisability. -------------- (a) Each Option granted to a Non-Employee Director in his or her initial year of Board service pursuant to Sections 5.1.2(a) and (b) (e.g. up to 3,000 shares) shall become exercisable in three equal annual installments, commencing on the first anniversary of the applicable Grant Date; (b) For each Non-Employee Director who automatically receives, as of each subsequent Grant Date, an Option to purchase 1,500 Shares annually, any such outstanding Option, and such awards granted on or after July 23, 1998 shall become exercisable as to 100% of the Shares subject to such Option in full on the first anniversary of the applicable Grant Date. Notwithstanding the foregoing, with respect to any outstanding Option, and awards granted on or after May 21, 1998, upon a Non-Employee Director's death, disability, retirement, resignation or non-reelection to the Board of Directors, all unvested options held by such person shall immediately become exercisable. However, except as specifically set forth above, if a Participant incurs a Termination of Service prior to his or her Option(s) becoming fully exercisable, the Option(s) (or portions thereof) which are not exercisable on the date of Termination of Service shall immediately expire. 5.2.4 Expiration of Options. Subject to the last sentence of Section --------------------- 5.2.3, each Option shall terminate upon the first to occur of the following events: (a) The expiration of ten (10) years from the applicable Grant Date; (b) The expiration of three (3) months from the date of the Participant's Termination of Service prior to age 70 for any reason other than the Participant's death or Disability, provided that the Committee, in its discretion, may extend such three-month period to a maximum of the ten (10) years; (c) The expiration of two (2) years from the date of the Participant's Termination of Service by reason of Disability, or (d) The expiration of five (5) years from the date of the Participant's Termination of Service at or after age 70 for any reason other than the Participant's death or Disability. 4 5.2.5 Death of Director. Notwithstanding Section 5.2.4, if a ----------------- Director dies prior to the expiration of his or her Option(s) in accordance with Section 5.2.4, his or her Option(s) which are exercisable on the date of his or her death shall terminate two (2) years after the date of death. 5.3 Payment. Options shall be exercised by the Participant's delivery of ------- a written notice of exercise (satisfactory to the Committee) to the Company in care of VP Human Resources Department, with a copy to General Counsel, Legal Department, 601 Montgomery Street, San Francisco, California 94111, or at such other address as Company may hereafter designate in writing, setting forth the number of Shares with respect to which the Option is to be exercised, and accompanied by full payment for the Shares. Upon the exercise of any Option, the Exercise Price shall be payable to the Company in full in cash or its equivalent. As soon as practicable after receipt of a written notification of exercise and full payment for the Shares purchased, the Company shall deliver to the Participant (or the Participant's designated broker), Share certificates (which may be in book-entry form) representing such Shares. 5.4 Deferral of Option Proceeds. --------------------------- (a) Notwithstanding anything herein to the contrary, a Participant granted an Option hereunder who is eligible to defer income under the Company's Directors' Deferred Compensation Plan may elect, at the discretion of, and in accordance with rules which may be established by, the Committee, to defer delivery of the proceeds of exercise of an Option which is exercised by means of an exchange of Shares as described in Section 5.4(a)(ii) or (iii), provided, in either such case, that Shares tendered or applied in exercise of such Option shall have been held by the Participant for at least six months prior to such exercise. A Participant's election as provided in the preceding sentence shall be irrevocable. Notwithstanding any other provision of this Section 5.4, a deferral election made by a Participant hereunder shall be void and shall not be given effect unless (i) the Participant's deferral election is made at least six full calendar months prior to the calendar month in which the option otherwise would expire, (ii) the Participant's deferral election is made at least six full calendar months prior to the calendar month in which the option is exercised, and (iii) the Participant is serving as a Non-Employee Director on the date of exercise of the Option. For purposes of either or both of clauses (i) or (ii) of the preceding sentence, rules established by the Committee may require an election earlier than the six calendar month period described therein. Upon exercise of an Option to which a deferral election applies, the Shares covered by such exercise shall not be issued or transferred to the Participant, and instead, a number of Stock Units, as defined below, equal to the number of Shares covered by such exercise and in respect of which the Participant has made a deferral election, shall be credited to an account in the name of the Participant on the books and records of the Company (a "Deferred Option Compensation Account") at the date of exercise. A separate Deferred Option Compensation Account shall be maintained with respect to each effective deferral election. (b) For purposes of this Section 5.4, a "Stock Unit" is a bookkeeping entry initially representing an amount equivalent to the fair market value of one Share. Stock Units represent an unfunded and unsecured obligation of the Company, except as otherwise provided for by the Committee. Settlement of Stock Units shall be made by issuance of Shares on such date or dates 5 or upon the occurrence of such event or events as the Committee may authorize the Participant to designate at the time a deferral election is made hereunder, provided, however, that in no event shall settlement occur more than 60 days after a Participant's Termination of Service for any reason. The number of Shares to be so distributed may be increased by dividend equivalents, which may be valued as if reinvested in Shares. Until a Stock Unit is settled, the number of Shares represented by a Stock Unit shall be subject to adjustment pursuant to Section 4.3. (c) Participants have the status of general unsecured creditors of the Company with respect to their Deferred Option Compensation Accounts, and such accounts constitute a mere promise by the Company to make payments with respect thereto. (d) A Participant's right to benefit payments with respect to the Deferred Option Compensation Accounts may not be anticipated, alienated, sold, transferred, assigned, pledged, encumbered, attached or garnished by creditors of the Participant or the Participant's beneficiary and any attempt to do so shall be void and shall not be given effect. (e) To the extent determined by the Committee, any amount deferred under this Section 5.4, and any Deferred Option Compensation Account, may be treated and held as a portion of the Company's Officer Deferred Compensation Plan, in which event the provisions of said plan shall govern the operation and administration of deferred amounts hereunder and Deferred Option Compensation Accounts, to the extent not inconsistent with the provisions of this Section 5.4. 5.5 Options are not Incentive Stock Options. Options are not intended to --------------------------------------- be incentive stock options within the meaning of Section 422 of the Code. SECTION 6 RESTRICTED STOCK 6.1 Grant of Restricted Stock to Directors Serving on the 1996 Grant Date. --------------------------------------------------------------------- Each Non-Employee Director who is such on a Grant Date, automatically shall receive, as of such Grant Date, an Award of 300 Shares of Restricted Stock. Notwithstanding the preceding, the number of Shares granted to any Non-Employee Director on any Grant Date shall be reduced if and as necessary so that the Fair Market Value of the Shares does not exceed $30,000 on the Grant Date. 6.2 Grant of Restricted Stock for Directors first elected after the 1996 -------------------------------------------------------------------- Grant Date. Each Non-Employee Director who first becomes such after the 1996 - ---------- Grant Date, automatically shall receive on his or her initial Grant Date only (a) an Award of 25 Shares of Restricted Stock for each full month of service on the Board until the next Grant Date and, (b) as of each subsequent Grant Date on which the Non-Employee Director is such, an Award of 300 Shares of Restricted Stock. Notwithstanding the preceding, the number of Shares granted to any Non- Employee Director on any Grant Date shall be reduced if and as necessary so that the Fair Market Value of the Shares does not exceed $30,000 on the Grant Date. A Director joining the Board on or before the 15th day of the month will receive credit for service for the full month. 6 6.3 Restricted Stock Escrow. For purposes of compliance with Section 9.4, ----------------------- Shares of Restricted Stock shall not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated by the Participant until six months after the applicable Grant Date. Unless the Committee determines otherwise, Shares of Restricted Stock shall be either (a) held by the Company as escrow agent until such six-month period expires, or (b) affixed with an appropriate legend restricting the sale, transfer, pledge, assignment, or other alienation or hypothecation of such Shares by the Participant until expiration of the six month period. 6.4 Voting and other Rights. After Shares of Restricted Stock have been ----------------------- granted, the Participant may exercise full voting rights with respect to such Shares. A Participant shall be entitled to receive all dividends and other distributions paid with respect to such Shares. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability that are provided in Section 6.2. 6.5 Cash Payment for Income Taxes. As soon as practicable after each ----------------------------- Grant Date, the Company shall pay to each Non-Employee Director, in cash or its equivalent, an amount equal to the expected increase in his or her federal, state and local income tax liability due to the Shares granted to the Participant on such Grant Date. The formula for determining each such cash payment shall be adopted by the Committee (in its discretion) from time to time, but in each case shall assume that the maximum prevailing income tax rates apply to the Participant. SECTION 7 MISCELLANEOUS 7.1 No Effect on Service. Nothing in the Plan shall (a) create any -------------------- obligation on the part of the Board to nominate any Participant for reelection by the Company's stockholders, or (b) interfere with or limit in any way the right of the Company to terminate any Participant's service. 7.2 Indemnification. Each person who is or shall have been a member of --------------- the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from (a) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan or any Option Agreement, and (b) from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Certificate of Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under any power that the Company may have to indemnify them or hold them harmless. 7.3 Successors. All obligations of the Company under the Plan shall be ---------- binding on any successor to the Company, whether the existence of such successor is the result of a direct or 7 indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business or assets of the Company. 7.4 Beneficiary Designations. If permitted by the Committee, a ------------------------ Participant may name a beneficiary or beneficiaries to whom any vested but unpaid Award shall be paid in the event of the Participant's death. Each such designation shall revoke all prior designations by the Participant and shall be effective only if given in a form and manner acceptable to the Committee. In the absence of any such designation, any vested benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate and, subject to the terms of the Plan and of the applicable Option Agreement, any unexercised vested Award may be exercised by the administrator or executor of the Participant's estate. 7.5 Nontransferability of Awards. No Award granted under the Plan may be ---------------------------- sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will, by the laws of descent and distribution, or to the limited extent provided in Section 7.4. All rights with respect to an Award granted to a Participant shall be available during his or her lifetime only to the Participant. Notwithstanding the foregoing, the Participant may, to the extent provided in the Plan and in a manner specified by the Committee, transfer an Option by bona fide gift and not for any consideration, to a member of the Participant's immediate family or to a trust for the exclusive benefit of the Participant and/or a member or members of the Participant's immediate family. 7.6 No Rights as Stockholder. Except to the limited extent provided in ------------------------ Section 6.4, no Participant (nor any beneficiary) shall have any of the rights or privileges of a stockholder of the Company with respect to any Shares issuable pursuant to an Award (or exercise thereof), unless and until certificates representing such Shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Participant, beneficiary or Company (as escrow agent). 7.7 Withholding Requirements. Prior to the delivery of any Shares or cash ------------------------ pursuant to an Award (or exercise thereof), the Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes (including the Participant's FICA obligation) required to be withheld with respect to such Award (or exercise thereof). SECTION 8 AMENDMENT, TERMINATION, AND DURATION 8.1 Amendment or Termination. The Board, in its sole discretion, may ------------------------ amend or terminate the Plan, or any part thereof, at any time and for any reason. The amendment, suspension, or termination of the Plan shall not, without the consent of the Participant, alter or impair any rights or obligations under any Award theretofore granted to such Participant. 8.2 Duration of the Plan. The Plan shall commence on the date specified -------------------- herein, and subject to Section 8.1 (regarding the Board's right to amend or terminate the Plan), shall remain in effect thereafter. 8 SECTION 9 LEGAL CONSTRUCTION 9.1 Gender and Number. Except where otherwise indicated by the context, ----------------- any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 9.2 Severability. In the event any provision of the Plan shall be held ------------ illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 9.3 Requirements of Law. The granting of Awards and the issuance of ------------------- Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 9.4 Compliance with Rule 16b-3. For the purpose of ensuring that -------------------------- transactions under the Plan do not subject Participants to liability under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), all transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 promulgated under the 1934 Act, and any future regulation amending, supplementing or superseding such regulation. To the extent any provision of the Plan, Option Agreement or action by the Committee or a Participant fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 9.5 Governing Law. The Plan and all Option Agreements shall be construed ------------- in accordance with and governed by the laws of the State of California without giving effect to any choice or conflict of law provision or rule (whether of the State of California or otherwise) which would cause the application of the laws of any jurisdiction other than the State of California. 9.6 Captions . Captions provided herein are for convenience only, and -------- shall not serve as a basis for interpretation or construction of the Plan. 9 EXECUTION IN WITNESS WHEREOF, The PMI Group, Inc., by its duly authorized officer, has executed the Plan on the date indicated below. THE PMI GROUP, INC. Dated: July 28, 1998 By: /s/ CHARLES BROWN ------- ------------------- Title: AVP/HR 10 EX-10.20 4 SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN AS AMENDED EXHIBIT 10.20 THE PMI GROUP, INC. SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN EFFECTIVE APRIL 1, 1995 (AMENDED AND RESTATED AS OF JANUARY 1, 1998) ARTICLE I Definitions ----------- 1.01 "Committee" means the Committee under the PMI Retirement Plan. --------- 1.02 "Company" means The PMI Group, Inc. ------- 1.03 "Early Retirement Age" means Early Retirement Age as defined under the --------------------- Retirement Plan. 1.04 "Early Retirement Benefit" means the Early Retirement Benefit as ------------------------ defined under the Retirement Plan. 1.05 "Employer" means The PMI Group, Inc. as defined under the Retirement Plan. -------- 1.06 "Participant" means any employee who: (a) is eligible for benefits under ----------- the Retirement Plan, (b) retires on or after January 1, 1989, and (c) meets the eligibility requirements of Section 3.01 of this Plan. 1.07 "Plan" means this plan, The PMI Group, Inc. Supplemental Employee ---- Retirement Plan as set forth in the instrument and as heretofore or hereafter amended from time to time. 1.08 "Retirement Plan Benefits" is defined in Section 4.03 of this Plan. ------------------------ 1.09 "Retirement Plan" means The PMI Group, Inc. Retirement Plan. --------------- 1.10 "Retired Participant" means a Participant who retired in accordance ------------------- with the provisions of the Retirement Plan as heretofore or hereafter amended. 1.11 "Spouse" means Spouse as defined in the Retirement Plan. ------ 1.12 "Trust" shall mean a trust established pursuant to Section 4.07 of the ----- Plan for the purposes of holding assets for the payment of the Employer's general creditors, including the Employer's Participants. Such Trust shall be intended to be a grantor trust, of which the Employer is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Code. In addition, the Trust, if established, shall be irrevocable and shall conform to the provisions of Revenue Procedure 92-64. 2 ARTICLE II Introduction ------------ 2.01 Purpose. The purpose of this Plan is: (1) to restore to employees ------- of the Company the benefits they lose under the Retirement Plan as a result of the compensation limit in section 401(a)(17) of the Internal Revenue Code of 1986, as amended, or any successor provision ("section 401(a)(17)"), (2) to restore to employees the benefits they lose as a result of Section 415 of the Internal Revenue Code of 1986, as amended, or any successor provision ("Section 415"), (3) to provide the "Beef-up" benefit for eligible employees as described in Section 3.02(b), and (4) to make up lost early retirement payments for individuals who failed to reach their 20th anniversary with Allstate as described in Section 3.02(c). The Plan is an unfunded deferred compensation program for a select group of management and highly compensated employees. Thus, the Plan is subject to Part 1 of Title I of ERISA, but is exempt from Parts 2, 3 and 4 thereof. 2.02 Administration. The Plan will be administered by the Committee. -------------- The Committee has all discretionary authority to issue such rules as it deems appropriate and to interpret the provisions of the Plan and make factual determinations, including the power to determine the rights or eligibility of employees or participants and any other persons, and the amounts of their benefits under the Plan, and to remedy ambiguities, inconsistencies, or omissions. Any decision by the Committee shall be final, binding, and conclusive on all participants and all other persons. ARTICLE III Eligibility and Amount of Benefits ---------------------------------- 3.01 Eligibility. Each Participant is eligible to receive a benefit under ----------- this Plan if he or she is vested in benefits under the Retirement Plan and if: (a) such vested benefits have been reduced because of the application of section 401(A)(17) or 415; or (b) he or she is eligible for the "Beef-up" as described in the Allstate Retirement Plan Document in effect on April 1, 1995; or (c) he or she less than 20 years of service with Allstate on April 1, 1995 and retires from the Company with at least 20 years of total service with the Company and Allstate combined and has reached his or her 55th birthday but has not reached his or her normal retirement date as defined by the Allstate Retirement Plan. 3 3.02 Amount of Benefit. The amount of benefit paid from the Plan will be ----------------- equal to: (a) plus (b) plus (c) minus (d) below: (a) The benefit which would have been payable to the Participant under the term of the Retirement Plan, but for the restrictions of section 401(a)(17) and section 415. (b) For Participants who retire from the Retirement Plan before December 31, 1999 and who are at least age 55 but less than age 60, the Company will enhance their benefit as described in (i) and (ii) below: (i) The Participant's Final Average Earnings (FAE) will be calculated as if he or she had continued to work until the earlier of December 31, 1999 or age 60 at their current pensionable earnings. If the FAE is greater when calculated in this manner, it will be used in place of the FAE calculated in the normal manner at termination. (ii) For Participants who were hired at Allstate before 1978, his or her benefit will be first decreased by (A) below and then increased by (B) below: (A) The number of years from termination to the latter of December 31, 1999 or age 60 divided by the number of years of Allstate service prior to January 1, 1978 times the Allstate pre- 1978 benefit. (B) The number of years from termination to the latter of December 31, 1999 or age 60 divided by the number of years of service from January 1, 1988 to April 1, 1995 times the Allstate post-1988 benefit. (c) For Participants who retire from the Retirement Plan with at least 55 years of age and 20 years of combined service with The Company and Allstate and who did not have 20 years of service with Allstate on April 1, 1995, The Company will provide a temporary annuity equal to: (i) as reduced in (ii) payable for the period described in (iii) below: (i) The monthly life annuity payable from the Allstate Retirement Plan starting at the Participant's Normal Retirement Date as described by the Allstate Retirement Plan. This is the accrued Allstate benefit at the Company spin-off date as communicated by Allstate. (ii) The monthly life annuity will be reduced by one half percent per month (6% per year) for each month the Participant's retirement precedes his or her Normal Retirement as described by the Allstate Retirement Plan. 4 (iii) The monthly life annuity will be paid starting on the first day of the month following retirement until the earlier of the Participant's death or the date which the Participant becomes eligible to receive his or her benefit from the Allstate Retirement Plan. Alternatively, the Participant may elect to have, in the event of his or her death, the monthly life annuity continue to his or her surviving spouse but not beyond the date when the Participant would have become eligible to receive his or her benefit from the Allstate Retirement Plan. If the Participant elects to have the full benefit continue to his or her spouse, then the benefit in 3.02(c)(ii) above will be further reduced two percent. If the Participant elects to have half of the benefit continue to his or her spouse, then the benefit in 3.02(c)(ii) above will be further reduced one percent. (d) The amount of benefit payable from the Retirement Plan. 3.03 Preretirement Surviving Spouse Benefit. Preretirement Surviving -------------------------------------- Spouse Benefits will be payable under this Plan on behalf of a Participant if such Participant's surviving Spouse is eligible for benefits payable from the Retirement Plan. The benefit payable will be determined in a manner consistent with similar benefits under the Retirement Plan. 3.04 Death Benefits After Retirement. Benefits will be payable from this Plan ------------------------------- to a beneficiary or contingent annuitant designated by a Retired Participant only if such beneficiary or contingent annuitant will also receive benefits from the Retirement Plan after such Participant's death. The amount of the benefit payable will be determined in a manner consistent with similar benefits under the Retirement Plan. ARTICLE IV Payment of Benefits ------------------- 4.01 Forms and Timing of Benefit Payments. All benefits except those described ------------------------------------- in 3.02(c) above will be paid as a single lump sum based on the life annuity at the time the Participant terminates or retires. The Retirement Plan factors for calculating lump sums in effect at the time of termination or retirement will be used to calculate the lump sum. 4.02 Plan Termination. No further benefits may be earned under this Plan with ---------------- respect to the Retirement Plan after the termination of such Retirement Plan. 5 4.03 Retirement Plan Benefits. The term "Retirement Plan Benefits" generally ------------------------ means the benefits actually payable to a Participant, Spouse, beneficiary, or contingent annuitant under the Retirement Plan. However, this Plan is only intended to remedy pension reductions caused by the operation of sections 401(a)(17) and 415 and not reductions caused for any other reason. In those instances where pension benefits are reduced for some other reason, the term "Retirement Plan Benefits" shall be deemed to mean the benefits that would have been actually payable but for such other reason. Examples of such other reasons include, but are not limited to, the following: (a) A reduction in pension benefits as a result of a distress termination (as described in ERISA (S)4041(c) or any comparable successor provision of law) of the Retirement Plan. In such a case, the Retirement Plan Benefits will be deemed to refer to the payments that would have been made from the Retirement Plan had it terminated on a fully funded basis as a standard termination (as described in ERISA (S)4041(b) or any comparable successor provision of law). (b) A reduction of accrued benefits as permitted under section 412(c)(8) of the Internal Revenue Code of 1986, as amended, or any comparable successor provision of law. (c) A reduction of pension benefits as a result of payment of all or a portion of a Participant's benefits to a third party on behalf of or with respect to a Participant. 4.04 Facility of Payment. Any amount payable under the Plan to a person under ------------------- legal disability or who, in the judgment of the Committee, is unable to properly manage his financial affairs, may be paid to such person's legal representative, or may be applied for the benefit of such person in any manner selected by the Committee. 4.05 Review of Benefit Determinations. The Committee will provide notice in -------------------------------- writing to any Participant or Beneficiary whose claim for benefits under the Plan is denied and the Committee shall afford such Participant or Beneficiary a review of its decision if so requested. 4.06 Payment and Funding of Benefits. Amounts payable under the Plan to or on ------------------------------- account of a Participant shall be paid directly by the Employers, and shall be provided solely from the general assets of the Employers. Benefits under the Plan are not funded, the Employers' obligation to pay such benefits is merely an unsecured contractual obligation, and a Participant or Beneficiary shall be treated as a general creditor of the Employers with respect to any benefits payable under the Plan. Except as provided in Section 4.07, nothing in this Plan shall be deemed to create a trust of any kind for the benefit of the Participant or any beneficiary, or create any fiduciary relationship 6 between the Company and the Participant or any beneficiary with respect to any assets of the Company. 4.07 Contributions to Trust Upon a Change of Control. Upon a "Change of ----------------------------------------------- Control" (as defined below) and by the fifteenth business day following the end of each calendar month of each Plan year thereafter, the Employer shall irrevocably deposit cash (or its equivalent) to a Trust for the investment of benefits payable under the Plan to or on account of each Participant. However, any contributions made to the Trust in respect of each Participant shall remain subject to the claims of the general creditors of the Employers. Nothing contained in this Section 4.07 shall give any Participant or beneficiary any interest in or claim against any specific assets of the Company. For purposes of this Plan, "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (iv) any beneficial ownership maintained by (but not additional acquisitions by), The Allstate Corporation and its subsidiaries, and their respective successors ("Allstate"), pending such time that Allstate distributes or transfers its current ownership interest in the Outstanding Company Common Stock and Outstanding Company Voting Securities as contemplated by the Prospectus dated April 10, 1995, relating to the initial public offering of the common stock of the Company, or (v) any acquisition pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 4.07. Notwithstanding the foregoing, in its sole discretion, the Board may increase the 20% threshold set forth above in this subsection (a) prior to any acquisition of 20% or more beneficial ownership of the Outstanding Company Common Stock or the Outstanding Company Voting Securities; provided, that (i) such increased threshold shall apply only to the acquisition and maintenance of beneficial ownership by any Person eligible to report such beneficial ownership at the time of such acquisition on Schedule 13G under the Exchange Act, and (ii) in the event that any Person initially eligible to so report on Schedule 13G thereafter ceases to be eligible to so report on Schedule 13G, the occurrence of the event causing such Person no longer to be eligible to so report shall be deemed an acquisition by such Person of all of the Outstanding 7 Company Common Stock and Outstanding Company Voting Securities beneficially owned by such Person immediately prior to such occurrence; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another entity (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 8 Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because any Person acquires beneficial ownership of 20% or more of the Outstanding Company Voting Securities or Outstanding Company Common Stock as a result of the acquisition of such securities or stock by the Company, which acquisition reduces the number of the Outstanding Company Voting Securities or Outstanding Company Common Stock; provided, that if after such acquisition by the Company such Person (while such Person remains the beneficial owner of 20% or more of the Outstanding Company Voting Securities or Outstanding Company Common Stock) becomes the beneficial owner of additional shares of such Outstanding Company Voting Securities or Outstanding Company Common Stock (as the case may be), a Change of Control shall then occur. Capitalized terms used in this Section 4.07, not otherwise defined, shall have the meaning set forth in the form of change of control employment agreement approved at the February 12, 1998 meeting of the Board of Directors. ARTICLE V Miscellaneous ------------- 5.01 Action by Company. Any action required or permitted to be taken by the ----------------- Company under the Plan shall be by resolution of its Board of Directors, by resolution of a duly authorized committee of its Board of Directors, or by a person or persons authorized by resolution of its Board of Directors or such committee. 5.02 Amendment and Plan Termination. The Company may, in its sole ------------------------------ discretion, terminate, suspend, or amend this Plan at any time or from time to time, in whole or in part, but no amendment, suspension, or termination of the Plan shall, without the consent of a Participant, reduce the accrued benefit of the Participant or any Spouse; provided, however, that this Section 5.02 shall not prevent reductions on account of the Participant's (or Spouse's) benefit ceasing to be affected (or becoming affected to a lesser degree) by the limitations of section 401(a)(17) and section 415. 5.03 No Effect on Employment. Nothing in the Plan shall interfere with or limit ----------------------- in any way the right of the Company or the Employer directly employing the Participant to terminate any Participant's employment at any time, with or without cause. Employment with the Company and its affiliates is on an at-will basis only. 5.04 Assignment of Benefits. A Participant, Retired Participant, surviving ---------------------- Spouse, or beneficiary may not, either voluntarily or involuntarily, assign, anticipate, alienate, commute, pledge, or encumber any benefits to which he or she is or may become entitled under the Plan, nor may the same be subject to attachment or garnishment by any creditor's claim or to legal process. 9 5.05 Construction. The Committee shall have full discretionary authority ------------ to determine eligibility and to construe and interpret the terms of the Plan, including the power to remedy possible ambiguities, inconsistencies, or omissions. 5.06 Governing Law; Severability. The Plan shall be construed, administered and --------------------------- governed in all respects in accordance with the laws of the State of California (but without giving effect to any choice or conflict of law, provision or rule which would cause the application of the laws of any jurisdiction other than the State of California), and, to the extent applicable, ERISA and the Code. If any provision of the Plan shall be held invalid or unenforceable by a court of competent jurisdiction, the remaining provisions hereof shall continue to be fully effective. 5.07 Number. The singular, where appearing in this Plan, will be deemed to ------- include the plural, unless the context clearly indicates the contrary. 5.08 Participation of Affiliates. One or more affiliates of the Company may --------------------------- become participating employers by adopting the Plan. By adopting the Plan, an affiliate is deemed to agree to all of its terms, including (but not limited to) the provisions granting exclusive authority to the Company to amend the Plan and the provisions granting exclusive authority to the Committee to administer and interpret the Plan. Any affiliate may terminate its participation in the Plan at any time subject, in each case, to the approval of the Company. The liabilities incurred under the Plan to the Participants employed by each employer shall be solely the liabilities of that employer, and no other employer shall be liable for benefits accrued by a Participant during any period when he or she was not employed by such employer. 5.09 Indemnification. The Company shall, and hereby does, indemnify and hold --------------- harmless the members of the Committee, from and against any and all losses, claims, damages or liabilities (including attorneys' fees and amounts paid, with the approval of the Company's Board of Directors, in settlement of any claim) arising out of or resulting from the implementation of a duty, act or decision with respect to the Plan, so long as such duty, act or decision does not involve gross negligence or willful misconduct on the part of any such individual. EXECUTION IN WITNESS WHEREOF, The PMI Group, Inc., by it duly authorized officer, has executed the amended and restated Plan on the date indicated below, such amendments shall be effective as of January 1, 1998. 10 THE PMI GROUP, INC. Dated: July 28, 1998 By: /s/ CHARLES BROOM ______________________________ Title: AVP/HR ___________________________ 11 EX-10.31 5 DIRECTORS' DEFERRED COMPENSATION PLAN EXHIBIT 10.31 THE PMI GROUP, INC. DIRECTORS' DEFERRED COMPENSATION PLAN (Amended and Restated as of July 23, 1998) TABLE OF CONTENTS
Page SECTION 1 DEFINITIONS 1.1 "Affiliate".......................................... 1 1.2 "Beneficiary"........................................ 1 1.3 "Board of Directors"................................. 1 1.4 "Change of Control".................................. 1 1.5 "Code"............................................... 3 1.6 "Committee".......................................... 3 1.7 "Company"............................................ 4 1.8 "Compensation"....................................... 4 1.9 "Compensation Deferrals"............................. 4 1.10 "Disability"......................................... 4 1.11 "Financial Hardship"................................. 4 1.12 "Participant"........................................ 4 1.13 "Participant's Account" or "Account"................. 4 1.14 "Plan"............................................... 4 1.15 "Plan Year".......................................... 4 1.16 "Nonemployee Director"............................... 4 SECTION 2 PARTICIPATION 2.1 Participation........................................ 5 2.1.1 Current Nonemployee Directors............. 5 2.1.2 Initial Elections by New Nonemployee Directors................................. 5 2.1.3 Elections for Subsequent Plan Years....... 5 2.1.4 No Election Changes During Plan Year...... 5 2.1.5 Specific Timing and Method of Election.... 5 2.2 Suspension of Compensation Deferrals................. 5 2.2.1 Automatic Suspension...................... 5 2.2.2 Permissible Suspension.................... 6 2.3 Termination of Participation......................... 6 SECTION 3 COMPENSATION DEFERRAL ELECTIONS 3.1 Compensation Deferrals............................... 6 3.2 Crediting of Compensation Deferrals.................. 6 3.3 Deemed Investment Return on Accounts................. 6 3.4 Form of Payment...................................... 7 3.5 Term of Deferral..................................... 7 3.6 Changes in Elections as to Term and Form for Payment. 7 SECTION 4 ACCOUNTING 4.1 Participants' Accounts............................... 7 4.2 Participants Remain Unsecured Creditors.............. 8
i
4.3 Accounting Methods................................... 8 4.4 Reports.............................................. 8 SECTION 5 DISTRIBUTIONS 5.1 Normal Time for Distribution......................... 8 5.2 Change of Control.................................... 8 5.3 Special Rule for Death or Disability................. 8 5.4 Special Rule re Deductibility........................ 9 5.5 Latest Permissible Distribution Date................. 9 5.6 Beneficiary Designations............................. 9 5.6.1 Spousal Consent............................. 9 5.6.2 Changes and Failed Designations............. 10 5.7 Financial Hardship................................... 10 5.8 Payments to Incompetents............................. 10 5.9 Undistributable Accounts............................. 10 5.10 Committee Discretion................................. 10 SECTION 6 PARTICIPANT'S INTEREST IN ACCOUNT 6.1 Compensation Deferral Contributions.................. 11 SECTION 7 ADMINISTRATION OF THE PLAN 7.1 Committee............................................ 11 7.2 Actions by Committee................................. 11 7.3 Powers of Committee.................................. 11 7.4 Decisions of Committee............................... 12 7.5 Administrative Expenses.............................. 12 7.6 Eligibility to Participate........................... 12 7.7 Indemnification...................................... 13 SECTION 8 FUNDING 8.1 Unfunded Plan........................................ 13 SECTION 9 MODIFICATION OR TERMINATION OF PLAN 9.1 Company's Obligation is Limited...................... 13 9.2 Right to Amend or Terminate.......................... 13 9.3 Effect of Termination................................ 13 SECTION 10 GENERAL PROVISIONS 10.1 Inalienability........................................ 13 10.2 Rights and Duties..................................... 14 10.3 No Enlargement of Rights.............................. 14 10.4 Compliance with Rule 16b-3............................ 14 10.5 Compensation Deferrals Not Counted Under Other Employee Benefit Plans................................ 14 10.6 Applicable Law........................................ 14
ii
10.7 Severability.......................................... 14 10.8 Captions.............................................. 15
iii THE PMI GROUP, INC. DIRECTORS' COMPENSATION PLAN (Amended and Restated as of July 23, 1998) THE PMI GROUP, INC., a Delaware corporation, having established The PMI Group, Inc. Directors' Deferred Compensation Plan, hereby amends and restates the Plan effective as of July 23, 1998, for the benefit of members of the Board of Directors who are employees of neither the Company nor its Affiliates, in order to provide such directors with certain deferred compensation benefits. The Plan is an unfunded deferred compensation plan which is exempt from the provisions of the Employee Retirement Income Security Act of 1974, as amended. SECTION 1 DEFINITIONS The following words and phrases shall have the following MEANINGS unless a different meaning is plainly required by the context: 1.1 "AFFILIATE" shall mean (a) the Company, and (b) each corporation, trade or business which is, together with the Company, a member of a controlled group of corporations or an affiliated service group or under common control (within the meaning of section 414(b), (c) or (m) of the Code), but only for the period during which such other entity is so affiliated with the Company. 1.2 "BENEFICIARY" shall mean the person or persons entitled to receive the balance credited to a Participant's Account under the Plan upon the death of a Participant, as provided in Section 5.4. 1.3 "BOARD OF DIRECTORS" shall mean the Board of Directors of the Company, as constituted from time to time. 1.4 "CHANGE OF CONTROL" means the occurrence of any of the following: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored 1 or maintained by the Company or any corporation controlled by the Company, (iv) any beneficial ownership maintained by (but not additional acquisitions by), The Allstate Corporation and its subsidiaries, and their respective successors ("Allstate"), pending such time that Allstate distributes or transfers its current ownership interest in the Outstanding Company Common Stock and Outstanding Company Voting Securities as contemplated by the Prospectus dated April 10, 1995, relating to the initial public offering of the common stock of the Company, or (v) any acquisition pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 1.4. Notwithstanding the foregoing, in its sole discretion, the Board may increase the 20% threshold set forth above in this subsection (a) prior to any acquisition of 20% or more beneficial ownership of the Outstanding Company Common Stock or the Outstanding Company Voting Securities; provided, that (i) such increased threshold shall apply only to the acquisition and maintenance of beneficial ownership by any Person eligible to report such beneficial ownership at the time of such acquisition on Schedule 13G under the Exchange Act, and (ii) in the event that any Person initially eligible to so report on Schedule 13G thereafter ceases to be eligible to so report on Schedule 13G, the occurrence of the event causing such Person no longer to be eligible to so report shall be deemed an acquisition by such Person of all of the Outstanding Company Common Stock and Outstanding Company Voting Securities beneficially owned by such Person immediately prior to such occurrence; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another entity (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting 2 securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because any Person acquires beneficial ownership of 20% or more of the Outstanding Company Voting Securities or Outstanding Company Common Stock as a result of the acquisition of such securities or stock by the Company, which acquisition reduces the number of the Outstanding Company Voting Securities or Outstanding Company Common Stock; provided, that if after such acquisition by the Company such Person (while such Person remains the beneficial owner of 20% or more of the Outstanding Company Voting Securities or Outstanding Company Common Stock) becomes the beneficial owner of additional shares of such Outstanding Company Voting Securities or Outstanding Company Common Stock (as the case may be), a Change of Control shall then occur. Capitalized terms used in this Section 1.4, not otherwise defined, shall have the meaning set forth in the form of change of control employment agreement approved at the February 12, 1998 meeting of the Board of Directors. 1.5 "CODE" shall mean the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing or superseding such section. 1.6 "COMMITTEE" shall mean the committee appointed by (and serving at the pleasure of) the Board of Directors to administer the Plan. As of the effective date of the Plan, the members of the Committee shall be the Compensation and Nominating Committee of the Board of Directors. 3 1.7 "COMPANY" shall mean The PMI Group, Inc., a Delaware corporation. 1.8 "COMPENSATION" shall mean the annual cash retainer, retainer for serving as a committee chairperson (if any), and meeting fees (if any) of a Participant. A Participant's Compensation shall not include any other type of remuneration. 1.9 "COMPENSATION DEFERRALS" shall mean the amounts credited to Participants' Accounts under the Plan pursuant to their deferral elections made in accordance with Section 2.1. 1.10 "DISABILITY" or "DISABLED" shall mean the mental or physical inability of a Participant to perform the regularly assigned duties of a member of the Board of Directors, provided that such inability (a) has continued or is expected to continue for a period of at least six months and (b) is evidenced by the certificate of a physician satisfactory to the Committee stating that such inability exists and is likely to be permanent. 1.11 "FINANCIAL HARDSHIP" shall mean a severe financial emergency which is caused by a sudden and unexpected accident, illness or other event beyond the control of the Participant which, absent a suspension of deferrals under Section 2.2 or accelerated distribution under Section 5.5, would result in severe financial burden to the Participant or a member of his or her immediate family. A Financial Hardship does not exist to the extent that the hardship may be relieved by (a) reimbursement or compensation by insurance, (b) by liquidation of the Participant's other assets (to the extent such liquidation would not itself cause severe financial hardship), or (c) any loan available to the Participant (to the extent the payments on such loan would not themselves cause severe financial hardship. 1.12 "PARTICIPANT" shall mean a Nonemployee Director who (a) has become a Participant in the Plan pursuant to Section 2.1 and (b) has not ceased to be a Participant pursuant to Section 2.3. 1.13 "PARTICIPANT'S ACCOUNT" or "ACCOUNT" shall mean, as to any Participant, the separate account maintained on the books of the Company in order to reflect his or her interest under the Plan. 1.14 "PLAN" shall mean The PMI Group, Inc. Directors' Deferred Compensation Plan, as set forth in this instrument and as hereafter amended from time to time. 1.15 "PLAN YEAR" shall mean the calendar year. 1.16 "NONEMPLOYEE DIRECTOR" means a member of the Board of Directors who is an employee of neither the Company nor of any Affiliate. 4 SECTION 2 PARTICIPATION 2.1 PARTICIPATION. Each Nonemployee Director's decision to become a Participant shall be entirely voluntary. 2.1.1 CURRENT NONEMPLOYEE DIRECTORS. Each Nonemployee Director who both (a) is such on July 1, 1997, and (b) previously elected to make Compensation Deferrals under the Plan for the 1997 Plan Year, shall have his or her Compensation Deferral election continue in effect for the remainder of the 1997 Plan Year only (and subject to the other provisions of the Plan). 2.1.2 INITIAL ELECTIONS BY NEW NONEMPLOYEE DIRECTORS. Each individual who first becomes a Nonemployee Director after July 1, 1997 may elect to become a Participant in the Plan by electing, within thirty days of the date of his or her hire or promotion (as the case may be), to make Compensation Deferrals under the Plan. An election under this Section 2.1.2 to make Compensation Deferrals shall be effective only for the remainder of the Plan Year with respect to which the election is made. 2.1.3 ELECTIONS FOR SUBSEQUENT PLAN YEARS. A Nonemployee Director may elect to become a Participant (or to continue or reinstate his or her active participation) in the Plan for any subsequent Plan Year by electing, no later than December 31 of the preceding Plan Year, to make Compensation Deferrals under the Plan. An election under this Section 2.1.3 to make Compensation Deferrals shall be effective only for the Plan Year with respect to which the election is made. 2.1.4 NO ELECTION CHANGES DURING PLAN YEAR. After the beginning of a Plan Year, a Participant shall not be permitted to change or revoke his or her deferral election for such Plan Year, except to the limited extent provided in Section 2.2. 2.1.5 SPECIFIC TIMING AND METHOD OF ELECTION. Notwithstanding any contrary provision of this Section 2.1, the Committee, in its sole discretion, shall determine the manner and deadlines for Participants to make Compensation Deferral elections. The deadlines prescribed by the Committee may be earlier than the deadlines specified in this Section 2.1, but shall not be later than such specified deadlines. 2.2 SUSPENSION OF COMPENSATION DEFERRALS. 2.2.1 AUTOMATIC SUSPENSION. In the event that a Participant receives a financial hardship withdrawal from The PMI Group, Inc. Savings and Profit- Sharing Plan or any other plan (maintained by the Company or an Affiliate) which contains a qualified cash or deferred arrangement under section 401(k) of the Internal Revenue Code of 1986, as amended (collectively, the "401(k) Plans"), the Participant's Compensation Deferrals under the Plan (if any) shall be suspended for a period of twelve (12) months from the date that the Participant received such hardship withdrawal. Notwithstanding the preceding, the Participant's 5 Compensation Deferrals shall be not be so suspended if the Committee determines that such suspension is not required in order to preserve the tax-qualification of the 401(k) Plans. 2.2.2 PERMISSIBLE SUSPENSION. In the event that a Participant incurs a Financial Hardship, the Committee, in its sole discretion, may suspend the Participant's Compensation Deferrals for the remainder of the Plan Year. However, an election to make Compensation Deferrals under Section 2.1 shall be irrevocable as to amounts deferred as of the effective date of any suspension in accordance with this Section 2.2.2. 2.3 TERMINATION OF PARTICIPATION. A Nonemployee Director who has become a Participant shall remain a Participant until his or her entire vested Account balance is distributed. However, a Nonemployee Director who has become a Participant may or may not be an active Participant making Compensation Deferrals for a particular Plan Year, depending upon whether he or she has elected to make Compensation Deferrals for such Plan Year. SECTION 3 COMPENSATION DEFERRAL ELECTIONS 3.1 COMPENSATION DEFERRALS. At the times and in the manner prescribed in Section 2.1, each Nonemployee Director may elect to defer portions of his or her Compensation and to have the amounts of such deferrals credited to his or her Account. For each Plan Year, a Nonemployee Director may elect to defer an amount equal to any percentage or any specific dollar amount of his or her Compensation, provided that the percentage or dollar amount elected by the Participant shall result in an expected deferral of not less than $5,000 of his or her Compensation. Notwithstanding any contrary provision of the Plan, the Committee may reduce a Participant's Compensation Deferrals to the extent necessary to satisfy any deductions required by law. 3.2 CREDITING OF COMPENSATION DEFERRALS. The amounts deferred pursuant to Section 3.1 shall reduce the Participant's Compensation for the Plan Year and shall be credited to the Participant's Account as of the date on which the amounts (but for the deferral) otherwise would have been paid to the Participant. For each Plan Year, the exact dollar amount to be deferred from each Compensation payment shall be determined by the Committee under such formulae as it shall adopt from time to time. 3.3 DEEMED INVESTMENT RETURN ON ACCOUNTS. Although no assets will be segregated or otherwise set aside with respect to a Participant's Account, the amount that is ultimately payable to the Participant with respect to his or her Account shall be determined as if such Account had been invested in common stock of the Company (including reinvestment of any deemed dividends). The Committee, in its sole discretion, shall adopt (and may modify from time to time) such rules and procedures as it deems necessary or appropriate to implement the deemed investment of the Participants' Accounts. However, such procedures may differ among Participants or classes of Participants, as determined by the Committee in its discretion. 6 3.4 FORM OF PAYMENT. Each Participant shall indicate on his or her deferral election (made pursuant to Section 3.1) the form of payment for the Compensation Deferrals made pursuant to such election. A Participant may elect (a) a lump sum payment, or (b) a fixed number of annual installment payments (not to exceed ten). A Participant's election as to the form of payment shall apply to all amounts credited to the Participant's Account for the Plan Year with respect to which the election is made, and except to the limited extent provided in Section 3.6, shall be irrevocable. 3.5 TERM OF DEFERRAL. Each Participant shall indicate on his or her deferral election made pursuant to Section 3.1 the time for payment for Compensation Deferrals (and deemed investment returns, gains and losses thereon) made pursuant to such election. A Participant may elect a term of deferral equal to any whole number (not less than one) of calendar years specified in his or her deferral election. In addition, pursuant to such procedures as the Committee (in its discretion) may adopt from time to time, a Participant may elect a term of deferral which ends upon the later (or earlier) of the expiration of a specified period or the occurrence of a specific event (for example, the later of ten years or termination of service on the Board of Directors). A Participant's election as to the term of deferral shall apply to all amounts credited to the Participant's Account for the Plan Year with respect to which the election is made, and except to the limited extent provided in Section 3.6, shall be irrevocable. 3.6 CHANGES IN ELECTIONS AS TO TERM AND FORM FOR PAYMENT. A Participant may change his or her election under Section 3.4 and/or Section 3.5 for amounts credited to the Participant's Account for any Plan Year, provided that any such election will be effective only if (a) such election is made at least two Plan Years prior to the Plan Year in which payment of such amounts is scheduled to commence (without giving effect to such election), (b) the newly elected scheduled payment commencement date is not earlier than the second Plan Year after the Plan Year in which such election is made, and (c) payment of such amounts has not actually commenced. For example, if a Participant initially elected to receive his or 1999 Plan Year deferrals in a lump sum to be paid during the 2003 Plan Year, the Participant instead may elect to receive payment in the form of ten annual installments commencing during the 2004 Plan Year, provided that such election is made on or before December 31, 2001. (i.e., not ---- less than two Plan Years prior to the Plan Year in which payment of such amounts previously was scheduled to commence, and with a newly elected scheduled payment commencement date which is not earlier than the second Plan Year after the Plan Year in which such election is made). SECTION 4 ACCOUNTING 4.1 PARTICIPANTS' ACCOUNTS. For each Plan Year, at the direction of the Committee, there shall be established and maintained on the books of the Company, a separate Account or Accounts for each Participant to which shall be credited all Compensation Deferrals made by the Participant during such Plan Year, and deemed investment returns, gains and losses on such Compensation Deferrals. 7 4.2 PARTICIPANTS REMAIN UNSECURED CREDITORS. All amounts credited to a Participant's Account under the Plan shall continue for all purposes to be a part of the general assets of the Company. Each Participant's interest in the Plan shall make him or her only a general, unsecured creditor of the Company. 4.3 ACCOUNTING METHODS. The accounting methods or formulae to be used under the Plan for the purpose of maintaining the Participants' Accounts, including the calculation and crediting (or debiting) of deemed returns, gains and losses, shall be determined by the Committee, in its sole discretion. The accounting methods or formulae selected by the Committee may be revised from time to time. 4.4 REPORTS. Each Participant shall be furnished with periodic statements of his or her Account, reflecting the status of his or her interest in the Plan, at least annually. SECTION 5 DISTRIBUTIONS 5.1 NORMAL TIME FOR DISTRIBUTION. Subject to Sections 5.2 through 5.5 and Section 5.10, distribution of the balance credited to a Participant's Account shall commence as soon as administratively practicable after the end of the term(s) of deferral elected by the Participant under Section 3.5, in accordance with the following rules. If, pursuant to Section 3.4, the Participant elected to receive annual installment payments, his or her first installment shall be equal to the balance then credited to his or her Account, divided by the number of installments to be made. Each subsequent annual installment shall be paid to the Participant as near as administratively practicable to each anniversary of the first installment payment. The amount of each subsequent installment shall be equal to the balance then credited to the Participant's Account, divided by the number of installments remaining to be made. While a Participant's Account is in installment payout status, the unpaid balance credited to the Participant's Account shall continue to be credited (or debited) with deemed investment returns, gains and losses under Section 3.3. 5.2 CHANGE OF CONTROL. If there is a Change of Control, the balance then credited to a Participant's Account shall be distributed to him or her in a lump sum as soon as administratively practicable after the date of the Change of Control. Deemed investment returns, gains and losses shall be credited (or debited) prior to any such accelerated distribution in accordance with Section 3.3. The amount of any such accelerated lump sum distribution shall also include any amount that the Participant deferred but which has not yet been credited to his or her Account. 5.3 SPECIAL RULE FOR DEATH OR DISABILITY. If a Participant dies or becomes Disabled, the balance then credited to his or her Account shall be distributed to the Participant (or his or her Beneficiary) at the time and in the form elected by the Participant pursuant to Sections 3.4 and 3.5; provided, however, that the Committee, in its sole discretion, may elect to distribute such amount in a lump sum as soon as administratively practicable after the date of death or 8 Disability. In accordance with Section 3.3, deemed investment returns, gains and losses shall be credited (or debited) prior to any such accelerated distribution. 5.4 SPECIAL RULE RE DEDUCTIBILITY. Notwithstanding any contrary provision of Section 5.1, any payment scheduled for a particular Plan Year shall not be made in such Plan Year to the extent necessary to avoid application of the deductibility limitation of section 162(m) of the Code. (For this purpose, deductibility shall be determined by adding such payment to all other compensation paid by the Company and its Affiliates to the Participant during the Plan Year.) If, pursuant to the foregoing sentences, any amounts are not paid when originally scheduled, such amounts shall be paid in the first subsequent taxable year in which such payments would not be subject to the deductibility limitation of section 162(m) of the Code. During any such delay in payment, unpaid amounts shall continue to be credited (or debited) with deemed investment returns, gains and losses under Section 3.3. Notwithstanding the foregoing, distribution of a Participant's Account shall be made without regard to the deductibility limitation of section 162(m) of the Code if the time for distribution is accelerated pursuant to Section 5.2 or Section 5.3. 5.5 LATEST PERMISSIBLE DISTRIBUTION DATE. Notwithstanding any contrary provision of this Section 5, any amount which is credited to a Participant's Account on January 15 of the second calendar year following the year in which the Participant terminates service on the Board of Directors shall be distributed to the Participant (or his or her Beneficiary) in a single lump sum as soon as administratively practicable after such January 15. Any such amount shall continue to be credited (or debited) with deemed investment returns, gains and losses until the date of payment. For example, if a Participant terminates service on the Board of Directors during July 2000, and an amount remains credited to his or her Account on January 15, 2002 (after application of the other provisions of Section 5), then such amount (as increased or decreased by deemed investment returns, gains and losses) shall be distributed to the Participant (or his or her Beneficiary) in a lump sum as soon as administratively practicable after January 15, 2002. 5.6 BENEFICIARY DESIGNATIONS. Each Participant may, pursuant to such procedures as the Committee may specify, designate one or more Beneficiaries. 5.6.1 SPOUSAL CONSENT. If a Participant designates a person other than or in addition to his or her spouse as a primary Beneficiary, the designation shall be ineffective unless the Participant's spouse consents to the designation. Any spousal consent required under this Section 5.6 shall be ineffective unless it (a) is set forth in writing in a form specified in the discretion of the Committee, (b) acknowledges the effect of the Participant's designation of another person as his or her Beneficiary under the Plan, and (c) is signed by the spouse and witnessed by an authorized agent of the Committee or a notary public. Notwithstanding this consent requirement, if the Participant establishes to the satisfaction of the Committee that written spousal consent may not be obtained because the spouse cannot be located, his or her designation shall be effective without a spousal consent. Any spousal consent required under this Section 5.6 shall be valid only with respect to the spouse who signs the consent. A Participant may revoke his or her Beneficiary designation at any time, provided that such revocation is in writing. 9 5.6.2 CHANGES AND FAILED DESIGNATIONS. A Participant may designate different Beneficiaries (or may revoke a prior Beneficiary designation) at any time by delivering a new designation (or revocation of a prior designation) in accordance with Section 5.6.1. Any designation or revocation shall be effective only if it is received by the Committee. However, when so received, the designation or revocation shall be effective as of the date the notice is executed (whether or not the Participant still is living), but without prejudice to the Committee on account of any payment made before the change is recorded. The last effective designation received by the Committee shall supersede all prior designations. If a Participant dies without having effectively designated a Beneficiary, or if no Beneficiary survives the Participant, the Participant's Account shall be payable to his or her surviving spouse, or, if the Participant is not survived by his or her spouse, the Account shall be paid to his or her estate. 5.7 FINANCIAL HARDSHIP. In the event that a Participant incurs a Financial Hardship, the Committee, in its sole discretion and notwithstanding any contrary provision of the Plan, may determine that all or part of the Participant's Account shall be paid to him or her immediately; provided, however, that the amount paid to the Participant pursuant to this Section 5.7 shall be limited to the amount reasonably necessary to alleviate the Participant's Financial Hardship. Also, payment under this Section 5.7 may not be made to the extent that the hardship may be relieved by suspension of the Participant's Compensation Deferrals in accordance with Section 2.2. 5.8 PAYMENTS TO INCOMPETENTS. If any individual to whom a benefit is payable under the Plan is a minor or legally incompetent, the Committee shall determine whether payment shall be made directly to the individual, any person acting as his or her custodian or legal guardian under the California Uniform Transfers to Minors Act, his or her legal representative or a near relative, or directly for his or her support, maintenance or education. 5.9 UNDISTRIBUTABLE ACCOUNTS. Each Participant and (in the event of death) his or her Beneficiary shall keep the Committee advised of his or her current address. If the Committee is unable to locate the Participant or Beneficiary to whom a Participant's Account is payable under this Section 5, the Participant's Account shall continue to be credited (or debited) with deemed investment returns, gains and losses in accordance with Section 3.3. Accounts that, in accordance with the preceding sentence, have been undistributable for a period of thirty-five months shall be forfeited as of the end of the thirty- fifth month. If a Participant whose Account was forfeited under this Section 5.9 (or his or her Beneficiary) files a claim for distribution of the Account after the date on which it was forfeited, and if the Committee determines that such claim is valid, then the forfeited balance shall be paid by the Company in a lump sum cash payment as soon as practicable thereafter (without interest or any deemed investment returns, gains or losses after the date of forfeiture). 5.10 COMMITTEE DISCRETION. Within the specific time periods described in this Section 5, the Committee shall have sole discretion to determine the specific timing of the payment of any Account balance under the Plan. In addition and notwithstanding any contrary provision of the Plan, the Committee, in its sole discretion, may cause the balance credited to a Participant's 10 Account to be paid to him or her in a lump sum at any time following the Participant's cessation of service on the Board of Directors. SECTION 6 PARTICIPANT'S INTEREST IN ACCOUNT 6.1 COMPENSATION DEFERRAL CONTRIBUTIONS. Subject to Sections 8.1 (relating to creditor status) and 9.2 (relating to amendment and/or termination of the Plan), a Participant's interest in the balance credited to his or her Account at all times shall be 100% vested and nonforfeitable. SECTION 7 ADMINISTRATION OF THE PLAN 7.1 COMMITTEE. The Plan shall be administered by the Committee. The Committee shall have the authority to control and manage the operation and administration of the Plan. Any member of the Committee may resign at any time by notice in writing mailed or delivered to the Secretary of the Company. 7.2 ACTIONS BY COMMITTEE. Each decision of a majority of the members of the Committee then in office shall constitute the final and binding act of the Committee. The Committee may act with or without a meeting being called or held and shall keep minutes of all meetings held and a record of all actions taken by written consent. 7.3 POWERS OF COMMITTEE. The Committee shall have all powers and discretion necessary or appropriate to supervise the administration of the Plan and to control its operation in accordance with its terms, including, but not by way of limitation, the following powers: (a) to interpret and determine the meaning and validity of the provisions of the Plan and to determine any question arising under, or in connection with, the administration, operation or validity of the Plan or any amendment thereto; (b) to determine any and all considerations affecting the eligibility of any Nonemployee Director to become a Participant or remain a Participant in the Plan; (c) to cause one or more separate Accounts to be maintained for each Participant; (d) to cause Compensation Deferrals and deemed investment returns, gains and losses to be credited to Participants' Accounts; (e) to establish and revise a method or procedure for the deemed investment of Participants' Accounts, as provided in Section 3.3; 11 (f) to establish and revise an accounting method or formula for the Plan, as provided in Section 4.3; (g) to determine the manner and form in which any distribution is to be made under the Plan; (h) to determine the manner and form for making elections under the Plan; (i) to determine the status and rights of Participants and their spouses, Beneficiaries or estates; (j) to employ such counsel, agents and advisers, and to obtain such legal, clerical and other services, as it may deem necessary or appropriate in carrying out the provisions of the Plan; (k) to establish, from time to time, rules for the performance of its powers and duties and for the administration of the Plan; (l) to arrange for annual distribution to each Participant of a statement of benefits accrued under the Plan; (m) to publish a claims and appeal procedure pursuant to which individuals or estates may claim Plan benefits and appeal denials of such claims; (n) to delegate to any one or more of its members or to any other person, severally or jointly, the authority to perform for and on behalf of the Committee one or more of the functions of the Committee under the Plan; and (o) to decide all issues and questions regarding Account balances, and the time, form, manner and amount of distributions to Participants. 7.4 DECISIONS OF COMMITTEE. All actions, interpretations, and decisions of the Committee shall be conclusive and binding on all persons, and shall be given the maximum possible deference allowed by law. 7.5 ADMINISTRATIVE EXPENSES. All expenses incurred in the administration of the Plan by the Committee, or otherwise, including legal fees and expenses, shall be paid and borne by the Company. 7.6 ELIGIBILITY TO PARTICIPATE. No member of the Committee who is also a Nonemployee Director shall be excluded from participating in the Plan if otherwise eligible, but he or she shall not be entitled, as a member of the Committee, to act or pass upon any matters pertaining specifically to his or her own Account under the Plan. 12 7.7 INDEMNIFICATION. The Company shall, and hereby does, indemnify and hold harmless the members of the Committee, from and against any and all losses, claims, damages or liabilities (including attorneys' fees and amounts paid, with the approval of the Board of Directors, in settlement of any claim) arising out of or resulting from the implementation of a duty, act or decision with respect to the Plan, so long as such duty, act or decision does not involve gross negligence or willful misconduct on the part of any such individual. SECTION 8 FUNDING 8.1 UNFUNDED PLAN. All amounts credited to a Participant's Account under the Plan shall continue for all purposes to be a part of the general assets of the Company. The interest of the Participant in his or her Account, including his or her right to distribution thereof, shall be an unsecured claim against the general assets of the Company. Nothing contained in the Plan shall give any Participant or beneficiary any interest in or claim against any specific assets of the Company. SECTION 9 MODIFICATION OR TERMINATION OF PLAN 9.1 COMPANY'S OBLIGATION IS LIMITED. The Company intends to continue the Plan indefinitely, and to maintain each Participant's Account until it is scheduled to be paid to him or her in accordance with the provisions of the Plan. However, the Plan is voluntary on the part of the Company, and the Company does not guarantee to continue the Plan. The Company at any time may, by amendment of the Plan, suspend Compensation Deferrals or may discontinue Compensation Deferrals, with or without cause. Complete discontinuance of all Compensation Deferrals shall be deemed a termination of the Plan. 9.2 RIGHT TO AMEND OR TERMINATE. The Board of Directors, in its sole discretion, may amend or terminate the Plan, or any part thereof, at any time and for any reason, provided that no amendment or termination of the Plan shall, without the consent of the Participant, reduce the balance then credited to the Participant's Account. 9.3 EFFECT OF TERMINATION. If the Plan is terminated pursuant to this Section 9, the balances credited to the Accounts of the affected Participants shall be distributed to them at the time and in the manner set forth in Section 5; provided, however, that the Committee, in its sole discretion, may authorize accelerated distribution of Participants' Accounts as of any earlier date. SECTION 10 GENERAL PROVISIONS 10.1 INALIENABILITY. In no event may any Participant, Beneficiary, spouse or estate sell, transfer, anticipate, assign, hypothecate, or otherwise dispose of any right or interest under the Plan; and such rights and interests shall not at any time be subject to the claims of creditors 13 nor be liable to attachment, execution or other legal process. Accordingly, for example, a Participant's interest in the Plan is not transferable pursuant to a domestic relations order. 10.2 RIGHTS AND DUTIES. Neither the Company nor the Committee shall be subject to any liability or duty under the Plan except as expressly provided in the Plan, or for any action taken, omitted or suffered in good faith. 10.3 NO ENLARGEMENT OF RIGHTS. Neither the establishment or maintenance of the Plan, the making of any Compensation Deferrals nor any action of the Company or the Committee, shall be held or construed to confer upon any individual any right to be continue as a member of the Board of Directors. 10.4 COMPLIANCE WITH RULE 16B-3. All transactions under the Plan are intended to be exempt from liability under section 16(b) of the Securities Exchange Act of 1934, as amended ("section 16(b)"). To the extent deemed necessary or advisable by the Committee, any election, payment, distribution or other transaction by or on behalf of any Nonemployee Director may be canceled or delayed in order to ensure that such payment will not result in any liability under section 16(b) to such individual. 10.5 COMPENSATION DEFERRALS NOT COUNTED UNDER OTHER EMPLOYEE BENEFIT PLANS. Compensation Deferrals under the Plan will not be considered for purposes of contributions or benefits under any other employee benefit plan sponsored by the Company or any Affiliate, except to the extent specifically provided in any such plan. 10.6 APPLICABLE LAW. The provisions of the Plan shall be construed, administered and enforced in accordance with the laws of the State of California (other than its conflict of laws provisions). 10.7 SEVERABILITY. If any provision of the Plan is held invalid or unenforceable, its invalidity or unenforceability shall not affect any other provisions of the Plan, and in lieu of each provision which is held invalid or unenforceable, there shall be added as part of the Plan a provision that shall be as similar in terms to such invalid or unenforceable provision as may be possible and be valid, legal, and enforceable. 14 10.8 CAPTIONS. The captions contained in and the table of contents prefixed to the Plan are inserted only as a matter of convenience and for reference and in no way define, limit, enlarge or describe the scope or intent of the Plan nor in any way shall affect the construction of any provision of the Plan. EXECUTION IN WITNESS WHEREOF, The PMI Group, Inc., by its duly authorized officer, has executed the Plan on the date indicated below. THE PMI GROUP, INC. /s/ CHARLES BROOM - --------------------------------------- By: Charles Broom Title: Assist. VP, Human Resources Date: July 28, 1998 -------- 15 EX-11.1 6 COMPUTATION OF NET INCOME PER SHARE EXHIBIT 11.1 ------------ THE PMI GROUP, INC. AND SUBSIDIARIES COMPUTATION OF NET INCOME PER SHARE
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, (In thousands, except per share data) 1998 1997 1998 1997 ------- -------- ------- -------- BASIC NET INCOME PER COMMON SHARE: Net income $46,787 $42,279 $92,555 $91,451 Average common shares outstanding 31,918 33,618 32,173 33,920 ------- -------- ------- ------- Basic net income per common share $ 1.47 $ 1.26 $ 2.88 $ 2.70 ======= ======= ======= ======= DILUTED NET INCOME PER COMMON SHARE: Net income $46,787 $42,279 $92,555 $91,451 ------- ------- ------- ------- Average common shares outstanding 31,918 33,618 32,173 33,920 Net shares to be issued upon exercise of dilutive stock options after applying treasury stock method 201 98 188 106 ------- ------- ------- ------- Average shares outstanding 32,119 33,716 32,361 34,026 ------- ------- ------- ------- DILUTED NET INCOME PER COMMON SHARE $ 1.46 $ 1.25 $ 2.86 $ 2.69 ======= ======= ======= =======
26 EX-27.1 7 FINANCIAL DATA SCHEDULE
7 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1,316,078 0 0 151,673 0 0 1,496,807 8,862 35,021 47,966 1,705,831 201,726 81,071 0 0 99,442 0 0 352 1,071,873 1,705,831 235,173 42,716 10,191 10,023 68,675 0 92,496 129,272 36,717 92,555 0 0 0 92,555 2.88 2.86 0 0 0 0 0 0 0
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