-----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, NLv3VM26hEuL0P6PpgTIdi5qDiaGQ2s4LcRcjuvhJh6nBAeIgpJzSTs418kyeYKM X9DfpjLtoYUfsjBzYaqp8Q== /in/edgar/work/20000811/0000929624-00-001145/0000929624-00-001145.txt : 20000921 0000929624-00-001145.hdr.sgml : 20000921 ACCESSION NUMBER: 0000929624-00-001145 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PMI GROUP INC CENTRAL INDEX KEY: 0000935724 STANDARD INDUSTRIAL CLASSIFICATION: [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: 695144 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 0001.txt 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, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to ______________________ Commission file number 1-13664 THE PMI GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 94-3199675 (State of Incorporation) (IRS Employer Identification No.) 601 Montgomery Street, San Francisco, California 94111 (Address of principal executive offices) (Zip Code) (415) 788-7878 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class of Stock Par Value Date Number of Shares - -------------- --------- -------- ---------------- Common Stock $0.01 07/31/00 44,169,873 THE PMI GROUP, INC. Index to Quarterly Report on Form 10-Q June 30, 2000
Part I - Financial Information Page ---- Item 1. Interim Consolidated Financial Statements and Notes (Unaudited) Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2000 and 1999 3 Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-23 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Part II - Other Information Item 1. Legal Proceedings 24 Item 4. Submission of Matters to a Vote of Securities Holders 24 Item 6. Exhibits and Reports on Form 8-K 25 Signatures 26 Index to Exhibits 27
2 PART I - FINANCIAL INFORMATION ITEM 1. INTERIM FINANCIAL STATEMENTS THE PMI GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Six Months Ended June 30, Ended June 30, --------------------------- ------------------------- (In thousands except per share amounts) 2000 1999 2000 1999 ---------- ----------- ---------- ---------- Revenues Premiums earned $ 156,833 $ 131,330 $ 305,549 $ 260,099 Investment income, less investment expense 29,035 21,827 56,118 43,528 Realized capital gains, net 370 327 1,138 344 Other income 1,655 2,689 4,506 7,453 ---------- ----------- ---------- ---------- Total revenues 187,893 156,173 367,311 311,424 ---------- ----------- ---------- ---------- Losses and expenses Losses and loss adjustment expenses 26,711 22,847 54,934 52,717 Amortization of policy acquisition costs 20,416 21,144 40,814 41,967 Underwriting and other operating expenses 42,357 38,902 81,560 77,805 Interest expense 2,573 1,804 4,943 3,593 Distributions on preferred capital securities 2,077 2,077 4,155 4,155 ---------- ----------- ---------- ---------- Total losses and expenses 94,134 86,774 186,406 180,237 ---------- ----------- ---------- ---------- Income before income taxes 93,759 69,399 180,905 131,187 Income tax expense 28,780 19,940 55,936 38,076 ---------- ----------- ---------- ---------- Net income $ 64,979 $ 49,459 $ 124,969 $ 93,111 ========== =========== ========== ========== Per common share data: Basic net income $ 1.47 $ 1.10 $ 2.82 $ 2.07 ========== =========== ========== ========== Diluted net income $ 1.45 $ 1.09 $ 2.79 $ 2.06 ========== =========== ========== ========== Cash dividends declared $ 0.04 $ 0.03 $ 0.08 $ 0.06 ========== =========== ========== ==========
See accompanying notes to consolidated financial statements. 3 THE PMI GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2000 1999 (Dollars in thousands) ------------- ------------ Assets (Unaudited) Investments: Available for sale, at fair value: Fixed income securities (amortized cost $1,504,641 and $1,485,396) $ 1,531,976 $ 1,479,310 Equity securities Common stock (cost $58,430 and $44,714) 98,070 83,890 Preferred stock (cost $72,983 and $17,660) 70,230 17,582 Common stock of affiliates, at underlying book value 115,755 91,453 Short-term investments (at cost, which approximates fair value) 126,749 145,093 -------------- ------------- Total investments 1,942,780 1,817,328 Cash 10,536 28,076 Accrued investment income 22,601 22,058 Reinsurance recoverable and prepaid premiums 52,581 50,714 Premiums receivable 32,557 30,659 Receivable from affiliates 2,506 2,996 Deferred policy acquisition costs 68,769 69,579 Property and equipment, net 46,231 40,462 Other assets 46,967 38,890 -------------- ------------- Total assets $ 2,225,528 $ 2,100,762 ============== ============= Liabilities Reserve for losses and loss adjustment expenses $ 291,735 $ 282,000 Unearned premiums 172,956 182,089 Long-term debt 139,930 145,367 Reinsurance balances payable 26,165 25,415 Deferred income taxes 87,440 75,640 Other liabilities and accrued expenses 77,677 73,908 -------------- ------------- Total liabilities 795,903 784,419 -------------- ------------- Company-obligated mandatorily redeemable preferred capital securities of subsidiary trust holding solely junior subordinated deferrable interest debenture of the Company 99,092 99,075 Shareholders' equity Preferred stock -- $.01 par value; 5,000,000 shares authorized - - Common stock -- $.01 par value; 187,500,000 shares authorized; 52,794,004 and 52,793,777 issued 528 528 Additional paid-in capital 265,828 265,828 Accumulated other comprehensive income 35,871 20,186 Retained earnings 1,379,046 1,258,617 Treasury stock (8,671,193 and 8,091,924 shares at cost) (350,740) (327,891) -------------- ------------- Total shareholders' equity 1,330,533 1,217,268 -------------- ------------- Total liabilities and shareholders' equity $ 2,225,528 $ 2,100,762 ============== =============
See accompanying notes to consolidated financial statements. 4 THE PMI GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, ---------------------------- (In thousands) 2000 1999 ----------- ---------- Cash flows from operating activities Net income $ 124,969 $ 93,111 Adjustments to reconcile net income to net cash provided by operating activities: Realized capital gains, net (1,138) (344) Equity in earnings of affiliates (4,344) (3,126) Depreciation and amortization 7,649 3,325 Changes in: Reserve for losses and loss adjustment expenses 9,735 8,823 Unearned premiums (9,133) (390) Deferred policy acquisition costs 809 (7,625) Accrued investment income (543) 541 Reinsurance balances payable 749 4,152 Reinsurance recoverable and prepaid premiums (1,866) (3,555) Premiums receivable (1,898) (5,569) Income taxes 1,220 2,999 Receivable from affiliates 490 1,283 Receivable from Allstate - (2,056) Other (8,778) (26,743) ----------- ---------- Net cash provided by operating activities 117,921 64,826 ----------- ---------- Cash flows from investing activities Proceeds from sales of equity securities 22,303 16,085 Investment collections of fixed income securities 500 - Proceeds from sales of fixed income securities 104,735 132,888 Investment purchases: Fixed income securities (137,667) (141,700) Equity securities (82,958) (16,239) Net decrease (increase) in short-term investments 18,343 (18,049) Investment in affiliates (19,506) (740) Purchase of PMI Ltd. - (7,799) Purchase of property and equipment (9,018) (5,129) ----------- ---------- Net cash used in investing activities (103,268) (40,683) ----------- ---------- Cash flows from financing activities Proceeds from exercise of stock grants and options 1,168 327 Principal payments on long-term debt (4,804) - Dividends paid to shareholders (4,540) (3,018) Purchase of The PMI Group, Inc. common stock (24,017) (20,797) ----------- ---------- Net cash used in financing activities (32,193) (23,488) ----------- ---------- Net (decrease) increase in cash (17,540) 655 Cash at beginning of period 28,076 9,757 ----------- ---------- Cash at end of period $ 10,536 $ 10,412 =========== ==========
See accompanying notes to consolidated financial statements. 5 THE PMI GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (Unaudited) Note 1 - Basis of presentation The accompanying unaudited consolidated financial statements include the accounts of The PMI Group, Inc. ("TPG"), a Delaware corporation; its wholly- owned subsidiaries, PMI Mortgage Insurance Co. ("PMI"), an Arizona corporation; Residential Guaranty Co. ("RGC"), an Arizona corporation; American Pioneer Title Insurance Company ("APTIC"), a Florida corporation; and PMI's wholly-owned subsidiaries, PMI Mortgage Insurance Ltd. ("PMI Ltd."), an Australian mortgage insurance company, PMI Mortgage Services Co. ("MSC"), a California corporation, and other insurance, reinsurance and non-insurance subsidiaries of PMI and TPG. TPG and its subsidiaries are collectively referred to as the "Company". All material intercompany transactions and balances have been eliminated in consolidation. In addition, PMI has equity interests in CMG Mortgage Insurance Company and CMG Reinsurance Company (collectively referred to as "CMG"), both of which conduct residential mortgage insurance and reinsurance business, and also Fairbanks Capital Holding Corp. ("Fairbanks"), a special servicer of single-family residential mortgages. TPG has an equity interest in RAM Holdings Ltd. and RAM Holdings II Ltd. (collectively referred to as "RAM Re"), a financial guaranty reinsurance company based in Bermuda. CMG, Fairbanks and Ram Re 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 (GAAP) for interim financial information and the requirements of Form 10-Q and Article 7 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation, have been included. Interim results for the quarter and six months ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. The financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in The PMI Group, Inc. 1999 Annual Report to Shareholders. Note 2 - Changes in Accounting Policy Effective January 1, 2000 the Company changed its accounting policy for international subsidiaries and affiliates to report operations on a one-month lag from domestic operations. Accordingly, the results of foreign operations for the six months ended June 30, 2000 represent five months of activity. Note 3 - Earnings per Share The weighted average common shares outstanding for computing basic earnings per share ("EPS") were 44,094,069 and 44,887,242 for the three months ended June 30, 2000 and 1999, respectively, and 44,248,927 and 45,058,499 for the six months ended June 30, 2000 and 1999, respectively. 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 such options had the potential effect of increasing common shares to 44,736,476 and 45,170,097 for the three months ended June 30, 2000 and 1999, respectively, and 44,748,719 and 45,247,107 for the six months ended June 30, 2000 and 1999, respectively. Net income available to common shareholders does not change for computing diluted EPS. 6 Note 4 - Comprehensive Income The reconciliation of net income to comprehensive income for the three months and the six months ended June 30, 2000 and 1999 are as follows:
Three Months Six Months Ended June 30, Ended June 30, ------------------------ ------------------------ (In thousands) 2000 1999 2000 1999 --------- ---------- --------- ---------- Net income $ 64,979 $ 49,459 $ 124,969 $ 93,111 Other comprehensive income, net of tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period 30,536 (22,844) 20,789 (28,153) Less: reclassification adjustment for gains included in net income (241) (213) (740) (224) Currency translation adjustment (2,419) - (4,364) - --------- ---------- --------- ---------- Other comprehensive income (loss), net of tax 27,876 (23,057) 15,685 (28,377) --------- ---------- --------- ---------- Comprehensive income $ 92,855 $ 26,402 $ 140,654 $ 64,734 ========= ========== ========= ==========
Note 5 - Deferred Policy Acquisition Costs ("DAC") Consolidated mortgage insurance operations defers certain costs related to the acquisition of primary mortgage insurance and amortizes these costs against related premium revenue in order to match costs and revenues in accordance with GAAP. These acquisition costs vary with, and are primarily related to, the acquisition of new business. Specific costs that consolidated mortgage insurance operations defers include all underwriting, contract underwriting and sales related activities. To the extent the Company is compensated by customers for contract underwriting, those underwriting costs are not deferred. The DAC asset is amortized and charged against revenue in proportion to estimated gross profits over the life of the policies using the guidance provided by SFAS No. 97, Accounting and Reporting by Insurance Enterprises For Certain Long-Duration Contracts and for Realized Gains and Losses From the Sale of Investments. The following table reconciles beginning and ending DAC balance for the periods indicated.
Three Months Six Months Ended June 30, Ended June 30, ---------------------------- ---------------------------- (In thousands) 2000 1999 2000 1999 ----------- ---------- ----------- ----------- Beginning DAC balance $ 68,827 $ 65,682 $ 69,579 $ 61,605 U.S. acquisition costs incurred and deferred 18,387 24,692 37,319 49,592 U.S. amortization of deferred costs (20,416) (21,144) (40,814) (41,967) Net change in PMI Ltd. DAC balance 1,971 - 2,685 - ----------- ---------- ----------- ----------- Ending DAC balance $ 68,769 $ 69,230 $ 68,769 $ 69,230 =========== ========== =========== ===========
7 Note 6 - Business Segments The Company's reportable operating segments include Domestic Mortgage Insurance, International Mortgage Insurance and Title Insurance. The Other segment includes the income and expenses of the holding company, the results from the business of contract underwriting and software licensing, and the activity of an inactive broker-dealer. Intersegment transactions are immaterial. The Company evaluates performance primarily based on segment net income. The following tables present information about reported segment income (loss) and segment assets for the periods indicated:
Domestic International Quarter ended June 30, 2000 Mortgage Mortgage Title Consolidated (In thousands) Insurance Insurance Insurance Other Total - ------------------------------------------------------------------------------------------------------------------------------- Premiums earned $ 124,972 $ 7,083 $ 24,778 $ - $ 156,833 ========== ======== ======== =========== ========== Net underwriting income (expenses) before tax - external customers $ 69,586 $ 3,509 $ 2,537 $ (6,628) $ 69,004 Investment income (including capital gains) 21,531 3,258 457 1,348 26,594 Equity in earnings of affiliates 2,290 - - 521 2,811 Interest expense - (766) - (1,807) (2,573) Distributions on preferred capital securities - - - (2,077) (2,077) ---------- -------- -------- ----------- ---------- Income (loss) before income tax expense 93,407 6,001 2,994 (8,643) 93,759 Income tax expense (benefit) 28,483 2,114 1,068 (2,885) 28,780 ---------- -------- -------- ----------- ---------- Net income (loss) $ 64,924 $ 3,887 $ 1,926 $ (5,758) $ 64,979 ========== ======== ======== =========== ========== Total assets $1,884,029 $177,481 $ 47,938 $ 116,080 $2,225,528 ========== ======== ======== =========== ==========
Domestic Quarter ended June 30, 1999 Mortgage Title Consolidated (In thousands) Insurance Insurance Other Total - ------------------------------------------------------------------------------------------------------------ Premiums earned $ 107,339 $ 23,991 $ - $ 131,330 ========== ======== ======== =========== Net underwriting income (expenses) before tax - external customers $ 49,956 $ 2,715 $ (1,545) $ 51,126 Investment income (including capital gains) 19,390 380 790 20,560 Equity in earnings of affiliates 1,302 - 292 1,594 Interest expense - - (1,804) (1,804) Distributions on preferred capital securities - - (2,077) (2,077) ---------- -------- --------- ----------- Income (loss) before income tax expense 70,648 3,095 (4,344) 69,399 Income tax expense (benefit) 20,272 1,134 (1,466) 19,940 ---------- -------- --------- ----------- Net income (loss) $ 50,376 $ 1,961 $ (2,878) $ 49,459 ========== ======== ======== =========== Total assets $1,680,790 $ 41,776 $ 90,672 $ 1,813,238 ========== ======== ======== ===========
8
Domestic International Six Months ended June 30, 2000 Mortgage Mortgage Title Consolidated (In thousands) Insurance Insurance Insurance Other Total - ------------------------------------------------------------------------------------------------------------------------------- Premiums earned $ 245,507 $ 12,674 $ 47,368 $ - $ 305,549 ========== ======== ======== ========= ========== Net underwriting income (expenses) before tax - external customers $ 129,114 $ 7,229 $ 4,068 $ (7,664) $ 132,747 Investment income (including capital gains) 42,621 6,585 914 2,793 52,914 Equity in earnings of affiliates 4,071 - - 273 4,344 Interest expense (13) (1,286) - (3,646) (4,945) Distributions on preferred capital securities - - - (4,155) (4,155) ---------- -------- -------- --------- ---------- Income (loss) before income tax expense 175,793 12,528 4,982 (12,398) 180,905 Income tax expense (benefit) 53,384 4,228 1,666 (3,342) 55,936 ---------- -------- -------- --------- ---------- Net income (loss) $ 122,409 $ 8,300 $ 3,316 $ (9,056) $ 124,969 ========== ======== ======== ========= ========== Total assets $1,884,029 $177,481 $ 47,938 $ 116,080 $2,225,528 ========== ======== ======== ========= ==========
Domestic Six Months ended June 30, 1999 Mortgage Title Consolidated (In thousands) Insurance Insurance Other Total - ------------------------------------------------------------------------------------------------------------ Premiums earned $ 212,577 $ 47,522 $ - $ 260,099 ========== ======== ======== =========== Net underwriting income (expenses) before tax - external customers $ 93,297 $ 4,940 $ (3,174) $ 95,063 Investment income (including capital gains) 38,541 748 1,457 40,746 Equity in earnings of affiliates 2,563 - 563 3,126 Interest expense - - (3,593) (3,593) Distributions on preferred capital securities - - (4,155) (4,155) ---------- -------- -------- ----------- Income (loss) before income tax expense 134,401 5,688 (8,902) 131,187 Income tax expense (benefit) 38,919 2,071 (2,914) 38,076 ---------- -------- -------- ----------- Net income (loss) $ 95,482 $ 3,617 $ (5,988) $ 93,111 ========== ======== ======== =========== Total assets $1,680,790 $ 41,776 $ 90,672 $ 1,813,238 ========== ======== ======== ===========
The Company did not have any major customers that accounted for more than 10% of its consolidated revenues for any of the periods presented. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, or are preceded by, followed by or that include the words "believes," "expects," "anticipates," "estimates," or similar expressions, and that relate to future plans, events or performance are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this document include: (i) management's expectation that secondary market bulk transactions will continue to be a portion of MICA's total origination volume during the year 2000, creating volatility in quarterly market share results of individual companies, including PMI; (ii) management's belief that the persistency rate may continue to increase if interest rates remain stable or rise during 2000; (iii) management's anticipation that the percentage of NIW subject to captive mortgage reinsurance agreements and other risk-share programs will continue to increase in 2000 and beyond, reducing the Company's net premiums written and net premiums earned; (iv) management's expectation that the amount of pool risk written by PMI in the year 2000 will be less than the amount written in 1999; (v) management's anticipation that the percentage of PMI's risk relating to risk- share programs will continue to increase as a percentage of total risk; (vi) management's belief that PMI's default rate may increase by year-end due to the maturation of insurance in force and seasonality; (vii) management's expectation that California will continue to account for a significant portion of total claims paid during the year 2000; (viii) management's expectation 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 may continue to decline; (ix) and management's anticipation that a significant percentage of NIW will be delivered through the contract underwriting channel during 2000. When a forward-looking statement includes a statement of the assumptions or bases underlying the forward-looking statement, the Company cautions that, while it believes such assumptions or bases to be reasonable and makes them in good faith, assumed facts or bases almost always vary from actual results, and the difference between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the Company or its management expresses an expectation or belief as to future results, such expectations or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. 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 items addressed in the section titled "Cautionary Statements and Investment Considerations" ("IC# 1-16") set forth below and other risks detailed from time to time in the Company's periodic filings with the Securities and Exchange Commission. All forward-looking statements of the Company are qualified by and should be read in conjunction with the Investment Considerations set forth below. The Company undertakes no obligation to publicly update or revise any forward- looking statements, whether as a result of new information, future events or otherwise. 10 RESULTS OF CONSOLIDATED OPERATIONS: THREE MONTHS ENDED JUNE 30, 2000 AND 1999 Consolidated net income was $65.0 million in the three months ended June 30, 2000, a 31.3% increase over the corresponding period of 1999. The growth can be attributed to increases in premiums earned of 19.4% and net investment income of 33.0%, partially offset by a decrease in other income of 37.0%, an increase in losses and loss adjustment expenses of 17.1%, and an increase in interest expense of 44.4%. Included in the 2000 financial results are the operations from PMI Ltd., which was acquired in the third quarter of 1999 and contributed $3.9 million of net income in the three months ended June 30, 2000. Diluted net income per share increased by 33.0% to $1.45 in 2000. Excluding capital gains, operating earnings per share increased by 33.0% to $1.45. Revenues in the second quarter of 2000 increased by 20.3% to $187.9 million compared with the second quarter of 1999. U.S. MORTGAGE INSURANCE OPERATIONS The Company's primary operating subsidiary, PMI, contributed approximately 80% of total revenues in the second quarter of 2000, generated by mortgage guaranty insurance written in the United States. PMI's new insurance written ("NIW") decreased by 14.5% to $6.5 billion in the second quarter of 2000 compared with the corresponding period of 1999, primarily as a result of a decline in total residential mortgage origination activity and the corresponding decrease in total volume of the private mortgage insurance industry. The members of the private mortgage insurance industry, as reported by the industry's trade association, Mortgage Insurance Companies of America ("MICA"), experienced a decrease in total new insurance written of 15.9% to $41.7 billion in the second quarter of 2000 from the corresponding period of 1999. This decrease was primarily due to a decline in total residential mortgage originations, particularly in refinancing activity, brought on by the rising interest rate environment. Total residential mortgage originations are estimated at $276 billion compared with $381 billion in the corresponding period of 1999, a 27.6% drop. Refinancing as a percentage of PMI's NIW decreased to 8.1% in the second quarter of 2000 from 25.6% in the corresponding period of 1999. The private mortgage insurance companies' market share increased to 60.3% of the total low down-payment market (insurable loans) from 50.9% in the second quarter of 1999. Management believes that the private mortgage insurance companies' increase in market share was primarily the result of an expansion of the MICA market through secondary market bulk transactions, which were generally not insured by MICA in 1999. (See IC2) PMI's market share of NIW increased to 15.6% in the second quarter of 2000, compared with 15.3% in the second quarter of 1999. On a combined basis with CMG, market share increased to 17.1% in the second quarter of 2000 compared with 16.5% in the second quarter of 1999. PMI's market share decreased from the first quarter 2000 level of 18.1% due to a bulk transaction in the first quarter representing approximately $1 billion of NIW insured by PMI. Management believes the industry insured bulk NIW during the second quarter, in which PMI did not participate. Management expects these secondary market bulk transactions to continue to be a portion of MICA's total origination volume during 2000. Accordingly, management expects volatility in quarterly market share results of individual companies, including PMI. PMI's cancellations of primary insurance in force decreased by 35.8% to $4.3 billion in the second quarter of 2000 compared with the corresponding period of 1999 primarily due to the decrease in refinancing activity previously discussed. As a result of the decrease in cancellation activity, PMI's persistency rate increased to 78.8% as of June 30, 2000 compared with 71.9% as of December 31, 1999 and 66.1% as of June 30, 1999. Management believes that if interest rates remain stable or rise during 2000, the persistency rate may continue to increase. 11 Insurance in force increased by 10.7% to $91.1 billion at June 30, 2000 compared with June 30, 1999. On a combined basis with CMG, insurance in force grew by 11.7% to $97.6 billion at June 30, 2000 compared with June 30, 1999. PMI's risk in force increased by 12.1% to $22.2 billion at June 30, 2000 compared with June 30, 1999. On a combined basis with CMG, risk in force grew by 12.7% to $23.8 billion compared with June 30, 1999. The strong growth rates in insurance and risk in force were primarily due to the decrease in cancellation activity (and the corresponding increase in persistency) and secondarily to the bulk transaction discussed above. Consolidated U.S. mortgage insurance net premiums written grew by 8.5% to $123.1 million in the second quarter of 2000 compared with the corresponding period of 1999. This increase was primarily due to the growth of insurance and risk in force discussed above, the continued shift to deeper coverage products and to a recapture agreement of an old pool business reinsurance arrangement in the third quarter of 1999 (see Note 7 "Reinsurance" of the Notes to the Consolidated Financial Statements included in the PMI Group, Inc. 1999 Annual Report to Shareholders). The old pool risk in force was $1.4 billion at June 30, 2000. Refunded premiums decreased by 53.8% to $2.6 million as a result of the decrease in policy cancellations. Ceded premiums written increased by 8.2% to $8.0 million for the quarter ended June 30, 2000 due to the increasing use of captive reinsurance arrangements, offset by the lack of ceded premiums in 2000 related to the Old Pool reinsurance recapture agreement. Approximately 33% of new insurance written in the second quarter of 2000 was subject to captive mortgage reinsurance agreements compared with approximately 20% in the corresponding period of 1999. Management anticipates that the percent of the NIW subject to captive mortgage reinsurance agreements and other risk-share programs will continue to increase in 2000 and beyond. In addition, the anticipated continued growth of captive reinsurance arrangements is expected to reduce the Company's net premiums written and net premiums earned. Mortgage insurance premiums earned increased 16.5% to $125.0 million in the second quarter of 2000 primarily due to the increase in premiums written. GSE pool risk written totaled $24 million for the second quarter of 2000, compared with $61 million in the corresponding period of 1999. Management expects the amount of pool risk written in 2000 to be less than the amount of pool risk written in 1999. GSE pool risk in force was $725 million as of June 30, 2000, representing 3.3% of direct primary risk in force. Risk in force under risk-share programs with PMI's customers, represented approximately 24% of direct primary risk in force at June 30, 2000, compared to approximately 20% at June 30, 1999. During 2000, management anticipates the percentage of PMI's risk related to risk-share programs to continue to increase as a percent of total risk. (See IC10) The percentage of PMI's insurance in force with deeper coverage continued to increase. Mortgages with original loan-to-value ratios greater than 90% and equal to or less than 95% ("95s") with 30% insurance coverage increased to 37.6% of risk in force as of June 30, 2000, from 35.9% as of June 30, 1999. Mortgages with original loan-to-value ratios greater than 85% and equal to or less than 90% ("90s") with 25% insurance coverage increased to 31.7% of risk in force as of June 30, 2000, compared with 31.2% as of June 30, 1999. Mortgage insurance losses and loss adjustment expenses increased 9.3% to $24.7 million in the second quarter of 2000 compared with the second quarter of 1999 primarily due to an increase in the inventory of loans in default and the corresponding increase in loss reserves. Loans in default increased by 5.3% to 15,096 at June 30, 2000 compared with June 30, 1999. However, PMI's national default rate decreased by 0.06 percentage points to 1.93% at June 30, 2000 compared with June 30, 1999, due to an 8.3% increase in policies in force to 781,087 at June 30, 2000. Management believes that PMI's default rate may increase by year-end due to the maturation of insurance in force and seasonality. (See IC12) Direct primary claims paid in the second quarter of 2000 decreased by 17.2% to $15.4 million compared with the same period in 1999, due to a 5.1% decrease in the average claim size to approximately $18,570 and a 13.2% decline in the number of claims paid to 867. The reduction in the average claim size is the result of a smaller 12 percentage of claims originating from the California book of business and to increased loss mitigation efforts by PMI and lenders. Default rates on PMI's California policies decreased to 2.21% at June 30, 2000, from 2.59% at June 30, 1999. Policies written in California accounted for 11.8% and 31.6% of the total dollar amount of claims paid in the second quarter of 2000 and 1999, respectively. Management expects that California will continue to account for a significant portion of total claims paid during 2000. However, 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 could continue to decline. (See IC13) Mortgage insurance policy acquisition costs incurred and deferred decreased by 25.5% to $18.4 million in the second quarter of 2000 compared with the same period in 1999 as a result of the 14.5% decrease in NIW and a decrease in contract underwriting. Amortization of policy acquisition costs decreased by 3.3% to $20.4 million. A significant portion of policy acquisition costs relates to contract underwriting. New policies processed by contract underwriters represented 23.7% of PMI's NIW in the second quarter of 2000 compared with 35.8% in the corresponding period of 1999. Management anticipates that a significant percentage of NIW will be delivered through the contract underwriting channel during 2000. (See IC7) Other mortgage insurance operating expenses decreased by 23.3% to $10.5 million in the second quarter of 2000 compared with the second quarter of 1999, due to 1999 Y2K remediation costs, and reengineering efforts in 1999 and 2000. The mortgage insurance loss ratio declined by 1.3 percentage points to 19.8% in the quarter ended June 30, 2000 compared with the corresponding period in 1999. The decrease is attributed primarily to the growth in premiums which outstripped the slight increase in loss expenses as discussed above. The gross expense ratio (GAAP basis) decreased by 10.4 percentage points to 23.4% compared with the corresponding period in 1999 primarily due to the increase in premiums written along with the decrease in underwriting & other operating expenses. The combined ratio decreased by 6.9 percentage points to 44.9% in the second quarter of 2000 compared with the same period in 1999. INTERNATIONAL MORTGAGE INSURANCE OPERATIONS During 1999, the Company commenced operations in Australia and Hong Kong. The Company's Australian affiliate, PMI Ltd., was acquired on August 6, 1999. For the quarter ended June 30, 2000, PMI Ltd. generated $12.6 million of net premiums written and $7.1 million in net premiums earned. PMI Ltd.'s losses and loss adjustment expenses were $1.8 million and underwriting and other expenses were $2.6 million for the second quarter 2000. Investment income for PMI Ltd. was $3.3 million in the second quarter of 2000. NIW for PMI Ltd. was $2.1 billion in the second quarter while insurance in force grew to $18.2 billion as of June 30, 2000. Financial results for the operations in Hong Kong were immaterial during the second quarter of 2000. TITLE INSURANCE OPERATIONS Title insurance premiums earned increased 3.3% to $24.8 million in the three months ended June 30, 2000 compared with the same period in 1999 primarily due to continued geographic expansion efforts offset by the decrease in residential mortgage originations as previously noted. In the second quarter of 2000, approximately 70.6% of APTIC's premiums earned were generated from the state of Florida, compared with approximately 74.0% in the corresponding period of 1999. Underwriting and other expenses increased 4.8% to $22.0 million in the second quarter of 2000 compared with the same period in 1999 due to a increase in agency fees and commissions related to the increase in premiums earned. The title insurance combined ratio increased by 1.1 percentage points to 89.8%. 13 OTHER Other income, which was generated primarily by MSC, decreased by 37.0% to $1.7 million in the second quarter of 2000 compared with the second quarter of 1999 primarily due to the decrease in contract underwriting services. Other expenses increased by 92.9% to $8.1 million, primarily due to international expansion and diversification efforts and secondarily to equity based compensation, partially offset by a decrease in contract underwriting expenses. (See IC7) In the quarter ended June 30, 2000, the Company's net investment income (including realized capital gains) increased by 33.0% to $29.0 million compared with the second quarter of 1999 primarily due to the growth in the investment portfolio of $422 million over the second quarter of 1999. This increase is due to the acquisition of PMI Ltd. and positive cash flows generated by the Company. In addition, the current portfolio book yield increased to 6.1% at June 30, 2000 from 5.9% at June 30, 1999 primarily as a result of the increasing interest rate environment. The Company's effective tax rate increased to 30.7% in the second quarter of 2000 from 28.7% in the second quarter of 1999 as a result of the increase in domestic and international underwriting operations relative to the increase in tax-exempt investment income. SIX MONTHS ENDED JUNE 30, 2000 AND 1999 Consolidated net income was $125.0 million in the six months ended June 30, 2000, a 34.3% increase over the corresponding period of 1999. The growth can be attributed to increases in premiums earned of 17.5% and net investment income of 29.0%, partially offset by an increase in underwriting and other expenses of 2.2%, a decrease in other income of 40.0%, an increase in losses and loss adjustment expenses of 4.2%, and an increase in interest expense of 36.1%. Included in the 2000 financial results are the operations from PMI Ltd., which was acquired in the third quarter of 1999 and contributed $8.3 million of net income for the six months ended June 30, 2000. Diluted net income per share increased by 35.4% to $2.79 in 2000. Excluding capital gains, operating earnings per share increased by 35.2% to $2.78. Revenues in the first half of 2000 increased by 18.0% to $367.3 million compared with the first six months of 1999. U.S. MORTGAGE INSURANCE OPERATIONS The Company's primary operating subsidiary, PMI, contributed approximately 80% of total revenues in the first half of 2000, generated by mortgage guaranty insurance written in the United States. PMI's NIW decreased by 16.8% to $12.4 billion in the first six months of 2000 compared with the corresponding period of 1999, primarily as a result of a decline in total residential mortgage origination activity and the corresponding decrease in total volume of the private mortgage insurance industry, partially offset by an increase in PMI's market share. The private mortgage insurance industry experienced a decrease in total new insurance written of 25.2% to $74.4 billion for the six months ended June 30, 2000 compared with the corresponding period of 1999. This decrease was primarily due to a decrease in total residential mortgage originations, particularly in refinancing activity, brought on by the rising interest rate environment. Total residential mortgage originations are estimated at $464 billion for the first six months of 2000 compared with $732 billion in the corresponding period of 1999. Refinancing as a percentage of PMI's NIW decreased to 9.1% for the six months ended June 30, 2000 from 31.3% in the corresponding period of 1999. The private mortgage insurance companies' market share increased to 60.9% of the total low down-payment market (insurable loans) from 51.8% in the same period of 1999. Management believes that the private mortgage insurance companies' increase in market share was primarily the result of an expansion of the MICA market through secondary market bulk transactions which were generally not insured by MICA in 1999. (See IC2) 14 PMI's market share of NIW increased to 16.7% in the first six months of 2000 compared with 14.9% in the first six months of 1999. On a combined basis with CMG, market share increased to 18.1% in the first half of 2000 compared with 16.2% in the first half of 1999. Management believes the increase in PMI's market share was primarily the result of a bulk secondary market transaction representing approximately $1 billion in NIW insured by PMI during the first quarter of 2000, offset by bulk NIW insured by PMI's competitors in the second quarter of 2000. Management expects these bulk-type transactions to continue to be a portion of MICA's total origination volume during 2000. Accordingly, management expects volatility in market share results of individual companies, including PMI. Consolidated U.S. mortgage insurance net premiums written grew by 13.3% to $240.1 million in the first six months of 2000 compared with the corresponding period of 1999. This increase was primarily due to the growth of insurance and risk in force as discussed above, the continued shift to deeper coverage products, and to a recapture agreement of an old pool business reinsurance arrangement in the third quarter of 1999 (see Note 7 "Reinsurance" of the Notes to the Consolidated Financial Statements included in the PMI Group, Inc. 1999 Annual Report to Shareholders). Refunded premiums decreased by 46.2% to $5.0 million as a result of the decrease in policy cancellations. Ceded premiums written decreased slightly by 1.8% to $16.2 million due to the lack of ceded premiums in 2000 related to the Old Pool reinsurance recapture agreement offset by the increasing popularity and usage of captive reinsurance arrangements. Approximately 30% of new insurance written in the second quarter of 2000 was subject to captive mortgage reinsurance agreements compared with approximately 20% in the corresponding period of 1999. Management anticipates that the percent of the NIW subject to captive mortgage reinsurance agreements and other risk- share programs will continue to increase in 2000 and beyond. In addition, the anticipated continued growth of captive reinsurance arrangements is expected to reduce the Company's net premiums written and net premiums earned. Mortgage insurance premiums earned increased 15.5% to $245.5 million in the second quarter of 2000 primarily due to the increase in premiums written. GSE pool risk written totaled $44 million for the six months ended June 30, 2000, compared with $103 million in the corresponding period of 1999. Management expects the amount of pool risk written in 2000 to be less than the amount of pool risk written in 1999. Mortgage insurance losses and loss adjustment expenses increased 0.1% to $52.3 million in the first six months of 2000 compared with the first six months of 1999 primarily due to an increase in the inventory of loans in default and the corresponding increase in loss reserves. Direct primary claims paid in the first half of 2000 decreased by 16.8% to $34.6 million compared with the same period in 1999 due to a 6.8% decrease in the average claim size to approximately $19,500 and a 10.7% decline in the number of claims paid to 1,779. The reduction in the average claim size is the result of a smaller percentage of claims originating from the California book of business and to increased loss mitigation efforts by PMI and lenders. Mortgage insurance policy acquisition costs incurred and deferred decreased by 24.8% to $37.3 million for the six months ended June 30, 2000 compared with the same period in 1999 as a result of the 16.8% decrease in NIW and a decrease in contract underwriting. Amortization of policy acquisition costs decreased by 2.9% to $40.8 million. Contract underwriting generated 22.7% of NIW for the six months ended June 30, 2000 compared with 39.5% in the same period in 1999. Other mortgage insurance operating expenses decreased by 6.8% to $23.4 million in the first six months of 2000 compared with the same period in 1999 due to 1999 Y2K remediation costs and reengineering efforts in 1999 and 2000. The mortgage insurance loss ratio declined by 3.3 percentage points to 21.3% for the six months ended June 30, 2000 compared with the corresponding period in 1999. The decrease is attributed to the growth in premiums earned as discussed above. The gross expense ratio (GAAP basis) decreased by 10 percentage points to 25.3% 15 primarily due to the increase in premiums written and a decrease in expenses as discussed above. The combined ratio decreased by 8.2 percentage points to 48.1% in the first half of 2000 compared with the same period in 1999. INTERNATIONAL MORTGAGE INSURANCE OPERATIONS For the six months ended June 30, 2000, PMI Ltd. generated $18.6 million of net premiums written and $12.7 million in net premiums earned. PMI Ltd.'s losses and loss adjustment expenses were $2.2 million and underwriting and other expenses were $4.6 million for the first six months of 2000. Investment income for PMI Ltd. was $6.6 million in the first half of 2000. NIW for PMI Ltd. was $2.9 billion in the first half of 2000. Financial results for the operations in Hong Kong were immaterial for the first six months of 2000. TITLE INSURANCE OPERATIONS Title insurance premiums earned decreased 0.2% to $47.4 million for the six months ended June 30, 2000 compared with the same period in 1999 primarily due to the decrease in residential mortgage originations offset by geographic expansion, as previously noted. In the first half of 2000, approximately 69.8% of APTIC's premiums earned were generated from the state of Florida, compared with approximately 71.0% in the corresponding period of 1999. Underwriting and other expenses increased 1.7% to $42.8 million in the first half of 2000 compared with the same period in 1999 due to geographic expansion efforts. The title insurance combined ratio increased by 1.8 percentage points to 91.4%. OTHER Other income, which was generated primarily by MSC, decreased by 40.0% to $4.5 million in the first half of 2000 compared with the first half of 1999 primarily due to the decrease in contract underwriting services. Other expenses decreased by 13.2% to $12.0 million, primarily due to the decrease in contract underwriting services, offset by increased investment in diversification efforts. In the six months ended June 30, 2000, the Company's net investment income (including realized capital gains) increased by 29.0% to $56.1 million compared with the first half of 1999 primarily due to the growth in the investment portfolio of $422 million over the first half of 1999. This increase is due to the acquisition of PMI Ltd. and positive cash flows generated by the Company. The Company's effective tax rate increased to 30.9% in the first half of 2000 from 29.0% in the first half of 1999 as a result of the increase in domestic and international underwriting operations relative to the increase in tax-exempt investment income. LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION Liquidity and capital resource considerations are different for TPG and PMI, its principal insurance operating subsidiary. 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. PMI's ability to pay dividends to TPG is limited by, among other restrictions, the insurance laws of Arizona. Such laws provide that PMI may pay: (i) out of available surplus, (ii) without prior approval of the Arizona Insurance Director, (iii) dividends during any 12-month period not to exceed the lesser of 10% of policyholders' surplus as 16 of the preceding year end, or the last calendar year's investment income. The laws of Florida limit the payment of dividends by APTIC to TPG in any one year to 10% of available and accumulated surplus derived from realized net operating profits and net realized capital gains. In addition to the dividend restrictions by state laws, the Company's credit agreements limit the payment of dividends by PMI, and various credit rating agencies and insurance regulatory authorities have broad discretion to limit the payment of dividends to TPG by PMI or APTIC. During the first quarter of 2000, APTIC declared a cash dividend of $3.0 million to TPG, substantially the full amount of a dividend that can be paid by APTIC in 2000 without prior permission from the Florida Department of Insurance. During July 2000, the Arizona Department of Insurance approved a return of capital of $50 million to be paid by PMI to TPG in the second half of 2000. 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 and other expenses incurred by the holding company. The Company announced a stock repurchase program in the amount of $100.0 million authorized by the TPG Board of Directors in November 1998. During first half of 2000, TPG purchased $24.0 million of the Company's common stock. As of June 30, 2000, $51.2 million remained available under the 1998 authorization. As of June 30, 2000, TPG had approximately $62.9 million of available funds. This amount has decreased from the December 31, 1999 balance of $93.1 million due primarily to the common stock repurchases in 2000 and investment in Fairbanks. In addition, TPG has two bank credit lines available totaling $50.0 million. At June 30, 2000, there were no outstanding borrowings under the credit lines. 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 $103.3 million and $53.1 million in the six months ended June 30, 2000 and 1999, respectively. The increase in cash flows during this period was the result of a temporary timing difference relating primarily to the payment of income taxes in 1999 and to the increase in net income in 2000. The Company's invested assets increased by $125.5 million at June 30, 2000 compared with December 31, 1999. This increase is primarily due to positive cash flows from consolidated operations and to the acquisition of PMI Ltd. Consolidated reserves for losses and loss adjustment expenses increased by 3.4% to $291.7 million compared with December 31, 1999 primarily due to slight increases in the reserve balances for the primary and GSE pool books of business consistent with slight increases in the default inventory, partially offset by a decrease in the old pool reserve balance. Consolidated shareholders' equity increased by 9.3% to $1.33 billion as of June 30, 2000 compared with December 31, 1999, due primarily to increases of $125.0 million from net income and $15.7 million from other comprehensive income, and $1.2 million from equity based compensation, offset by the common stock repurchases of $24.0 million and dividends declared of $4.5 million. PMI's statutory risk-to-capital ratio at June 30, 2000 was 14.1 to 1, compared with 14.8 to 1 at December 31, 1999. (See IC9) Item 3 - Quantitative and Qualitative Disclosures about Market Risk There have been no significant changes in market risk since December 31, 1999. 17 CAUTIONARY STATEMENTS AND INVESTMENT CONSIDERATIONS GENERAL ECONOMIC CONDITIONS (IC1) Changes in economic conditions, including economic recessions, declining housing values, higher unemployment rates, deteriorating borrower credit, rising interest rates, increases in refinance activity caused by declining interest rates, or combinations of these factors, could reduce the demand for mortgage insurance, cause claims on policies issued by PMI to increase, and/or increase PMI's loss experience. MARKET SHARE AND COMPETITION (IC2) The Company's financial condition and results of operations could be harmed 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 from lending institutions that choose not to insure against borrower default, self-insure through affiliates, or offer residential mortgage products that do not require mortgage insurance. The mortgage insurance industry is highly competitive. Several of the Company's competitors in the mortgage insurance industry have greater direct or indirect capital reserves that provide them with potentially greater flexibility than the Company. PMI also competes directly with federal and state governmental and quasi- governmental agencies, principally the FHA and, to a lesser degree, the VA. In addition, the captive reinsurance subsidiaries of national banks, savings institutions, or bank holding companies could become significant competitors of the Company in the future. Other mortgage lenders are also forming reinsurance affiliates that compete with the Company. The Gramm-Leach-Bliley Act of 1999 could lead to additional significant competitors of the Company in the future. In October 1999, the Federal Housing Finance Board ("FHF Board") adopted resolutions which authorize each Federal Home Loan Bank ("FHLB") to offer programs to fund or purchase single-family conforming mortgage loans originated by participating member institutions under the single-family member mortgage assets program and in July 2000 the FHF Board gave permanent authority to each FHLB to purchase such loans from member institutions. Under the FHF Board's rules, FHLBs and member institutions are also authorized to provide credit enhancement for eligible loans. Any expansion of the FHLBs ability to issue mortgage insurance or use alternatives to mortgage insurance could reduce the demand for private mortgage insurance and harm the Company's financial condition and results of operations. Certain lenders originate a first mortgage lien with an 80% LTV ratio, a 10% second mortgage lien, and require the remaining 10% of the purchase price from a borrower's funds ("80/10/10"). This 80/10/10 product, as well as similar products, competes with mortgage insurance as an alternative for lenders selling loans in the secondary mortgage market. If the 80/10/10 product or a similar product becomes a widely accepted alternative to mortgage insurance, the Company's financial condition and results of operations could suffer. Legislation and regulatory changes affecting the FHA have affected demand for private mortgage insurance. In particular, increases in the maximum loan amount that the FHA can insure can reduce the demand for private mortgage insurance. For example, management believes the decline in the MICA members' share of the mortgage insurance business from 56.3% at December 31, 1998 to approximately 52.4% at December 31, 1999 resulted in part from an increase in the maximum individual loan amount the FHA can insure. In January 2000, the maximum individual loan amount that FHA can insure increased to $219,849 from $208,800. This increase may cause demand for private mortgage insurance to decrease. In addition, the Omnibus Spending Bill of 1999 18 streamlined the FHA down-payment formula and made FHA insurance more competitive with private mortgage insurance in areas with higher home prices. FANNIE MAE AND FREDDIE MAC (IC3) Fannie Mae and Freddie Mac are collectively referred to as government-sponsored enterprises ("GSEs"). The GSEs are permitted by charter to purchase conventional high-LTV mortgages from lenders who obtain mortgage insurance on those loans. Fannie Mae and Freddie Mac have some discretion to increase or decrease the amount of private mortgage insurance coverage they require on loans, provided the minimum insurance coverage requirement is met. During 1999, Fannie Mae and Freddie Mac separately announced programs where reduced mortgage insurance coverage will be made available for lenders that deliver loans approved by the GSEs automated underwriting services. Although management has not seen any significant movement towards the reduced coverage programs offered by the GSEs to date, if the reduction in required levels of mortgage insurance becomes widely accepted by mortgage lenders and their customers, the reduction could harm the Company's financial condition and results of operations. The GSEs also have separately introduced new "tiered primary" products pursuant to which the GSEs, upon receipt from lenders of loans with traditional borrower paid mortgage insurance, restructure the mortgage insurance coverage with reduced amounts of primary coverage and deeper pool coverage. Wide acceptance by lenders of the GSEs' "tiered primary" products could reduce levels of primary coverage traditionally provided by PMI and, therefore, could have a material adverse affect upon the Company's financial condition and results of operations. On April 13, 1999 the Office of Federal Housing Enterprise Oversight ("OFHEO") announced proposed risk-based capital regulations, which could treat credit enhancements issued by private mortgage insurance companies with claims-paying ability ratings of AAA or higher more favorably than those issued by companies with AA or lower ratings. The director of OFHEO has stated that the agency expects to draft and publish in the Federal Register final regulations by the end of the year 2000. Shifts in the GSEs' preference for private mortgage insurance to other forms of credit enhancement, including a tiering of mortgage insurers based on their credit rating, could harm the Company's financial condition and results of operations. Freddie Mac has made several announcements that it would pursue a permanent charter amendment that would allow it to utilize alternative forms of default loss protection or otherwise forego the use of private mortgage insurance on higher loan-to-value mortgages. In addition, Fannie Mae announced it is interested in pursuing new risk management approaches, which may include a reduction in the use of mortgage insurance. 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. A loss of PMI's existing eligibility status, either due to a failure to maintain the 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. INSURANCE IN FORCE (IC4) A significant percentage of PMI's premiums earned is generated from existing insurance in force and not from new insurance written. The policy owner or servicer of the loan may cancel insurance coverage at any time. A decline in insurance in force as a result of a decrease in persistency due to policy cancellations of older books of business could harm the Company's financial condition and results of operations. The Home Owners Protection Act of 1998 ("Act") provides for the automatic termination or cancellation upon a borrower's request of private mortgage insurance upon satisfaction of certain conditions. Management is uncertain of the Act's impact on PMI's insurance in force, but believes any reduction in premiums attributed to the Act's 19 required cancellation of mortgage insurance will not have a significant impact on the Company's financial condition and results of operations. During a period of falling interest rates, an increasing number of borrowers refinance their mortgage loans and PMI generally experiences an increase in the prepayment rate of insurance in force, resulting from policy cancellations of older books of business with higher rates of interest. Although PMI has a history of expanding business during periods of low interest rate, the resulting increase of NIW may ultimately prove to be inadequate to compensate for the loss of insurance in force arising from policy cancellations. RATING AGENCIES (IC5) 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, principally PMI's capital resources as computed by the rating agencies, and are not applicable to the Company's common stock or outstanding debt. On March 10, 2000, Standard & Poor's affirmed the AA+ financial strength rating and claims-paying ability rating of PMI. During June 1999, Moody's affirmed the Aa2 financial strength rating and claims-paying ability rating of PMI. During March 1999, Moody's announced that it changed PMI's and TPG's rating outlook from stable to negative, stating such action was based on TPG's stock repurchases, PMI's writing of GSE pool and diversification into new sectors. A reduction in PMI's claims-paying ratings below AA- could seriously harm the Company's financial condition and results of operations (See IC3). LIQUIDITY (IC6) 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. Numerous factors bear on the Company's ability to maintain and meet its capital and liquidity needs, including the level and severity of claims experienced by the Company's insurance subsidiaries, the performance of the financial markets, standards and factors used by various credit rating agencies, financial covenants in credit agreements, and standards imposed by state insurance regulators relating to the payment of dividends by insurance companies. Any significant change in these factors could adversely affect the Company's ability to maintain capital resources to meet its business needs. CONTRACT UNDERWRITING SERVICES; NEW PRODUCTS (IC7) The Company provides contract underwriting services for a fee that enable customers to improve the efficiency and quality of their operations by outsourcing all or part of their mortgage loan underwriting. The Company also generally agrees to assume the cost of repurchasing underwritten-deficient loans that have been contract underwritten, a remedy not available under the Company's master primary insurance policies. Due to the demand of contract underwriting services, limitations on the number of available underwriting personnel, and heavy price competition among mortgage insurance companies, PMI's inability to recruit and maintain a sufficient number of qualified underwriters or any significant increase in the cost PMI incurs to satisfy its underwriting services obligations could harm the Company's financial condition and results of operations. TPG and PMI, from time to time, introduce new mortgage insurance products or programs. The Company's financial condition and results of operations could suffer if PMI or the Company experiences delays in introducing competitive new products and programs or if these products or programs are less profitable than the Company's existing products and programs. 20 INSURANCE REGULATORY MATTERS (IC8) On January 31, 2000, the Illinois Department of Insurance issued a letter addressed to all mortgage guaranty insurers licensed in Illinois. The letter states that it may be a violation of Illinois law for mortgage insurers to offer to Illinois mortgage lenders the opportunity to purchase certain notes issued by a mortgage insurer or an affiliate, or to participate in loan guaranty programs. The letter also states that a violation might occur if mortgage insurers offer lenders coverage on pools of mortgage loans at a discounted or below market premium in return for the lenders' referral of primary mortgage insurance business. In addition, the letter stated that, to the extent a performance guaranty actually transfers risk to the lender in return for a fee, the lender may be deemed to be doing an insurance business in Illinois without authorization. The letter announced that any mortgage guaranty insurer that is participating in the described or similar programs in the State of Illinois should cease such participation or alternatively, provide the Department with a description of any similar programs, giving the reason why the provisions of Illinois are not applicable or not violated. If the Illinois Department of Insurance were to determine that PMI was not in compliance with Illinois law, the Company's financial condition and results of operations could be harmed. In February 1999, the New York Department of Insurance stated in Circular Letter No. 2, addressed to all private mortgage insurers licensed in New York that certain pool risk-share and structured products and programs would be considered to be illegal under New York law. PMI believes that it complies with the requirements of Circular Letter No. 2 with respect to transactions that are governed by it. In the event the New York Department of Insurance determined PMI was not in compliance with Circular Letter No. 2, the Company's financial condition and results of operations could suffer. RISK-TO-CAPITAL RATIO (IC9) The State of Arizona, PMI's state of domicile for insurance regulatory purposes, and other regulators limit the amount of insurance risk that may be written by PMI, by a variety of financial factors. For example, Arizona law provides that if a mortgage guaranty insurer domiciled in Arizona does not have the amount of minimum policyholders position required, it must cease transacting new business until its minimum policyholders position meets the requirements. Under Arizona law, minimum policyholders position is calculated based on the face amount of the mortgage, the percentage coverage or claim settlement option and the loan to value ratio category, net of reinsurance ceded, but including reinsurance assumed. Other factors affecting PMI's risk-to-capital ratio include: (i) 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; (ii) TPG's credit agreements and the terms of its guaranty of the debt incurred to purchase PMI Ltd.; and (iii) TPG's and PMI's credit or claims-paying ability ratings which generally 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 harm the Company's financial condition and results of operations. CHANGES IN COMPOSITION OF INSURANCE WRITTEN; POOL INSURANCE (IC10) The composition of PMI's NIW has included an increasing percentage of mortgages with LTV's in excess of 90% and less than or equal to 95% ("95s"). At June 30, 2000, 46.5% of PMI's risk in force consisted of 95s, which, in PMI's experience, have had a claims frequency approximately twice that of mortgages with LTV's equal to or less than 90% and over 85% ("90s"). PMI also offers coverage for mortgages with LTV's in excess of 95% and up to 97% ("97s"). At June 30, 2000, 5.3% of PMI's risk in force consisted of 97s that have even higher risk characteristics than 95s and greater uncertainty as to pricing adequacy. In June 2000, PMI introduced expanded coverage for certain mortgages with LTV's in excess of 97%. This expanded coverage has commensurately higher risk characteristics and pricing uncertainty. PMI's NIW also includes adjustable rate mortgages ("ARMs"), 21 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 new pool insurance product, which is generally used as an additional credit enhancement for certain secondary market mortgage transactions. New pool risk written was $24 million for the quarter ended June 30, 2000. This new pool insurance product provides coverage to certain loans with non-conforming, and therefore higher risk, characteristics. 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 these products, and the associated investment income, may ultimately prove to be inadequate to compensate for future losses from these products. POTENTIAL INCREASE IN CLAIMS (IC11) Mortgage insurance coverage and premiums generally cannot be canceled by PMI and remains renewable at the option of the insured until required to be canceled under applicable Federal or state laws 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 (IC12) 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 RISKS (IC13) 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 15.1%, 7.6% and 7.2% of its risk in force concentrated and where the default rate on all PMI policies in force is 2.21%, 2.49% and 1.77% compared with 1.89% nationwide as of June 30, 2000. CAPTIVE REINSURANCE ARRANGEMENTS; RISK-SHARING TRANSACTIONS (IC14) PMI's customers have indicated an increasing demand for captive reinsurance arrangements, which allow a reinsurance company, generally an affiliate of the lender, to assume a portion of the mortgage insurance default risk in exchange for a portion of the insurance premiums. An increasing percentage of PMI's NIW is being generated by customers with captive reinsurance companies, and management expects that this trend will continue. An increase in captive reinsurance arrangements would decrease in net premiums written which may negatively impact the yield obtained in the Company's net premiums earned for customers with captive reinsurance arrangements. The inability of the Company to provide its customers with acceptable risk-sharing structured transactions, including potentially increasing levels of premium cessions in captive reinsurance arrangements, would likely harm PMI's competitive position. 22 GRAMM-LEACH-BLILEY ACT (IC15) On November 12, 1999, the President signed the Gramm-Leach-Bliley Act of 1999 (the "Act") into law. Among other things, the Act allows bank holding companies to engage in a substantially broader range of activities, including insurance underwriting, and allows insurers and other financial service companies to acquire banks. The Act allows a bank holding company to form an insurance subsidiary, licensed under state insurance law, to issue insurance products directly, including mortgage insurance. The Company expects that, over time, the Act will allow consumers the ability to shop for their insurance, banking and investment needs at one financial services company. The Company believes that the Act may lead to increased competition in the mortgage insurance industry by facilitating the development of new savings and investment products, resulting in the Company's customers offering mortgage insurance directly rather than through captive reinsurance arrangements with the Company's insurance subsidiaries and encouraging large, well-capitalized financial service companies to enter the mortgage insurance business. INTERNATIONAL MORTGAGE INSURANCE; STRATEGIC INVESTMENTS (IC16) As the Company seeks to expand its business internationally, it increasingly will be subject to risks associated with international operations, including: the need for regulatory and third party approvals; challenges retaining key foreign-based employees and key relationships with customers and business partners in international markets; the economic strength of the foreign mortgage origination markets targeted; changes in foreign regulations and laws; foreign currency exchange; potential increases in the level of defaults and claims on policies insured by foreign-based subsidiaries; and the need to integrate PMI's risk management technology systems and products with those of its foreign operations. In particular, the performance of the Company's Australian subsidiary could be materially and adversely affected by various factors affecting the Australian economy including, but not limited to, a weakening in the demand for housing, interest rate volatility, and/or an increase in claims. The performance of the Company's other strategic investments could materially and adversely be affected by changes in the real estate, mortgage lending, mortgage servicing, title and financial guaranty markets; future movements in interest rates; those operations' future financial condition and performance; the ability of those entities to execute future business plans; and PMI's dependence upon management to operate those companies in which PMI does not own a controlling share. 23 THE PMI GROUP, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION June 30, 2000 Item 1 - Legal Proceedings On December 17, 1999, G. Craig Baynham and Linnie Baynham (collectively, the "Plaintiffs") filed a putative RESPA class action lawsuit against PMI Mortgage Insurance Co., the Company's mortgage insurance subsidiary. (For details relating to this action, see the Company's Form 8-K filed June 5, 2000.) On May 15, 2000, Plaintiffs filed a motion for leave to file a Second Amended Complaint, naming Jerry M. Tucker and Ann Helms as additional plaintiffs, and including additional allegations in support of their contention that RESPA's one year stature of limitations should be equitably tolled as to claims of putative class member who paid mortgage insurance premiums on or after December 17, 1996. The court granted Plaintiffs' motion for leave to file a Second Amended Complaint and Plaintiffs served the Second Amended Complaint on PMI on June 9, 2000. The Company continues to contest this action vigorously. Based upon the information presently available to the Company, management believes that this matter will not have a material adverse effect on the Company's financial position of results of operations. However, the outcome of litigation is inherently uncertain and accordingly there can be no assurance that the ultimate outcome of this matter will not have a material adverse effect on the Company's financial position of results of operations. Item 4 - Submission of Matters to a Vote of Securities Holders At the Company's Annual Meeting of Stockholders held on May 18, 2000, the following individuals were elected to the Board of Directors: 1. Election of Directors
Votes For Votes Withheld ---------- -------------- Dr. James C. Castle 40,241,537 42,514 Donald C. Clark 40,241,549 42,502 W. Roger Haughton 40,241,015 43,036 Wayne E. Hedien 40,241,549 42,502 Raymond L. Ocampo Jr. 40,237,049 47,002 John D. Roach 40,240,399 43,652 Dr. Kenneth T. Rosen 40,241,549 42,502 Richard L. Thomas 40,241,534 42,517 Mary Lee Widener 40,240,926 43,125 Ronald H. Zech 40,241,549 42,502
24 The following proposals were approved at the Company's Annual Meeting Votes for Votes against Votes Withheld ---------- ------------- -------------- 2. Appointment of Ernst & Young LLP as Independent auditors of the Company for 2000. 40,280,073 1,682 2,296 Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits - The exhibits listed in the accompanying Index to Exhibits are filed as part of this Form 10-Q (b) Reports on Form 8-K: (i) On May 2, 2000 the Company filed a report on Form 8-K to amend the "Cautionary Statement" contained in the April 26, 2000 press release relating to projected operating earnings for the year 2001. (ii) On June 5, 2000 the Company filed a report on Form 8-K relating to a putative RESPA class action lawsuit filed against PMI Mortgage Insurance Co. by G. Craig Baynham and Linnie Baynham on December 17, 1999. 25 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 11, 2000. The PMI Group, Inc. /s/ John M. Lorenzen, Jr. ------------------------------ John M. Lorenzen, Jr. Executive Vice President and Chief Financial Officer /s/ Brian P. Shea ------------------------------ Brian P. Shea Vice President and Controller, Chief Accounting Officer 26 INDEX TO EXHIBITS (Part II, Item 6)
Exhibit Number Description of Exhibit - ------- ---------------------- 10.2* Amendment No. 1 to The PMI Group, Inc. Equity Incentive Plan. (Restated as of August 16, 1999) 10.3* Amendment No. 1 to The PMI Group, Inc. Stock Plan for Non-Employee Directors. (Restated as of August 16, 1999) 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. EX-10.2 2 0002.txt AMEND #1 TO EQUITY INCENT PLAN-RESTD 8/16/99 EXHIBIT 10.2 ------------ AMENDMENT NO. 1 TO THE PMI GROUP, INC. EQUITY INCENTIVE PLAN THE PMI GROUP, INC., having adopted The PMI Group, Inc. Equity Incentive Plan (the "Plan") and having amended and restated the Plan effective as of August 16, 1999, hereby amends Section 8.9 of the Plan, effective as of June 19, 2000, by substituting the following sentence for the penultimate sentence thereof: The amount so withheld shall not exceed the amount determined by using the minimum federal, state, local or foreign jurisdiction statutory withholding rates applicable to the Participant with respect to the Award on the date that the amount of tax to be withheld is to be determined. IN WITNESS WHEREOF, The PMI Group, Inc., by its duly authorized officer, has executed this Amendment No. 1 on the date indicated below. THE PMI GROUP, INC. Dated: July 6, 2000 By /s/ Victor J. Bacigalupi ----------------------------------- Name: Victor J. Bacigalupi Title: Executive Vice President, General Counsel and Secretary EX-10.3 3 0003.txt AMEND #1 STCK PLN FOR NON-EMPL DIRS-RESTD 8/16/99 EXHIBIT 10.3 ------------ AMENDMENT NO. 1 TO THE PMI GROUP, INC. STOCK PLAN FOR NON-EMPLOYEE DIRECTORS THE PMI GROUP, INC., having adopted The PMI Group, Inc. Stock Plan for Non-Employee Directors (the "Plan") and having amended and restated the Plan effective as of August 16, 1999, hereby amends Section 7.7 of the Plan, effective as of June 19, 2000, to read in its entirety as follows: 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 the minimum Federal, state, and local taxes required to be withheld with respect to such Award (or exercise thereof). IN WITNESS WHEREOF, The PMI Group, Inc., by its duly authorized officer, has executed this Amendment No. 1 on the date indicated below. THE PMI GROUP, INC. Dated: July 5, 2000 By /s/ Victor J. Bacigalupi ----------------------------------- Name: Victor J. Bacigalupi Title: Executive Vice President, General Counsel and Secretary EX-11.1 4 0004.txt COMPUTATION OF NET INCOME PER SHARE EXHIBIT 11.1 ------------ THE PMI GROUP, INC. AND SUBSIDIARIES COMPUTATION OF RESTATED NET INCOME PER SHARE /(1)/
Three Months Ended Six Months Ended June 30, June 30, ------------------------- -------------------------- (In thousands, except for per share data) 2000 1999 2000 1999 ------- ------- -------- ------- Basic net income per common share: Net income $64,979 $49,459 $124,969 $93,111 ======= ======= ======== ======= Average common shares outstanding 44,094 44,887 44,249 45,058 ======= ======= ======== ======= Basic net income per common share $ 1.47 $ 1.10 $ 2.82 $ 2.07 ======= ======= ======== ======= Diluted net income per common share: Net income $64,979 $49,459 $124,969 $93,111 ======= ======= ======== ======= Average common shares outstanding 44,094 44,887 44,249 45,058 Net shares to be issued upon exercise of dilutive stock options after applying treasury stock method 642 283 500 190 ======= ======= ======== ======= Average shares outstanding 44,736 45,170 44,749 45,248 ------- ------- -------- ------- Diluted net income per common share $ 1.45 $ 1.09 $ 2.79 $ 2.06 ======= ======= ======== =======
(1) Restated to conform with Statement of Financial Accounting Standards No. 128, Earnings per Share. EX-27.1 5 0005.txt FINANCIAL DATA SCHEDULE
7 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1,531,976 0 0 284,055 0 0 1,942,780 10,536 52,581 68,769 2,225,528 291,735 172,956 0 0 139,930 0 0 528 1,330,533 2,225,528 305,549 56,118 1,138 4,506 54,934 40,814 81,560 180,905 55,936 124,969 0 0 0 124,969 2.82 2.79 0 0 0 0 0 0 0
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