-----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, TGJ1Yu9sMEE+XsnxyuyNGQgrpNsYebGxdpGvntZzUJazGffeIVU0EV1pYMLHSj// yZjHdHaPLHYuY8qrocujNg== 0000929624-01-000543.txt : 20010409 0000929624-01-000543.hdr.sgml : 20010409 ACCESSION NUMBER: 0000929624-01-000543 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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-K SEC ACT: SEC FILE NUMBER: 001-13664 FILM NUMBER: 1590559 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-K 1 0001.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-13664 THE PMI GROUP, INC. (Exact name of registrant as specified in its charter) 601 Montgomery Street 94-3199675 Delaware San Francisco, California 94111 (I.R.S. Employer (State of Incorporation) (Address of principal executive offices) Identification No.)
(415) 788-7878 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered --------------------- ----------------------------------------- Common Stock, $.01 par value New York Stock Exchange Pacific Exchange Preferred Stock Purchase Rights New York Stock Exchange Pacific Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __ The aggregate market value of the voting stock (common stock) held by non-affiliates of the registrant as of the close of business on February 28, 2001 was $2,483,311,505 based on the closing sale price of the common stock on the New York Stock Exchange consolidated tape on that date. Number of shares outstanding of the Registrant's common stock, as of the close of business on February 28, 2001: 44,336,931. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the fiscal year ended December 31, 2000 are incorporated by reference into Items 6 through 8 of Part II. Portions of the Proxy Statement for registrant's 2001 Annual Meeting of Stockholders to be held on May 17, 2001 are incorporated by reference into Items 10 through 13 of Part III. The Exhibit Index is located on page 56. TABLE OF CONTENTS
Cautionary Statement PART I Item 1. Business..................................................................................... 4 A. General.................................................................................. 4 B. U.S. Mortgage Insurance Operations....................................................... 5 1. Products................................................................... 5 2. Competition and Market Share............................................... 9 3. Customers.................................................................. 13 4. Business Composition....................................................... 14 5. Sales; Mortgage Insurance Acquisition Channels............................. 16 6. Underwriting Practices..................................................... 18 7. Affordable Housing......................................................... 21 8. Defaults and Claims........................................................ 22 9. Reinsurance................................................................ 29 10. Regulation................................................................. 31 11. Financial Strength; Ratings................................................ 35 C. Strategic Investments................................................................... 35 1. International Mortgage Insurance........................................... 35 2. Title Insurance............................................................ 38 3. Financial Guaranty Reinsurance............................................. 39 4. Mortgage Loan Servicing.................................................... 39 D. Investment Portfolio..................................................................... 39 E. Employees................................................................................ 40 Item 2. Properties................................................................................... 40 Item 3. Legal Proceedings............................................................................ 40 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 41 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matter..................... 43 Common Stock Preferred Stock Preferred Share Purchase Rights Plan Payment of Dividends and Policy Item 6. Selected Financial Data...................................................................... 44 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................... 44 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 44 Item 8. Financial Statements and Supplementary Data.................................................. 44 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................................... 44
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PART III Item 10. Directors and Executive Officers of the Registrant.......................................... 45 Item 11. Executive Compensation...................................................................... 45 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 45 Item 13. Certain Relationships and Related Transactions.............................................. 45 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 45 INDEX TO EXHIBITS............................................................................................. 56
3 Cautionary Statement Regarding Forward-Looking Statements Certain written and oral statements made by the Company 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 include the words "believes," "expects," "anticipates," "estimates" or similar expressions, or that relate to future plans, events or performance are forward-looking statements within the meaning of the federal securities laws. When a forward-looking statement includes an underlying assumption, the Company cautions that, while it believes the assumption to be reasonable and makes it in good faith, assumed facts almost always vary from actual results, and the difference between assumed facts and actual results can be material. Where, in any forward-looking statement, the Company expresses an expectation or belief as to future results, there can be no assurance that the expectation or belief will result. The Company's actual results may differ materially from those expressed in any forward-looking statements made by the Company. Forward-looking statements involve a number of risks or uncertainties including, but not limited to, the Investment Considerations ("IC's") addressed in the "Management's Discussion and Analysis" section of the Company's 2000 Annual Report to Stockholders (Exhibit 13.1), which is incorporated by reference in Item 7. Other risks are referred to 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 such risk disclosure. Except as may be required by applicable law, 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. PART I Item 1. Business A. General The PMI Group, Inc. ("TPG") is a holding company, incorporated in Delaware in 1972 and headquartered in San Francisco. TPG and its subsidiaries are collectively referred to as the "Company." Through its wholly and partially owned subsidiaries, the Company offers residential mortgage insurance domestically and internationally, title insurance, financial guaranty reinsurance and other residential lender services. PMI Mortgage Insurance Co. ("PMI"), TPG's largest wholly owned subsidiary, is a leading residential mortgage insurer in the United States. PMI also reinsures residential mortgage insurance in Hong Kong. PMI Mortgage Insurance Ltd ("PMI Ltd"), PMI's wholly owned subsidiary, is the second largest mortgage insurance company in Australia and New Zealand. In February 2001, PMI began offering mortgage insurance and other credit enhancement products in European Union member states through its indirect wholly owned subsidiary, PMI Mortgage Insurance Company Limited ("PMI Europe"). PMI Europe is headquartered in Dublin, Ireland. PMI's partially owned subsidiary, CMG Mortgage Insurance Company ("CMG"), offers mortgage insurance for loans originated by credit unions. TPG conducts its title insurance business through its wholly owned subsidiary, American Pioneer Title Insurance Company ("APTIC"). TPG owns a significant minority interest in RAM Holdings Ltd. and RAM Holdings II Ltd. (collectively, "RAM Re"), a financial guaranty reinsurance company based in Bermuda. In addition, PMI owns a significant minority interest in Fairbanks Capital Holding Corporation ("Fairbanks"), which offers mortgage loan servicing to residential lenders. 4 CMG, RAM Re and Fairbanks are accounted for on the equity method in the Company's consolidated financial statements. At December 31, 2000, the Company's total assets were $2.4 billion and its shareholders' equity was $1.5 billion. B. U.S. Mortgage Insurance Operations Licensed in all 50 states and the District of Columbia, PMI provides private residential mortgage insurance in the United States to residential mortgage lenders and investors. PMI is incorporated in Arizona and headquartered in San Francisco. Residential mortgage insurance insures lenders and investors against potential losses in the event of borrower default. Specifically, PMI covers default risk on first mortgage loans on one to four unit residential properties. Mortgage insurance facilitates the sale of low down payment mortgages in the secondary mortgage market and expands home ownership opportunities by enabling people to buy a home with a down payment of less than 20%. Mortgage insurance is also purchased by investors and lenders desiring additional protection against mortgage default or capital relief for loans with down payments of greater than 20%. Based upon new insurance written in 2000, as reported by Inside Mortgage Finance, PMI is the nation's second largest private mortgage insurer. 1. Products Primary Mortgage Insurance Primary mortgage insurance provides mortgage default protection to lenders or investors on individual loans at specified coverage percentages. PMI's obligation to an insured with respect to a claim is generally determined by multiplying the specified "coverage percentage" by the "claim amount," which includes any unpaid loan balance, delinquent interest and certain expenses associated with the loan's default and foreclosure. In lieu of paying the coverage percentage of the claim amount on a defaulted loan, PMI may pay the entire claim amount and take title to the mortgaged property. (See 8. Defaults and Claims, below.) PMI generally offers coverage percentages on primary insurance ranging from 4% to 42% of the claim amount. The insured selects the coverage percentage, usually to comply with investor requirements to reduce the loss exposure on loans purchased by the investor. PMI's primary new insurance written ("NIW") for the year ended December 31, 2000 was $27.3 billion. NIW does not include primary mortgage insurance placed upon loans more than 12 months after their origination. PMI's primary risk in force at December 31, 2000 was $23.6 billion. Mortgage insurance premiums are usually charged to the borrower by the mortgage lender or loan servicer, who in turn remits the premiums to PMI. In certain instances, the lender pays the premiums to PMI without directly charging the borrower. In those cases, the lender may adjust the interest rate on the loan to reflect, in part, the mortgage insurance premium. Premium payments may be paid to PMI on a monthly, annual or single premium basis. Under PMI's monthly premium plans, premiums are paid at the mortgage loan closing and monthly thereafter. PMI also offers a monthly plan under which the first monthly premium is payable at the time the first monthly mortgage payment is due. Monthly plans represented 91.9% of NIW in 2000. Annual premium plans require payment of the first-year premium at the time of loan closing and annual renewal premium payments in advance each year thereafter. Single premium plans require lump-sum premium payments at loan closing or financed into the loan amount, which may be refundable if coverage is canceled by the insured lender, which generally occurs when the loan is repaid or the value of the property has increased significantly. Single premium and annual premium plans represented 8.1% and 4.1% of NIW 5 in 2000 and 1999, respectively. Single and annual premium plans combined represented 18.0% of insurance in force and 14.6% of risk in force as of December 31, 2000. Generally, mortgage insurance is renewable at the option of the insured at the premium rate fixed when the insurance on the loan was initially issued. As a result, the impact of increased claims and incurred losses from policies originated in a particular year cannot be offset by renewal premium increases on policies in force or mitigated by PMI's nonrenewal of insurance coverage. PMI may not cancel mortgage insurance, except for nonpayment of premiums or certain material violations of PMI's Master Policy. The insured may cancel mortgage insurance coverage at any time. Fannie Mae and Freddie Mac's current guidelines regarding cancellation of mortgage insurance generally provide that a borrower's written request to cancel mortgage insurance should be honored if the borrower has a satisfactory payment record and the principal balance is not greater than 80% of the original value of the property or, in some instances, the current value of the property. The Home Owners Protection Act also provides for the automatic termination, or cancellation upon a borrower's request, of private mortgage insurance upon satisfaction of certain conditions. (See 10. Regulation - Federal Laws and Regulation, below.) Mortgage insurance coverage can also be canceled at any time by the holder of the loan or loan's mortgage servicer. A significant percentage of PMI's premiums earned is generated from existing insurance in force and not from new insurance written. Accordingly, a decline in insurance in force as a result of policy cancellations of older books of business could harm the Company's financial condition. During a period of falling interest rates, an increasing number of borrowers refinance their mortgage loans and PMI generally experiences a decrease in existing 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 rates, the resulting increase in NIW may ultimately prove to be inadequate to offset the loss of insurance in force arising from policy cancellations. (See IC's.) Fannie Mae and Freddie Mac (the "GSEs") are the predominant purchasers of conventional mortgage loans in the United States. In order to sell low down payment loans to the GSEs, lenders must comply with the GSEs' requirements by purchasing private mortgage insurance, or maintaining lender recourse or lender participation. (See 2. Competition and Market Share, below). Lenders that purchase private mortgage insurance in connection with the sale of loans to the GSEs must comply with the GSEs' coverage percentage requirements. The GSEs have some discretion to increase or decrease the amount of mortgage insurance coverage they require on loans provided minimum requirements are met. For example, in 1995, the GSEs increased their coverage requirements from 25% to 30% on mortgages with loan-to-value ratios ("LTV") of 90.01% to 95% ("95s"), and increased their coverage requirements from 17% to 25% for mortgages with LTV's of 85.01% to 90% ("90s"). PMI's percentage of risk in force with the "deeper" coverage requirements increased as a result of the changed coverage requirements. As PMI charges higher premium rates for higher coverage, the deeper coverage requirements imposed by the GSEs in 1995 resulted in higher earned premiums for loans of similar type. During 1999, the GSEs offered reduced coverage requirements for certain loans approved for purchase by their automated loan underwriting systems. Coverage requirements on these "approved" loans are similar to those required by the GSEs prior to 1995. PMI has seen some movement by lenders toward these "reduced coverage" programs. The GSEs will further reduce the coverage requirements for loans approved for purchase by their automated underwriting systems if the lender pays an up-front delivery fee. PMI believes that lenders generally have declined to pay the delivery fee required to obtain this further reduction in coverage. The GSEs also have introduced several high LTV programs, for example the 97 LTV program, that require coverage similar to those levels established in 1995. 6 In cooperation with participating lenders, PMI has entered into agreements with the GSEs to restructure primary mortgage insurance coverage on high LTV loans sold to the GSEs over a specified period of time. The coverage restructuring involves reduced amounts of primary coverage and a second layer of coverage, usually in the form of "pool" insurance. (See Pool Mortgage Insurance, below.) These restructuring transactions may provide for the provision of services by the GSEs to the mortgage insurer and payment of fees by the mortgage insurer to the GSEs for the reduced coverage and/or the services provided. This restructured coverage represented a small portion of PMI's NIW and total pool risk written in 2000. If this restructured coverage is less profitable than PMI's traditional mortgage insurance business, and if this coverage becomes widely accepted, it could have a material adverse effect upon the Company's financial condition. (See IC's.) PMI's percentage of insurance in force comprised of 95s with 30% coverage decreased from 30.4% at December 31, 1999 to 29.7% at December 31, 2000. PMI's percentage of NIW comprised of 95s with 30% coverage decreased from 33.5% for the year ended December 31, 1999 to 24.9% for the year ended December 31, 2000. This decline was due primarily to PMI's execution in 2000 of certain "negotiated transactions" which included mortgage loans requiring lower coverage percentages and loans with greater than 20 percent down payments. (See Negotiated Transactions, below; IC's.) PMI's average coverage percentage was 23.7% and 24.8% for NIW in the years ended December 31, 2000 and 1999, respectively. At December 31, 2000, PMI's average coverage percentage on insurance in force was 24.3% compared to 24.4% at December 31, 1999. Pool Mortgage Insurance Generally. Pool insurance is generally used as an additional credit enhancement for secondary market mortgage transactions. Traditionally, pool insurance has covered the entire loss on a defaulted mortgage loan that exceeds the claim payment under any primary coverage up to a stated aggregate loss limit for all of the loans in the pool. Because the insurance exposure is not limited to a set coverage percentage on specific loans as with primary insurance, the rating agency capital requirements for this type of pool are greater than for primary. PMI also offers "modified" pool insurance that, in addition to having a stated aggregate loss limit, has exposure limits on each individual loan in the pool. PMI often issues pool and modified pool insurance through negotiated transactions (see Negotiated Transactions, below). Pool risk written in 2000 was $194.6 million, of which 54.5% was GSE Pool and 44.0% was modified pool. Total pool risk in force as of December 31, 2000 was $2.3 billion, including modified pool, GSE Pool, and Old Pool (see below). The mortgage insurance industry does not count pool insurance toward NIW or insurance in force or risk in force. Accordingly, references to such figures in this document refer only to primary insurance, unless otherwise indicated. GSE Pool Insurance. In 1997, PMI began offering a pool insurance product for mortgage loans sold by PMI's customers to the GSEs ("GSE Pool"). New risk written for GSE Pool was $106.0 million and $230.9 million for the years ended December 31, 2000 and 1999, respectively. This product is similar in structure to the pool insurance product offered by PMI prior to 1994 ("Old Pool"), but has better risk management characteristics including lower stop loss limits, improved nationwide geographic diversification and lower LTVs. The average stop loss limit for this product as of December 31, 2000 was 1.1%. GSE Pool risk in force at December 31, 2000 was $785.6 million. (See IC's.) PMI expects to write less GSE Pool in 2001 than it wrote in 2000. Old Pool Insurance. In 1999, pursuant to a Recapture Agreement between PMI and Forestview Mortgage Insurance Company, PMI assumed mortgage pool insurance loss reserves presently estimated to be $17.5 million, net of expense allocations, previously insured by Forestview. These old pools are mortgage pool 7 policies written prior to 1994 and are past their peak claim periods. Risk in force for the Forestview recaptured Old Pool portfolio was $1.4 billion at December 31, 2000. Negotiated Transactions, Captive Reinsurance and Other Risk-Sharing Products Negotiated, Secondary Market "Bulk" Transactions. PMI engages in negotiated, secondary market "bulk" transactions. While the terms vary from deal to deal, negotiated transactions generally involve bidding upon and, if successful, insuring a large group of loans or committing to insure new loan originations on agreed terms. Insurance issued in negotiated transactions may include primary, pool, modified pool or a combination thereof. Some negotiated transactions contain a risk-sharing component under which the insured assumes a first- or second-loss position or shares in losses in some manner. Negotiated transactions may involve loans that are or will be securitized and in these instances PMI may be asked to provide "down to" insurance coverage. "Down to" coverage provides insurance coverage necessary to reduce the insured's exposure on each loan in the group to a percentage of the loan balance satisfactory to the insured. PMI issued $5.8 billion of primary mortgage insurance through negotiated transactions in 2000, which accounted for 21.1% of PMI's NIW for the year ended December 31, 2000. In 1999, 2.4% of PMI's NIW was acquired through negotiated transactions. Negotiated transactions have come primarily from secondary mortgage market participants including underwriters of mortgage-back securities and mortgage investors such as the GSEs. PMI believes that negotiated transactions will make up a significant portion of the mortgage insurance industry's and PMI's NIW and pool risk written in 2001. (See IC's.) Negotiated transactions have impacted the Company in a number of ways and management believes this business will continue to impact the Company in the future. PMI's sales force, which traditionally has focused on mortgage originators, was reorganized, in part, to allocate additional resources to pursue negotiated transactions with secondary mortgage market participants. In addition, PMI formed a "negotiated transactions" team to acquire and execute secondary market transactions. Negotiated transactions are often won through competitive bidding on large groups of loans. To obtain this business PMI competes with other mortgage insurers and other providers of credit enhancement who may offer alternative forms of credit enhancement. Accordingly, PMI's ability to quickly and efficiently analyze large loan portfolios and develop and price complex insurance products is critical. Negotiated transactions often include "non-traditional" loans, including Alternative A and less than A quality mortgages. Alternative A loans have approximately the same credit profile as traditional loans insured by PMI but have been underwritten with reduced income, deposit and/or employment documentation. Loans of less than A quality have been underwritten to non- traditional and generally lower credit requirements than credit guidelines for traditional loans. (See 4. Business Composition, below; IC's.) Captive Reinsurance. PMI's captive reinsurance programs allow a reinsurance company, generally an affiliate of a lender, to assume a portion of the mortgage insurance default risk in exchange for a portion of the insurance premiums for loans originated by the lender and insured by PMI. Approximately 34% of NIW in 2000 was subject to captive mortgage reinsurance agreements compared with approximately 22% in 1999. While PMI does not anticipate the number of captive reinsurance arrangements to materially increase in 2001, it does expect that an increasing percentage of its NIW will be generated by customers with captive reinsurance affiliates. This trend may negatively impact net premiums written and the yield obtained by the Company on net premiums earned. (See 2. Competition and Market Share - Fannie Mae and Freddie Mac - The GSEs; 9. Reinsurance; IC's.) 8 Other Risk-Sharing Products. In addition to captive reinsurance, PMI offers other risk-sharing products, including: . layered co-insurance, a primary mortgage insurance program under which the insured retains liability for losses between certain levels of aggregate losses; . pmiADVANTAGE(SM), a lender-paid primary mortgage insurance program that provides reductions from standard rates based on the delivery efficiency and quality of the business generated; and . various products designed for, and in cooperation with, the GSEs and/or lenders that involve some aspect of risk-sharing. Some of these products are executed through negotiated transactions (see Negotiated, Secondary Market "Bulk" Transactions," above). 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. Several of the above risk-sharing products, as well as pool insurance, are the subject of regulatory reviews. (See IC's.) Joint Venture CMG offers mortgage guaranty insurance for loans originated by credit unions. CMG is operated as a joint venture equally owned by PMI and CUNA Mutual Investment Corporation ("CMIC"). CMIC is part of the CUNA Mutual Group which provides insurance and financial services to credit unions and their members in the United States and other countries. PMI and CMIC both provide services to CMG. At December 31, 2000, CMG had $7.1 billion of primary insurance in force. CMG's financial results are reported in PMI's financial statements under the equity method of accounting. CMG's operating results are not included in PMI's results shown in Part I of this Form 10-K, unless otherwise noted. PMI and CMIC also jointly own CMG Mortgage Assurance Company ("CMGA") which offers mortgage insurance for credit union loans secured by junior liens, and CMG Mortgage Reinsurance Company ("CMG Re") which provides reinsurance to CMG and CMGA. Under the terms of the joint venture arrangement, at the end of fifteen years, or earlier under certain limited conditions, CMIC has the right to require PMI to sell, and PMI has the right to require CMIC to purchase, PMI's interest in CMG for an amount equal to the then current fair market value. For this purpose, fair market value will be determined by agreement between PMI and CMIC or, failing such agreement, through appraisal by nationally recognized investment- banking firms. 2. Competition and Market Share U.S. Private Mortgage Insurance Industry The U.S. private mortgage insurance industry consists of seven active mortgage insurers, including Mortgage Guaranty Insurance Corporation; GE Capital Mortgage Insurance Corporation, an affiliate of GE Capital Corporation; United Guaranty Residential Insurance Company, an affiliate of American International Group, Inc; and Radian Guaranty Inc., an affiliate of Radian Group, Inc. PMI's share of the private mortgage insurance market in 2000 was approximately 18%, including CMG's 1.4% share. (See IC's.) The following tables show market share of private mortgage insurers over the past five years and for each quarter of 2000: 9
Private Mortgage Insurance Industry Market Share (Based on NIW) Year Ended December 31, --------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ----------- ---------- ---------- ---------- Mortgage Guaranty Insurance Corp. 24.5% 24.3% 23.1% 26.4% 25.5% PMI & CMG 18.1 16.3 16.2 13.8 14.7 United Guaranty Corp. 15.7 14.4 12.7 12.8 12.7 Radian Guaranty Inc. (1) 15.3 17.5 19.4 17.8 15.7 GE Capital Mortgage Insurance Corp. 14.6 15.2 16.4 16.5 18.5 Republic Mortgage Insurance Co. 9.2 10.0 9.7 10.3 11.2 Triad Guaranty Insurance Corp. 2.6 2.3 2.5 2.4 1.7 ---------- ----------- ---------- ---------- ---------- Total 100.0% 100.0% 100.0% 100.0% 100.0% ========== =========== ========== ========== ==========
Private Mortgage Insurance Industry Market Share (Based on NIW) 2000 by Quarter ------------------------------------------------------------ 4Q 3Q 2Q 1Q ---------- ----------- ---------- ---------- Mortgage Guaranty Insurance Corp. 22.2% 27.7% 25.1% 22.5% PMI & CMG 19.6 16.5 17.1 19.5 United Guaranty Corp. 14.9 16.2 16.1 15.3 Radian Guaranty Inc. (1) 16.8 15.5 13.2 15.5 GE Capital Mortgage Insurance Corp. 13.8 12.8 17.6 14.3 Republic Mortgage Insurance Co. 9.5 8.7 8.2 10.6 Triad Guaranty Insurance Corp. 3.2 2.6 2.7 2.3 ---------- ----------- ---------- ---------- Total 100.0% 100.0% 100.0% 100.0% ========== =========== ========== ==========
Source: Inside Mortgage Finance (1) Formerly CMAC & Amerin; market share data prior to merger represents combined pro forma results of CMAC & Amerin. PMI believes that quarterly market share fluctuations in 2000 were due in large part to negotiated transactions executed by PMI and its competitors. PMI believes that negotiated transactions will continue to cause quarterly market share results to fluctuate. According to the Mortgage Bankers Association of America, for the year ended December 31, 2000, total mortgage originations were $1.1 trillion compared to $1.3 trillion for the year ended December 31, 1999. U.S. and State Governmental Agencies PMI and other private mortgage insurers compete with federal and state governmental and quasi-governmental agencies that sponsor their own mortgage insurance programs. The private mortgage insurers' principal government competitor is the Federal Housing Administration ("FHA") and, to a lesser degree, the Veterans Administration ("VA"). The following table shows the relative mortgage insurance market share of FHA/VA and private mortgage insurers over the past five years.
Federal Government and Private Mortgage Insurance Market Share (Based on NIW) Year Ended December 31, -------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- --------- --------- --------- FHA/VA 41.4% 47.6% 43.7% 45.6% 44.8% Private Mortgage Insurance 58.6 52.4 56.3 54.4 55.2 ---------- ---------- --------- --------- --------- Total 100.0% 100.0% 100.0% 100.0% 100.0% ========== ========== ========= ========= =========
Source: Inside Mortgage Finance 10 Effective January 1, 2001, the Department of Housing and Urban Development ("HUD"), in accordance with its index, increased the maximum single-family loan amount that the FHA can insure to $239,250. While there is no maximum VA loan amount, lenders will generally limit VA loans to $203,000. Private mortgage insurers have no limit as to maximum individual loan amounts that they can insure. As of January 1, 2001, the FHA reduced the up-front mortgage insurance premiums it charges on loans from 2.25% to 1.5% of the original loan amounts. The FHA also has streamlined its down-payment formula making FHA insurance more competitive with private mortgage insurance in areas with higher home prices. These and other legislative and regulatory changes have caused and may cause future demand for private mortgage insurance to decrease and this could harm the Company's financial condition and results of operations. (See IC's.) Federal Home Loan Bank Mortgage Partnership Finance Program. In October 1999, the Federal Housing Finance Board ("FHF Board") adopted resolutions which authorize each Federal Home Loan Bank ("FHLB") to offer programs to purchase single-family conforming mortgage loans originated by participating member institutions under the single-family member mortgage assets program. In July 2000, the FHF Board gave permanent authority to each FHLB to purchase such loans from member institutions without any volume cap. Under the FHF Board's rules, member institutions are also authorized to provide credit enhancement for eligible loans. Any expansion of the FHLBs' ability to use alternatives to mortgage insurance could reduce the demand for private mortgage insurance and harm the Company's financial condition and results of operations. PMI and other private mortgage insurers also face limited competition from several state housing insurance funds which are either independent agencies or affiliated with state housing agencies. Fannie Mae and Freddie Mac - The GSEs As the predominant purchasers of conventional mortgage loans in the United States, the GSEs provide a direct link between the mortgage origination and capital markets. The GSEs may purchase conventional high LTV mortgages only if the lender (i) secures private mortgage insurance from an eligible insurer on those loans; (ii) retains a participation of not less than 10% in the mortgage; or (iii) agrees to repurchase or replace the mortgage in the event of a default under specified conditions. However, if the lender retains a participation in the mortgage or agrees to repurchase or replace the mortgage, applicable federal bank and savings institution regulations may increase the level of capital required to be held by the lender and the lender's cost of doing business may be adversely affected. Consequently, lenders prefer to make loans that can be sold in the secondary market utilizing mortgage insurance from insurers deemed eligible by the GSEs. PMI is a GSE authorized mortgage insurer. Private mortgage insurers must satisfy requirements set by the GSEs to be eligible to insure loans sold to the GSEs. One of the GSEs' requirements is that private mortgage insurers, including PMI, maintain at least an AA- rating with a public national rating agency. Any change in PMI's GSE eligibility status could have a material, adverse effect on the Company's financial condition and results of operations. (See IC's.) The GSEs have the ability to implement new eligibility requirements for mortgage insurers. They also have the authority to change the pricing arrangements for purchasing retained participation mortgages as compared to insured mortgages, increase or reduce required insurance coverage percentages, and alter or liberalize underwriting standards on low down payment mortgages they purchase. Private mortgage insurers, including PMI, are affected by such changes. (See 1. Products - Primary Mortgage Insurance, above.) For example, in June 2000, Freddie Mac issued revised mortgage insurer eligibility requirements. These revised requirements contain new, detailed requirements with respect to captive reinsurance transactions. Among other things, the new requirements: (i) mandate that captive reinsurance agreements 11 include genuine risk transfer in accordance with Financial Accounting Standards Board ("FASB") No. 113, Accounting and Reporting for Reinsurance of Short- Duration and Long-Duration Contracts; and (ii) impose capital or rating requirements on captive reinsurers that reinsure more than 25% of the ceded risk or premium under a quota-share or excess-of-loss agreement. Freddie Mac also has the authority to waive these requirements on a case by case basis. In 2000, the maximum single-family principal balance loan limit eligible for purchase by the GSEs was increased in accordance with the applicable index to $252,700 and in January 2001 that limit was raised to $275,000. PMI believes that any increase in this loan limit may positively affect the number of loans eligible for mortgage insurance, thereby increasing the size of the mortgage insurance market. The GSEs are subject to oversight by HUD. In October 2000, HUD announced new GSE mortgage purchase requirements, known as affordable housing goals. Under these goals that begin in 2001, at least 50% of all loans purchased by the GSEs must support low- and moderate-income homebuyers and 31% of such units must be in underserved areas. The GSEs' prior goal for affordable housing was that at least 42% of the units financed by each GSE be low- and moderate-income housing, and that approximately 24% of such units be in underserved areas. PMI believes that the GSEs' goals to expand purchases of affordable housing loans have increased the size of the mortgage insurance market. Fannie Mae also has expanded its Community Home Buyers Program to include commitments to purchase certain volumes of loans with LTV's between 95% and 97% ("97s") and between 97% and 100% ("100s"). The Office of Federal Housing Enterprise Oversight ("OFHEO") is required to develop risk-based capital regulations for the GSEs and in April 1999 OFHEO announced its development of proposed risk-based capital regulations. The proposed regulations specified a risk-based capital stress test that, when applied to the GSEs, determines the amount of capital that a GSE must hold to maintain positive capital throughout a 10-year period of severe economic conditions. Final regulations could require the GSEs to hold more capital than they each presently maintain for loans with LTV's of 95 percent or higher. Further, final capital regulations could treat credit enhancements issued by private mortgage insurance companies with claims-paying ability ratings of AAA more favorably than those issued by companies with less than AAA ratings. PMI's claims paying ability is currently rated AA+ and Aa2 by Standard & Poor's and Moody's, respectively. The director of OFHEO has stated that the agency expects to publish final regulations in the first half of 2001. (See IC's.) Mortgage insurers, including PMI, compete with the GSEs when the GSEs seek to assume mortgage default risk that could be covered by mortgage insurance. As discussed above, the GSEs have introduced programs that allow lenders to purchase reduced mortgage insurance coverage or provide for the restructuring of existing mortgage insurance with reduced amounts of primary coverage and the addition of pool coverage. In the past, Freddie Mac has stated that it would pursue a permanent charter amendment allowing it to utilize alternative forms of default risk protection or otherwise forego the use of private mortgage insurance on higher loan-to-value mortgages. In October 2000, Fannie Mae announced its intention during the next three years to increase its share of revenue associated with the management of mortgage credit risk by retaining mortgage risk previously borne by its "risk-sharing partners," including mortgage insurers. Any attempts by the GSEs to increase their shares of revenue associated with mortgage risk could include a reduction in the use or level of mortgage insurance, and could have an adverse effect on the Company. (See IC's.) Freddie Mac's and Fannie Mae's automated underwriting systems, Loan Prospector(SM) and Desktop Underwriter(TM), respectively, can be used by mortgage originators to determine whether Freddie Mac or Fannie Mae will purchase a loan prior to closing. Through these systems, lenders are able to obtain approval for mortgage insurance with any participating mortgage insurer. PMI works with both agencies in offering insurance services through their systems, while utilizing its proprietary risk management systems 12 to monitor the risk quality of loans insured through such systems. These automated underwriting systems are also used by the GSEs as the basis for their reduced coverage programs. (See IC's.) Mortgage Lenders PMI and other private mortgage insurers compete indirectly with mortgage lenders that elect to retain the risk of loss from defaults on all or a portion of their high LTV mortgage loans rather than obtain insurance for such risk. Certain lenders originate a first mortgage lien with an 80% LTV ratio, a 10% second mortgage lien, and 10% of the purchase price from borrower's funds ("80/10/10"). This 80/10/10 product and other similar products compete with mortgage insurance as an alternative for lenders selling loans in the secondary mortgage market. In addition to captive reinsurance arrangements with affiliates of lenders, mortgage insurers share a portion of their coverage with their customers through risk retention arrangements. PMI also offers various premium rates based on the risk characteristics, loss performance or class of business of the loans to be insured or on the costs associated with doing such business. While many factors are considered in determining rates, there can be no assurance that the premiums charged will be adequate to compensate PMI or TPG for the risks associated with the coverage provided to its customers. Gramm-Leach-Bliley Act The Gramm-Leach-Bliley Act (the "Act") became effective on March 11, 2000 and allows, among other things, bank holding companies to engage in a substantially broader range of activities, including insurance underwriting. The Act allows a bank holding company to form an insurance subsidiary, licensed under state insurance law, to issue insurance products, including mortgage insurance. Any such mortgage insurance subsidiary would be subject to state insurance regulations including capital, reserve and risk diversification requirements and restrictions on the payments of dividends. Further, before any loans insured by the subsidiary are eligible for purchase by the GSEs, the insurance subsidiary must meet the GSEs' eligibility standards which currently require a claims- paying ability rating of at least AA- and the establishment of comprehensive operating policies and procedures. Because many aspects of the Act still require clarification and promulgation and because few bank holding companies have sought to utilize the Act to date, the Company is unable to ascertain the full impact of the Act on PMI. (See IC's.) The Office of the Comptroller of the Currency has granted permission to certain national banks to form a reinsurance company as a wholly owned operating subsidiary for the purpose of reinsuring mortgage insurance written on loans originated or purchased by such bank. The Federal Reserve Board has adopted a final rule, effective as of February 2, 2001, that permits similar activities for bank holding companies. The Office of Thrift Supervision has granted permission for subsidiaries of thrift institutions to reinsure private mortgage insurance coverage on loans originated or purchased by affiliates of such thrift's parent organization. The reinsurance subsidiaries of national banks, savings institutions or bank holding companies could become significant competitors of the Company in the future. 3. Customers PMI insures mortgage loans funded by mortgage originators. Mortgage originators include mortgage bankers, savings institutions, commercial banks and other mortgage lenders. Traditionally, PMI's primary customers have been mortgage bankers with the balance of PMI's customers being savings institutions, commercial banks and other mortgage lenders. Mortgage brokers originate loans on behalf of mortgage lenders and are not master policyholders. As the beneficiary under PMI's master policy is the owner of the insured loan, the purchaser of that loan is entitled to the policy benefits. The GSEs, as the predominant 13 purchasers of conventional mortgage loans in the U.S., are the beneficiaries of the majority of the Company's mortgage insurance coverage. In 2000, the mortgage lending industry continued its consolidation trend. A greater percentage of that industry's business in 2000 was originated by large lenders. At least several large lenders, however, rely in part upon mortgage brokers and smaller loan originators ("correspondents") to source and originate loans on their behalf. To date, large lenders generally have allowed their correspondents to control decisions relating to the ordering of mortgage insurance and the selection of particular mortgage insurance providers. PMI anticipates that large lenders in 2001 generally will continue to allow their correspondents to control these decisions. The centralization of these decisions by large lenders, however, could magnify the impact that mortgage lending consolidation has on mortgage insurers. Accordingly, the loss of a large lender as PMI's customer, or a large lender's decision to significantly reduce its business with PMI could, if permanent, have an adverse effect on PMI. (See IC's.) Also in 2000, PMI expanded its offering of non-traditional products to secondary market participants such as underwriters of mortgage-backed securities and the GSEs. These entities entered into negotiated transactions with PMI pursuant to which PMI insured pools of loans or committed to insure new loan originations on agreed terms. Insurance issued in negotiated transactions may include primary, pool, modified pool or a combination thereof. (See 1. Products - Negotiated Transactions, above.) In 2000, the GSEs purchased mortgage insurance from PMI on loans with down payments exceeding 20% to assist in their risk/capital management programs. These purchases involved the use of primary insurance or modified pool insurance. In 2000, PMI's top ten customers generated approximately 40% of its NIW, compared to 39% in 1999. 4. Business Composition A significant percentage of PMI's premiums earned is generated from existing insurance in force and not from NIW. PMI's primary insurance on traditional loans typically has an average duration of five to seven years. The insured, the policy owner or servicer of a loan may cancel insurance coverage at any time. The composition of PMI's risk in force is summarized in the table below. The table is based upon information available on the date of mortgage origination. 14
Risk In Force As of December 31, ------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- ------- ------- ------- Primary Risk in Force (in millions) $ 23,559 $ 21,159 $19,324 $18,092 $17,336 LTV: 97s and above 5.7 % 4.9 % 3.3 % 1.8 % 0.0 % 95s 45.7 46.7 46.3 46.2 44.7 90s and below 48.6 48.4 50.4 52.0 55.3 -------- -------- ------- ------- ------- Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % ======== ======== ======= ======= ======= Loan Type: Fixed 90.5 % 91.4 % 89.7 % 83.3 % 80.6 % ARM 9.4 7.9 9.2 15.2 17.7 ARM (scheduled/potential Negative amortization) 0.1 0.7 1.1 1.5 1.7 -------- -------- ------- ------- ------- Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % ======== ======== ======= ======= ======= Mortgage Term: Over 15 years 98.8 % 95.6 % 94.7 % 93.7 % 90.6 % 15 years and under 1.2 4.4 5.3 6.3 9.4 -------- -------- ------- ------- ------- Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % ======== ======== ======= ======= ======= Property Type: Single-family detached 87.3 % 87.5 % 87.1 % 86.3 % 86.7 % Condominium 6.0 6.1 6.4 6.8 6.9 Other 6.7 6.4 6.5 6.9 6.4 -------- -------- ------- ------- ------- Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % ======== ======== ======= ======= ======= Occupancy Status: Primary Residence 97.2 % 98.0 % 98.6 % 99.0 % 99.2 % Second Home 1.5 1.2 1.0 0.8 0.6 Non-owner occupied 1.3 0.8 0.4 0.2 0.2 -------- -------- ------- ------- ------- Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % ======== ======== ======= ======= ======= Loan Amount: $100,000 or less 23.2 % 24.0 % 26.4 % 27.3 % 28.3 % Over $100,000 and up to $250,000 68.2 68.6 66.1 65.6 64.8 Over $250,000 8.6 7.4 7.5 7.1 6.9 -------- -------- ------- ------- ------- Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % ======== ======== ======= ======= ======= Traditional 94.9 % NA NA NA NA Non-Traditional (Alt A/Less than A) 5.1 NA NA NA NA -------- Total 100.0 % ======== Pool Risk in Force (in millions) GSE Pool $ 785.6 $ 681.2 $ 450.3 NA NA Old Pool 1,391.5 1,407.8 NA NA NA All Other Pool 169.4 57.0 42.4 NA NA
. Fixed v. Adjustable Rate Mortgages. Relatively low interest rates during 1996-2000 resulted in an increasing percentage of mortgages insured by PMI at fixed rates of interest. Based on PMI's experience, fixed rate loans represent less risk than adjustable rate mortgages ("ARMs") because claim frequency on ARMs is generally higher than on fixed rate loans. 15 . High LTV Loans. The composition of PMI's NIW and risk in force includes 95s, which in PMI's experience have a claims frequency approximately twice that of 90s. PMI also offers coverage for mortgages with LTV's in excess of 95% and up to 97% ("97s"). PMI believes that 97s 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 higher risk characteristics and pricing uncertainty. (See IC's.) . Non-Traditional Loans. PMI's NIW and risk in force also includes non- traditional loans, chiefly Alternative A and less than A quality mortgages. Loan characteristics, credit quality, loss development, pricing structures and persistency on non-traditional loans can be significantly different and riskier than PMI's traditional prime business, and non-traditional loans generally do not meet the standard underwriting guidelines of the GSEs. PMI believes that the average duration of non-traditional loans is significantly less than the average duration of traditional loans. Non-traditional loans represented approximately 19% of PMI's 2000 NIW, and PMI believes that percentage could increase in 2001. Management expects higher delinquency rates, default rates and claim payment rates for ARMs, high LTV loans and non-traditional loans and incorporates these assumptions into its pricing. However, there can be no assurance that the premiums earned on ARMs, high LTV loans, non-traditional loans and the associated investment income will prove adequate to compensate for future losses from these loans. (See IC's.) Changes in Coverage Percentages. Principally as a result of the GSEs' increased coverage requirements, PMI's percentage of risk and insurance in force with "deep" coverage (95s with 30% coverage and 90s with 25% coverage) increased beginning in 1995. PMI does not believe that coverage percentages have any relationship to loan default rates. However, deeper coverage on a loan increases the severity of any claim on that loan. Accordingly, PMI generally charges higher premium rates for deeper coverage. Deeper coverage as a percentage of PMI's NIW and, to a lesser extent, as a percentage of insurance in force declined in 2000. This decline was due primarily to PMI's execution in 2000 of certain negotiated transactions which included mortgage loans requiring lower coverage percentages and loans with greater than 20 percent down payments. PMI may enter into similar transactions in 2001 and deeper coverage may continue to decline in 2001. To a lesser extent, the GSEs' reduced coverage requirement programs introduced in 1999 may have contributed to the decline of deeper coverage as a percentage of NIW in 2000. (See 1. Products - Primary Mortgage Insurance, above; IC's.) PMI's average coverage percentage was 23.7% and 24.8% for NIW in the years ended December 31, 2000 and 1999, respectively. 5. Sales; Mortgage Insurance Acquisition Channels Sales. PMI employs a sales force located throughout the country to sell its products and provide services to lenders located throughout the United States. At December 31, 2000, PMI had nine sales field offices located in nine states. PMI's sales force receives compensation comprised of a base salary with incentive compensation tied to performance objectives. PMI's Product Development and Pricing Department has primary responsibility for advertising, sales materials, pricing and the creation of new products and services. PMI's product development personnel at the director level and above are eligible to participate in a bonus plan. In 2000, PMI completed a reorganization of its sales force. Prior to the reorganization, PMI's sales force was organized geographically and divided into sales regions. In light of continuing mortgage lender consolidation and the increasing dominance of the largest mortgage originators, PMI's sales force is now organized tactically, focusing on customer relationships with an emphasis on "national accounts," PMI's large lender customers. As a result of PMI's increasing negotiated transactions business, PMI has dedicated 16 additional personnel and resources to focus on PMI's secondary market customers and other customers that may require insurance applied to large loan portfolios. Mortgage Insurance Acquisition Channels. To obtain mortgage insurance on a specific mortgage loan a customer typically submits to PMI an application and various supporting documentation. If the loan is approved for mortgage insurance (see 6. Underwriting Practices, below), PMI issues a certificate of insurance to the customer. Historically, the customer's application and PMI's response have been paper transactions executed via mail, courier or facsimile. During the last several years, however, advances in technology have enabled PMI to offer its customers the option of electronic submission of applications and receipt of certificates. A growing number of PMI's customers require that PMI provide its products and services electronically. Many of these customers also require that PMI customize its electronic delivery methods to their particular technology platforms. An increasing portion of PMI's NIW is delivered electronically. Management expects these trends to continue and, accordingly, believes that it is essential for PMI to continue to invest substantial resources to maintain electronic connectivity with its customers. In some instances, connectivity has become the primary factor used by mortgage originators to choose a mortgage insurer. (See IC's.) PMI's failure to keep pace with the technological demands of its customers could have a material, adverse effect on the Company's financial conditions and results of operations. While the development and customization costs are substantial, electronic acquisition and delivery of mortgage insurance benefits PMI. E-commerce reduces paperwork for both PMI and its customers, streamlines the mortgage insurance application process, reduces errors associated with re-entering information and increases the speed with which PMI is able to respond to applications, all of which can enhance PMI's relationship with lenders while reducing acquisition costs. PMI's electronic acquisition channels, once developed, require significantly less per transaction human effort than PMI's traditional paper acquisition channels. Examples of PMI's electronic acquisition channels include: . e-PMI(SM). In September 1999, PMI introduced its electronic delivery channel for mortgage insurance "e-PMI." PMI's customers can order mortgage insurance directly from the e-PMI web-site or, in the case of certain lenders, by using an embedded link that "frames" e-PMI within the customer's own site. e-PMI is available by request and is tailored to a lender's specifications. Currently it offers users real-time access to mortgage insurance origination services and mortgage insurance rates. PMI will be seeking to offer expanded services in the future through the phased introduction of new capabilities. . EDI. PMI accepts applications for insurance electronically through electronic data interchange ("EDI") links with lenders. EDI links may run over value-added networks, secure e-mail or secure Internet connections, "web-EDI." . Connectivity to Third Party Internet Sites. PMI also electronically connects to its customers directly through lender-specific web-sites and, indirectly, through lender-neutral web-sites or "portals" and loan origination and servicing systems. . Tape-to-Tape Negotiated Transactions. PMI's negotiated transactions, which often involve large loan portfolios, are conducted largely electronically. Prior to insuring these groups of loans, PMI receives from the insured details of the loan portfolios in electronic "tape" format. 17 6. Underwriting Practices Risk Management Approach PMI underwrites its primary business based upon the historical performance of risk factors of individual loan profiles and utilizes an automated underwriting system in the risk selection process to assist the underwriter with decision making. PMI's underwriting process evaluates five categories of risk: . Borrower. An evaluation of the borrower's credit history is an integral part of PMI's risk selection process. In addition to the borrower's credit history, PMI analyzes several factors, including the borrower's employment history, income, funds needed for closing and the details of the home purchase. . Loan Characteristics. PMI analyzes four general characteristics of the loan product to quantify risk: (i) LTV; (ii) type of loan instrument; (iii) type of property; and (iv) purpose of the loan. Certain categories of loans are generally not insured by PMI because such loans are deemed to have an unacceptable level of risk, such as loans with scheduled negative amortization. . Property Profile. PMI reviews appraisals used to determine the property value. . Housing Market Profile. PMI places significant emphasis on the condition of regional housing markets in determining its underwriting guidelines. PMI analyzes the factors that impact housing values in each of its major markets and closely monitors regional market activity on a quarterly basis. . Mortgage Lender. PMI tracks the historical risk performance of all customers that hold a master policy. This information is factored into the determination of the loan programs that PMI will approve for various lenders. PMI uses national and territorial underwriting guidelines to evaluate the potential risk of default on mortgage loans submitted for insurance coverage. The national guidelines have developed over time and take into account PMI's loss experience and the underwriting guidelines of the GSEs. PMI expects its internal and contract underwriters to utilize their knowledge of local markets, risk management principles and business judgment in evaluating loans on their own merits in conjunction with PMI's underwriting guidelines. Accordingly, PMI's underwriting staff is trained to consider combined risk characteristics and their impact in different real estate markets and have discretionary authority to insure loans which are substantially in conformance with PMI's published underwriting guidelines. Significant deviations from such guidelines require higher level underwriting approval. PMI also offers pre-loan and post-loan credit counseling to borrowers using the 97% and 100% products as an aid in managing the greater risks associated with 97s and 100s compared to 95s. (See IC's.) The pmiAURA(SM) System ("pmiAURA"). Applications for mortgage insurance are also generally analyzed by PMI's automated underwriting system, pmiAURA. pmiAURA employs claim and risk statistical models to predict the relative likelihood of default by a mortgage borrower. pmiAURA assigns applications risk scores predicting the likelihood of default, and automatically refers certain applications to underwriters based on higher risk characteristics, territorial underwriting guidelines or other administrative requirements. The individual underwriter will then make the final decision on those files referred by pmiAURA. pmiAURA's database contains performance data on more than 2.3 million loans, and includes economic and demographic information to enhance its predictive power. 18 During 2000, the pmiAURA System referred 45.9% of the loan applications it analyzed to underwriters for further review, compared to 43.4% in 1999. Applications that are not referred by pmiAURA are approved by PMI for mortgage insurance without additional underwriting review. These loan applications generally have favorable risk characteristics such as strong borrower credit ratings, low borrower debt-to-income ratios or stable borrower income histories. The pmiAURA System can generate several types of scores, including: a loan risk score that assesses the risk solely due to the borrower and loan and property characteristics that are independent of market risk; a market score which is a measure of the default risk due solely to the economic conditions of a specific metropolitan area and a total risk score that combines the information in the loan risk and market scores. As an added benefit, pmiAURA's extensive database provides detailed performance reports of underwriting quality trends by geographic region, product type, customer characteristics and other key factors. These reports allow PMI's underwriting management to monitor risk quality on a daily basis and to formulate long-term responses to developing risk quality trends. Ultimately, such responses can lead to regional variations from, or permanent changes to, PMI's underwriting guidelines. pmiAURA is approved by the Wall Street rating agencies as an effective tool for establishing levels of credit support needed on securities backed by non-conforming, conventional loans. Automated underwriting systems free underwriters from having to review the highest quality applications and enable the underwriters to focus on more complex credit applications and market and lender analyses. On the basis of its experience with the automated underwriting systems PMI believes that, in addition to improving underwriting results, these automated underwriting systems have improved PMI's underwriting efficiency and have brought consistency to the underwriting judgment process. Underwriting Process Delegated Underwriting. For the last three years, the majority of PMI's NIW has been underwritten pursuant to PMI's Partner Delivered Quality Program (the "PDQ Program"). The PDQ Program is a delegated underwriting program that allows approved lenders to determine whether loans meet program guidelines and requirements and are thus eligible for mortgage insurance. At present, more than 1,500 lenders approve applications under the PDQ Program. PMI's delegated business accounted for 73% and 56% of PMI's NIW in 2000 and 1999, respectively. Delegated underwriting enables PMI to meet mortgage lenders' demands for immediate insurance coverage of certain loans. Delegated underwriting has become standard industry practice. Under the PDQ Program, customers use their own PMI-approved underwriting guidelines and eligibility requirements in determining whether PMI is committed to insuring a loan. Upon receipt of delegated loans, PMI uses pmiAURA to evaluate their key loan risk characteristics and to monitor the quality of delegated business on an ongoing basis. Additionally, PMI audits a representative sample of loans insured by lenders participating in the PDQ Program on a regular basis to determine compliance with program requirements. If a lender participating in the program commits PMI to insure a loan which fails to meet all of the applicable underwriting guidelines, PMI is obligated to insure such a loan except under certain narrowly-drawn exceptions to coverage, for example, maximum loan-to-value criteria. Loans that are not eligible for the PDQ Program may be submitted to PMI for insurance coverage through the standard application process (see below). PMI believes that the performance of its delegated insured loans will not vary materially over the long-term from the performance of all other insured loans because: (i) only qualified lenders who demonstrate underwriting proficiency are eligible for the program; (ii) only loans meeting average-to-above average underwriting eligibility criteria are eligible for the program; and (iii) PMI has the ability to monitor the 19 quality of loans submitted under the PDQ Program with proprietary risk management tools and an on-site audit of each PDQ lender. Standard Application. Customers that are not approved to participate in the PDQ Program generally must submit to PMI an application for each loan, supported by various documents. The application for insurance and supporting documents may be sent to PMI via one of the acquisition channels discussed above. The documents submitted to PMI by the mortgage lender generally include a copy of the borrower's loan application, an appraisal report or other statistical evaluation on the property by either the lender's staff appraiser or an independent appraiser, and a written credit report on the borrower. Under PMI's standard full documentation submission program, verifications of the borrower's employment, income and funds needed for the loan closing are also required. Once the loan package is received by PMI's home or field underwriting offices, key borrower, property and loan product information are extracted from the file and analyzed by the pmiAURA System. In the event that the pmiAURA System refers a loan application to an underwriter for additional review, the underwriter will review the entire insurance application package. This will include the detailed systems analysis and the borrower, loan and property profiles to determine if the risk presented by the loan is acceptable. The underwriter either approves the application, delays the final decision pending receipt of more information or declines the application for insurance. PMI generally responds within one business day after an application and supporting documentation are received. PMI's rejection rates for the years ended December 31, 2000 and December 31, 1999 were 4.4% and 4.5%, respectively. PMI shares its knowledge of risk management principles and real estate economic conditions with customers to improve the quality of submitted business and reduce the rejection rate. PMI also accepts applications under its Quick Application Program. This program is limited to those lenders with a track record of high quality business. PMI's Quick Application Program allows selected lenders to submit insurance applications that do not include all standard documents. The lender is required to maintain written verification of employment and source of funds needed for closing and other supporting documentation in its origination file. PMI may schedule on-site audits of lenders' files on loans submitted under this program. Negotiated Transactions. Negotiated transactions frequently involve a customer's "bulk" delivery of loans to PMI. Bulk transactions require evaluation of the loan portfolio as a whole, and pricing will often be determined by the composition of the risk of the transaction rather than loan-by-loan premium. While the underwriting process for negotiated transactions varies, underwriting steps generally include: . Obtaining complete data files from customer including all PMI required elements; . Preparation and review of stratification summaries of the loans by various loan risk factors (e.g., LTV, loan type, property type); . Review of loan group by PMI's Credit Policy department including identification and exclusion of uninsurable loans; . Due diligence underwriting of sample loan files and review of loan originator and loan servicer; and . Submission of loans to pmiAURA System model specifically tailored to negotiated transactions. 20 Contract Underwriting Through its wholly owned subsidiary PMI Mortgage Services Co. ("MSC"), PMI 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. Such contract underwriting services are provided both for mortgage loans for which PMI provides mortgage insurance and for loans for which PMI does not. MSC also performs the contract underwriting activities of CMG. As a part of its contract underwriting services, MSC provides remedies to its customers in the event that MSC fails to properly underwrite a mortgage loan. Such remedies may include: (i) the purchase of additional or "deeper" mortgage insurance; (ii) the assumption of some or all of the costs of repurchasing insured and uninsured loans from the GSEs and other investors; or (iii) issuance of indemnifications to investors in the event that the loans default as a result of MSC's underwriting errors. Generally, the scope of these remedies are in addition to those contained in PMI's master primary insurance policies. Worsening economic conditions or other factors that could lead to increases in PMI's default and/or claim rate could also cause the number and severity of the remedies that must be offered by MSC to increase (see 8. Defaults and Claims, below). Such an increase could have a material effect on the financial condition of the Company. (See IC's.) Contract underwriting services have become important to mortgage lenders as they seek to reduce costs. New policies processed by contract underwriters represented 23.4% of PMI's NIW in 2000 compared with 35.8% in 1999. PMI anticipates that loans underwritten by MSC will continue to make up a significant percentage of PMI's NIW and that contract underwriting will remain the preferred method among many mortgage lenders for processing loan applications. The number of contract underwriters deployed by the Company is directly related to the volume of mortgage originations and/or refinancing. (See IC's.) PMI's contract underwriters and its field underwriting force have access to PMI's automated underwriting systems. PMI, through its contract underwriting systems, provides its customers with access to Freddie Mac's and Fannie Mae's automated underwriting services, Loan ProspectorSM and Desktop UnderwriterSM, respectively, which are used as tools by mortgage originators to determine whether Freddie Mac or Fannie Mae will purchase a loan prior to closing. 7. Affordable Housing In recent years, expanding home ownership opportunities for low and moderate- income individuals and communities has been an increasing priority for PMI, lenders and the GSEs. PMI's approach to affordable lending is to develop products and services that assist responsible borrowers who may not qualify using traditional underwriting practices. These underwriting standards do not accommodate borrowers who have historically not managed their affairs in a responsible manner; rather they seek to identify those home buyers who have met or will meet their obligations in a timely and conscientious manner. Additionally, affordable housing programs assist homebuyers who have demonstrated good credit quality and who have the ability and the willingness to meet their mortgage obligations but who may not have accumulated sufficient cash for a traditional down payment. The beneficiaries of these programs have included recent immigrants who have not established traditional credit histories, borrowers not accustomed to using traditional savings institutions and home buyers who, although consistently employed, lack the traditional stability with a single employer due to the nature of their employment. To further promote affordable housing, PMI has entered into risk-sharing arrangements or "layered co-insurance" with certain institutional lenders, Native American tribes and housing authorities. Layered co-insurance is utilized primarily by financial institutions to meet Community Reinvestment Act ("CRA") 21 lending goals and by Native American tribes and housing authorities to provide homeownership opportunities to traditionally under-served populations. Under such arrangements, the mortgage insurance is structured so that financial responsibility is shared between the lender or Native American tribe/housing authority and PMI. Typically PMI is responsible for the first loss layer, as well as a third catastrophic layer, with the lender or Native American Tribe/Housing Authority retaining a predetermined second loss layer. PMI has also established partnerships with numerous national organizations to mitigate affordable housing risks and expand the understanding of responsibilities of home ownership. These community partners include Consumer Credit Counseling Services, Neighborhood Reinvestment Corp. and the affiliated Neighborhood Housing Services of America, the National Black Caucus, Social Compact, the National American Indian Housing Conference, the AFLCIO Housing Advancement Trust and the American Homeownership and Counseling Institute. In addition, PMI has developed partnerships with local organizations in an effort to expand home ownership opportunities and promote community revitalization. Included among these organizations are the Oakland, California based Unity Council, the San Francisco China Town Community Development Corporation, the Orange County Affordable Home Ownership Alliance, the East Los Angeles Community Corporation and several Native American nations. Programs offered under PMI's affordable housing initiatives receive the same credit and actuarial analysis as all other standard programs although some programs utilize affordable underwriting guidelines established by lenders that differ from PMI's criteria. Loans to low and moderate income borrowers and communities, whether acquired through affordable housing initiatives or otherwise, accounted for approximately 33% of NIW in 2000. The percentage of PMI's new risk written that relied on affordable underwriting guidelines (as designated by lenders) was 10.3% in 2000 and 8.8% in 1999. PMI believes that some affordable housing loans may have higher risks than its other insured business. As a result, PMI has instituted various programs including pre- and post-purchase borrower counseling and risk sharing approaches, seeking to mitigate the additional risks that may be associated with some affordable housing loan programs. 8. Defaults and Claims Defaults PMI's default rate for its book of primary insurance at December 31, 2000 was 2.21% compared to 2.12% at December 31, 1999. (See Part II. Item 7. Management's Discussion and Analysis of Financial Condition And Results of Operations.) PMI's claim process begins with receipt of notification of a default from the insured on an insured loan. "Default" is defined in PMI's master policy as the borrower's failure to pay when due an amount equal to the scheduled monthly mortgage payment under the terms of the mortgage. Generally, the master policy requires an insured to notify PMI of a default no later than the last business day of the month following the month in which the borrower becomes three monthly payments in default. In most cases, defaults are reported earlier. PMI's insureds typically report defaults within approximately 60 days of the initial default. Borrowers default for a variety of reasons, including the reduction of income, unemployment, divorce, illness, the inability to manage credit, and the level of interest rates. Borrowers may cure defaults by making all of the delinquent loan payments or by selling the property in full satisfaction of all amounts due under the mortgage. Defaults that are not cured result in a claim to PMI. (See Claims and Policy Servicing, below.) The following table shows the number of loans insured, the number of loans in default and the default rate for PMI's primary insurance. 22
U.S. Historical Domestic Default Rates Total Insured Loans in Force Year Ended December 31, ---------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------- ----------- ----------- ---------- --------- Primary Insurance Number of Insured Loans in Force 820,213 749,591 714,210 698,831 700,084 Number of Loans in Default 18,093 15,893 16,528 16,638 15,326 Default Rate 2.21% 2.12% 2.31% 2.38% 2.19%
The default rate for PMI's pool insurance, excluding Old Pool, was 0.79% at December 31, 2000. Primary default rates differ from region to region in the United States depending upon economic conditions and cyclical growth patterns. The two tables below set forth primary default rates by region for the various regions of the United States and the ten largest states by PMI's risk in force as of December 31, 2000.
Primary Default Rates by Region (1) As of Period End, ---------------------------------------------------------------------------------------------------------- 2000 1999 1998 ---------------------------------- -------------------------------- -------------------------------- Region Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 - ------ ------ ------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Pacific (2) 2.13% 2.01% 2.03% 2.19% 2.31% 2.31% 2.28% 2.64% 2.69% 2.67% 2.72% 3.03% New England (3) 1.69 1.52 1.44 1.61 1.88 1.51 1.55 1.69 1.79 1.68 1.64 1.81 Northeast (4) 2.64 2.37 2.37 2.53 2.64 2.62 2.54 2.87 2.91 2.77 2.68 2.88 South Central (5) 2.01 1.75 1.65 1.73 1.81 1.74 1.64 1.78 1.92 1.78 1.73 1.87 Mid-Atlantic (6) 2.09 2.01 1.97 2.07 2.11 2.17 2.04 2.21 2.37 2.23 2.22 2.40 Great Lakes (7) 2.45 2.02 1.94 1.78 1.95 1.91 1.85 1.91 1.98 1.94 1.88 1.88 Southeast (8) 2.47 2.21 2.13 2.21 2.31 2.18 2.02 2.25 2.39 2.16 2.10 2.35 North Central (9) 1.97 1.79 1.71 1.69 1.67 1.70 1.67 1.88 1.96 1.91 1.78 1.95 Plains (10) 1.80 1.73 1.68 1.67 1.65 1.78 1.59 1.76 1.73 1.63 1.45 1.53 Total Portfolio 2.21 1.99 1.93 2.01 2.12 2.07 1.99 2.22 2.31 2.20 2.16 2.36
(1) Default rates are shown by region on location of the underlying property. (2) Includes California, Hawaii, Nevada, Oregon and Washington. (3) Includes Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont. (4) Includes New Jersey, New York and Pennsylvania. (5) Includes Alaska, Arizona, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Utah. (6) Includes Delaware, Maryland, Virginia, Washington, D.C. and West Virginia. (7) Includes Indiana, Kentucky, Michigan and Ohio. (8) Includes Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee. (9) Includes Illinois, Minnesota, Missouri and Wisconsin. (10) Includes Idaho, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota and Wyoming. 23
PMI's Default Rates for Top 10 States by Primary Risk in Force (1) Percent of PMI's Primary Risk in Force as of Default Rate December 31, As of December 31, --------------- ----------------------------------------------------------------------------------- 2000 2000 1999 1998 1997 1996 --------------- --------- -------- -------- -------- ------- California 14.75% 2.26% 2.59% 3.15% 3.73% 3.81% Florida 7.79 2.91 3.00 3.08 2.93 2.40 Texas 7.14 2.13 2.06 2.18 2.25 2.04 Illinois 5.04 2.34 2.01 2.35 2.56 2.14 Washington 4.59 1.75 1.62 1.58 1.66 1.58 New York 4.56 2.94 2.85 2.98 2.94 2.59 Pennsylvania 3.72 2.47 2.38 2.64 2.38 2.13 Georgia 3.68 2.31 1.95 2.01 1.87 2.59 Virginia 3.28 1.43 1.42 1.55 1.67 1.54 Massachusetts 3.21 1.66 1.49 1.67 1.67 1.73 Total Portfolio 2.21 2.12 2.31 2.38 2.19
(1) Top ten states as determined by total risk in force as of December 31, 2000. Default rates are shown by states based on location of the underlying property. Default rates on PMI's California policies decreased to 2.26% (representing 2,141 loans in default) at December 31, 2000, from 2.59% (representing 2,382 loans in default) at December 31, 1999. Claim sizes on California policies tend to be larger than the national average claim size due to higher loan balances relative to other states. (See Claims and Policy Servicing, below.) Policies written in California accounted for approximately 13% and 29% of the total dollar amount of claims paid for the year ended December 31, 2000 and 1999, respectively. The following table sets forth the dispersion of PMI's primary insurance in force and risk in force as of December 31, 2000, by year of policy origination and average coupon rate since PMI began operations in 1972.
Insurance and Risk in Force by Policy Year and Average Coupon Rate ---------------------------------------------------------------------------------------------- Average Rate Primary Percent Primary Percent Policy Year (1) Insurance in Force of Total Risk in Force of Total - ------------ ---------------- ------------------- --------- -------------- ---------- (In thousands) (In thousands) 1972-1992 9.3% $ 4,490,238 4.7% $ 907,829 3.0% 1993 7.3 5,684,806 5.9 1,148,475 4.9 1994 8.4 3,590,510 3.7 773,873 3.3 1995 7.9 3,652,198 3.8 967,476 4.1 1996 7.8 5,165,365 5.3 1,381,580 5.9 1997 7.6 6,410,339 6.6 1,700,850 7.3 1998 6.9 19,317,313 19.9 4,876,199 20.9 1999 7.4 23,100,737 23.8 5,777,338 24.8 2000 8.1 25,502,099 26.3 6,024,985 25.8 ----------- ------ ----------- ------ Total Portfolio $96,913,605 100.0% $23,558,605 100.0% =========== ====== =========== ======
(1) Average annual mortgage interest rate derived from Freddie Mac and Mortgage Bankers Association data. With respect to traditional primary loans insured by PMI, insurance written from the period of January 1, 1995 through December 31, 1998 represented 35.6% of PMI's insurance in force at December 31, 2000. This portion of PMI's book of business is in its expected peak default and claim period. Claim activity is 24 not spread evenly throughout the coverage period of a primary book of business. Based on the Company's experience, the majority of claims occur in the third through sixth years after loan origination, and relatively few claims are paid during the first two years after loan origination. PMI believes that loans in its developing non-traditional primary book will have shorter lives and earlier incidences of default than loans in PMI's traditional book. Non-traditional loans represented 5.5% of PMI's insurance in force at December 31, 2000, primarily from the 2000 policy year. PMI believes that the default rate on its non-traditional book, excluding Alternative A loans, will likely increase during 2001 and this could cause PMI's primary default rate to increase during 2001. (See 6. Underwriting Practices - Contract Underwriting, above.) Claims and Policy Servicing Direct primary claims paid by PMI in 2000 decreased to $66.7 million from $79.6 million in 1999. (See Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.) The frequency of defaults does not directly correlate to the number of claims PMI receives. This is because the rate at which defaults cure is influenced by borrowers' financial resources and circumstances and regional economic differences. Whether an uncured default leads to a claim principally depends on the borrower's equity at the time of default and the borrower's or the insured's ability to sell the home for an amount sufficient to satisfy all amounts due under the mortgage loan. When the chance of a defaulted loan reinstating is minimal, PMI works with the servicer of the loan for possible loan workout or early disposal of the underlying property. Property dispositions typically result in savings to PMI over the percentage coverage amount payable under the master policy. Under the terms of PMI's master policy, the insured shall file a claim with PMI no later than 60 days after it has acquired title to the underlying property, usually through foreclosure. An insurance "claim amount" includes: . the amount of unpaid principal due under the loan; . the amount of accumulated delinquent interest due on the loan, excluding late charges, to the lesser of the date of claim filing or sixty days following the acquisition of title to the underlying property; . certain expenses advanced by the insured such as hazard insurance premiums, property maintenance expenses and property taxes to the date of claim filing; and . certain foreclosure costs, including attorneys' fees. The claim amount is subject to review and possible adjustment by PMI. Depending on the applicable state foreclosure law, an average of about 12 months elapses from the date of default to filing of a claim on an uncured default. PMI's master policy excludes coverage for physical damage whether caused by fire, earthquake or other hazard where the borrower's default was caused by an uninsured casualty. PMI has the right to rescind coverage and not pay a claim if the insured, its agents or the borrower misrepresent material information in the insurance application. According to industry practice, a misrepresentation is generally considered material if the insurer would not have agreed to insure the loan had the true facts been known at the time of certificate issuance. Within 60 days after a claim and any necessary supporting documentation have been filed, PMI has the option of: . paying the coverage percentage specified in the certificate of insurance; 25 . in the event the property is sold pursuant to an arrangement made prior to or during the 60-day period after the claim is filed (a "prearranged sale"), paying the lesser of (i) 100% of the claim amount less the proceeds of sale of the property or (ii) the coverage percentage multiplied by the claim amount; or . paying 100% of the claim amount in exchange for the insured's conveyance to PMI of good and marketable title to the property, with PMI then selling the property for its own account. Properties acquired under this option are included on PMI's balance sheet in other assets as residential properties from claim settlements also known as "REO." PMI attempts to choose the claim settlement option which best mitigates the amount of its claim payment. However, PMI generally settles by paying the coverage percentage multiplied by the claim amount. In 2000 and 1999, PMI settled 26.8% and 29.3%, respectively, of the primary claims processed for payment on the basis of a prearranged sale. In 2000 and 1999, PMI exercised the option to acquire the property on approximately 12% and 8%, respectively, of the primary claims processed for payment. At December 31, 2000 and 1999, PMI owned $26.8 million and $14.9 million, respectively, of REO valued at the lower of cost or estimated realizable value. This increase resulted primarily from increases in the number and value of REO. The ratio of the claim paid to the original risk in force relating to such loan is referred to as "claim severity" and is a factor that influences PMI's losses. The main determinants of claim severity are the age of the mortgage loan, accrued interest on the loan, expenses advanced by the insured and the foreclosure expenses. These amounts depend in part on the time required to complete foreclosure which varies depending on state laws. Pre-foreclosure sales and other early workout efforts help to reduce overall severity. The average claim severity level has decreased from 99.9% in 1994 to 72.2% in 2000. Technology for Claims and Policy Servicing Technology is an integral part of the claims and policy servicing process and PMI believes that technology will continue to take on a greater role in increasing internal efficiencies and improving customer service. With increasing frequency, PMI's customers expect PMI to offer them technological solutions with respect to claims submission, claim payment and policy servicing. (See IC's.) Defaults and Claims. PMI, through its automatic default reporting process ("ADR"), allows paperless reporting of default information by the insured. PMI uses an automated claim-for-loss worksheet program which compiles pertinent data while automatically calculating the claim amount and predicting the best settlement alternative. To enhance efficiencies and ease of use for its customers, PMI developed Document Free ClaimEase(SM) which is designed to require only an addendum to the uniform claim-for-loss worksheet, thereby reducing paperwork and resulting in more rapid claims settlements. PMI offers customers the option of receiving claims payments by direct deposit to their bank accounts rather than by check. To contain costs and expand internal efficiencies, PMI uses optical imaging in its claims functions allowing PMI to eliminate the transfer and storage of documents relating to claims. Policy Servicing. PMI has developed several technology tools with respect to policy servicing and claims. pmiPHONE-CONNECT(SM) is a voice response application that enables the insured to access PMI's database via telephone to inquire on the status of coverage and to obtain information on billings, refunds and renewals. pmiWEB-CONNECT(SM) is an enhanced version of pmiPHONE-CONNECT and provides access to PMI's servicing database via the Internet, thus allowing customers to inform PMI of loan closing dates, servicing transfers, defaults and claims. PMI is also capable of receiving claims, handling premium billing, and executing loan sale transfers via EDI. 26 Loan Performance In 1985, the Company adopted substantially more conservative underwriting standards that, along with increased premium rates and generally improving economic conditions in various regions, are believed by the Company to have contributed to the lower cumulative loss payment ratios in subsequent years. While the cumulative loss payment ratios of policy years 1985 through 2000 will increase over time, the cumulative loss payment ratio for each such year at December 31, 2000 is lower than the cumulative loss payment ratio for each of the years 1980 through 1984 at the same number of years after original policy issuance. The table below sets forth cumulative losses paid by PMI at the end of each successive year after the year of original policy issuance ("policy year"), expressed as a percentage of the cumulative premiums written on such policies.
Years Percentage of Cumulative Losses Paid Since To Cumulative Premiums Written Policy Issue Policy Issue Year ----------------------------------------------------------------- 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 ----------------------------------------------------------------- (in percents) 1 0.4 0.4 0.9 0.3 0.2 0.0 0.1 0.0 0.0 0.0 2 11.8 23.3 38.1 14.8 9.8 4.5 1.5 0.4 0.1 0.3 3 39.2 90.4 112.1 47.3 44.0 18.7 5.2 2.0 2.0 3.6 4 74.2 139.3 166.3 83.0 83.1 35.2 8.7 5.1 6.1 10.8 5 95.5 168.3 180.9 129.3 114.3 47.4 12.2 9.7 11.6 21.9 6 100.8 168.0 229.6 165.9 127.1 56.4 15.6 13.1 18.5 32.4 7 90.8 184.8 251.0 177.5 135.9 60.7 18.5 17.5 23.1 40.3 8 98.5 197.3 265.4 184.6 139.3 63.0 21.3 20.7 26.2 45.7 9 107.8 203.6 265.7 187.7 141.9 65.0 24.1 23.0 29.1 49.6 10 111.4 205.6 264.4 189.8 142.6 65.3 25.8 25.1 31.5 51.7 11 113.0 207.1 263.8 191.0 142.9 65.9 27.4 26.5 33.6 52.8 12 114.1 208.8 264.4 191.3 142.6 65.8 28.4 27.8 34.6 53.1 13 114.6 208.9 263.3 191.1 142.1 65.8 28.8 28.4 35.0 14 115.0 209.8 262.2 190.6 141.7 65.9 29.0 28.6 15 115.1 209.5 261.5 190.1 141.5 66.0 29.1 16 115.3 209.2 260.8 189.8 141.3 66.0 17 115.5 208.9 260.4 189.5 141.0 18 115.5 208.5 259.8 189.5 19 115.5 208.1 259.6 20 115.4 208.1 21 115.4 ----------------------------------------------------------------------- 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ----------------------------------------------------------------------- (in percents) 1 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.1 1.2 2 0.7 0.8 1.1 1.0 1.0 2.8 2.9 2.3 1.2 2.7 3 7.1 6.6 6.9 5.5 6.5 10.4 8.3 5.8 3.8 4 17.8 16.9 16.3 13.4 13.7 15.4 11.9 8.7 5 31.7 28.9 28.3 18.7 18.0 18.2 14.2 6 41.8 39.8 36.1 21.1 20.1 19.2 7 50.5 47.4 40.3 21.9 20.9 8 56.2 51.3 41.5 22.0 9 59.2 52.7 41.3 10 60.9 52.6 11 61.4
27 This table shows that, measured by cumulative losses paid relative to cumulative premiums written ("cumulative loss payment ratios"), the performance of policies originally issued in the years 1980 through 1984 was adverse, with cumulative loss payment ratios for those years ranging from 115.4% to 259.6% at the end of 2000. Such adverse experience was significantly impacted by deteriorating economic and real estate market conditions in the "Oil Patch" states. The table also demonstrates the general improvement in PMI's cumulative loss payment ratios since policy year 1982. This reflects both improved claims experience for the more recent years and the higher premium rates charged by PMI beginning in 1985. Policy years 1986 through 1988 generally have had the best cumulative loss payment ratios of any years since 1980. Policy years 1989 through 1992 displayed somewhat higher loss payment ratios than 1986 through 1988 at the same age of development. This was due primarily to the increased refinancings of mortgages originating in policy years 1989 to 1992 which resulted in reduced aggregate premiums and led to higher default rates on California loans. For policy years 1993 through 1999, cumulative losses have been developing at a favorable rate for the Company due to improving economic conditions. In 2000, PMI expanded its product offerings to include insurance for "non- traditional" loans which are primarily Alternative A and less than A quality loans. Non-traditional loans generally have shorter lives and earlier incidences of default than traditional "A quality" loans. These earlier incidences of default have resulted in a small but larger than normal number of claims already paid in calendar year 2000 on loans insured during the year. Claim payments, when divided by the relatively small amount of written premium on loans insured during the year, have resulted in a cumulative claim payment ratio of 1.2% at December 31, 2000. This ratio, which represents thirty-one policies issued in 2000 upon which claims were also paid in 2000, is higher than for any year shown in the table at the same age of development. However, PMI attempts to incorporate its expectation of non-traditional loans' higher default rates into its pricing for such business. Because of these pricing adjustments and because the non-traditional business represents a relatively small portion of PMI's total book, management expects that future development of the year 2000 ratio will be similar to that of the years 1990 through 1999. Given PMI's limited experience with respect to these loans there can be no assurance that premiums charged will be sufficient to cover losses. (See IC's.) Loss Reserves A significant period of time may elapse between the occurrence of the borrower's default on mortgage payments (the event triggering a potential future claims payment), the reporting of such default to PMI and the eventual payment of the claim related to such uncured default. To recognize the liability for unpaid losses related to the default inventory PMI, in accordance with industry practice, establishes loss reserves in respect of defaults included in such inventory, based upon the estimated claim rate and estimated average claim amount. Included in loss reserves are loss adjustment expense ("LAE") reserves, and incurred but not reported ("IBNR") reserves. These reserves are estimates and there can be no assurance that PMI's reserves will prove to be adequate to cover ultimate loss developments on reported defaults. (See IC's.) Consistent with industry accounting practices, PMI does not establish loss reserves in respect of estimated potential defaults that may occur in the future. PMI's reserving process for primary insurance is based on default notifications received by PMI in a given year (the "report year method"). In the report year method, ultimate claim rates and average claim amounts selected for each report year are estimated based on past experience. Claim rates and amounts are also estimated by region for the most recent report years to validate nationwide report year estimates which are then used in the normal reserving methodology. For each report year the claim rate, estimated average claim amount and the number of reported defaults are multiplied together to determine the amount of direct incurred losses for that report year. Losses paid to date for that report year are subtracted from the 28 estimated report year incurred losses to obtain the loss reserve for that report year. The sum of the reserves for all report years yields the total loss reserve on reported defaults. Pool business loss reserving is subject to the same assumptions and economic uncertainties as primary insurance and generally involves the following process. PMI divides all currently pending pool insurance delinquencies into six categories of delinquency, which connote progressively more serious stages of default (e.g., delinquent less than four months, delinquent more than four months, in foreclosure but no sale date set). A claim rate is selected for each category based on past experience and management judgment. Expected claim sizes, stated as a percentage of the outstanding loan balance on the delinquent loan, are similarly selected. The loss reserve is then generally calculated as the sum over all delinquent loans of the product of the outstanding loan balance, the claim rate and the expected claim size percentage. PMI reviews its claim rate and claim amount assumptions on at least a quarterly basis and adjusts its loss reserves accordingly. The impact of inflation is not explicitly isolated from other factors influencing the reserve estimates although inflation is implicitly included in the estimates. PMI does not discount its loss reserves for financial reporting purposes. PMI's reserving process is based upon the assumption that past experience, adjusted for the anticipated effect of current economic conditions and projected future economic trends, provides a reasonable basis for estimating future events. However, estimation of loss reserves is a highly subjective process especially in light of changing economic conditions. In addition, economic conditions that have affected the development of the loss reserves in the past may not necessarily affect development patterns in the future. PMI's Actuarial Services department performs the loss reserve analysis. On the basis of such loss reserve analysis, management believes that the loss reserves are, in the aggregate, computed in accordance with commonly accepted loss reserving standards and principles and meet the requirements of the insurance laws and regulations to which it is subject. Management also believes that the loss reserves are a reasonable provision for all unpaid loss and LAE obligations under the terms of its policies and agreements. (See IC's.) Such reserves are necessarily based on estimates and the ultimate net cost may vary from such estimates. These estimates of ultimate losses are based on management's analysis of various economic trends including the real estate market and unemployment rates and their effect on recent claim rate and claim severity experience. These estimates are regularly reviewed and updated using the most current information available. Any resulting adjustments are reflected in current financial statements. (For a reconciliation of the beginning and ending reserve for losses and loss adjustment expenses, see Part II, Item 8. Financial Statements Note 5 - Loss Reserves.) As a result of changes in estimates of ultimate losses resulting from insured events in prior years, the provision for losses and loss adjustment expenses, net of reinsurance recoverable, decreased by $88.8 million in 2000. These changes were primarily the result of very favorable economic conditions throughout the U.S and continued improvement in the California housing market. 9. Reinsurance The use of reinsurance as a source of capital and as a risk management tool is well established within the mortgage insurance industry. Reinsurance does not discharge PMI, as the primary insurer, from liability to a policyholder. The reinsurer simply agrees to indemnify PMI for the reinsurer's share of losses incurred under a reinsurance agreement, unlike an assumption arrangement, where the assuming reinsurer's liability to the policyholder is substituted for that of PMI's. 29 Captive Reinsurance Certain mortgage insurers, including PMI, have agreed to reinsure portions of their risk written on loans originated by certain lenders with captive reinsurance companies affiliated with such lenders. As of December 31, 2000, approximately 27% of PMI's insurance in force was subject to such captive reinsurance arrangements and, in 2000, approximately 34% of PMI's NIW was subject to captive reinsurance arrangements. In 2000, PMI ceded approximately 25% of the total premiums subject to captive reinsurance arrangements for a commensurate level of risk. These percentages are expected to increase in upcoming years. CMG does not currently reinsure any of its business with captive reinsurers but expects to do so in the future. PMI's captive reinsurance agreements primarily consist of what are known in the industry as excess-of-loss reinsurance. In excess-of-loss reinsurance, PMI retains a first loss position on a defined set of mortgage insurance risk, reinsures a second loss layer of this risk with a captive reinsurer and retains the remaining risk above the second loss layer. PMI also has entered into two quota-share captive reinsurance agreements under which the captive reinsurer assumes a pro rata share of all (i.e., first dollar) losses in return for a pro rata share of the premiums collected. In 2000, Freddie Mac issued revised Eligibility Criteria for Private Mortgage Insurers that established certain financial requirements for captive reinsurance transactions. (See 2. Competition and Market Share - Fannie Mae and Freddie Mac - The GSEs, above.) To ensure the performance of its captive reinsurers, PMI requires each captive reinsurer to establish a trust account with a United States domiciled bank and to maintain funds therein in an amount not less than the loss, unearned premium and contingency reserves required to be held under Arizona law. These estimated liabilities are recalculated by PMI on a quarterly basis. All reinsurance premiums payable by PMI are deposited directly into the trust accounts and the captive reinsurers are permitted to make withdrawals from the trust account only if, and to the extent that, the trust balances exceed certain predetermined reserve levels and PMI as the sole beneficiary of the trust has expressed written consent for such withdrawal. Other Reinsurance; Reinsurance Subsidiaries - RGC, RIC, PMG, CMG and Pinebrook Effective August 20, 1999, PMI entered into an excess-of-loss reinsurance treaty relating to aggregate stop loss limit pool insurance contracts issued by PMI during 1997 and 1998. The participating reinsurers have claims-paying rating of AA or AAA from Standard and Poor's. (See Part II, Item 8. Financial Statements Note 6 - Reinsurance.) PMI also has a 5% quota share reinsurance agreement in place with a participating reinsurer relating to primary business written by PMI during 1993-1997. Under the terms of this arrangement, the reinsurer indemnifies PMI for 5% of all losses paid under the reinsured primary business to which it cedes 5% of the related premiums less a ceding commission. Effective January 1, 2001, PMI commenced reinsuring its wholly owned Australia subsidiary, PMI Mortgage Insurance Company Ltd ("PMI Ltd") on an excess-of-loss basis. Under the terms of the agreement, for each of the next 5 calendar years (i.e., 2001-2005), PMI is obligated to indemnify PMI Ltd for losses that exceed 130% of PMI Ltd's net earned premiums for each year, but not losses that exceed 220% of such net earned premiums. Certain states limit the amount of risk a mortgage insurer may retain to 25% of the indebtedness to the insured and, as a result, the deep coverage portion of such insurance over 25% must be reinsured. To minimize reliance on third party reinsurers and to permit PMI and CMG to retain the premiums (and related risk) on deep coverage business, TPG formed several wholly owned subsidiaries including Residential Guaranty Co. ("RGC"), Residential Insurance Co. ("RIC"), PMI Mortgage Guaranty Co. ("PMG"), and, together with CMIC (CMG's co-owner), CMG Re to provide reinsurance of such deep coverage to PMI and CMG. PMI and CMG use reinsurance provided by its reinsurance subsidiaries solely for purposes of 30 compliance with statutory coverage limits. (See IC's.) TPG's reinsurance subsidiaries generally have the ability to write direct mortgage insurance and to provide reinsurance to unaffiliated mortgage insurers. In 1997, PMI began offering GSE pool insurance to select lenders and aggregators. In connection with the pool policies issued, PMI may only retain 25% of the risk covered by such policies. PMI reinsures the remaining risk though RGC, PMG and RIC. (See 1. Products - Pool Mortgage Insurance, above; IC's.) In addition, in 1999, PMI acquired Pinebrook Mortgage Insurance Company ("Pinebrook") from Allstate Insurance Company. Pinebrook's sole business at the present time is to provide excess-of-loss coverage to PMI on certain pool insurance policies issued by PMI during the early 1990s. 10. Regulation State Regulation General. The Company's insurance subsidiaries are subject to comprehensive, detailed regulation intended for the protection of policyholders, rather than for the benefit of investors, by the insurance departments of the various states in which they are licensed to transact business. Although their scope varies, state insurance laws generally grant broad powers to supervisory agencies or officials to examine companies and to enforce rules or exercise discretion touching almost every significant aspect of the insurance business. These include the licensing of companies to transact business and varying degrees of scrutiny of and control over claims handling practices, reinsurance arrangements, premium rates, the forms and policies offered to customers, financial statements, periodic financial reporting, permissible investments (see 12. Internal Investment Portfolio) and adherence to financial standards relating to statutory surplus, dividends and other criteria of solvency intended to assure the performance of contractual obligations to policyholders. Mortgage insurers are generally restricted by state insurance laws and regulations to writing mortgage insurance business only. This restriction prohibits the Company's mortgage insurance subsidiaries from directly writing other types of insurance. The non-insurance subsidiaries of TPG are not subject to regulation under state insurance laws except with respect to transactions with their insurance affiliates. Insurance Holding Company Regulation. All states have enacted legislation that requires each insurance company in a holding company system to register with the insurance regulatory authority of its state of domicile and to furnish to such regulatory authority financial and other information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. The states also regulate transactions between insurance companies and their parents and affiliates. Generally, such regulations require that all transactions within a holding company system between an insurer and its affiliates be fair and reasonable and that the insurer's statutory policyholders' surplus following any transaction with an affiliate be both reasonable in relation to its outstanding liabilities and adequate for its needs. TPG is treated as an insurance holding company under the laws of the State of Arizona based on its ownership and affiliation with PMI, PMG, RGC and RIC ("Arizona Insurers"). The Arizona insurance laws regulate, among other things, certain transactions in the Company's common stock and certain transactions between TPG and its Arizona Insurers, or any one of them with each other or with any other affiliate. Specifically, no person may, directly or indirectly, offer to acquire or acquire beneficial ownership of more than 10% of any class of outstanding securities of TPG or any one of the Arizona Insurers unless such person files a statement and other documents with the Arizona Director of Insurance and obtains the Director's prior approval after a public hearing is held on the matter. In addition, material transactions between TPG, PMI, PMG, RGC and RIC and their affiliates are subject to certain conditions, including that 31 they be "fair and reasonable." These restrictions generally apply to all persons controlling or under common control with PMI or PMG, RGC and RIC. "Control" is presumed to exist if 10% or more of PMI's or PMG's, RGC's and RIC's voting securities is owned or controlled, directly or indirectly, by a person, although the Arizona Director of Insurance may find that "control" in fact does or does not exist where a person owns or controls either a lesser or greater amount of securities. In addition, Arizona law requires that the Arizona Director of Insurance be given 30-day prior notice of certain types of agreements between an insurance company and any affiliate, and the Director is authorized to deny any transactions that do not meet applicable standards of fairness and soundness. The Insurance Holding Company laws and regulations are substantially similar in Florida (where APTIC is domiciled), Illinois (where Pinebrook is domiciled) and Wisconsin (where CMG and CMG Re are domiciled), and transactions among these subsidiaries, or any one of them and another affiliate (including TPG) are subject to regulatory review and approval in the respective state of domicile. Under Florida law, however, regulatory approval must be obtained prior to the acquisition, directly or indirectly, of 5% or more of the voting securities of APTIC or TPG (compared to 10% in Arizona). The applicable requirements of Wisconsin law are similar to those of Arizona law regulating insurance holding companies, except that the hearing to approve a change in control is optional in Wisconsin. Similarly, Pinebrook, an Illinois-domiciled insurer is subject to that state's holding company laws, which are substantially similar to Arizona's. For purposes of Arizona, Florida, Illinois and Wisconsin law, "control" means the power to direct or cause the direction of the management of an insurer, whether through the ownership of voting securities, by contract other than a commercial contract for goods or non-management services, or otherwise, unless the power is the result of an official position with or corporate office held by the person. Reserves. PMI, RGC, PMG and RIC are required under the insurance laws of Arizona and many other states, including New York and California, to establish a special contingency reserve with annual additions of amounts equal to 50% of premiums earned. Pinebrook is subject to the same requirement under Illinois law, as are CMG and CMG Re under Wisconsin law. The insurance laws of the various states, including Florida, impose additional reserve requirements applicable to title insurers such as APTIC. For example, title insurers must maintain, in addition to reserves for outstanding losses, an unearned premium reserve computed according to statute, and are subject to limitations with respect to the level of risk they can assume on any one contract. At December 31, 2000, PMI had statutory policyholders' surplus of $159.5 million and statutory contingency reserve of $1.46 billion. (See Part II, Item 8. Financial Statements Note 14 - Statutory Accounting.) Dividends. PMI's ability to pay shareholder dividends is limited, among other things, by the insurance laws of Arizona and other states. Under Arizona law, PMI may pay dividends out of available surplus without prior approval of the Arizona Insurance Director, as long as such dividends during any 12-month period do not exceed the lesser of (i) 10% of policyholders' surplus as of the preceding calendar year end, or (ii) the preceding calendar year's investment income. In accordance with the foregoing, PMI is permitted to pay ordinary dividends (as such are termed under the Arizona statute) to TPG of $16.0 million in 2001 without prior approval of the Arizona Director. Any dividend in excess of this amount (either alone or together with other dividends/distributions made in the last 12 months) is an extraordinary dividend and requires the prior approval of the Arizona Director. The Director may approve of an extraordinary dividend if he or she finds that, following the distribution, the insurer's policyholders' surplus is reasonable in relation to its liabilities and adequate to its financial needs. The Director is also required to approve a return of capital from PMI's contributed capital. In addition to Arizona, other states may limit or restrict PMI's ability to pay shareholder dividends. For example, California, New York and Illinois prohibit mortgage insurers from declaring dividends except from undivided profits remaining on hand over and above the aggregate of their paid-in capital, paid-in 32 surplus and contingency reserves. Florida prohibits an insurer from making a dividend if, following such dividend, its ratio of surplus to liabilities would fall below 10%. CMG faces shareholder dividends/distributions restrictions under Wisconsin laws similar to those faced by PMI in Arizona. CMG, like PMI, is also subject to other state laws restricting or limiting a mortgage insurer's ability to declare or pay shareholder dividends, including California, Florida, Illinois and New York. (See C. Strategic Investments - 2. Title Insurance, below; Part II, Item 8. Financial Statements Note 13 - Dividends and Shareholders Equity.) In addition to the dividend restrictions described above, insurance regulatory authorities have broad discretion to limit the payment of dividends by insurance companies. For example, if insurance regulators determine that payment of a dividend or any other payments to an affiliate (such as payments under a tax sharing agreement, payments for employee or other services, or payments pursuant to a surplus note) would, because of the financial condition of the paying insurance company or otherwise, be hazardous to such insurance company's policyholders or creditors, the regulators may block payments that would otherwise be permitted without prior approval. Premium Rates and Policy Forms. PMI and CMG's premium rates and policy forms are subject to regulation in every state in which each is licensed to transact business in order to protect policyholders both against the adverse effects of excessive, inadequate or unfairly discriminatory rates and to encourage competition in the insurance marketplace. In all states, premium rates and, in most states, policy forms must be filed prior to their use. In some states, such rates and forms must also be approved prior to use. Changes in premium rates are subject to being justified, generally on the basis of the insurer's loss experience, expenses and future trend analysis. The general default experience in the mortgage insurance industry may also be considered. Reinsurance. Regulation of reinsurance varies by state. Except for Arizona, Illinois, Wisconsin, New York and California, most states have no special restrictions on mortgage guaranty reinsurance other than standard reinsurance requirements applicable to property and casualty insurance companies. Certain restrictions apply under Arizona law to domestic companies and under the laws of several other states to any licensed company ceding business to unlicensed reinsurers. Under such laws, if a reinsurer is not admitted or approved in such states, the company ceding business to the reinsurer cannot take credit in its statutory financial statements for the risk ceded to such reinsurer absent compliance with certain reinsurance security requirements. Arizona prohibits reinsurance unless the reinsurance arrangements meet certain requirements even if no statutory financial statement credit is to be taken. In addition, Arizona, Wisconsin and several other states limit the amount of risk a mortgage insurer may retain with respect to coverage of an insured loan to 25% of the entire indebtedness to the insured. Coverage in excess of 25% must be reinsured. (See 9. Reinsurance.) Examination. PMI, PMG, RGC, RIC, APTIC, CMG, CMG Re and Pinebrook are subject to examination of their affairs by the insurance departments of each of the states in which they are licensed to transact business. The Arizona Director of Insurance periodically conducts a financial examination of insurance companies domiciled in Arizona. In lieu of examining a foreign insurer, the Commissioner may accept an examination report by a state that has been accredited by the National Association of Insurance Commissioners. Federal Laws and Regulation In addition to federal laws that directly affect mortgage insurers, private mortgage insurers including PMI are impacted indirectly by federal legislation and regulation affecting mortgage originators and lenders; by purchasers of mortgage loans such as Freddie Mac and Fannie Mae; and by governmental insurers such as 33 the FHA and VA. For example, changes in federal housing legislation and other laws and regulations that affect the demand for private mortgage insurance may have a materially adverse effect on PMI. Legislation that increases the number of persons eligible for FHA or VA mortgages could have a materially adverse effect on the Company's ability to compete with the FHA or VA. The Home Owners Protection Act (the "Act"), effective July 29, 1999, provides for the automatic termination, or cancellation upon a borrower's request, of private mortgage insurance upon satisfaction of certain conditions. The Act applies to owner-occupied residential mortgage loans regardless of lien priority and to borrower-paid mortgage insurance closed after the effective date of the Act. FHA loans are not covered by the Act. Under the Act, automatic termination of mortgage insurance would generally occur once the loan-to-value ratio ("LTV") reaches 78%. A borrower may generally request cancellation of mortgage insurance once the LTV reaches 80% of the home's original value or when actual payments reduce the loan balance to 80% of the home's original value, whichever occurs earlier. For borrower initiated cancellation of mortgage insurance, the borrower must have a "good payment history" as defined by the Act. (See IC's.) The Real Estate Settlement and Procedures Act of 1974 ("RESPA") applies to most residential mortgages insured by PMI and related regulations provide that mortgage insurance is a "settlement service" for purposes of loans subject to RESPA. Subject to limited exceptions, RESPA prohibits persons from accepting anything of value for referring real estate settlement services to any provider of such services. Although many states including Arizona prohibit mortgage insurers from giving rebates, RESPA has been interpreted to cover many non-fee services as well. The recently renewed interest of HUD in pursuing violations of RESPA has increased awareness of both mortgage insurers and their customers of the possible sanctions of this law. Home Mortgage Disclosure Act ("HMDA). Most originators of mortgage loans are required to collect and report data relating to a mortgage loan applicant's race, nationality, gender, marital status and census tract to HUD or the Federal Reserve under the Home Mortgage Disclosure Act of 1975 ("HMDA"). The purpose of HMDA is to detect possible discrimination in home lending and, through disclosure, to discourage such discrimination. Mortgage insurers are not required pursuant to any law or regulation to report HMDA data although, under the laws of several states, mortgage insurers are currently prohibited from discriminating on the basis of certain classifications. Mortgage insurers have, through their trade association Mortgage Insurance Companies of America ("MICA"), entered voluntarily into an agreement with the Federal Financial Institutions Examinations Council ("MFIEC") to report the same data on loans submitted for insurance as is required for most mortgage lenders under HMDA. Mortgage lenders are subject to various laws, including HMDA, RESPA, the Community Reinvestment Act, and the Fair Housing Act. Fannie Mae and Freddie Mac are also subject to RESPA and various laws, including laws relating to government sponsored enterprises, which may impose obligations or create incentives for increased lending to low and moderate income persons or in targeted areas. Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (the "Act") became effective on March 11, 2000 and allows, among other things, 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. (See 2. Competition and Market Share, above; IC's.) The Act also imposes new consumer information privacy requirements on financial institutions, including obligations to protect and safeguard consumers' nonpublic personal information and records, and limitations on the re-use of such information. Compliance with the Act is mandated by July 1, 2001. National Association of Insurance Commissioners ("NAIC"). The NAIC has developed a rating system, the Insurance Regulatory Information System ("IRIS"), primarily intended to assist state insurance departments 34 in overseeing the statutory financial condition of all insurance companies operating within their respective states. IRIS consists of 11 key financial ratios, which are intended to indicate unusual fluctuations in an insurer's statutory financial position and/or operating results. The NAIC applies its IRIS financial ratios to PMI on a continuing basis in order to monitor PMI's financial condition. 11. Financial Strength; Ratings PMI's claims-paying ability is currently rated "AA+" (Excellent) by Standard & Poor's Rating Services ("S&P"), "AA+" (Very Strong) by Fitch IBCA, Inc. ("Fitch"), and "Aa2" (Excellent) by Moody's Investors Service, Inc. ("Moody's"). In March 2000, S&P affirmed the AA+ financial strength rating and claims paying ability rating of PMI. In September 2000, Fitch affirmed PMI's AA+ financial strength rating. In October 2000, Moody's announced that it changed PMI's and TPG's rating outlook from negative to stable and also confirmed its Aa2 financial strength rating of PMI. PMI's claims-paying ability ratings from certain national rating agencies have been based in part on the third party reinsurance arrangements discussed above and on various capital support commitments from Allstate. On October 28, 1994, PMI entered into a runoff support agreement with Allstate (the "Runoff Support Agreement") 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 or, in the alternative, Allstate may make contributions directly to PMI or TPG. In the event that Allstate makes payments or contributions under the Runoff Support Agreement, which management believes is a remote possibility, Allstate would receive subordinated debt or preferred stock of PMI or TPG in return. Fannie Mae and Freddie Mac impose requirements on private mortgage insurers for such insurers to be eligible to insure loans sold to such agencies. In order to be Fannie Mae and Freddie Mac eligible, PMI must maintain an AA- rating with any public national rating agency. (See IC's.) C. Strategic Investments In March 1999, TPG announced its plan to significantly diversify its domestic mortgage insurance operations through strategic investments and the development of international mortgage insurance operations. Total revenues for the year ended December 31, 2000 from the Company's consolidated strategic investments and non-U.S. mortgage insurance businesses constituted approximately 21% of the Company's consolidated revenues compared with approximately 20% and 17% in 1999 and 1998. The growth in revenue attributed to the Company's strategic investments and non-U.S. mortgage insurance operations was approximately 17% in 2000. These percentages exclude revenue from Ram Re, CMG and Fairbanks as those entities are accounted for on the equity method in the Company's consolidated financial statements. 1. International Mortgage Insurance Australia and New Zealand TPG offers mortgage insurance in Australia and New Zealand through its indirect, wholly owned subsidiary, PMI Mortgage Insurance Ltd ("PMI Ltd"). PMI Ltd was founded in 1965 and is headquartered in Sydney, Australia. TPG acquired PMI Ltd in August 1999. In addition to its headquarters in Sydney, PMI Ltd has four offices in other major Australian cities (Melbourne, Brisbane, Adelaide, and Perth) and one in Auckland, New Zealand. The New Zealand operation is a branch of the Australian enterprise and is not separately incorporated. At December 31, 2000, PMI Ltd's total assets were $174.0 million. The 35 Company does not hedge the foreign exchange exposure in Australia dollars to US dollars. The average exchange rate was 0.58 in 2000 compared to 0.65 in 1999. Single premiums and 100% coverage characterize Australian mortgage insurance or "lenders' mortgage insurance" ("LMI"). As in the United States, lenders usually collect the single premium from the prospective borrowers and remit the amount to the mortgage insurer. The mortgage insurer in turn invests the proceeds and reports the single premium in its financial statements over time according to an actuarially determined multi-year schedule. The premium is potentially partly refundable if the policy is cancelled within the first year only. After the first policy year no refund will be paid. Lenders control the decision to maintain coverage on a loan and have the freedom to cancel coverage at any point. LMI provides insurance coverage on the entire loan amount plus certain expenses. Historically, losses normally range from 20% to 25% of the original loan amount on defaulted loans. "Top cover" predominates in New Zealand where the total loss (including expenses) is paid up to a prescribed percentage of the original loan amount. Typical top cover in New Zealand is 20% to 30%. The majority of the loans insured by PMI Ltd are ARM's with loan terms of between twenty and thirty years. Changes in interest rates impact the frequency of claims with respect to these loans. Because of the preponderance of ARM loans that simultaneously adjust with prevailing market rates, borrowers have little incentive to refinance their mortgages. Initial period, "teaser" or "honeymoon" rates represent the only real inducement for borrowers to pay off their existing mortgage in favor of a new one. In fact, given that mortgage interest is not deductible in Australia or New Zealand, borrowers have a strong incentive to reduce their principal balance by amortizing or prepaying their mortgages. These actions commensurately lower PMI Ltd's loss exposure. Only recently, maximum LTVs were restricted to 95% by the LMI industry. PMI Ltd recently launched a three-percent down payment product utilizing PMI's experience to determine risk profiles and pricing levels. PMI Ltd expects these high LTV products to perform similarly to PMI's high LTV products in the United States. (See IC's.) The Australian Prudential Regulatory Authority ("APRA") regulates all financial institutions in Australia including mortgage insurers. APRA provides for reduced capital requirements for depository institutions that insure residential mortgages above 80% LTV with an "A" Standard & Poor's or equivalent rated mortgage insurance company. PMI Ltd is rated AA-, A1 and AA by Standards & Poor's, Moody's and Fitch IBCA, respectively. Westpac, Commonwealth, ANZ, and National Australia Bank collectively provide 60% or more of Australia's residential housing finance. Other participants in Australian mortgage lending include "regional" banks, building societies, credit unions, and non-bank mortgage originators, called "mortgage managers." Mortgage managers typically fund their lending activities via the capital markets and mortgage-backed securitizations. Securitization of mortgages is actively pursued in Australia. Mortgage insurance is the most frequently used form of credit enhancement for these bond issues and mortgage insurance is ultimately placed on all loans (whether high or low LTV) destined for securitization. Mortgage managers tend to place mortgage insurance on the lower LTV loans at origination to be assured that each individual loan is an acceptable risk to the mortgage insurer. Banks generally purchase mortgage insurance on lower LTV loans immediately prior to securitization. In either case, the coverage follows the standard, 100% coverage, primary insurance. Including PMI Ltd, four mortgage insurers serve the Australian and New Zealand markets. Though no public statistics are kept regarding competitor market share or insurance in force, PMI Ltd believes the 36 largest provider in Australia is likely GE, which purchased the Australian government's participating entity, Housing Loan Insurance Company, in late 1997. GE operates two companies: GEMICO and GEMI Pty Ltd. The Company believes that PMI Ltd is the second largest mortgage insurer in Australia and New Zealand. Royal & Sun is the next largest competitor in Australia. CGULMI is the smallest mortgage insurer in Australia, but probably the largest provider in New Zealand. A significant portion of PMI Ltd's business is acquired through captive mortgage insurance arrangements with its lending customers. These captive arrangements typically contain a contractual period over which the lender commits to send PMI Ltd a prescribed volume of business. Generally the captive arrangements operate in one of two ways. In one arrangement, loans are 100% insured by PMI Ltd and then a small proportion of each loan is reinsured on a quota share basis by the lender's captive insurer. In exchange for this loss risk transfer, PMI Ltd pays a negotiated premium to the captive. Under the other arrangement, the lender's captive writes the insurance risk and cedes a large portion of the risk on a quota share basis to PMI Ltd. In this case PMI Ltd receives a premium from the captive for the risk it assumes. Generally, captive arrangements are subject to review by the lender and PMI Ltd every five years. In the event that the lender or PMI Ltd wishes to terminate the captive arrangement at that time, PMI Ltd generally has the right to purchase the lender's equity interest in the captive. Under limited circumstances, the lender may have a right to require PMI Ltd to purchase the lender's equity interest in the captive. PMI Ltd offers ancillary services to earn mortgage insurance business from lenders. Included in these offerings are a number of computer-based business development tools including the pmiSCORE, an automated underwriting and decision support system and pmiE-COMMERCE, an internet-based customer development and connectivity tool. These products and services, as well as captive arrangements and basic mortgage insurance pricing, have enabled PMI Ltd to secure written agreements with some of its customers to allocate a given portion of their mortgage insurance business for a period of time to PMI Ltd, usually one to three years. PMI Ltd endeavors to execute such agreements whenever possible. Effective January 1, 2000, the Company changed its accounting policy to report international operations on a one-month lag from domestic operations. Accordingly, the results of PMI Ltd for the twelve months ended December 31, 2000 represented eleven months of activity. As of December 31, 2000, PMI Ltd's insurance in force totaled $19.3 billion compared to the year ended December 31, 1999 where insurance in force was $20.4 billion. PMI Ltd's reserves for losses for the year ended December 31, 2000, were $5.4 million compared to $3.7 million for the year ended December 31, 1999. Hong Kong In 1999, PMI opened an office in Hong Kong and began to reinsure residential mortgages in Hong Kong. PMI entered into an agreement with the Hong Kong Mortgage Corporation ("HKMC"), a public sector entity created to add liquidity to the Hong Kong residential mortgage market. HKMC is the direct insurer of residential mortgages with LTVs of up to 90%, with PMI providing reinsurance coverage on amounts over 70% LTV. For the year ended December 31, 2000, PMI reinsured $252.9 million of loans. For the nine months of operations during 1999, PMI reinsured $209.9 million of loans. Europe In February 2001, the Company formed PMI Mortgage Insurance Company Limited ("PMI Europe"), a mortgage insurance and credit enhancement company incorporated and located in Ireland. Headquartered in Dublin, PMI Europe is licensed to offer mortgage insurance and other credit enhancement products by the Irish Department of Enterprise Trade & Employment. With this license, PMI Europe may offer its products to all of the European Union member states. PMI Europe's claims-paying ability is currently rated AA by 37 Standard & Poor's and Aa3 by Moody's Investors Service. These ratings are based in part on a capital support agreement provided by PMI and a guarantee of PMI's obligations under that agreement by TPG. 2. Title Insurance In 1992, TPG acquired American Pioneer Title Insurance Co. ("APTIC"), a Florida- based title insurance company, as part of its strategy to provide additional mortgage-related services to its customers. APTIC is licensed in 44 states and the District of Columbia. Although APTIC is currently writing business in 35 states, it primarily provides real estate title insurance on residential property in Florida. A title insurance policy protects the insured party against losses resulting from title defects, liens and encumbrances existing as of the effective date of the policy and not specifically excepted from the policy's coverage. Based on direct premiums written during 2000, APTIC is ranked fifth among the 28 active title insurers conducting business in the State of Florida. For the year ended December 31, 2000, 63.9% of APTIC's premiums earned came from its Florida operations. APTIC generates title insurance business through both direct and indirect marketing to realtors, attorneys and lenders. As a direct marketer, APTIC operates under the name Chelsea Title Company, a branch network of title production facilities and real estate closing offices. As an indirect marketer APTIC recruits and works with corporate title agencies, attorney agencies and approved attorneys. Its agency business accounted for 95.8% and 95.2% of APTIC's premiums earned for the years ended December 31, 2000 and 1999, respectively. While the industry trend in the residential market appears to be towards direct operations consisting of underwriter owned or controlled entities, APTIC's operational plan is geared towards developing and cultivating agency relationships. APTIC has created a suite of computerized software designed to assist its agents in the areas of real estate settlement, real property examination and electronic commerce. These products, together with APTIC's assistance to its policy issuing agents in the areas of underwriting, claims, audit, and title agency management, create an atmosphere for the development and continuous cultivation of long term contractual relationships. Title policy issuing agency relationships are memorialized by written contracts and are generally long-term in nature without the right of immediate unilateral termination by either party. As part of APTIC's risk management program, it has, since 1986, entered into reinsurance treaties with other insurers covering policies issued. Currently, APTIC has a reinsurance agreement with ACE Capital Title Reinsurance Company ("ACE") which, in general, provides for automatic reinsurance of title policies in excess of $1.0 million but not greater than $26.0 million. Policies in excess of $10.0 million require written consent of ACE. Policies in excess of $26.0 million are reinsured through the use of facultative agreements with ACE and/or other reinsurers. APTIC's claims-paying ability is currently rated AA- (very high) by Fitch, A" by Demotech, Inc. and A by LACE. APTIC's claims-paying rating by Fitch is based in part on a capital support agreement provided by PMI and the reinsurance agreement discussed in the preceding paragraph. APTIC is subject to comprehensive regulation in the states in which it is licensed to transact business. Among other things, such regulation requires APTIC to adhere to certain financial standards relating to statutory reserves and other criteria of solvency. Generally, title insurers are restricted to writing only title insurance, and may not transact any other kind of insurance. This restriction prohibits APTIC from using its capital and resources in support of other types of insurance businesses. The insurance laws of the various states, including Florida, impose reserve requirements on APTIC. For instance, title insurers such as APTIC must maintain, in addition to reserves for outstanding losses, an unearned premium reserve 38 computed according to statute and are subject to limitations with respect to the level of risk they can assume on any one contract. The laws of Florida, in general, limit the payment of dividends by APTIC to TPG in any one year to the greater of either 10% of APTIC's statutory surplus as to policyholders derived from realized net operating profits on its business and realized net capital gains derived during the immediately preceding calendar year. As a result, APTIC may be limited in its ability to pay dividends to TPG. 3. Financial Guaranty Reinsurance TPG owns 24.9% of RAM Holdings Ltd. and RAM Holdings II Ltd. (collectively, "RAM Re"), the first AAA rated financial guaranty reinsurance company based in Bermuda. This strategic investment was consummated, in part, because of the perceived industry need for additional sources of highly rated financial guaranty capacity and because of TPG's desire to diversify into similar businesses. Ram Re commenced business in the first quarter of 1998. Three executives of the Company serve as directors of Ram Re. RAM Re's financial results are reported in the Company's financial statements under the equity method of accounting. 4. Mortgage Loan Servicing On March 31, 2000, the Company acquired an interest in Fairbanks Capital Holdings Corp ("Fairbanks"). Fairbanks, through its wholly owned subsidiary, acquires and services single-family residential mortgages and specializes in the resolution of non-performing and under-performing mortgages. As of December 31, 2000, Fairbanks serviced approximately $12.1 billion in mortgages. The Company believes that its investment in Fairbanks will broaden the scope of PMI's involvement in lender services and allow PMI to leverage Fairbanks' core competency in loss mitigation. Two executives of the Company serve as directors of Fairbanks. Fairbanks' financial results are reported in the Company's financial statements under the equity method of accounting. D. Investment Portfolio The Company's investment portfolio is managed under the TPG and Subsidiaries Investment Policy Statement (the "Policy"), and includes the investment portfolios of TPG and TPG's subsidiaries, except for APTIC and PMI Ltd, which manage their own portfolios under separate investment policies that are reviewed at least annually by PMI's Treasury personnel. The Company's pre-tax income from the total investments represented 31.9% of pre-tax operating income during 2000. As of December 31, 2000, approximately 87% of the total investments were managed under the Policy. The Policy's goal is to attain consistent after tax total returns. Emphasis is placed on providing a predictable level of income and on the maintenance of adequate levels of liquidity, safety and preservation of capital; growth is a secondary consideration. In addition to satisfying state regulatory limits on the amount that can be invested in any single investment category, e.g., no more than 20% of assets may be invested in common stocks, a minimum average fixed income credit quality of "A" rating must be maintained and no single credit risk may exceed 5% of total investments. At December 31, 2000, based on market value, approximately 92% of the Company's fixed income investments under the Policy were invested in securities rated "A" or better, with 62% rated "AAA" and 20% rated "AA," in each case by at least one nationally recognized securities rating organization. The balance of the portfolio under the Policy was invested in equity securities. Under Arizona law, PMI may invest up to 10% of its assets in investments that are not otherwise expressly authorized, including derivative instruments. Additionally, PMI is subject to other state regulations regarding investment activities with which PMI currently comply. The Company's policy is also to limit its 39 derivative transactions to currency and interest rate swaps necessary to minimize revenue fluctuations related to its international operations. The Policy is subject to change depending upon state regulatory, economic and market conditions and the existing or anticipated financial condition and operating requirements, including the tax position, of the Company. At December 31, 2000, the market value of the Company's investment portfolio was approximately $2.1 billion. At that date, the market value of the investments under the Policy was approximately $1.8 billion. At December 31, 2000, municipal securities represented 71.1% of the market value of the investments under the Policy. Fixed income securities due in less than one year, within one to five years, within five to ten years; after ten years, and other represented 10.9%, 20.6%, 10.2%, and 58.3%, respectively, of such total market value. (See C. Strategic Investments - 1. International Mortgage Insurance and 2. Title Insurance; Part II, Item 8. Financial Statements Note 4 - Investments.) APTIC's investment portfolio of approximately $34 million is managed internally in accordance with APTIC's investment policies. Approximately 92% of APTIC's portfolio consists of bonds rated AA and higher. PMI Ltd's investment portfolio of approximately $162 million is managed externally in accordance with PMI Ltd's investment policies. Approximately 92% of PMI Ltd's portfolio consists of bonds rated AA and higher. E. Employees As of December 31, 2000, TPG, its wholly owned subsidiaries and CMG, had 1,117 full-time and part-time employees, of which 715 persons perform services primarily for PMI, 90 are employed by PMI Ltd, 20 perform services primarily for CMG, and an additional 292 persons are employed by APTIC. The Company's employees are non-union and its employee relations are considered to be good. In addition, MSC had 462 temporary workers and contract underwriters as of December 31, 2000. Item 2. Properties PMI currently leases its home office in San Francisco, California, which contains approximately 100,000 square feet of space. The lease expires in 2004. In December 2000, PMI entered into a contract to purchase a seven-story office building site in Walnut Creek to serve as its world headquarters. Construction is underway on the office building and completion of the approximately 195,000 square foot building is scheduled to occur at the end of 2001. PMI also leases space for its 27 field and satellite offices throughout the United States comprising approximately 97,500 square feet with lease terms of no more than five years. During 2000, PMI transferred its operation data center to Rancho Cordova, California, which consists of approximately 15,000 square feet of office space. PMI believes its existing properties are well utilized and are suitable and adequate for its operations. Item 3. Legal Proceedings On December 17, 1999, G. Craig Baynham and Linnie Baynham ("Plaintiffs") filed a putative RESPA class action lawsuit against PMI. (See the Company's Form 8-K filed December 29, 1999.) This action was filed by Plaintiffs in the U.S. District Court for the Southern District of Georgia, Augusta Division (the "Court"). On December 15, 2000, the Company announced that PMI had entered into an agreement with Plaintiffs to settle the action. The settlement agreement was preliminarily approved by the Court and a final hearing on the settlement is scheduled for June 15, 2001. PMI denied all facts and allegations in the lawsuit that related to Section 8 of the Real Estate Settlement Procedures Act ("RESPA"). The Company currently 40 estimates that the gross amount of the settlement will be between $20 million and $22 million. To account for the settlement PMI took a pre-tax charge against fourth quarter 2000 earnings of $5.7 million, which is the estimated cost of settlement less anticipated insurance recovery. The charge is based, in part, upon an estimate of insurance payments the Company will receive from its insurance carriers as reimbursement for certain costs and expenses incurred by, and to be incurred by, the Company in connection with its defense and settlement of the action. The Company has agreed to participate in non-binding mediation with its insurance carriers with respect to the amount of any such payments. There can be no assurance that the Company's estimate of the amount of insurance payments will be realized. If the Company does not realize the estimated amount of insurance proceeds its financial condition and results of operations could be adversely affected. If the Court does not approve the settlement, the litigation will continue. In that event, there can be no assurance that the ultimate outcome of the litigation will not have a material adverse effect on the Company's financial condition. The settlement agreement contains a three year injunction, terminating on December 31, 2003, which extends to all members, present and future, of the putative class. The injunction provides that so long as certain products and services challenged in the lawsuit, including agency pool insurance, contract underwriting, reinsurance agreements with reinsurance affiliates of lenders and mortgage insurance restructuring transactions, meet the minimum requirements for risk transfer and cost recovery specified in the injunction they will be deemed to be in compliance with RESPA and other applicable laws. The injunction also prohibits lawsuits by class members for any mortgage insurance related claims, including but not limited to such products and services, for any loan transaction closed on or before December 31, 2003. The injunction will not restrict the Company or its subsidiaries from continuing to offer its current menu of mortgage insurance, reinsurance and lender services domestically or internationally. Under the terms of the agreement, all borrowers who have obtained, or will obtain, a "federally-related" mortgage loan that is insured by a certificate of primary mortgage insurance issued by PMI between December 18, 1996 and November 30, 2000 (with exceptions for borrowers whose loans were insured as bulk/seasoned loans) are entitled to receive a payment. As part of the settlement agreement, the class members will give a general release to the Company, lenders and the GSEs for all claims including claims under RESPA. Various other legal actions and regulatory reviews are currently pending that involve the Company and specific aspects of its conduct of business. In the opinion of management, the ultimate liability or resolution in one or more of the foregoing actions is not expected to have a material adverse effect on the financial condition or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted during the fourth quarter of 2000 to a vote of stockholders through the solicitation of proxies or otherwise. EXECUTIVE OFFICERS OF REGISTRANT Set forth below is certain information regarding TPG's executive officers as of December 31, 2000, including age as of March 31, 2001, and business experience for at least the past five years. W. ROGER HAUGHTON, 53, is Chairman of the Board and Chief Executive Officer of TPG and its subsidiary, PMI Mortgage Insurance Co., which was established in San Francisco in 1972. He brings more than 31 years of experience to his position. Mr. Haughton came to PMI in 1985 from Allstate Insurance Company. He was appointed President and Chief Executive Officer of the subsidiary in January 1993. He became President, Chief Executive Officer and a Director of TPG when the Company went public in April 1995, and was elected Chairman of the Board in May 1998. A graduate of the University of California at 41 Santa Barbara, Mr. Haughton holds a B.A. in economics. He is a member of the Executive Committee and past President of Mortgage Insurance Companies of America, the industry trade association. Mr. Haughton has a long history of active volunteerism with various affordable housing organizations, including Habitat for Humanity, and is on the board and former Chairman of Social Compact, a Washington D.C. organization dedicated to promoting revitalization of America's inner cities. He is also on the board of San Francisco's Bay Area Council. He is an Ex Officio member of the Governance and Nominating Committee. L. STEPHEN SMITH, 51, has been President and Chief Operating Officer of TPG and PMI since September 1998. Prior thereto he was Executive Vice President of Marketing and Field Operations of PMI since May 1994 and was elected to the same positions with TPG in January 1995. Prior thereto, he was PMI's Senior Vice President of Field Operations from September 1993 to May 1994, Senior Vice President of Marketing and Customer Technology from December 1991 to September 1993 and Vice President/General Manager of PMI's Eastern Zone from September 1985 to December 1991. CLAUDE J. SEAMAN, 54, has been President International and Strategic Investments of TPG and PMI since February 2001. Prior thereto, he was Group Executive Vice President Strategic Investments of TPG and PMI since February 1999. Prior thereto, he was Executive Vice President of Insurance Operations of PMI since May 1994, and was elected to the same positions with TPG in January 1995. Prior thereto, he was PMI's Senior Vice President of Insurance Operations from March 1993 to May 1994, Vice President of Claims from December 1991 to March 1993 and Vice President of Underwriting from January 1987 to December 1991. JOHN M. LORENZEN, Jr., 56, has been Executive Vice President of PMI since May 1994 and Chief Financial Officer of PMI since April 1989, and was elected to the same positions with TPG in January 1995. Prior thereto, he was PMI's Senior Vice President from April 1989 to May 1994 and Vice President of Finance from April 1985 to April 1989. BRADLEY M. SHUSTER, 46, has been Executive Vice President Corporate Development of TPG and PMI since February 1999. Prior thereto, he was Senior Vice President, Treasurer and Chief Investment Officer of PMI since August 1995, and was elected to the same position with TPG, in September 1995. Prior thereto, he was an audit partner with the accounting firm of Deloitte & Touche LLP from May 1988 to July 1995. VICTOR J. BACIGALUPI, 57, has been Executive Vice President, General Counsel and Secretary of TPG and PMI since August 1999. Prior thereto he was Senior Vice President, General Counsel and Secretary of TPG and PMI since November 1996. Prior to joining TPG, he was a partner in the law firm of Bronson, Bronson & McKinnon LLP, San Francisco, California since February 1992. DANIEL L. ROBERTS, 50, has been Executive Vice President, Chief Information Officer of TPG and PMI since March 1, 2000. Prior thereto he was Senior Vice President, Chief Information Officer of TPG and PMI since December 1997. Prior to joining TPG, he was Vice President and Chief Information Officer of St. Joseph Health System, a position he held since he joined the company in October 1994. Prior thereto, he was Vice President, Information Services and Chief Information Officer for a division of Catholic Healthcare West, positions he held since joining the Company in December 1990. Mr. Roberts was a consulting partner with the accounting firm of Deloitte & Touche from July 1985 to December 1990. 42 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Common Stock TPG is listed on the New York Stock Exchange and the Pacific Exchange under the trading symbol PMI. As of December 31, 2000 there were 44,309,922 shares issued and outstanding. As of January 25, 2001, there were 44,310,814 shares issued and outstanding held by approximately 43 stockholders of record and approximately 8,859 beneficial owners of shares held by brokers and fiduciaries. The following table shows the high, low and closing common stock prices by quarter from the New York Stock Exchange Composite Listing for the two years ended December 31, 2000 and 1999: 2000 1999 ------------------------ -------------------------- High Low Close High Low Close ------ ----- ------- ------ ----- ------- First quarter 48.81 33.50 47.44 35.88 26.67 30.92 Second quarter 54.75 44.19 47.52 42.38 28.17 41.88 Third quarter 72.38 48.75 67.75 47.08 39.81 40.88 Fourth quarter 74.94 56.50 67.69 55.50 40.88 48.81 Preferred Stock TPG's Board of Directors is authorized to issue up to 5,000,000 shares of preferred stock of TPG in classes or series and to fix the designations, preferences, qualifications, limitations or restrictions of any class or series with respect to the rate and nature of dividends, the price and terms and conditions on which shares may be redeemed, the amount payable in the event of voluntary or involuntary liquidation, the terms and conditions for conversion or exchange into any other class or series of the stock, voting rights and other terms. The Company may issue, without the approval of the holders of common stock, preferred stock which has voting, dividend or liquidation rights superior to the common stock and which may adversely affect the rights of the holders of common stock. The Company has reserved for issuance under the Rights Plan described below up to 400,000 shares of preferred stock. Preferred Share Purchase Rights Plan On January 13, 1998, the Company adopted a Preferred Share Purchase Rights Plan ("Rights Plan"). Under the Rights Plan, all shareholders of record as of January 26, 1998 received rights to purchase shares of a new series of preferred stock on the basis of one right for each common stock held on that date. However, rights issued under the Rights Plan will not be exercisable initially. The rights will trade with the Company's common stock and no certificates will be issued until certain triggering events occur. The Rights Plan has a 10-year term from the record date, but the Company's Board of Director's will review the merits of redeeming or continuing the Rights Plan not less than once every three years. Rights issued under the plan will be exercisable only if a person or group acquires 10% or more of the Company's common stock or announces a tender offer for 10% or more of the common stock. If a person or group acquires 10% or more of the Company's common stock, all rightholders except the buyer will be entitled to acquire the Company's common stock at a discount and/or under certain circumstances to purchase shares of the acquiring company at a discount. The Rights Plan contains an exception that would allow passive institution investors to acquire up to a 15% ownership interest before the rights would become exercisable. 43 Payment of Dividends and Policy Payment of future dividends is subject to a declaration by TPG's Board of Directors. The dividend policy is also dependent on the ability of PMI to pay dividends to TPG, which is subject to, among other factors, regulatory restrictions by the Arizona Department of Insurance and TPG's credit agreements and the Runoff Support Agreement. (See Part I, Item 1.B(9), "Regulation" and Part II, Item 8, Financial Statement Note 13 - "Dividends and Stockholders' Equity".) During the second quarter of 1995, TPG's Board of Directors declared its first dividend on common stock of $0.05 per share (pre-split basis), and has declared and paid a quarterly dividend of $0.05 per share (pre-split basis) through the second quarter of 1999. In connection with the Company's 3-for-2 stock split on August 16, 1999, the quarterly dividend was adjusted to $0.04 per share for the third and fourth quarters of 1999 and continued to be $0.04 per share for 2000. Item 6. Selected Financial Data The information required by this Item is incorporated by reference from portions of The PMI Group, Inc. 2000 Annual Report to Stockholders under the heading "Eleven-Year Summary of Financial Data" filed as part of Exhibit 13.1. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this Item is incorporated by reference from portions of The PMI Group, Inc. 2000 Annual Report to Stockholders under the heading "Management's Discussion and Analysis" as part of Exhibit 13.1. Item 7A. Quantitative and Qualitative Disclosures About Market Risk At December 31, 2000, the average duration of the Company's fixed income investment portfolio was 4.9 years, and the Company had no derivative financial instruments in its investment portfolio. The result of a 100 basis points increase in interest rates would be a 5.8% decrease in the value of the Company's investment portfolio, while the result of a 100 basis points decrease in interest rates would be a 4.5% increase in the value of the Company's investment portfolio. Item 8. Financial Statements and Supplementary Data The information required by this Item is incorporated by reference from portions of The PMI Group, Inc. 2000 Annual Report to Stockholders as part of Exhibit 13.1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Effective February 17, 2000, the Company's Board of Directors approved the engagement of Ernst & Young LLP as the Company's independent auditors for the fiscal year ending December 31, 2000. 44 PART III Item 10. Directors and Executive Officers of the Registrant The information concerning TPG's Directors as required by this Item is incorporated by reference from TPG's 2000 Proxy Statement under the captions "Nominees For Director of TPG" and "Section 16(a) Beneficial Ownership Reporting Compliance". Information regarding Executive Officers of TPG is included in a separate item captioned "Executive Officers of Registrant" in Part I of this report. Item 11. Executive Compensation The information required by this Item is incorporated by reference from TPG's 2000 Proxy Statement under the captions "Directors-Compensation and Benefits," "Executive Compensation" and "Compensation Committee Interlocks and Insider Participants." Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this Item is incorporated by reference from TPG's 2000 Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management". Item 13. Certain Relationships and Related Transactions Not Applicable. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements: The financial statements listed in the accompanying Index to Consolidated Financial Statements and Financial Statement Schedules are filed as part of this Form 10-K. 2. Financial Statement Schedules: The financial statement schedules listed in the accompanying Index to Consolidated Financial Statements and Financial Statement Schedules are filed as part of the Form 10-K. All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits: Exhibits listed in the accompanying Index to Exhibits are filed as part of this Form 10-K. (b) Reports on Form 8-K: On December 19, 2000, the Company filed a report on Form 8-K regarding two press releases that the Company issued on December 15, 2000. The first press release announced that PMI had entered into an agreement with the plaintiffs to settle the putative class action litigation captioned Baynham et al. v. PMI Mortgage Insurance Company. The second press release announced the Company's projected operating earnings for 2000 and projected operating earnings growth rate for 2001. 45 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES [Item 14(a) 1 and 2] Consolidated Financial Statements --------------------------------- (all contained in Exhibit 13.1) Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 Consolidated Balance Sheets as of December 31, 2000 and 1999 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements Reports of Independent Auditors Financial Statement Schedules ----------------------------- (schedules immediately follow Form 10-K signature pages; reports contained in Exhibits 23.1 and 23.3) Reports of independent auditors on financial statement schedules as of and for the specified years in the three-year period ended December 31, 2000: Schedule I-Summary of investments other than in related parties Schedule II-Condensed financial information of Registrant Schedule III-Supplementary insurance information Schedule IV-Reinsurance 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Francisco, State of California, on the 26th day of March, 2001. The PMI Group, Inc. BY: /s/ W. Roger Haughton ------------------------------------------------ W. Roger Haughton Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ W. Roger Haughton Chairman of the Board and March 26, 2001 - --------------------- Chief Executive Officer W. Roger Haughton /s/ John M. Lorenzen, Jr. Executive Vice President, March 30, 2001 - ------------------------- Chief Financial Officer, and John M. Lorenzen, Jr. Assistant Secretary (Principal Financial Officer) /s/ Brian P. Shea Vice President, Controller and March 30, 2001 - ----------------- Assistant Secretary Brian P. Shea (Controller and Principal Accounting Officer) /s/ James C. Castle Director March 12, 2001 - ------------------- Dr. James C. Castle /s/ Donald C. Clark Director March 18, 2001 - ------------------- Donald C. Clark /s/ Wayne E. Hedien Director March 13, 2001 - ------------------- Wayne E. Hedien /s/ Raymond L. Ocampo Jr. Director March 15, 2001 - -------------------------- Raymond L. Ocampo Jr. /s/ John D. Roach Director March 13, 2001 - ----------------- John D. Roach /s/ Kenneth T. Rosen Director March 15, 2001 - -------------------- Dr. Kenneth T. Rosen
47
/s/ Richard L. Thomas Director March 14, 2001 - --------------------- Richard L. Thomas /s/ Mary Lee Widener Director March 20, 2001 - -------------------- Mary Lee Widener /s/ Ronald H. Zech Director March 13, 2001 - ------------------ Ronald H. Zech
48 THE PMI GROUP, INC. AND SUBSIDIARIES SCHEDULE 1 - SUMMARY OF INVESTMENTS The information required by this schedule is incorporated by reference from portions of The PMI Group, Inc. 2000 Annual Report to Stockholders under the heading "Notes to Consolidated Financial Statements" as part of Exhibit 13.1. 49 THE PMI GROUP, INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET PARENT COMPANY ONLY December 31, 2000 and 1999
ASSETS 2000 1999 ---- ---- (Dollars in thousands) Investments: available for sale, at fair value: Fixed income securities (cost: $63,645; $32,745) $ 58,342 $ 31,696 Short-term investments 39,117 60,973 ---------- ---------- Total investments 97,459 92,669 ---------- ---------- Cash 7,918 407 Investment in subsidiaries, at equity in net assets 1,582,906 1,316,082 Other assets 27,916 14,685 ---------- ---------- Total Assets $1,716,199 $1,423,843 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Long-term debt $ 99,609 $ 99,542 Accounts payable - affiliates 5,567 1,630 Other liabilities 9,610 3,235 ---------- ---------- Total liabilities 114,786 104,407 ---------- ---------- Commitments and contingent liabilities (Note A) Junior subordinated deferrable interest debenture held solely by subsidiary trust 102,202 102,168 Shareholders' equity: Preferred stock - $.01 par value; 5,000,000 shares authorized - - Common stock - $.01 par value; 187,500,000 shares authorized and 52,793,777 shares issued 528 528 Additional paid-in capital 267,762 265,828 Accumulated other comprehensive income 62,501 20,186 Retained earnings 1,511,751 1,258,617 Treasury stock, at cost (8,484,082 and 8,091,924 shares) (343,331) (327,891) ---------- ---------- Total shareholders' equity 1,499,211 1,217,268 ---------- ---------- Total liabilities and shareholders' equity $1,716,199 $1,423,843 ========== ==========
See accompanying supplementary notes to Parent company condensed financial statements. 50 THE PMI GROUP, INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF OPERATIONS PARENT COMPANY ONLY Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998 ---- ---- ---- (In thousands) Revenue: Equity in undistributed net income of subsidiaries $273,501 $112,029 $ 90,696 Subsidiary dividends 3,000 97,339 103,200 Investment income 6,174 8,913 9,600 Net realized capital gains 807 329 1,045 -------- -------- -------- Total revenue 283,482 218,610 204,541 -------- -------- -------- Expenses: Operating expenses 13,257 6,456 722 Interest expense 16,052 15,810 15,592 -------- -------- -------- Total expenses 29,309 22,266 16,314 -------- -------- -------- Income before income taxes 254,173 196,344 188,227 Income tax benefit 6,039 8,122 2,133 -------- -------- -------- Net income $260,212 $204,466 $190,360 ======== ======== ========
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME PARENT COMPANY ONLY Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998 ---- ---- ---- (In thousands) Net income $ 260,212 $ 204,466 $ 190,360 --------- --------- --------- Other comprehensive income, net of tax: Unrealized gains on investments: Unrealized holding gains (losses) arising during period 50,575 (53,945) 18,539 Reclassification adjustment for gains (losses) included in net income (281) (331) (16,013) Currency translation adjustment (7,979) - - --------- --------- --------- Other comprehensive income (loss), net of tax 42,315 (54,276) 2,526 --------- --------- --------- Comprehensive Income $ 302,527 $ 150,190 $ 192,886 ========= ========= =========
See accompanying supplementary notes to Parent company condensed financial statements. 51 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS PARENT COMPANY ONLY Year Ended December 31, 2000, 1999 and 1998
2000 1999 1998 ---- ---- ---- (In thousands) Cash flows from operating activities: Net income $ 260,212 $ 204,466 $ 190,360 Adjustments to reconcile net income to net cash used in operating activities: Amortization 99 278 1,063 Equity in earnings of subsidiaries (276,501) (209,368) (193,896) Net realized capital gains (807) (329) (1,045) Payable to affiliates 3,937 (48) 565 Other 1,960 (7,435) 2,282 --------- --------- ---------- Net cash used in operating activities (11,100) (12,436) (671) --------- --------- ---------- Cash flows from investing activities: Dividends from subsidiaries 3,000 97,339 103,200 Investment in affiliates - (2,038) (4,000) Return of capital from subsidiary 50,000 - - Purchases of fixed income securities (40,771) (3,887) (1,000) Purchases of equity securities (5,569) (14,840) (20,173) Investment collections of fixed income securities - - 6,271 Proceeds from sales of fixed income securities 10,680 22,110 40,522 Proceeds from sales of equity securities - - 93 Net (increase) decrease in short-term investments 21,856 (57,251) 32,455 --------- --------- ---------- Net cash provided by investing activities 39,196 41,433 157,368 --------- --------- ---------- Cash flows from financing activities: Dividends paid to shareholders (7,079) (5,199) (6,333) Proceeds from exercise of stock options 1,934 964 2,592 Purchase of The PMI Group, Inc. common stock (15,440) (24,828) (152,920) --------- --------- ---------- Net cash used in financing activities (20,585) (29,063) (156,661) --------- --------- ---------- Net increase (decrease) in cash 7,511 (66) 36 Cash at beginning of year 407 473 437 --------- --------- ---------- Cash at end of year $ 7,918 $ 407 $ 473 ========= ========= ==========
See accompanying supplementary notes to Parent company condensed financial statements. 52 THE PMI GROUP, INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY SUPPLEMENTARY NOTES Note A The accompanying Parent Company ("TPG") financial statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements (including Notes 10, 11 and 12 related to long-term obligations, commitments and contingent liabilities and the junior subordinated debenture) appearing in The PMI Group, Inc. 2000 Annual Report to Shareholders. Note B During 2000, 1999 and 1998, TPG received $53.0 million, $97.3 million and $103.2 million, respectively, of ordinary and extraordinary cash dividends/returns of capital from subsidiaries. 53 THE PMI GROUP, INC. AND SUBSIDIARIES SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION As of and for the Years Ended December 31, 2000, 1999 and 1998
Reserve for Investment Losses and Income Losses and Amortization Deferred Loss Net and Loss Of Deferred Other Acquisition Adjustment Unearned Premiums Premiums Equity Adjustment Acquisition Operating Segment Costs Expenses Premiums Written Earned Earnings Expenses Costs Expenses - ------------- ----------- ---------- ---------- --------- ---------- ---------- ---------- ------------ ---------- (In thousands) 2000 MI (1) $63,295 $281,704 $ 96,561 $498,255 $503,750 $ 96,585 $ 95,308 $77,337 $ 54,362 International (2) 3,714 5,384 74,305 36,823 26,628 11,475 5,684 - 7,220 Title - 8,001 - 103,984 103,984 1,890 2,087 - 94,302 Other (3) - - - - - 9,249 - - 33,887 ----------- ----------- ---------- --------- ---------- ---------- ---------- ------------ ---------- Total $67,009 $295,089 $170,866 $639,062 $634,362 $119,199 $103,079 $77,337 $189,771 =========== =========== ========== ========= ========== ========== ========== ============ ========== 1999 MI (1) $67,281 $269,931 $102,022 $459,065 $447,214 $ 80,922 $110,465 $80,252 $ 54,017 International (2) 2,298 3,714 80,067 12,071 11,291 3,673 1,213 - 4,472 Title - 8,355 - 100,118 100,118 1,634 1,004 - 88,244 Other (3) - - - - - 8,913 - - 23,506 ----------- ----------- ---------- --------- ---------- ---------- ---------- ------------ ---------- Total $69,579 $282,000 $182,089 $571,254 $558,623 $ 95,142 $112,682 $80,252 $170,239 =========== =========== ========== ========= ========== ========== ========== ============ ========== 1998 MI (1) $61,605 $206,132 $ 94,886 $409,796 $411,922 $ 77,257 $135,097 $60,280 $ 44,293 Title - 9,127 - 79,304 79,304 1,401 619 - 69,109 Other (3) - - - - - 6,023 - - 29,223 ----------- ----------- ---------- --------- ---------- ---------- ---------- ------------ ---------- Total $61,605 $215,259 $ 94,886 $489,100 $491,226 $ 84,681 $135,716 $60,280 $142,625 =========== =========== ========== ========= ========== ========== ========== ============ ==========
(1) Represents Domestic Mortgage Insurance Operations. (2) Represents International Mortgage Insurance Operations. (3) Represents ancillary services and parent company investment income. 54 THE PMI GROUP, INC. AND SUBSIDIARIES SCHEDULE IV - REINSURANCE Years Ended December 31, 2000, 1999 and 1998
Percentage Assumed Ceded of Amount Premiums earned for the Gross From Other To Other Net Assumed year ended December 31, Amount Companies Companies Amount To Net - ----------------------------- ------------ ------------ --------------- -------------- ------------- (In thousands, except percentages) 2000 Mortgage Guaranty $567,258 $1,800 $38,680 $530,378 0.3% Title 104,344 - 360 103,984 0.0 ------------ -------------- --------------- -------------- Total $671,602 $1,800 $39,040 $634,362 0.3 ============ ============== =============== ============== 1999 Mortgage Guaranty $486,235 $6,443 $34,173 $458,505 1.4% Title 100,355 2 239 100,118 0.0 ------------ -------------- --------------- -------------- Total $586,590 $6,445 $34,412 $558,623 1.2 ============ ============== =============== ============== 1998 Mortgage Guaranty $441,855 $2,508 $32,441 $411,922 0.6% Title 79,483 9 188 79,304 0.0 ------------ -------------- --------------- -------------- Total $521,338 $2,517 $32,629 $491,226 0.6 ============ ============== =============== ==============
55 INDEX TO EXHIBITS [Item 14(a) 3] Exhibit Number Description of Exhibits - ------ ------------------------------------------------------------------- 3.1(b) Restated Certificate of Incorporation of the Registrant. 3.2(g) By-laws of the Registrant as amended and restated September 15, 1998. 4.1(b) Specimen common stock Certificate. 4.2(d) Indenture dated as of November 19, 1996 between The PMI Group, Inc. and the Bank of New York Trustee in connection with sale of $100,000,000 aggregate principal amount of 6 3/4% Notes due November 15, 2006. 4.3(e) The Junior Subordinated Indenture dated February 4, 1997 between The PMI Group, Inc. and The Bank of New York, Inc. 4.4(e) Form of Right Certificate, relating to Rights Agreement dated as of January 26, 1998. 4.5(j) Credit Agreement, dated as of August 3, 1999 by and among PMI Mortgage Insurance Australia (Holdings) Pty Limited, The PMI Group, Inc., and Bank of America, N.A. The Company agrees to furnish to the Securities and Exchange Commission, upon request, copies of all instruments defining the rights of holders of long-term debt of the Company where the total amount of securities authorized under each issue does not exceed ten percent of the Company's total assets. 4.6(j) Credit Agreement, dated as of February 13, 1996, between The PMI Group, Inc., and Bank of America National Trust and Savings Association, as amended. The Company agrees to furnish to the Securities and Exchange Commission, upon request, copies of all instruments defining the rights of holders of long-term debt of the Company where the total amount of securities authorized under each issue does not exceed ten percent of the Company's total assets. 10.1(i)* PMI Mortgage Insurance Co. Bonus Incentive Plan dated as of February 18, 1999 10.2(l)* The PMI Group, Inc. Equity Incentive Plan. (Restated as of August 16, 1999) 10.3(m)* Amendment No. 1 to The PMI Group, Inc. Equity Incentive Plan. (Restated as of August 16, 1999) 10.4* Amendment No. 2 to The PMI Group, Inc. Equity Incentive Plan. (Restated as of August 16, 1999) 10.5(l)* The PMI Group, Inc. Stock Plan for Non-Employee Directors. (restated as of August 16, 1999). 10.6(m)* Amendment No. 1 to The PMI Group, Inc. Stock Plan for Non-Employee Directors. (Restated as of August 16, 1999) 10.7(k) The PMI Group, Inc. Directors Deferred Compensation Plan. (amended & restated as of July 21, 1999). 10.8(a) Form of 1984 Master Policy of PMI Mortgage Insurance Co. 10.9(a) Form of 1994 Master Policy of PMI Mortgage Insurance Co. 10.10(a) CMG Shareholders Agreement dated September 8, 1994 between CUNA Mutual Investment Corporation and PMI Mortgage Insurance Co. 56 10.11(b) Runoff Support Agreement dated October 28, 1994 between Allstate Insurance Company, the Registrant and PMI Mortgage Insurance Co. 10.12(b) Form of Tax Sharing Agreement among the Registrant, the Registrant's subsidiaries, The Allstate Corporation, Allstate Insurance Company and Sears, Roebuck and Co. 10.13(a) Mortgage Insurance Variable Quota Share Reinsurance Treaty effective January 1, 1991 issued to PMI Mortgage Insurance Co. by Hannover Ruckversicherungs-Aktiengesellschaft ("Hannover"). 10.14(a) First Amendment to Mortgage Insurance Variable Quota Share Reinsurance Treaty made as of January 1, 1992 between Hannover and PMI Mortgage Insurance Co. 10.15(j) Supplemental Employee Retirement Plan (amended and restated as of May 20, 1999). 10.16(a) First Amendment to the Quota Share Primary Mortgage Reinsurance Agreement (No. 15031-940) made as of October 1, 1994 between PMI Mortgage Insurance Co. and Capital Mortgage Reinsurance Company 10.17(a) Form of Indemnification Agreement between the Registrant and its officers and directors. 10.18(a) Per Mortgage Excess of Loss Reinsurance Treaty effective January 1, 1994 issued to PMI Mortgage Insurance Co. by Hannover. 10.19(j) The PMI Group, Inc., Additional Benefit Plan dated as of February 18, 1999 10.20(e) The Guarantee Agreement, dated February 4, 1997 between The PMI Group, Inc. (As Guarantor) and The Bank of New York (As Trustee). 10.21(e) Amended and Restated Trust Agreement dated as of February 4, 1997 among The PMI Group, Inc., as Depositor, The Bank of New York, as Property Trustee, and The Bank of New York (Delaware), as Delaware Trustee. 10.22(e) Form of Change of Control Employment Agreement 10.23(k) The PMI Group, Inc., Officer Deferred Compensation Plan. (amended and restated as of September 16, 1999) 10.24(l) Excess of Loss Reinsurance Treaty effective August 20, 1999 issued by PMI Mortgage Insurance Co. to KRE Reinsurance Ltd, National Union Fire Insurance Company of Pittsburgh and Federal Insurance Co. The Company agrees to furnish to the Securities and Exchange Commission, upon request, copies of all agreements defining the rights of reinsurers of pool insurance contracts where the total amount of premiums paid does not exceed ten percent of the Company's total assets. 11.1 Statement re: computation of per share earnings. 12.1 Statement re: computation of earnings to fixed charges. 13.1 Selected Financial Data, Management's Discussion and Analysis of Financial Condition and Results of Operations and Financial Statements and Supplementary Data portions of The PMI Group, Inc.'s 1999 Annual Report to Shareholders, Reports of Independent Auditors. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Independent Auditors (Ernst & Young LLP, March 28, 2001). 23.2 Independent Auditors' Consent (Deloitte & Touche LLP, March 26, 2001). 23.3 Independent Auditors' Report (Deloitte & Touche LLP, January 20, 2000). 57 (a) Previously filed with the Company's Form S-1 Registration Statement (No. 33-88542), which became effective in April 1995 ("Form S-1"). (b) Previously filed with Amendment No. 1 to Form S-1, filed with the SEC on March 2, 1995. (c) Previously filed with Amendment No. 2 to Form S-1, filed with the SEC on March 13, 1995. (d) Previously filed with Form 8-K, filed with the SEC on November 25, 1996 (e) Previously filed with Form 10-K, filed with the SEC on March 27, 1998. (f) Previously filed with Form 10-Q, filed with the SEC on August 13, 1998. (g) Previously filed with Form 8-K, filed with the Sec on September 29, 1998. (h) Previously filed with the Company's Form S-3 Registration Statement (No. 33-66829) which became effective in November 1998. (i) Previously filed with Form 10-K, filed with the SEC on March 30, 1999. (j) Previously filed with Form 10-Q, filed with the SEC on August 16, 1999. (k) Previously filed with the Company's Form S-8 Registration Statement (No. 333-32190) which became effective on March 10, 2000. (l) Previously filed with the Form 10-K, filed with the SEC on March 30, 2000. (m) Previously filed with the Form 10-Q, filed with the SEC on August 11, 2000. * Compensatory or benefit plan in which certain executive officers or Directors of The PMI Group, Inc. or its subsidiaries are eligible to participate. 58 EX-10.4 2 0002.txt AMENDMENT #2 TO PMI EQUITY INCENTIVE PLAN EXHIBIT 10.4 ------------ AMENDMENT NO. 2 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 restated the Plan effective as of August 16, 1999, and having amended the restated Plan on one subsequent occasion, hereby amends the restated Plan effective as of February 18, 1999, by deleting the phrase "Years of Benefit Accrual Service" from clause (b) of the first sentence of Section 2.31 thereof and substituting the phrase "Years of Vesting Service" therefor. IN WITNESS WHEREOF, The PMI Group, Inc., by its duly authorized officer, has executed this Amendment No. 2 to the restated Plan on the date indicated below. THE PMI GROUP, INC. By: /s/ Charles Broom Vice President, Human Resources Dated: December 12, 2000 EX-11.1 3 0003.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1 ------------ THE PMI GROUP, INC. AND SUBSIDIARIES COMPUTATION OF RESTATED NET INCOME PER SHARE (1) Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998 -------- -------- -------- (Dollars in thousands, except per share data) Basic net income per common share: Net income $260,212 $204,466 $190,360 Average common shares outstanding 44,254 44,893 47,091 -------- -------- -------- Basic net income per common share $ 5.88 $ 4.55 $ 4.04 ======== ======== ======== Diluted net income per common share: Net Income $260,212 $204,466 $190,360 -------- -------- -------- Average common shares outstanding 44,254 44,893 47,091 Net shares to be issued upon exercise of dilutive stock option after applying treasury stock method 765 351 208 -------- -------- -------- Average shares outstanding 45,019 45,244 47,299 -------- -------- -------- Diluted net income per common share $ 5.78 $ 4.52 $ 4.02 ======== ======== ========
(1) Restated to conform with Statement of Financial Accounting Standards No. 128, Earnings per Share. EX-12.1 4 0004.txt STATEMENT RE: COMPUTATION OF EARNINGS TO FIXED EXHIBIT 12.1 ------------ THE PMI GROUP, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF PROFIT TO FIXED CHARGES
Year Ended December 31, 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (Dollars in thousands) Income from continuing operations before income tax $373,866 $290,086 $266,948 $242,867 $222,106 -------- -------- -------- -------- -------- Fixed Charges: Rentals - at computed interest * $ 3,756 $ 2,760 $ 2,959 $ 2,549 $ 2,459 Interest Expense 10,210 8,554 7,029 6,766 907 Distribution on redeemable capital securities 8,309 8,311 8,311 7,617 - -------- -------- -------- -------- -------- Total fixed charges $ 22,275 $ 19,625 $ 18,299 $ 16,932 $ 3,366 ======== ======== ======== ======== ======== Profit before taxes plus fixed charges $396,141 $309,711 $285,247 $259,799 $225,472 ======== ======== ======== ======== ======== Ratio of adjusted profit to fixed charges 17.8 15.8 15.6 15.3 67.0 ======== ======== ======== ======== ========
* Those portions of rent expense that are representative of interest cost. EX-13.1 5 0005.txt SELECTED FINANCIAL DATA EXHIBIT 13.1 ------------ Item 6. Selected Financial Data ELEVEN-YEAR SUMMARY OF FINANCIAL DATA
(Dollars in thousands, except per share data Year ended December 31, or otherwise noted) - --------------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Summary of consolidated operations Net premiums written $ 639,062 $ 571,253 $ 489,100 $ 432,052 $ 403,020 $ 314,021 ================================================================================== Premiums earned $ 634,362 $ 558,623 $ 491,226 $ 453,948 $ 412,738 $ 328,756 Investment income 119,199 95,142 84,681 83,136 67,442 62,041 Net realized capital gains (losses) 432 509 24,636 19,584 14,296 11,934 Other Income 8,578 15,850 20,366 7,979 6,948 2,309 ---------------------------------------------------------------------------------- Total revenues 762,572 670,124 620,909 564,647 501,424 405,040 Total losses and expenses (1) 388,706 380,038 353,961 321,780 279,318 224,499 ---------------------------------------------------------------------------------- Income from continuing operations before taxes 373,866 290,086 266,948 242,867 222,106 180,541 Income (loss) from discontinued operations - - - - - - Income tax expense (benefit) (2) 113,654 85,620 76,588 67,558 64,188 45,310 ---------------------------------------------------------------------------------- Net Income $ 260,212 $ 204,466 $ 190,360 $ 175,309 $ 157,918 $ 135,231 ================================================================================== U.S Mortgage Insurance Operating Ratios Loss ratio 18.9% 24.7% 32.8% 38.2% 41.9% 38.5% Net expense ratio (3) 25.3% 29.2% 25.5% 22.7% 18.4% 24.9% ---------------------------------------------------------------------------------- Combined ratio 44.2% 53.9% 58.3% 60.9% 60.3% 63.4% ================================================================================== Consolidated Balance Sheet Data Total assets $ 2,392,657 $ 2,100,762 $ 1,777,870 $ 1,686,603 $ 1,509,919 $ 1,304,440 Reserve for losses and loss adjustment expenses $ 295,089 $ 282,000 $ 215,259 $ 202,387 $ 199,774 $ 192,087 Long-term debt $ 136,819 $ 145,367 $ 99,476 $ 99,409 $ 99,342 $ - Preferred capital securities of subsidiary trust $ 99,109 $ 99,075 $ 99,040 $ 99,006 $ - $ - Shareholders' equity $ 1,499,211 $ 1,217,268 $ 1,097,515 $ 1,061,180 $ 986,862 $ 870,503 Shares outstanding (4) 44,309,922 44,702,080 45,417,902 48,691,871 51,764,729 52,514,841 (Dollars in thousands, except per share data Year ended December 31, or otherwise noted) - --------------------------------------------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 - --------------------------------------------------------------------------------------------------------------------- Summary of consolidated operations Net premiums written $ 277,747 $ 291,089 $ 208,602 $ 143,305 $ 120,532 ====================================================================== Premiums earned $ 296,345 $ 268,554 $ 173,039 $ 120,195 $ 101,913 Investment income 56,774 45,733 40,847 40,402 38,261 Net realized capital gains (losses) 3,064 1,229 686 1,335 (524) Other Income 3,802 - - - - ---------------------------------------------------------------------- Total revenues 359,985 315,516 214,572 161,932 139,650 Total losses and expenses (1) 221,434 202,543 119,912 39,879 78,979 ---------------------------------------------------------------------- Income from continuing operations before taxes 138,551 112,973 94,660 122,053 60,671 Income (loss) from discontinued operations - (28,863) 6,726 3,709 1,562 Income tax expense (benefit) (2) 32,419 24,305 (10,911) 69,661 9,649 ---------------------------------------------------------------------- Net Income $ 106,132 $ 59,805 $ 112,297 $ 56,101 $ 52,584 ====================================================================== U.S Mortgage Insurance Operating Ratios Loss ratio 40.5% 41.4% 33.2% 3.1% 47.4% Net expense ratio (3) 30.1% 28.2% 27.0% 25.3% 25.5% ---------------------------------------------------------------------- Combined ratio 70.6% 69.6% 60.2% 28.4% 72.9% ====================================================================== Consolidated Balance Sheet Data Total assets $ 1,097,421 $ 985,129 $ 815,136 $ 663,215 $ 569,550 Reserve for losses and loss adjustment expenses $ 173,885 $ 135,471 $ 94,002 $ 78,045 $ 115,805 Long-term debt $ - $ - $ - $ - $ - Preferred capital securities of subsidiary trust $ - $ - $ - $ - $ - Shareholders' equity $ 687,178 $ 575,300 $ 513,583 $ 399,489 $ 338,632 Shares outstanding (4) $52,500,000 $52,500,000 $52,500,000 $52,500,000 $52,500,000
Per Share Data Net income Operating (3) $ 5.85 $ 4.51 $ 3.69 $ 3.23 $ 2.83 Basic $ 5.88 $ 4.55 $ 4.04 $ 3.50 $ 3.01 Diluted $ 5.78 $ 4.52 $ 4.02 $ 3.49 $ 3.00 Shareholders' equity $ 33.83 $ 27.23 $ 24.16 $ 21.79 $ 19.06 Price/Earnings Ratio (5) 11.7 10.8 8.9 14.9 13.0 Stock price (6) : Close 67.69 48.81 32.92 48.20 36.92 High 74.94 55.50 57.00 49.32 40.00 Low 33.50 26.67 22.00 31.83 26.58 Cash dividends declared $ 0.16 $ 0.14 $ 0.13 $ 0.13 $ 0.13 PMI Operating and Statutory Data Number of policies in force 820,213 749,985 714,210 698,831 700,084 Default rate 2.21% 2.12% 2.31% 2.38% 2.19% Persistency 80.3% 71.9% 68.0% 80.8% 83.3% Primary insurance in force (in millions) $ 96,914 $ 86,729 $ 80,682 $ 77,787 $ 77,312 Primary risk in force (in millions) $ 23,559 $ 21,159 $ 19,324 $ 18,092 $ 17,336 Statutory capital $ 1,617,519 $ 1,372,273 $ 1,193,899 $ 1,114,342 $ 988,475 Risk-to-capital ratio 14.1:1 14.8:1 14.9:1 14.6:1 15.9:1 New insurance written $27,294,908 $28,732,505 $27,820,065 $15,307,147 $17,882,702 Policies issued 206,493 219,038 211,161 119,190 142,900 New insurance written market share 16.7% 16.3% 14.8% 12.7% 14.1% Return on equity 19.9% 18.5% 19.0% 18.3% 17.8% Tax rate 30.4% 29.5% 28.7% 27.8% 28.9% Total PMI Employee 1,117 1,113 1,016 916 586 Per Share Data Net income Operating (3) $ 2.43 $ 1.98 $ 1.12 $ 2.13 $ 1.05 Basic $ 2.58 $ 2.02 $ 1.14 $ 2.14 $ 1.07 Diluted $ 2.57 $ 2.02 $ 1.14 $ 2.14 $ 1.07 Shareholders' equity $ 16.58 $ 13.09 $ 10.96 $ 9.78 $ 7.61 Price/Earnings Ratio (5) 12.5 - - - - Stock price (6) : Close 30.17 - - - - High 35.67 - - - - Low 24.00 - - - - Cash dividends declared $ 0.10 $ - $ - $ - $ - PMI Operating and Statutory Data Number of policies in force 657,800 612,806 543,924 428,745 347,232 Default rate 1.98% 1.88% 1.81% 2.03% 2.38% Persistency 86.4% 83.6% 70.0% 74.6% 85.2% Primary insurance in force (in millions) $ 71,43 $ 65,982 $ 56,991 $ 43,698 $ 31,982 Primary risk in force (in millions) $ 15,130 $ 13,243 $ 11,267 $ 8,676 $ 6,481 Statutory capital $ 824,156 $ 659,402 $ 494,621 $ 456,931 $ 372,568 Risk-to-capital ratio 15.8:1 17.7:1 20.8:1 19.0:1 18.8:1 New insurance written $14,459,260 $18,441,612 $25,469,907 $19,463,000 $8,663,000 Policies issued 119,631 156,055 207,356 161,893 75,095 New insurance written market share 13.2% 14.0% 18.6% 19.4% 15.9% Return on equity 18.1% 17.3% 11.0% 24.6% 15.2% Tax rate 25.1% 23.4% 21.5% -11.5% 57.1% Total PMI Employee 578 586 632 529 410 Per Share Data Net income Operating (3) $ 1.01 Basic $ 1.00 Diluted $ 1.00 Shareholders' equity $ 6.45 Price/Earnings Ratio (5) - Stock price (6) : Close - High - Low - Cash dividends declared $ - PMI Operating and Statutory Data Number of policies in force 313,035 Default rate 2.38% Persistency 86.5% Primary insurance in force (in millions) $ 26,938 Primary risk in force (in millions) $ 5,554 Statutory capital $ 314,037 Risk-to-capital ratio 18.6:1 New insurance written $ 5,795,000 Policies issued 49,943 New insurance written market share 14.9% Return on equity 16.8% Tax rate 15.9% Total PMI Employee 400
(1) In 1991, the Company significantly revised its estimate for losses and loss adjustment expense, reducing total losses by $42.1 million and the loss ratio by 35 percentage points, and increasing income from continuing operations by $27.8 million. (2) During 1991, the Company increased its tax liabilities and income tax expense by $40.9 million in light of an unfavorable judgment by the U.S. Tax Court. In 1992, the 1991 judgment was overturned, and the company re-evaluated its tax balances and reduced its tax liabilities and income tax expense by $30.9 million. (3) Excludes litigation settlement charges of $5.7 million pre-tax and $0.08 per share after-tax. (4) Per Share Data and shares outstanding adjusted to reflect 3-for-2 stock split. (5) Based on the closing price as of December 31, and on trailing twelve- month operating earnings. (6) Closing price as of December 31. High and low price for trailing twelve-month period. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Regarding Forward-Looking Statements A number of written and oral statements made or incorporated by reference from time to time by us or our representatives in this document, other documents filed with the Securities and Exchange Commission, press releases, conferences, or otherwise that are not historical facts, or are preceded by, followed by or that include the words "believes," "expects," "anticipates," "estimates," or similar expressions, and that relate to future plans, events or performance are "forward-looking" statements within the meaning of the federal securities laws. Forward-looking statements in this document include: . our belief that the refinancing trend may continue to increase in the first half of 2001 and cause the penetration rate to decline; . our anticipation that negotiated bulk transactions will continue to be an increasing portion of total origination volume and cause volatility in the market share of mortgage insurers, including PMI Mortgage Insurance Co., or PMI, our primary operating subsidiary; . our expectation that the persistency rate will decrease in the first half of 2001; . our expectation that non-traditional loans insured by PMI will have higher delinquency and default rates; . our expectation that the amount of GSE pool risk written will continue to decrease in 2001; . our anticipation that the continued growth of captive reinsurance arrangements will reduce PMI's net premiums written and earned over the long-term; . our anticipation that the percentage of PMI's risk related to risk-share programs will continue to increase as a percentage of total risk in 2001; and . our anticipation that contract underwriting will continue to account for a significant portion of PMI's acquisition costs. When a forward-looking statement includes a statement of the assumptions or bases underlying the forward-looking statement, we caution that, while it believes such assumptions or bases are reasonable and has made them in good faith, assumed facts or bases may 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, we or our management expresses an expectation or belief as to future results, there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. Our actual results may differ materially from those expressed in any forward-looking statements made by us. These forward-looking statements involve a number of risks or uncertainties including, but not limited to, the items addressed in the section titled "Investment Considerations" set forth below and other risks referred to from time to time in our periodic filings with the Securities and Exchange Commission. All forward-looking statements made by us are qualified by and should be read in conjunction with the Investment Considerations set forth below and in our other periodic filings with the Securities and Exchange Commission. Except as may be required by applicable law, we and our management undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. RESULTS OF CONSOLIDATED OPERATIONS: 2000 versus 1999 Our consolidated net income was $260.2 million for the year ended December 31, 2000, a 27.3% increase from 1999. The growth was due to: . an increase in premiums earned of 13.6%; . an increase in net investment income of 25.3%; and . a decrease in losses and loss adjustment expenses of 8.5%. This growth was partially offset by: . an increase in underwriting and other operating expenses of 6.6%; . an increase in interest expense of 19.4%; and . a decrease in other income of 45.9%. Diluted net income per share increased by 27.9% to $5.78. Diluted operating earnings per share, excluding realized capital gains and a one-time litigation settlement charge, increased by 29.7% to $5.85. Consolidated revenues increased by 13.8% to $762.6 million in 2000. U.S. Mortgage Insurance Operations Our primary operating subsidiary, PMI Mortgage Insurance Co., or PMI, generated approximately 78% of our consolidated revenues for the year ended December 31, 2000. During 2000, the total principal amount of mortgages newly insured by PMI, or PMI's new insurance written, decreased by 5.0% to $27.3 billion. The decrease was primarily the result of a decline in total residential mortgage origination activity and a corresponding decline in the total volume of the private mortgage insurance market, partially offset by a gain in PMI's market share. As reported by the industry's trade association, Mortgage Insurance Companies of America, the private mortgage insurance industry experienced a 13.6% decrease from 1999 in total new insurance written to $163.1 billion in 2000. According to Inside Mortgage Finance, this decrease was primarily the result of the decline in total residential mortgage originations from $1.3 trillion in 1999 to $1.1 trillion in 2000. Total mortgage originations are driven significantly by interest rate fluctuations in the residential mortgage market. As mortgage rates rose during the first half of 2000, mortgage refinancing activity decreased, while originations of mortgages with respect to home purchases increased slightly. The shift from refinancing to purchase activity generally increases the private mortgage insurance penetration rate, which is the percentage of total mortgage originations insured by the private mortgage insurance industry. During the fourth quarter of 2000, declining mortgage rates resulted in increased mortgage refinancing activity. The private mortgage insurance penetration rate increased to 15.6% in 2000 from 14.7% in 1999. We believe that the refinancing trend may continue to increase in the first half of 2001 due to the expected low interest rate environment, which could cause the penetration rate to decline. As reported by Mortgage Insurance Companies of America, the private mortgage insurance industry's market share of the total insured market increased to 58.6% from 52.4% in 1999. We believe the increase was due primarily to market expansion through secondary market bulk transactions. Secondary market bulk transactions are negotiated transactions in which we insure a large group of loans or commit to insure new loans on agree upon terms. Secondarily, we believe that this increase was due to the increase in 2000 of the maximum single-family principal balance loan limit eligible for purchase by Fannie Mae and Freddie Mac, or the GSEs, to $252,700. An increase in the GSEs' loan limit increases the number of loans eligible for mortgage insurance and the size of the mortgage insurance market. According to Inside Mortgage Finance, PMI's market share of new insurance written increased to 16.7% in 2000 from 15.0% in 1999. On a combined basis with CMG Mortgage Insurance Company, or CMG, PMI's partially owned subsidiary, PMI's market share increased to 18.1% in 2000 from 16.3% in 1999 according to Inside Mortgage Finance. We believe the increase in market share was due to risk-sharing products, which are insurance products in which a portion of the risk is shared with the insured or a party related to the insured, and negotiated secondary market bulk transactions offered by PMI. Approximately 34% of new insurance written in 2000 was subject to captive mortgage reinsurance agreements, which are reinsurance products in which a portion of the risk insured with PMI is reinsured with an affiliate of the insured. In comparison, in 1999 approximately 25% of new insurance written was subject to captive mortgage reinsurance agreements. Negotiated bulk transactions with primary mortgage insurance accounted for approximately 21% of new insurance written in 2000, compared to approximately 2% in 1999. We anticipate that negotiated secondary market bulk transactions will continue to be an increasing portion of total volume of insurance originated in the residential mortgage insurance market. We also expect that there will be volatility in the market share of individual companies, including PMI, as a result of these transactions. New insurance written was $27.3 billion in 2000 compared to $28.7 billion in 1999. PMI's new insurance written does not include primary mortgage insurance placed upon loans more than 12 months after loan origination or pool transactions. PMI's insurance in force increased by 11.7% to $96.9 billion as of December 31, 2000. Insurance in force refers to the current principal balance of all mortgage loans with primary insurance as of a given date. On a combined basis with CMG, insurance in force grew by 12.4% to $104.0 billion at the end of 2000. PMI's primary risk in force at December 31, 2000 was $23.6 billion, an 11.3% increase from 1999. Primary risk in force is the dollar amount equal to the product of each individual insured mortgage loan's current principal balance multiplied by the percentage specified in the policy of the claim amount that would be subject to payment in the event of a claim. On a combined basis with CMG, risk in force increased by 12.1% to $25.3 billion as of December 31, 2000. The growth in insurance in force and risk in force was due in part to a decrease in the cancellation of insurance and a corresponding increase in the percentage of insurance policies at the beginning of a period that remain in force at the end of the period, which is referred to as persistency. Cancellations of insurance in force decreased by 23.1% to $17.1 billion, primarily due to lower refinancing activity in 2000 than in 1999. PMI's new insurance written from refinancing activity as a percentage of total insurance written decreased to 10.1% in 2000 from 22.3% in 1999. As a result of the decrease in policy cancellations, PMI's persistency rate increased to 80.3% at December 31, 2000 compared with 71.9% at December 31, 1999. Due to the anticipated declining interest rate environment in the first half of 2001, we expect persistency to decrease during that period. Non-traditional loans, including Alternative A and less than A quality loans, accounted for approximately 19% of PMI's new insurance written in 2000. In comparison, less than 2% of new insurance written was non-traditional loans in 1999. Generally, non-traditional loans are insured through negotiated secondary market bulk transactions. Loan characteristics, credit quality, loss development, pricing structures and lower persistency related to these non- traditional loans can be significantly different than PMI's traditional primary business. We expect higher delinquencies and default rates for non-traditional loans and incorporate these assumptions into our pricing. However, insurance on non-traditional loans might not generate the same returns as the standard business and the premiums generated by this insurance might not adequately offset the associated risk. GSE pool insurance risk written was $106.0 million in 2000 compared to $230.9 million in 1999. Pool insurance is a type of mortgage insurance that covers all or a percentage of a loss on individual mortgage loans held within a group or pool of loans up to an agreed aggregate limit for the pool. We expect that the amount of GSE pool risk written will continue to decrease in 2001. GSE pool risk in force at December 31, 2000 was $785.6 million and $681.4 million at December 31, 1999. In 1995, the GSEs increased the amount of mortgage insurance coverage they required lenders to maintain and, as a result, PMI's percentage of risk in force with deeper coverage percentages increased and contributed to the growth in premiums earned. The coverage percentage is the percentage of the total amount of a loan subject to payment by mortgage insurance in the event of a claim. In 1999, the GSEs reduced the coverage percentage required for some loans approved for purchase by the GSEs' automated loan underwriting systems. In addition, the GSEs will further reduce the coverage percentage required on loans approved for purchase by their automated underwriting systems if lenders pay a delivery fee to the GSEs. We believe that the changes by the GSEs to mortgage insurance coverage requirements, if widely accepted by lenders, could materially decrease PMI's level of primary risk in force and growth of premiums written. PMI's average coverage percentage on insurance in force was 24.3% at December 31, 2000 and 24.4% at December 31, 1999. The GSEs also offer new products for which the GSEs restructure the primary insurance coverage for insured loans they purchase by reducing primary insurance coverage and adding a second layer of insurance coverage, usually in the form of pool insurance. These programs may provide for the provision of services by the GSEs to the mortgage insurer and payment of fees by the mortgage insurer to the GSEs for the reduced coverage or the services provided. Net premiums written was $498.3 million for the year ended December 31, 2000, an 8.5% increase from 1999. Net premiums written refers to the amount of premiums received during a given period, net of refunds and premiums ceded under reinsurance arrangements, including captive reinsurance arrangements. This increase was primarily due to the growth of insurance and risk in force, discussed above, offset by a one-time increase to net premiums written in the third quarter of 1999 due to a recapture agreement of an old pool reinsurance arrangement with Forestview and the increased ceded premiums written. This agreement is discussed in more detail in Note 6 "Reinsurance" of the notes to our consolidated financial statements. The old pool insurance in force was $1.39 billion as of December 31, 2000 and $1.41 billion as of December 31, 1999. Ceded premiums written increased by 13.1% to $39.9 million resulting from the increase in captive reinsurance arrangements during 2000. Refunded premiums decreased by 28.2% to $11.2 million due to the decrease in policy cancellations in 2000. We anticipate that the continued growth of captive reinsurance arrangements will reduce our net premiums written and earned over the long-term. The amount of premiums recognized as revenue for accounting purposes, or premiums earned, increased 12.6% to $503.7 million in 2000 primarily due to the increase in premiums written. Primary risk in force under risk-sharing programs with PMI's customers represented 28.3% of primary risk in force at December 31, 2000 compared to 20.2% at December 31, 1999. We anticipate that the percentage of PMI's risk in force related to risk-sharing programs will continue to increase as a percentage of total risk in force in 2001. Losses and loss adjustment expenses decreased by 13.7% to $95.3 million in 2000, primarily due to the continuing improvement of the housing market nationwide, and in particular California, and the corresponding decrease in claim payments. Loans in default increased by 13.8% from 1999 to 18,093 at December 31, 2000, primarily due to the maturation of the 1996, 1997 and 1998 books of business and to a higher level of defaults on non-traditional loans. The default rate, which is the percentage of insured loans in force that are in default at a given date, for PMI's primary insurance increased slightly to 2.21% at December 31, 2000 from 2.12% at December 31, 1999. Claims paid on direct, primary insurance decreased by 16.2% to $66.7 million, due to a 6.0% decline in the average claim size to $18,973 and a 10.8% decline in the number of claims paid to 3,518. The reduction in average claims size was due in part to a reduced percentage of claims originating from the California book of business, and strengthened loss reduction efforts by PMI and its customers. The decrease in the number of claims paid was due to the improvement of the national housing market and overall economic expansion. The default rate on PMI's California portfolio decreased to 2.26% at December 31, 2000, from 2.59% at December 31, 1999. Claims paid for the policies written in California accounted for approximately 13% of the total dollar amounts of claims paid in 2000 compared to 29% in 1999. Underwriting and other operating expenses, including amortization of policy acquisition costs and non-acquisition related operating costs, decreased to $131.7 million in 2000 from $134.3 million in 1999, due in part to an increase in costs related to non-mortgage insurance operations allocated to the holding company. Mortgage insurance policy acquisition costs incurred and deferred decreased by 14.7% to $73.3 million in 2000 primarily due to the decrease in new insurance written. Amortization of deferred policy acquisition costs decreased by 3.6% to $77.3 million primarily due to the decrease in acquisition costs. A significant portion of PMI's policy acquisition costs relates to contract underwriting. New policies processed by contract underwriters represented approximately 23% of new insurance written in 2000 compared to approximately 29% in 1999. We anticipate that contract underwriting will continue to account for a significant portion of PMI's acquisition costs. Other operating expenses increased slightly due to the litigation settlement incurred in the fourth quarter of 2000 and payroll-related expense, offset by the increased costs allocated to the holding company. The mortgage insurance loss ratio, which is the ratio of incurred losses to net premiums earned, decreased by 5.8 percentage points to 18.9% in 2000. Incurred losses are the total amount of estimated future claim payments, including a number of related expenses. The decline was attributed primarily to the decrease in losses and loss adjustment expenses coupled with the increase in premiums earned. The net expense ratio decreased by 3.9 percentage points to 25.3% in 2000, primarily due to the decrease in the amortization of deferred policy acquisition costs along with the increase in net premiums written. The net expense ratio is the ratio of underwriting and operating expenses to the net amount of premiums received during a given period. The combined ratio, which is the sum of the loss ratio and the net expense ratio, decreased by 9.7 percentage points to 44.2% in 2000. On December 15, 2000, we announced that PMI had entered into an agreement to settle the putative class action lawsuit filed against PMI in December 1999. To account for the settlement, PMI took an after-tax charge against fourth quarter 2000 earnings of $0.08 per share, which represented the cost of settlement, estimated to be between $20 million to $22 million, less anticipated insurance recovery. We can not be sure that our estimate of the amount of insurance payments that we will receive will be achieved. If we do not receive these estimated insurance payments, our financial condition and results of operations could suffer. If the Court does not approve the settlement, the litigation will continue. In that event, there can be no assurance that the final outcome of the litigation will not have a material adverse effect on the Company's financial condition. International Mortgage Insurance Operations On August 6, 1999, we acquired PMI Ltd, a mortgage insurance operation in Australia and New Zealand. Accordingly, our results of operations for 2000 are not comparable to the prior year. Effective January 1, 2000, we changed our accounting policy for international subsidiaries and affiliates to report operations on a one-month lag from our domestic operations. Therefore, the results of our foreign operations for the year ended December 31, 2000 represented eleven months of activity. In addition, the results of PMI Ltd were affected by currency fluctuation in Australian dollars in 2000. Net income for PMI Ltd was $16.4 million for the year ended December 31, 2000 compared to $6.7 million for the period from August 6 to December 31, 1999. PMI Ltd generated $36.8 million of net premiums written and $26.6 million in net premiums earned during 2000, compared to $12.1 million of net premiums written and $11.3 million in net premiums earned for the period from August 6 to December 31, 1999. Losses and loss adjustment expenses were $5.7 million in 2000 compared to $1.2 million for the period from August 6 to December 31, 1999. Underwriting and other expenses were $9.9 million in 2000 compared to $4.5 million for the period from August 6 to December 31, 1999. Financial results for the operations in Hong Kong were immaterial in 2000. In February 2001, PMI began its European operation in Dublin, Ireland. Title Insurance Operations Net income for American Pioneer Title Insurance Co., or APTIC, was $6.2 million for the year ended December 31, 2000 compared to $8.1 million in 1999. Title insurance premiums earned increased 3.9% to $104.0 million in 2000, primarily due to continued geographic expansion efforts, offset by the decrease in residential mortgage originations. APTIC is licensed in 44 states and the District of Columbia. During 2000, approximately 64% of APTIC's premiums earned was generated from the State of Florida compared with 73% in 1999. Underwriting and other expenses increased by 6.9% to $94.3 million primary due to an increase in agency fees and commissions related to the increase in premiums earned and to the costs associated with expansion efforts. The combined ratio for our title insurance operations increased by 3.6 percentage points to 92.7% in 2000. Other Our net investment income, excluding realized capital gains was $119.2 million, a 25.3% increase from 1999. This increase was primarily due to the growth in our investment portfolio of $260.9 million and an increase in equity earnings of $4.6 million to $11.6 million in 2000. Investments in affiliates increased to $131.8 million at December 31, 2000 from $91.5 million at December 31, 1999, due primarily to additional capital investments in unconsolidated subsidiaries and their earnings. The pre-tax current portfolio book yield was 5.9% in 2000 and 6.0% in 1999. Net realized capital gains decreased slightly to $0.4 million in 2000. Interest expense increased by $1.7 million to $10.2 million due to a full year of interest incurred for 2000 on the bank note issued in connection with the acquisition of PMI Ltd. Other income, which was generated primarily by PMI Mortgage Services Co., or MSC, decreased to $8.2 million in 2000 from $15.8 million in 1999, primarily due to a decrease in contract underwriting services and to an IRS tax refund in 1999. Other expenses, which were incurred by the holding company and MSC, increased by 36.5% to $33.9 million in 2000. This increase was primarily due to the increased expense allocation to the holding company related to international expansion and diversification efforts as well as increased salaries and bonuses. Our effective tax rate increased to 30.4% in 2000 from 29.5% in 1999 as a result of the increase in domestic and international underwriting operations relative to tax-exempt investment income. 1999 versus 1998 Consolidated net income was $204.5 million in 1999, a 7.4% increase over 1998. The growth was due to increases in premiums earned of 13.7% and in net investment income of 12.4% as well as a decrease in losses and loss adjustment expenses of 17.0%. This was partially offset by an increase in acquisition, underwriting and other operating expenses of 23.5% and a decrease in realized capital gains of $24.1 million. These results included the operations of PMI Ltd from the acquisition date of August 6 through December 31, 1999, which contributed $6.7 million to net income. Diluted net earnings per share increased by 12.4% to $4.52 in 1999. Excluding realized capital gains, diluted operating earnings per share increased by 22.2% to $4.51. Consolidated revenues in 1999 increased by 7.9% to $670.1 million. U.S. Mortgage Insurance Operations PMI generated over 90% of our consolidated net income, which was derived from mortgage guaranty insurance written in the United States. During 1999, PMI's new insurance written increased by 1.7% to $28.3 billion primarily as a result of the growth in volume of the private mortgage insurance industry and the increase in PMI's market share. During 1999, PMI wrote an additional $0.5 billion of seasoned insurance, or mortgages insured over one year after the closing date, not included in new insurance written. The private mortgage insurance industry, as reported by the industry's trade association, Mortgage Insurance Companies of America, experienced an increase in total new insurance written of 0.8% to a new record level of $188.9 billion. This increase was the result of the second highest year of total residential mortgage originations, estimated by Inside Mortgage Finance, at $1.3 trillion compared with $1.5 trillion in 1998. Total mortgage originations were driven primarily by continued low interest rates in the first half of the year. During the second half of the year, interest rates began to rise, which decreased refinance activity and increased the percentage of originations relating to home purchases. This shift from refinance activity to purchase money generally increases the percent of total mortgage originations insured by private mortgage insurance. This percentage increased to 14.7% in 1999 from 12.4% in 1998. The increase in new insurance written was partially offset by the decline in the private mortgage insurance companies' market share to 52.4% of loans with low down payments from 56.3% in 1998. We believe the decrease resulted in part from the increase in the maximum individual loan amount the FHA can insure. PMI's market share of new insurance written increased to 15.0% in 1999 from 14.8% in 1998 according to Inside Mortgage Finance. On a combined basis with CMG, PMI's market share increased to 16.3% in 1999 compared with 16.1% in 1998. The increases in market share were primarily due to the acceptance by its customers of PMI's value added, risk sharing and GSE pool products. GSE pool risk in force totaled $681.4 million as of December 31, 1999 and $450.0 million as of December 31, 1998. Primary risk in force under risk-sharing programs with PMI's customers, excluding pool insurance, represented 20.2% of PMI's total risk in force at December 31, 1999, compared with 10.2% at December 31, 1998. PMI's cancellations of insurance in force decreased by 10.8% to $22.2 billion in 1999 primarily due to a decrease in refinancing activity that resulted from the increase in interest rates during the second half of the year. As a result of the decrease in policy cancellations, PMI's persistency rate increased to 71.9% as of December 31, 1999, compared with 68.0% as of December 31, 1998. Insurance in force increased by 7.4% to $86.7 billion at December 31, 1999. On a combined basis with CMG, PMI's insurance in force grew by 9.0% to $92.5 billion at December 31, 1999. PMI's market share of combined insurance in force increased by 0.2 percentage points to 15.5% according to Inside Mortgage Finance. PMI's risk in force increased by 9.5% and, when combined with CMG, grew by 10.8% to $22.6 billion. The growth rate of PMI's risk in force was greater than that of its insurance in force as a number of terminating policies were replaced by new policies with higher coverage percentages. Mortgage insurance net premiums written grew by 12.0% to $459.1 million in 1999. This increase was primarily due to the growth of risk in force of both primary and pool insurance and the continued shift to deeper coverage percentages for primary insurance, the increase in the persistency rate and to the recapture agreement of the old pool business reinsured by Forestview Mortgage Insurance Company. The Forestview old pool risk in force was $1.4 billion at December 31, 1999. Refunded premiums decreased by 28.8% to $15.6 million as a result of the decrease in policy cancellations. Ceded premiums written increased by 32.5% to $22.3 million due to the increasing popularity and usage of captive reinsurance arrangements. Approximately 25% of new insurance written in 1999 was subject to captive mortgage reinsurance agreements. Mortgage insurance premiums earned increased 8.6% to $447.2 million in 1999 primarily due to the increase in premiums written, partially offset by an increase in unearned premiums related to Forestview. The percentage of PMI's insurance in force with deeper coverage percentages continued to increase despite new product offerings by Fannie Mae and Freddie Mac. Mortgages with ratios of the original loan amount to the value of the property, referred to as loan-to-value ratios, greater than 95% and equal to or less than 97% with 35% insurance coverage increased to 4.5% of risk in force as of December 31, 1999, from 2.9% as of December 31, 1998. Mortgages with original loan-to-value ratios greater than 90% and equal to or less than 95% with 30% insurance coverage increased to 37.6% of risk in force as of December 31, 1999, from 34.4% as of December 31, 1998. Mortgages with original loan-to-value ratios greater than 85% and equal to or less than 90% with 25% insurance coverage increased to 31.8% of risk in force as of December 31, 1999, compared with 29.2% as of December 31, 1998. Mortgage insurance losses and loss adjustment expenses decreased 18.2% to $110.5 million in 1999 primarily due to the continuing improvement of the nationwide housing markets, particularly California, and the corresponding decrease in claim payments. Loans in default decreased by 3.8% to 15,893 at December 31, 1999. PMI's national default rate decreased by 0.19 percentage points to 2.12% at December 31, 1999, primarily due to an increase in policies in force, along with the decrease in loans in default. Direct primary claims paid decreased by 32.8% to $79.6 million due to a 13.3% decrease in the average claim size to approximately $20,200 and a 22.3% decline in the number of claims paid to 3,945 in 1999. The reduction in average claims 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. The decrease in the number of claims paid was due to the improvement in nationwide housing markets and the overall national economic expansion. The default rate on PMI's California portfolio decreased to 2.59%, representing 2,382 loans in default, at December 31, 1999, from 3.15%, representing 3,067 loans in default, at December 31, 1998. Policies written in California accounted for approximately 29% of the total dollar amount of claims paid in 1999 compared to 48.2% in 1998. Mortgage insurance policy acquisition costs incurred and deferred increased by 2.3% to $85.9 million in 1999 primarily as a result of the 3.3% increase in new insurance written. Amortization of policy acquisition costs increased 33.2% to $80.3 million primarily due to 1998 and 1999 deferrals. See Note 2 of the notes to our consolidated financial statements for a description of these deferrals. A significant portion of policy acquisition costs relates to contract underwriting. New policies processed by contract underwriters represented 28.8% of PMI's new insurance written in 1999 compared with 35.0% in 1998. Underwriting and other mortgage insurance operating expenses increased by 21.9% to $54.0 million in 1999 due primarily to an increase in the amortization of obsolete computer equipment and operating systems associated with remediation efforts associated with computer hardware and software relating to the processing of date information after January 1, 2000, and secondarily to increases in payroll and related costs. The mortgage insurance loss ratio declined by 8.1 percentage points to 24.7% in 1999. The decrease was attributed to the growth in premiums earned coupled with the decrease in losses and loss adjustment expenses. The expense ratio increased by 3.7 percentage points to 29.2% primarily due to the increase in the amortization of policy acquisition costs and the increase in underwriting and other mortgage insurance expenses, partially offset by the increase in net premiums written. In addition, the increase in premiums ceded in connection with captive reinsurance arrangements contributed to the increase in the expense ratio. The combined ratio decreased by 4.4 percentage points to 53.9% in 1999. International Mortgage Insurance Operations During 1999, we commenced operations in Australia and Hong Kong. Our Australian affiliate, PMI Ltd, was acquired on August 6, 1999. For the period beginning August 6, 1999 through December 31, 1999, PMI Ltd generated $12.1 million of net premiums written and $11.3 million in net premiums earned. Since the acquisition, PMI Ltd.'s mortgage insurance loss expenses were $1.2 million and its underwriting and other expenses were $4.5 million. Financial results for the operations in Hong Kong were immaterial during 1999. Title Insurance Operations Title insurance premiums earned increased 26.2% to $100.1 million in 1999 primarily due to APTIC's expansion into new states. APTIC was licensed in 41 states at December 31, 1999. In 1999, 72.9% of APTIC's premiums earned came from its Florida operations, compared with 77.3% in 1998. APTIC's underwriting and other expenses increased 27.6% to $88.2 million because of an increase in agency fees and commissions related to the increase in premiums earned in 1999, the title insurance combined ratio increased by 1.2 percentage points to 89.1%. Other In 1999, our consolidated net investment income, excluding realized capital gains, increased by $10.4 million to $95.1 million. This increase was primarily due to an increase in the investment portfolio of approximately $250 million, including $160.9 million as a result of the acquisition of PMI Ltd, and secondarily to an increase in equity earnings of $3.8 million. Investments in affiliates increased to $91.5 million at year-end 1999 from $60.5 million at year-end 1998. The average book yield of the investment portfolio decreased from 6.1% in 1998 to 5.9% in 1999 due to a higher percentage of the portfolio invested in tax-free municipal bonds. Realized capital gains decreased by $24.1 million to $0.5 million in 1999 due to the restructuring of the investment portfolio in 1998. Other income, primarily contract underwriting revenues generated by MSC, decreased by 22.1% to $15.9 million in 1999. Contract underwriting revenues decreased by 39.6% as a result of the decrease in refinance activity in the second half of 1999. Operating expenses incurred by MSC decreased by 35.6% to $18.3 million as a result of the decrease in refinance activity in the second half of 1999. Our effective tax rate increased to 29.5% in 1999 from 28.7% in 1998 as a result of a decrease in the proportion of tax-exempt investment income relative to total income. Liquidity, Capital Resources and Financial Condition Liquidity and capital resource considerations are different for us than they are for PMI. Our 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 us is affected by state insurance laws, our credit agreements, credit rating agencies and the discretion of insurance regulatory authorities. Arizona law provides that PMI may pay out of any available surplus account without prior approval of the Director of the Arizona Department of Insurance dividends during any 12-month period not to exceed the lesser of 10% of policyholders' surplus as of the preceding year end, or the last calendar year's investment income. Other state insurance laws restrict the payment of dividends from the unassigned surplus account only. In July 2000, the Arizona Department of Insurance approved a return of capital of $50.0 million from PMI to us, which was paid by PMI in the second half of 2000. The laws of Florida limit the payment of dividends by APTIC to us in any one year to 10% of available and accumulated surplus derived from realized net operating profits and net realized capital gains. As with PMI, the various credit rating agencies and insurance regulatory authorities have broad discretion to affect the payment of dividends to us by APTIC. During 2000, APTIC declared and paid a cash dividend of $3.0 million to us, substantially the full amount of a dividend that can be paid by APTIC in 2000 without prior permission from the Florida Department of Insurance. Included in our long-term debt is a $37.2 million (A$70.5 million) bank note issued in connection with our acquisition of PMI Ltd. The note provides that . our consolidated net worth shall not be less than $600 million; . PMI's statutory capital shall not be less than $675 million; . PMI's risk to capital ratio shall not exceed 23 to 1; and . our consolidated debt to capital ratio shall not exceed 0.40 to 1.0. Failure to maintain these financial covenants or debt restrictions may be deemed an event of default. On November 15, 1996, we issued $100 million in principal amount of our 6 3/4% senior notes maturing on November 15, 2006. In addition, we have a bank credit line in the amount of $25.0 million with Bank of America. As of December 31, 2000, there were no outstanding borrowings under the credit line. The credit line and the bank note issued in connection with our acquisition of PMI Ltd contain cross-default provisions, which provide for the acceleration and payment of all outstanding amounts in the event of default under any of our indebtedness of more than $10 million. A separate credit agreement with Chase Manhattan Bank expired on February 1, 2001, and there were no outstanding borrowings under that credit agreement at any time. Our holding company'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. In November 1998, we announced a stock repurchase program in the amount of $100.0 million authorized by our board of directors. During 2000, we purchased $24.0 million of our common stock. As of December 31, 2000, $45.4 million remained available under the 1998 authorization. We had $108.3 million of available funds at December 31, 2000, which has increased from the December 31, 1999 balance of $92.7 million, primarily due to a return of capital of $50.0 million from PMI, a dividend payment of $3.0 million from ATPIC and investment income. These increases were partially offset by the common stock repurchases of $24.0 million, dividends to shareholders and interest payments on our long-term debt. As of December 31, 2000, our invested assets increased by $260.9 million as a result of positive cash flows from consolidated operations. Consolidated reserves for losses and loss adjustment expenses increased by 4.6% in 2000 to $295.1 million, primarily due to the increases in the reserve balances for the primary and GSE pool insurance books of business, partially offset by a decrease in the old pool reserve balance in connection with the recapture agreement with Forestview. Consolidated shareholders' equity increased by $281.9 million in 2000. The increase resulted from $260.2 million of net income, $1.9 million of proceeds from stock grants, and $42.3 million of other comprehensive income net of unrealized gains on investments. These increases were partially offset by net purchases of our common stock and stock option activity of $15.4 million, and dividends declared of $7.1 million. The principal sources of funds for PMI are premiums received on new and renewal business and amounts earned from its investment portfolio. The principal uses of funds by PMI are policy acquisition costs, payment of claims and related expenses, other operating expenses, investment in subsidiaries, and dividends to us. Cash flows generated from PMI's operating activities decreased to $190.9 million in 2000 from $237.3 million in 1999, due primarily to the funds received in 1999 related to the reinsurance recapture agreement with Forestview. PMI has entered into capital support agreements with its European and Australian subsidiaries that could require PMI to make additional capital contributions to those subsidiaries in order to maintain their credit ratings. With respect to the European subsidiary, we have guaranteed PMI's capital support obligations. PMI's ratio of net risk in force to statutory capital, or statutory risk-to- capital ratio, at December 31, 2000 was 14.1 to 1 compared to 14.8 to 1 at December 31, 1999. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Our borrowings under credit facilities are subject to interest rates that are variable. As of December 31, 2000, the effective duration of our investment portfolio was 4.9 years. The result of a 100 basis points increase in interest rates would be a 5.8% decrease in the value of our investment portfolio, while the result of a 100 basis points decrease in interest rates would be a 4.5% increase in the value of our investment portfolio. $37.2 million of our long- term debt and $162.1 million of our invested assets are held by PMI Ltd and are denominated in Australian dollars, which has experienced significant devaluation during 2000. INVESTMENT CONSIDERATIONS General economic factors may adversely affect our loss experience and the demand for mortgage insurance. Losses result from events, such as unemployment, that reduce a borrower's ability to continue to make mortgage payments. The amount of the loss, if any, depends in part on whether the home of a borrower who defaults on a mortgage can be sold for an amount that will cover unpaid principal and interest and the expenses of the sale. Favorable economic conditions generally reduce the likelihood that borrowers will lack sufficient income to pay their mortgages and also favorably affect the value of homes, reducing and in some cases even eliminating a loss from a mortgage default. We believe that our loss experience could materially increase as a result of: . national or regional economic recessions; . declining values of homes; . higher unemployment rates; . deteriorating borrower credit; . interest rate volatility; . shortages of electric power in California or other states; or . combinations of these factors. These factors could also materially reduce the demand for housing and, consequently, the demand for mortgage insurance. If interest rates decline, home values increase or mortgage insurance cancellation requirements change, the length of time that our policies remain in force and our revenues could decline. A significant percentage of the premiums we earn each year are generated from insurance policies that we have written in previous years. As a result, the length of time insurance remains in force is an important determinant of our revenues. The policy owner or servicer of the loan may cancel insurance coverage at any time. In addition, the Home Owners Protection Act of 1998 provides for the automatic termination or cancellation of mortgage insurance upon a borrower's request if specified conditions are satisfied. Factors that tend to reduce the length of time our insurance remains in force include: . current mortgage interest rates falling below the rates on the mortgages underlying our insurance in force, which frequently results in borrowers refinancing their mortgages and canceling their existing mortgage insurance; . the rate of appreciation in home values experienced by the homes underlying the mortgages of the insurance in force, which can result in the cancellation of mortgage insurance; and . changes in the mortgage insurance cancellation policies of mortgage lenders and investors. Although we have a history of expanding our business during periods of low interest rates, the resulting increase of new insurance written may not be adequate to compensate us for our loss of insurance in force arising from policy cancellations. If the volume of low down payment home mortgage originations declines, the amount of insurance that we write could also decline, which could result in a decline in our future revenue. The factors that affect the volume of low down payment mortgage originations include: . the level of home mortgage interest rates; . the health of the domestic economy as well as conditions in regional and local economies; . housing affordability; . population trends, including the rate of household formation; . the rate of home price appreciation, which in times of heavy refinancing affects whether refinance loans have loan-to-value ratios that require private mortgage insurance; and . government housing policy encouraging loans to first-time homebuyers. We cannot cancel mortgage insurance policies or adjust renewal premiums to protect from unanticipated claims, which could harm our financial performance. We cannot cancel the mortgage insurance coverage that we provide. In addition, we generally establish renewal premium rates for the life of the mortgage insurance policy when the policy is issued. As a result, the impact of unanticipated claims generally cannot be offset by premium increases on policies in force or limited by nonrenewal of insurance coverage. The premiums we charge may not be adequate to compensate us for the risks and costs associated with the insurance coverage provided to our customers. Because we compete with private mortgage insurers, governmental agencies and others in an industry that is highly competitive, our revenues and profits could decline substantially as we respond to competition or if we lose market share. The principal sources of our direct and indirect competition include: . other private mortgage insurers, some of which are subsidiaries of well capitalized, diversified public companies with direct or indirect capital reserves that provide them with potentially greater resources than we have; . federal and state governmental and quasi-governmental agencies, principally the Federal Housing Administration and to a lesser degree the Veterans Administration; . mortgage lenders that choose not to insure against borrower default, self- insure through affiliates, or offer residential mortgage products that do not require mortgage insurance; and . captive reinsurance subsidiaries of national banks, savings institutions and bank holding companies and other mortgage lenders. If mortgage lenders and investors select alternatives to private mortgage insurance, the amount of insurance that we write could decline significantly, which could reduce our revenues and profits. Alternatives to private mortgage insurance include: . government mortgage insurance programs, including those of the Federal Housing Administration and the Veterans Administration; . investors holding mortgages in their portfolios and self-insuring; . investors using credit enhancements other than private mortgage insurance or using other credit enhancements in conjunction with reduced levels of private mortgage insurance coverage; and . mortgage lenders structuring mortgage originations to avoid private mortgage insurance, such as a first mortgage with an 80% loan-to-value ratio and a second mortgage with a 10% loan-to-value ratio, which is referred to as an 80-10-10 loan, rather than a first mortgage with a 90% loan- to-value ratio. In October 1999, the Federal Housing Finance Board authorized each Federal Home Loan Bank to offer programs to purchase single-family conforming mortgage loans originated by participating member institutions under the single-family member mortgage assets program. In July 2000, the Federal Housing Finance Board gave permanent authority to each Federal Home Loan Bank to purchase these loans from member institutions without any volume cap. Under the Board's rules, member institutions are also authorized to provide credit enhancement for eligible loans. Any expansion of the Federal Home Loan Banks' ability to use alternatives to mortgage insurance could reduce the demand for private mortgage insurance and harm our financial condition and results of operations. Legislation and regulatory changes may reduce demand for private mortgage insurance, which could harm our business. Increases in the maximum loan amount that the Federal Housing Authority, or FHA, can insure can reduce the demand for private mortgage insurance. Effective January 1, 2001, the maximum individual loan amount that the FHA can insure was increased to $239,250. In addition, the FHA has streamlined its down-payment formula and made FHA insurance more competitive with private mortgage insurance in areas with higher home prices. As of January 1, 2001, the FHA reduced the up-front mortgage insurance premiums it charges on loans from 2.25% to 1.5% of the original loan amounts. These and other legislative and regulatory changes have caused, and may cause in the future, demand for private mortgage insurance to decrease and this could harm our financial condition and results of operations. As a result of the enactment of The Gramm-Leach-Bliley Act, we expect to experience increased competition from mortgage insurance companies owned by large, well capitalized financial services companies, which could significantly harm our business. The Gramm-Leach-Bliley Act allows bank holding companies to engage in a substantially broader range of activities, including insurance underwriting, than those companies could previously engage in and allows insurers and other financial service companies to acquire banks. Bank holding companies are now permitted to form insurance subsidiaries that issue insurance products, including mortgage insurance, directly to consumers. We expect that, over time, consumers will have the ability to shop for their insurance, banking and investment needs at one financial services company. We believe that this new law may lead to increased competition in the mortgage insurance industry by facilitating the development of new savings and investment products, resulting in mortgage lenders offering mortgage insurance directly to home borrowers rather than through captive reinsurance arrangements with us and encouraging large, well-capitalized financial service companies to enter the mortgage insurance business. We depend on a small number of customers and our business and financial performance could suffer if we were to lose the business of a major mortgage lender. We are dependent on a small number of customers. Our top ten customers were responsible for 40% of our new insurance written as of December 31, 2000. The concentration of business with our customers may increase as a result of mergers or other factors. These customers may reduce the amount of business currently given to us or cease doing business with us altogether. Our master policies and related lender agreements do not, and by law cannot, require our lenders to do business with us. The loss of business from any major customer could seriously harm our business and results of operations. We acquire a significant percentage of our new business through secondary market "bulk" transactions with a limited number of investors. Our business could be harmed if these investors substitute other types of credit enhancement for private mortgage insurance. We could lose premium revenue if Fannie Mae or Freddie Mac continue to reduce the level of private mortgage insurance coverage required for low down payment mortgages. Fannie Mae and Freddie Mac offer programs that require less mortgage insurance coverage on mortgages approved by their automated underwriting systems. Fannie Mae and Freddie Mac might further reduce coverage requirements. If the reduction in required levels of mortgage insurance becomes widely accepted by mortgage lenders, we would lose premium revenue and our financial condition and results of operations could suffer. New products introduced by Fannie Mae or Freddie Mac could cause us to lose premium revenue if those products are successful. Fannie Mae and Freddie Mac have separately introduced new products pursuant to which they will, upon receipt from lenders of loans with primary mortgage insurance, restructure the mortgage insurance coverage with reduced amounts of primary coverage, usually deeper pool coverage, and, in some instances, payment of fees to Fannie Mae or Freddie Mac. If these products prove to be less profitable than PMI's traditional mortgage insurance business, and become widely accepted, they could have a material adverse effect upon the Company's financial condition. If Fannie Mae and Freddie Mac give mortgage lenders an incentive, such as a reduced guarantee fee, to select a mortgage insurer that has a claims-paying ability rating of "AAA," our business would be materially harmed unless we are successful in obtaining a "AAA" rating. In 1999 the Office of Federal Housing Enterprise Oversight announced proposed risk-based capital regulations that would treat credit enhancements issued by private mortgage insurance companies with claims-paying ability ratings of "AAA" more favorably than those issued by companies with lower ratings. The Office of Federal Housing Enterprise Oversight expects to publish final regulations in the first half of 2001. We do not have a "AAA" rating. If the proposed capital rules are adopted in a form that gives greater capital credit to private mortgage insurers with "AAA" ratings, we may need to obtain a "AAA." To obtain a claims-paying ability rating of "AAA" we would need to dedicate significant capital to the mortgage insurance business that we might use in other ways and we would also have additional costs that we would not otherwise incur. Changes in the preferences of Fannie Mae and Freddie Mac for private mortgage insurance to other forms of credit enhancement, or a tiering of mortgage insurers based on their credit rating, could harm our financial condition and results of operations. Efforts by Fannie Mae and Freddie Mac to reduce the need for private mortgage insurance could reduce our revenues. Freddie Mac has made several announcements that it would pursue a permanent charter amendment that would allow it to utilize alternative forms of default loss protection or otherwise forego the use of private mortgage insurance on higher loan-to-value mortgages. In October 2000, Fannie Mae announced its intention to increase its share of revenue associated with the management of mortgage credit risk and interest rate risk during the next three years by retaining mortgage credit risk previously borne by its "risk-sharing partners," including mortgage insurers. Part of any attempt by Fannie Mae to increase its share of revenue associated with mortgage credit risk could include a reduction in the use or level of mortgage insurance, which could reduce our revenue. Lobbying activities by large mortgage lenders calling for expanded federal oversight and legislation relating to the role of Fannie Mae and Freddie Mac in the secondary mortgage market could damage our relationships with those mortgage lenders, Fannie Mae and Freddie Mac. Together with Fannie Mae, Freddie Mac and mortgage lenders, we jointly develop and make available various products and programs. These arrangements involve the purchase of our mortgage insurance products and frequently feature cooperative arrangements between the three parties. In 1999, a coalition of financial services and housing related trade associations, including the Mortgage Insurance Companies of America and several large mortgage lenders, formed FM Watch, a lobbying organization that supports expanded federal oversight and legislation relating to the role of Fannie Mae and Freddie Mac in the secondary mortgage market. Fannie Mae and Freddie Mac have criticized, and lobbied against, FM Watch. These lobbying activities could, among other things, polarize Fannie Mae, Freddie Mac and members of FM Watch as well as our customers and us. As a result of this polarization, our relationships with Fannie Mae and Freddie Mac may limit our opportunities to do business with some mortgage lenders, particularly the large mortgage lenders that have formed FM Watch. Conversely, our relationships with these large mortgage lenders may limit our ability to do business with Fannie Mae and Freddie Mac. Either of these outcomes could seriously harm our financial condition and results of operations. If we are unable to introduce and successfully market new products and programs, our competitive position could suffer. From time to time we introduce new mortgage insurance products or programs. Our competitive position and financial performance could suffer if we experience delays in introducing competitive new products and programs or if these products or programs are less profitable than our existing products and programs. Mortgage lenders increasingly require us to reinsure a portion of the mortgage insurance default risk on mortgages that they originate with their captive mortgage reinsurance companies, which will reduce our net premiums written. Our customers have indicated an increasing demand for captive mortgage reinsurance arrangements. Under these arrangements, a reinsurance company, which is usually an affiliate of the mortgage lender, assumes a portion of the mortgage insurance default risk on mortgage loans originated by the lender in exchange for a portion of the insurance premiums. An increasing percentage of our new insurance written is being generated by customers with captive reinsurance companies, and we expect that this trend will continue. An increase in captive mortgage reinsurance arrangements will decrease our net premiums written which may negatively impact the yield that we obtain on net premiums earned for customers with captive mortgage reinsurance arrangements. If we do not provide our customers with acceptable risk-sharing structured transactions, including potentially increasing levels of premium cessions in captive mortgage reinsurance arrangements, our competitive position may suffer. Our risk in force consists of mortgage loans with high loan-to-value ratios, which generally result in more claims than mortgage loans with lower loan-to- value ratios. At December 31, 2000: . 46% of our risk in force consisted of mortgages with loan-to-value ratios greater than 90% but less than or equal to 95%, which we refer to as "95s". In our experience 95s have claims frequency rates approximately twice that of mortgages with loan-to-value ratios greater than 85% but less than or equal to 90%, which we refer to as "90s." . 6% of our risk in force consisted of mortgages with loan-to-value ratios greater than 95% but less than or equal to 97%, which we refer to as "97s". In our experience 97s have higher claims frequency rates than 95s and greater uncertainty as to pricing adequacy. . 0.1% of our risk in force consisted of mortgages with loan-to-value ratios greater than 97%, which in our experience have claims frequency rates higher than 97s. . 9% of our risk in force consisted of adjustable rate mortgages, which we refer to as "ARMs." In our experience ARMs, although priced higher, have claims frequency rates that exceed the rates associated with our book of business as a whole. The premiums we charge for mortgage insurance on non-traditional loans, and the associated investment income, may not be adequate to compensate us for future losses from these products. Our new insurance written in 2000 includes non-traditional, Alternative A and less than A loans, which we refer to as "non-traditional loans." Non-traditional loans represented approximately 19% of our total new insurance written in 2000. Loan characteristics, credit quality, loss development, pricing structures and persistency on non-traditional loans can be significantly different than our traditional prime business. In addition, non-traditional loans generally do not meet the standard underwriting guidelines of Fannie Mae and Freddie Mac. We expect higher delinquency rates and default rates for non-traditional loans. We cannot be assured that this book of business will generate the same returns as our standard business or that the premiums that we charge on non-traditional loans will adequately offset the associated risk. Paying a significant number of claims under the pool insurance we write could harm our financial performance. We offer pool insurance that is generally used as an additional credit enhancement for secondary market mortgage transactions. Pool insurance provides coverage for non-conforming loans, and is generally considered riskier than primary insurance. Under primary insurance, an insurer's exposure is limited to a specified percentage of any unpaid principal, delinquent interest and related expenses on an individual loan. Under traditional pool insurance, there is an aggregate exposure limit -- a "stop loss" -- on a pool of loans, which is generally a percentage of the initial aggregate loan balance of the entire pool of loans. Under our pool insurance, we could be required to pay the full amount of every loan in the pool that is in default and upon which a claim is made until the stop loss is reached, rather than a percentage of that amount. The premiums that we charge for these policies may not adequately compensate us if we experience higher delinquency and default rates than we anticipate at the time we set the premiums for the policies. If we are required to pay a significant number of claims under our pool insurance, then our financial condition and results of operations could be seriously harmed. The concentration of insurance in force in relatively few states could increase claims and losses and harm our financial performance. In addition to being affected by nationwide economic conditions, we could be particularly affected by economic downturns in specific regions of the United States where a large portion of our business is concentrated. As of December 31, 2000: . 15% of our total risk in force was on mortgages for homes located in California, where the default rate on our policies was 2.26% in 2000; . 8% of our total risk in force was on mortgages for homes located in Florida, where the default rate on our policies was 2.91% in 2000; and . 7% of our total risk in force was on mortgages for homes located in Texas, where the default rate on our policies was 2.13% in 2000. This compares with a nationwide default rate on our policies of 2.21% in 2000. Continued and prolonged adverse economic conditions in any of these states could result in high levels of claims and losses. In addition, refinancing of mortgage loans can have the effect of concentrating our insurance in force in economically weaker areas, because mortgages in areas experiencing appreciation of home values are less likely to require mortgage insurance at the time of refinancing than are mortgages in areas experiencing limited or no appreciation of home values. We delegate underwriting authority to mortgage lenders that may cause us to insure unacceptably risky mortgage loans, which could increase claims and losses. The majority of our new insurance written is underwritten pursuant to a delegated underwriting program. Once a mortgage lender is accepted into our delegated underwriting program, that mortgage lender may determine whether mortgage loans meet our program guidelines and may commit us to issue mortgage insurance. We expect to continue offering delegated underwriting to approved lenders and may expand the availability of delegated underwriting to additional customers. If an approved lender commits us to insure a mortgage loan, we may not refuse to insure, or rescind coverage on, that loan even if we reevaluate that loan's risk profile or the lender failed to follow our delegated underwriting guidelines, except in very limited circumstances. In addition, our ability to take action against an approved lender that fails to follow our program guidelines and requirements is limited by access to data that would be needed to assess the lender's compliance with those guidelines and requirements. Therefore, an approved lender could cause us to insure a material amount of mortgage loans with unacceptable risk profiles prior to our termination of the lender's delegated underwriting authority. We expect our loss experience to increase significantly as our policies continue to age. The majority of claims under private mortgage insurance policies have historically occurred during the third through the sixth years after issuance of the policies. As of December 31, 2000, approximately 72% of our risk in force was written after December 31, 1997. This means that less than half of our risk in force has reached the beginning of the expected peak claims period. As a result, our loss experience is expected to increase significantly as our policies continue to age. If the claim frequency on our risk in force significantly exceeds the claim frequency that was assumed in setting our premium rates, our financial condition and results of operations and cash flows would be seriously harmed. Our loss reserves may be insufficient to cover claims paid and loss-related expenses incurred. We establish loss reserves to recognize the liability for unpaid losses related to insurance in force on mortgages that are in default. These loss reserves are based upon our estimates of the claim rate and average claim amounts, as well as the estimated costs, including legal and other fees, of settling claims. These estimates are regularly reviewed and updated using currently available information. Any adjustments, which may be material, resulting from these reviews are reflected in our then current consolidated results of operations. Our reserves may not be adequate to cover ultimate loss development on incurred defaults. Our financial condition and results of operations could be seriously harmed if our reserve estimates are insufficient to cover the actual related claims paid and loss-related expenses incurred. If we fail to properly underwrite mortgage loans under our contract underwriting services, we may be required to assume the cost of repurchasing those loans. We provide contract underwriting services for a fee. These services help enable our customers to improve the efficiency and quality of their operations by outsourcing all or part of their mortgage loan underwriting to us. As part of our contract underwriting services, we generally provide remedies to our customers in the event that our underwriters fail to properly underwrite the mortgage loans. These remedies may include the assumption of the cost of repurchasing loans that are not properly underwritten, a remedy not available under our master primary insurance policies. Worsening economic conditions could cause us to increase the number and severity of the remedies that we offer, which could harm our financial condition. Due to the demand of contract underwriting services, limitations on the number of available underwriting personnel, and heavy price competition among mortgage insurance companies, our inability to recruit and maintain a sufficient number of qualified underwriters or any significant increase in the cost we incur to satisfy our underwriting services obligations could harm our financial condition and results of operations. If our claims-paying ability is downgraded, then mortgage lenders and the mortgage securitization market may not purchase mortgages or mortgage-backed securities insured by us, which could materially harm our financial performance. The claims-paying ability of PMI Mortgage Insurance Co., our largest wholly owned subsidiary, which we refer to as "PMI", is currently rated "AA+" (Excellent) by Standard and Poor's Rating Services, "Aa2" (Excellent) by Moody's Investors Service, Inc., and "AA+" (Very Strong) by Fitch IBCA. These ratings may be revised or withdrawn at any time by one or more of the rating agencies. These ratings are based on factors relevant to PMI's policyholders and are not applicable to our common stock or outstanding debt. Adverse developments in PMI's financial condition or results of operations, whether by virtue of underwriting or investment losses, the necessity to make capital contributions to our subsidiaries pursuant to capital support agreements, changes in the views of rating agencies, or other factors, could cause the rating agencies to lower or withdraw their ratings. If PMI's claims-paying ability rating falls below "AA-" from Standard and Poor's or "[Aa3]" from Moody's, then investors, including Fannie Mae and Freddie Mac, will not purchase mortgages insured by us, which would have a material and adverse effect on our financial condition and results of operations. Our ongoing ability to pay dividends to our stockholders and meet our obligations primarily depends upon the receipt of dividends and returns of capital from our insurance subsidiaries and our investment income. Our principal sources of funds are dividends from our subsidiaries, investment income and funds that may be raised from time to time in the capital markets. Factors that may affect our ability to maintain and meet our capital and liquidity needs include: . the level and severity of claims experienced by our insurance subsidiaries; . the performance of the financial markets; . standards and factors used by various credit rating agencies; . financial covenants in our credit agreements; and . standards imposed by state insurance regulators relating to the payment of dividends by insurance companies. Any significant change in these factors could adversely affect our ability to maintain capital resources to meet our business needs. Regulatory authorities in Illinois and New York are considering whether our business has been conducted in compliance with applicable state law. On January 31, 2000, the Illinois Department of Insurance issued a letter addressed to all mortgage guaranty insurers licensed in Illinois. The letter states that it may be a violation of Illinois law for mortgage insurers to offer to Illinois mortgage lenders the opportunity to purchase certain notes issued by a mortgage insurer or an affiliate, or to participate in loan guaranty programs. The letter also states that a violation might occur if mortgage insurers offer lenders coverage on pools of mortgage loans at a discounted or below market premium in return for the lenders' referral of primary mortgage insurance business. In addition, the letter stated that, to the extent a performance guaranty actually transfers risk to the lender in return for a fee, the lender may be deemed to be doing an insurance business in Illinois without authorization. The letter announced that any mortgage guaranty insurer that is participating in the described or similar programs in the State of Illinois should cease such participation or, alternatively, provide the Department with a description of any similar programs, giving the reason why the provisions of Illinois are not applicable or not violated. If the Illinois Department of Insurance were to determine that we were not in compliance with Illinois law, our financial condition and results of operations could suffer. In February 1999, the New York Department of Insurance stated in Circular Letter No. 2, addressed to all private mortgage insurers licensed in New York, that certain pool, risk-share and structured products and programs would be considered to be illegal under New York law. If the New York Department of Insurance determined we were not in compliance with Circular Letter No. 2, our financial condition and results of operations could suffer. An increase in PMI's risk-to-capital ratio could prevent it from writing new insurance, which would seriously harm our financial performance. The State of Arizona, PMI's state of domicile for insurance regulatory purposes, and other states limit the amount of insurance risk that may be written by PMI, based on a variety of financial factors, primarily risk-to-capital ratios. For example, Arizona law provides that if a mortgage guaranty insurer domiciled in Arizona does not have the amount of minimum policyholders position required, it must cease transacting new business until its minimum policyholders position meets the requirements. Under Arizona law, minimum policyholders position is calculated based on policyholders surplus, contingency reserves, the face amount of the mortgage, the percentage coverage or claim settlement option and the loan to value ratio category, net of reinsurance ceded, but including reinsurance assumed. Other factors affecting PMI's risk-to-capital ratio include: . limitations under the runoff support agreement with Allstate, which prohibit PMI from paying any dividends if, after the payment of the dividend, PMI's risk-to-capital ratio would equal or exceed 23 to 1; . our credit agreements and the terms of our guaranty of the debt incurred to purchase PMI Mortgage Insurance Ltd, which is our insurance subsidiary in Australia; and . capital requirements necessary to maintain our credit rating and PMI's claims-paying ability ratings. Generally, the methodology used by the rating agencies to assign credit or claims-paying ability ratings permits less capital leverage than under statutory requirements. Accordingly, statutory capital requirements may be lower than the capital necessary to satisfy rating agency requirements. PMI has several alternatives available to help control its risk-to-capital ratio, including: . obtaining capital contributions from us; . purchasing additional quota share or excess of loss reinsurance; and . reducing the amount of new business written. We may not be able to raise additional funds, or to do so on a timely basis, in order to make a capital contribution to PMI. In addition, reinsurance may not be available to PMI or, if available, may not be available on satisfactory terms. A material reduction in PMI's statutory capital, whether resulting from underwriting or investment losses or otherwise, or a disproportionate increase in risk in force, could increase its risk-to-capital ratio. An increase in PMI's risk-to-capital ratio could limit its ability to write new business. The inability to write new business could seriously harm our financial condition and results of operations. Our international insurance subsidiaries subject us to numerous risks associated with international operations. We have subsidiaries in Australia and Europe and may commit significant resources to expand our international operations. Accordingly, we are subject to a number of risks associated with international business activities. These risks include: . the need for regulatory and third party approvals; . challenges attracting and retaining key foreign-based employees, customers and business partners in international markets; . the economic strength of the foreign mortgage origination markets targeted, particularly the economies of Australia and Europe; . interest rate volatility in a variety of countries; . unexpected changes in foreign regulations and laws; . burdens of complying with a wide variety of foreign laws; . potentially adverse tax consequences; . restrictions on the repatriation of earnings; . foreign currency exchange rate fluctuations; . potential increases in the level of defaults and claims on policies insured by foreign-based subsidiaries; . the need to integrate our domestic insurance subsidiaries' risk management technology systems and products with those of our foreign operations; . the need to successfully develop and market products appropriate to the foreign market, including the development and marketing of credit enhancement products to European lenders and mortgage securitizations; . risks related to global economic turbulence; and . political instability. The performance of our strategic investments could harm our financial results. The performance of our strategic investments could be harmed 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 . our dependence upon management to operate those companies in which we do not own a controlling share. In addition, our ability to engage in additional strategic investments is subject to the availability of capital and maintenance of our claims-paying ability ratings by rating agencies. Our failure or inability to keep pace with the technological demands of our customers or with the technology-related products and services offered by our competitors could significantly harm our business and financial performance. Participants in the mortgage lending and mortgage insurance industries increasingly rely on e-commerce and other technology to provide and expand their products and services. An increasing number of our customers require that we provide our products and services electronically via the Internet or electronic data transmission, and the percentage of our new insurance written delivered electronically is increasing. We expect this trend to continue and, accordingly, believe that it is essential that we continue to invest substantial resources on maintaining electronic connectivity with our customers and, more generally, on e-commerce and technology. If we are not reimbursed by our insurance carriers for costs incurred by us in connection with our settlement of the Baynham litigation, we may be required to take an additional charge against earnings. We have entered into a settlement agreement with the plaintiffs in the putative class action lawsuit filed against us. We currently estimate that the gross amount of the settlement will be between $20 million and $22 million. To account for the settlement, we took a pre-tax charge against fourth quarter 2000 earnings of $5.7 million. This charge represented our estimate of the cost of settlement less our estimate of insurance payments we will receive from our insurance carriers as reimbursement for costs incurred by us in connection with our defense and settlement of the action. We have agreed to participate in non- binding mediation with our insurance carriers with respect to the amount of the payments to be reimbursed to us. If we do not realize our estimated amount of insurance proceeds, we could be required to take an additional charge against earnings and this could harm our financial condition and results of operations. Consolidated Statements of Operations
Year Ended December 31, (In thousands, except per share amounts) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues Premiums earned $ 634,362 $ 558,623 $ 491,226 Investment income 119,199 95,142 84,681 Net realized investment gains 432 509 24,636 Other 8,579 15,850 20,366 ------------ ------------ ------------ Total revenues 762,572 670,124 620,909 ------------ ------------ ------------ Losses and Losses and loss adjustment expenses 103,079 112,682 135,716 Expenses Amortization of deferred policy acquisition costs 77,337 80,252 60,280 Other underwriting and operating expenses 189,771 170,239 142,625 Interest expense 10,210 8,554 7,029 Distributions on preferred capital securities 8,309 8,311 8,311 ------------ ------------ ------------ Total losses and expenses 388,706 380,038 353,961 ------------ ------------ ------------ Income before income taxes 373,866 290,086 266,948 Income tax expense 113,654 85,620 76,588 ------------ ------------ ------------ Net income $ 260,212 $ 204,466 $ 190,360 ------------ ------------ ------------ Per Share Basic net income $ 5.88 $ 4.55 $ 4.04 ------------ ------------ ------------ Diluted net income $ 5.78 4.52 $ 4.02 ============ ============ ============
See accompanying notes to consolidated financial statements. Consolidated Balance Sheets
As of December 31, (Dollars in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ Assets Investments: Available for sale, at fair value: Fixed income securities (amortized cost: $1,536,291; $1,485,396) $ 1,613,330 $ 1,479,310 Equity securities: Common (cost: $53,315; $44,714) 81,726 83,890 Preferred (cost: $108,743; $17,660) 111,743 17,582 Common stock of affiliates (at underlying book value) 131,849 91,453 Short-term investments, at fair value 139,577 145,093 --------------- --------------- Total investments 2,078,225 1,817,328 --------------- --------------- Cash 21,969 28,076 Accrued investment income 23,494 22,058 Reinsurance recoverable and prepaid premiums 51,329 50,714 Premiums receivable 41,362 30,659 Receivable from affiliate 739 2,996 Deferred policy acquisition costs 67,009 69,579 Property and equipment, net 53,475 40,462 Other assets 55,055 38,890 --------------- --------------- Total assets $ 2,392,657 $ 2,100,762 =============== =============== Liabilities Reserve for losses and loss adjustment expenses $ 295,089 $ 282,000 Unearned premiums 170,866 182,089 Long-term debt 136,819 145,367 Reinsurance balances payable 26,581 25,415 Deferred income taxes 74,981 75,640 Other liabilities and accrued expenses 90,001 73,908 --------------- --------------- Total liabilities 794,337 784,419 --------------- --------------- Commitments and contingencies Company-obligated mandatorily redeemable preferred capital securities of subsidiary trust holding solely junior subordinated deferrable interest debenture of the Company 99,109 99,075 Shareholders' Equity Preferred stock - $.01 par value; 5,000,000 shares authorized and none issued or outstanding - - Common stock - $.01 par value; 187,500,000 shares authorized, and 52,793,777 issued 528 528 Additional paid-in capital 267,762 265,828 Accumulated other comprehensive income 62,501 20,186 Retained earnings 1,511,751 1,258,617 Treasury stock, at cost (8,484,082 and 8,091,924 shares) (343,331) (327,891) --------------- --------------- Total shareholders' equity 1,499,211 1,217,268 --------------- --------------- Total liabilities and shareholders' equity $ 2,392,657 $ 2,100,762 =============== ===============
See accompanying notes to consolidated financial statements. Consolidated Statements of Shareholders' Equity
Year Ended December 31, (In thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Common Balance, beginning of year $ 528 $ 352 $ 351 Stock 3 for 2 stock split in the form of a stock dividend - 176 - Stock grants and exercise of stock options - - 1 ----------- ------------- ------------ Balance, end of year 528 528 352 ----------- ------------- ------------ Additional Balance, beginning of year 265,828 265,040 262,448 Paid-in 3 for 2 stock split in the form of a stock dividend - (176) - Capital Stock grants and exercise of stock options 1,934 964 2,592 ----------- ------------- ------------ Balance, end of year 267,762 265,828 265,040 ----------- ------------- ------------ Accumulated Balance, beginning of year 20,186 74,462 71,936 ----------- ------------- ------------ Other Unrealized gains on investments: Comprehensive Unrealized holding gains (losses) arising during period Income [net of tax (benefit) of $28,327, ($29,047), and $9,982] 50,575 (53,945) 18,539 Less: reclassification adjustment for gains (losses) included in net income [net of tax of $151, $178, and $8,623] (281) (331) (16,013) ----------- ------------- ------------ Net unrealized holding gains (losses) 50,294 (54,276) 2,526 Currency translation adjustment (7,979) - - ----------- ------------- ------------ Other comprehensive income (loss), net of tax 42,315 (54,276) 2,526 ----------- ------------- ------------ Balance, end of year 62,501 20,186 74,462 ----------- ------------- ------------ Retained Balance, beginning of year 1,258,617 1,060,724 876,588 Earnings Net income 260,212 204,466 190,360 Dividends declared (7,078) (6,573) (6,224) ----------- ------------- ------------ Balance, end of year 1,511,751 1,258,617 1,060,724 ----------- ------------- ------------ Treasury Balance, beginning of year (327,891) (303,063) (150,143) Stock Purchases of The PMI Group, Inc. common stock (15,440) (24,828) (152,920) ----------- ------------- ------------ Balance, end of year (343,331) (327,891) (303,063) ----------- ------------- ------------ Total shareholders' equity $ 1,499,211 $ 1,217,268 $ 1,097,515 =========== ============= ============ Comprehensive Net income $ 260,212 $ 204,466 $ 190,360 Income Other comprehensive income (loss), net of tax 42,315 (54,276) 2,526 ----------- ------------- ------------ Comprehensive income $ 302,527 $ 150,190 $ 192,886 =========== ============= ============
See accompanying notes to consolidated financial statements. Consolidated Statements of Cash Flows
Year Ended December 31, (In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ Cash Net income $ 260,212 $ 204,466 $ 190,360 Flows Adjustments to reconcile net income to net cash provided by From operating activities: Operating Realized capital gains (432) (509) (24,636) Activities Equity in earnings of affiliates (11,643) (7,061) (3,225) Depreciation and amortization 24,092 13,243 6,282 Deferred income taxes (28,834) 7,539 19,444 Changes in: Reserve for losses and loss adjustment expenses 13,089 8,142 12,872 Unearned premiums (11,223) 13,526 736 Deferred policy acquisition costs 2,570 (7,973) (23,741) Accrued investment income (1,436) (1,903) 644 Reinsurance balances payable 1,166 4,495 2,936 Reinsurance recoverable and prepaid premiums (615) 53,616 (10,426) Premiums receivable (10,703) (6,292) (4,611) Receivable from affiliate 2,095 3,170 (1,778) Receivable from Allstate - 23,657 (6,835) Other (16,372) 6,649 20,079 --------- --------- --------- Net cash provided by operating activities 221,966 314,765 178,101 --------- --------- --------- Cash Proceeds from sales and maturities of fixed income 193,141 231,673 174,778 securities Flows Proceeds from sales of equity securities 53,370 42,647 75,181 from Investment purchases: Investing Fixed income securities (267,346) (332,046) (207,686) Activities Equity securities (145,258) (31,940) (53,092) Net (increase) decrease in short-term investments 5,516 (84,508) 40,476 Investment in affiliates (26,827) (25,634) (40,024) Purchase of PMI Ltd - (78,295) - Purchase of Pinebrook Insurance Company - (22,577) - Purchases of property and equipment (20,070) (12,528) (12,417) --------- --------- --------- Net cash used in investing activities (207,474) (313,208) (22,784) --------- --------- --------- Cash Issuance of long-term debt - 45,825 - Flows Proceeds from exercise of stock grants and options 1,934 964 2,592 From Dividends paid to shareholders (7,093) (5,199) (6,333) Financing Purchases of The PMI Group, Inc. common stock (15,440) (24,828) (152,920) --------- --------- --------- Activities Net cash provided by (used in) financing activities (20,599) 16,762 (156,661) --------- --------- --------- Net increase (decrease) in cash (6,107) 18,319 (1,344) Cash at beginning of year 28,076 9,757 11,101 --------- --------- --------- Cash at end of year $ 21,969 $ 28,076 $ 9,757 ========= ========= =========
See accompanying notes to consolidated financial statements. NOTE 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of The PMI Group, Inc. ("TPG"), a Delaware corporation; its direct and indirect wholly- owned subsidiaries, PMI Mortgage Insurance Co. ("PMI"), an Arizona Corporation; Residential Guaranty Co. ("RGC"), an Arizona corporation; American Pioneer Title Insurance Company ("APTIC"), a Florida corporation; PMI Mortgage Insurance Ltd ("PMI Ltd"), an Australian mortgage insurance company; PMI Mortgage Services Co. ("MSC"), a California corporation; and other insurance, reinsurance and non- insurance subsidiaries. TPG and its subsidiaries are collectively referred to as the "Company". In addition, PMI has equity interests in CMG Mortgage Insurance Company, CMG Mortgage Reinsurance Company and CMG Mortgage Assurance Company (collectively referred to as "CMG"), conduct residential mortgage insurance and reinsurance business, and also Fairbanks Capital Holding Corp. ("Fairbanks"), a special servicer of single-family residential mortgages. TPG has equity interests in RAM Holdings Ltd. and RAM Holdings II Ltd. (collectively referred to as "RAM RE"), two financial guaranty reinsurance companies based in Bermuda. CMG, Fairbanks and Ram Re are accounted for on the equity method of accounting in the Company's consolidated financial statements. All material intercompany transactions and balances have been eliminated in consolidation. NOTE 2. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business - The Company, through PMI and PMI Ltd, primarily writes residential mortgage guaranty insurance ("primary insurance") and mortgage pool insurance. In addition, the Company writes title insurance through APTIC. Primary mortgage insurance provides protection to mortgage lenders against losses in the event of borrower default and assists lenders in selling mortgage loans in the secondary market. Pool insurance is generally used as an additional credit enhancement for certain secondary market mortgage transactions. Title insurance protects the insured party against losses resulting from title defects, liens and encumbrances existing as of the effective date of the policy. Basis of Accounting - The financial statements have been prepared on the basis of accounting principles generally accepted in the United States ("GAAP"), which vary from statutory accounting practices prescribed or permitted by insurance regulatory authorities. (See Note 14.) The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investments - The Company has designated its entire portfolio of fixed income and equity securities as available for sale. Such securities are carried at fair value with unrealized gains and losses, net of deferred income taxes, reported as a component of accumulated other comprehensive income. The Company's short- term investments are those investments when purchased have the maturity less than 12 months. Investments in 20% to 50% owned affiliates are accounted for on the equity method and investments in less than 20% owned affiliates are accounted for on the cost method. Investment income consists primarily of interest and dividends. Interest is recognized on an accrual basis and dividends are recorded on the date of declaration. Realized capital gains and losses are determined on a specific- identification basis. Property and Equipment - Property and equipment, including software, is carried at cost less accumulated depreciation. The Company provides for depreciation using the straight-line method over the estimated useful lives of the assets, generally 3 to 10 years. Accumulated depreciation on property and equipment was $59.3 million and $51.4 million at December 31, 2000 and 1999, respectively. Revenue Recognition - Primary mortgage insurance policies are contracts that are non-cancelable by the insurer, are renewable at a fixed price at the insured's option, and provide for the payment of premiums on either a monthly, annual or single payment basis. Upon renewal by the insured, the Company is not able to re-underwrite or re-price its policies. Statement of Financial Accounting Standards ("SFAS") No. 60, Accounting and Reporting for Insurance Enterprises, specifically excludes mortgage guaranty insurance from its guidance relating to the earning of insurance premiums. Consistent with GAAP and industry accounting practices, premiums written on a single premium and an annual premium basis are initially deferred as unearned premiums and earned over the policy term. Premiums written on policies covering more than one year, or single premium plans, are amortized over the policy life in relation to the expiration of risk. Title insurance premiums are recognized as revenue on the effective date of the title insurance policy. Fee income of the non-insurance subsidiaries is earned as the services are provided. Deferred Policy Acquisition Costs - The Company defers certain costs in its mortgage insurance operations relating 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 and include all underwriting, contract underwriting and sales related activities. To the extent the Company is compensated by customers for contract underwriting, those underwriting costs are not deferred. Costs associated with the acquisition of mortgage insurance business are initially deferred and reported as deferred policy acquisition costs ("DPAC"). Because SFAS 60 specifically excludes mortgage guaranty insurance from its guidance relating to the amortization of DPAC, amortization of these costs for each underwriting year book of business are 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 estimate for each underwriting year is updated annually to reflect actual experience and any changes to key assumptions such as persistency or loss development. DPAC is summarized as follows:
(In thousands) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Beginning DPAC balance $ 69,579 $ 61,605 $ 37,864 Acquisition costs incurred and deferred 74,767 88,226 84,021 Amortization of deferred costs (77,337) (80,252) (60,280) --------- -------- -------- Ending DPAC balance $ 67,009 $ 69,579 $ 61,605 ========= ======== ========
Reserve For Losses and Loss Adjustment Expenses - The reserve for losses and loss adjustment expenses is the estimated cost of settling claims related to notices of default on insured loans that have been reported to the Company, as well as loan defaults that have occurred but have not been reported. Estimates are based on an evaluation of claim rates, claim amounts, and salvage recoverable. SFAS 60 specifically excludes mortgage guaranty insurance from its guidance relating to the reserve for losses. Consistent with GAAP and industry accounting practices, the Company does not establish loss reserves for future claims on insured loans that are not currently in default. Reserves for title insurance claims are based on estimates of the amounts required to settle such claims, including expenses for defending claims for which notice has been received and an amount estimated for claims not yet reported. Management believes that the reserve for losses and loss adjustment expenses at December 31, 2000 is appropriately established in the aggregate and is adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by that date. The establishment of appropriate reserves is an inherently uncertain process. Such reserves are necessarily based on estimates and the ultimate net cost may vary from such estimates. These estimates are regularly reviewed and updated using the most current information available. Any resulting adjustments, which may be material, are reflected in current operations. Earnings Per Share - Basic earnings per share ("EPS") excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The weighted average common shares outstanding for computing diluted EPS includes only stock options issued by the Company that have a dilutive impact and are outstanding for the period, and had the potential effect of increasing common shares. Net income available to common shareholders does not change for computing diluted EPS. Weighted average common shares outstanding for years ended December 31, 2000, 1999 and 1998 follows:
2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Weighted Average Shares Outstanding For basic EPS 44,253,619 44,893,250 47,090,673 For diluted EPS 45,018,501 45,244,060 47,299,065
The Company had a three-for-two stock split in 1999 in the form of a 50% stock dividend. All earnings per share amounts and stock option information prior to the stock split have been restated to reflect post-split amounts. Income Taxes - The Company accounts for income taxes using the liability method in accordance with SFAS No. 109, Accounting for Income Taxes. Derivatives - In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which established accounting and reporting standards for derivative instruments and for hedging activities. These rules require that all derivative instruments be reported in the consolidated financial statements at fair value. Changes in the fair value of derivatives are to be recorded each period in earnings or other comprehensive income, depending on whether the derivative is designated and effective as part of a hedged transaction, and on the type of hedge transaction. Gains or losses on derivative instruments reported in other comprehensive income must be reclassified as earnings in the period in which earnings are affected by the underlying hedged item, and the ineffective portion of all hedges must be recognized in earnings in the current period. The Company adopted this statement effective January 1, 2001. The Company's use of derivative financial instruments is generally limited to reducing its exposure to interest rate and currency exchange risk by utilizing interest rate and currency swap agreements which are accounted for as hedges. Hedge accounting requires a high correlation between changes in fair values or cash flows of derivative financial instrument and the specific item being hedged, both at inception and throughout the life of the hedge. In 1999, the Company entered into an interest rate swap to hedge interest rate risk associated with the acquisition debt described in Note 3 and 10. Management determined that this cash flow hedge was effective as of December 31, 2000. During 1999, the Company also entered into a foreign currency exchange contract to hedge the foreign currency exchange risk associated with the purchase price of PMI Ltd described in Note 3. The gain on this contract, which was not material, was recognized as an adjustment of the purchase price of the acquired company. Management anticipates that the adoption of this new statement will not have a material impact on the financial position or results of operations of the Company due to its limited use of derivative instruments. Foreign currency translation - The financial statements of foreign subsidiaries have been translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency Translation. Assets and liabilities denominated in non-U.S. dollar currencies are translated into U.S. dollar equivalents using year-end spot foreign exchange rates. Revenues and expenses are translated monthly at amounts that approximate weighted average exchange rates. The effects of translating operations with a functional currency other than the reporting currency are reported as a component of accumulated other comprehensive income. Concentration of Risk - A substantial portion of PMI's business is generated within the state of California. For the year ended December 31, 2000, 15.0% of new insurance written was in California. In addition, California's book of business represented 14.7% of total risk in force at December 31, 2000. Stock-Based Compensation - The Company accounts for stock-based awards to employees and directors using the intrinsic value method in accordance with Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees. (See Note 13.) Under APB 25, because the exercise price of the stock options equal the market price of the underlying stock on the grant date, no compensation expense is recognized. Change 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 twelve months ended December 31, 2000 represent eleven months of activity. The impact of this change is not material to the consolidated financial statements. Subsequent Event - On January 19, 2001, the Pacific Gas and Electric Company ("PG&E") defaulted on $10.0 million of commercial paper held by the Company at par classified as short-term investments. Management believes that PG&E will ultimately (directly or indirectly) redeem this obligation at par. NOTE 3. ACQUISITIONS On August 6, 1999, the Company, through PMI Mortgage Insurance Australia (Holdings) Pty Limited ("PMI Holdings"), a newly formed and wholly owned subsidiary of PMI, acquired all of the outstanding common stock of PMI Ltd for approximately $78.3 million. The acquisition was financed in part by the issuance of PMI Holdings debt of $45.8 million. The acquisition was accounted for under the purchase method of accounting and, accordingly, the 1999 consolidated financial statements included the results of PMI Ltd's operations from the date of acquisition. The excess of the estimated fair value of net assets acquired over the purchase price was approximately $21.7 million recorded as negative goodwill being amortized over approximately 8 years. On February 14, 2001, the FASB issued an Exposure Draft, Combinations and Intangible Assets, proposed to change the accounting treatment of Goodwill. If the Exposure Draft becomes effective as proposed, the remaining balance of the Company's negative goodwill will be recognized as extraordinary income in the period of implementation. The balance of negative goodwill as of December 31, 2000 was $11.7 million. On December 31, 1999, the Company acquired all of the outstanding common stock of Pinebrook Mortgage Insurance Company ("Pinebrook"), which was a wholly owned subsidiary of Allstate Insurance Company ("Allstate") for $22.6 million cash. The purchase price approximated the book value of Pinebrook, which did not differ significantly from fair value. This transaction has been accounted for under the purchase method. The pro-forma unaudited results of operations for the years ended December 31, 1999 and 1998, assuming the purchases had been consummated as of January 1, 1998, follows:
(In thousands, except per share amounts) 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Revenues $ 692,585 $ 583,298 Net income 220,679 215,212 Basic net income per common share 4.92 4.57 Diluted net income per common share 4.87 4.55
NOTE 4. INVESTMENTS Fair Values and Unrealized Net Gains (Losses) on Investments - The amortized cost and estimated fair values (based on quoted market prices) for fixed income and equity securities and unrealized net gains and losses on investments included in accumulated other comprehensive income are shown below:
Net Amortized Fair Gross Unrealized Unrealized ------------------------------- (In thousands) Cost Value Gains (Losses) Gains - ------------------------------------------------------------------------------------------------------------------------- At December 31, 2000: Fixed income securities U.S. government and agencies $ 101,588 $ 103,088 $ 2,504 $ (1,004) $ 1,500 Municipals 1,268,775 1,349,160 82,692 (2,307) 80,385 Corporate bonds 165,928 161,082 2,400 (7,246) (4,846) ----------- ----------- ----------- ----------- ----------- Total fixed income securities 1,536,291 1,613,330 87,596 (10,557) 77,039 Equity securities Common stocks 53,315 81,726 32,543 (4,132) 28,411 Preferred stocks 108,743 111,743 3,216 (216) 3,000 ----------- ----------- ----------- ----------- ----------- Total equity securities 162,058 193,469 35,759 (4,348) 31,411 Investment in affiliates 130,747 131,849 1,101 - 1,101 Short-term investments 139,470 139,577 113 (6) 107 ----------- ----------- ----------- ----------- ----------- Total investments $ 1,968,566 $ 2,078,225 $ 124,569 $ (14,911) $ 109,658 ----------- ----------- ----------- ----------- Deferred income taxes (39,178) Total unrealized gains, ----------- net of deferred tax $ 70,480 =========== At December 31, 1999: Fixed income securities U.S. government and agencies $ 87,223 $ 84,047 $ 387 $ (3,563) $ (3,176) Municipals 1,260,409 1,261,308 31,337 (30,438) 899 Corporate bonds 137,764 133,955 49 (3,858) (3,809) ----------- ----------- ----------- ----------- ----------- Total fixed income securities 1,485,396 1,479,310 31,773 (37,859) (6,086) Equity securities Common stocks 44,714 83,890 40,812 (1,636) 39,176 Preferred stocks 17,660 17,582 157 (235) (78) ----------- ----------- ----------- ----------- ----------- Total equity securities 62,374 101,472 40,969 (1,871) 39,098 Investment in affiliates 93,283 91,453 - (1,830) (1,830) Short-term investments 145,087 145,093 20 (14) 6 ----------- ----------- ----------- ----------- ----------- Total investments $ 1,786,140 $ 1,817,328 $ 72,762 $ (41,574) $ 31,188 ----------- ----------- ----------- ----------- Deferred income taxes (11,002) ----------- Total unrealized gains, net of deferred tax $ 20,186 ===========
The difference between cost and fair value of the investment in affiliates reflects net unrealized gains on the affiliates' investment portfolio. The stated fair value does not necessarily represent the fair value of the affiliates' common stock held by the Company. Short-term investments includes $10.0 million of commercial paper issued by PG&E. The change in net unrealized gains (losses), net of deferred income taxes, included in other comprehensive income for investments are as follows:
(In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Fixed income securities $ 53,948 $ (61,376) $ 8,874 Equity securities (5,586) 8,758 (6,565) Investment in affiliates 1,905 (1,662) 217 Short-term investments 27 4 - --------- ---------- -------- Total net unrealized gains (losses) $ 50,294 $ (54,276) $ 2,526 ========= ========== ========
Scheduled Maturities - The amortized cost and fair values of fixed income securities at December 31, 2000, by contractual maturity, are as follows:
Amortized Fair (In thousands) Cost Value - ---------------------------------------------------------------------------------------------------------------- Due in one year or less $ 12,098 $ 12,321 Due after one year through five years 195,485 197,557 Due after five years through ten years 179,268 187,128 Due after ten years 1,090,041 1,156,748 Mortgage-backed securities 59,399 59,576 ------------ ----------- Total fixed income securities $ 1,536,291 $ 1,613,330 ============ ===========
Actual maturities may differ from those scheduled as a result of calls or prepayments by the issuers prior to maturity. Investment Concentration and Other Items - The Company maintains a diversified portfolio of municipal bonds. At December 31, 2000 and 1999, the following states represented the largest concentrations in the portfolio (expressed as a percentage of the carrying value of all municipal bond holdings). Holdings in no other state exceed 5.0% of the portfolio at December 31, for the respective years.
2000 1999 - ---------------------------------------------------------------------------------------------------------- Illinois 14.1% 13.2% Texas 12.6 12.2 Washington 11.2 11.5 New York 9.7 9.2 Massachusetts 7.5 6.3 California 5.6 6.1 Pennsylvania 5.5 5.5
At December 31, 2000, fixed income and short-term securities with a market value of $15.6 million were on deposit with regulatory authorities as required by law. Investment Income - Investment income by investment type is as follows:
(In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------ Fixed income securities $ 94,794 $ 82,256 $ 76,427 Equity securities 4,841 2,400 2,466 Common stock of affiliates 11,643 7,061 3,225 Short-term investments 9,223 4,793 3,442 ----------- ------------ ------------ Investment income, before expenses 120,501 96,510 85,560 Investment expense (1,302) (1,368) (879) ----------- ------------ ------------ Net investment income $ 119,199 $ 95,142 $ 84,681 =========== ============ ============
Realized Investment Gains and Losses - Net realized investment gains (losses) on investments are as follows:
(In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------ Fixed income securities Gross gains $ 1,657 $ 535 $ 1,512 Gross losses (9,734) (3,610) (31) ----------- ----------- ------------ Net (8,077) (3,075) 1,481 Equity securities: Gross gains 17,768 7,210 26,298 Gross losses (9,474) (3,636) (3,143) ----------- ----------- ------------ Net 8,294 3,574 23,155 Short-term investments Gross gains 453 10 - Gross losses (238) - - ----------- ----------- ------------ Net 215 10 - ----------- ----------- ------------ Net realized investment gains, before income taxes 432 509 24,636 Income taxes (151) (178) (8,623) ----------- ----------- ------------ Net realized investment gains, net of income taxes $ 281 $ 331 $ 16,013 =========== =========== ============
NOTE 5. LOSS RESERVES The following table provides a reconciliation of the beginning and ending reserve for losses and loss adjustment expenses for each of the last three years:
(In thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Balance, January 1 $ 282,000 $ 215,259 $ 202,387 Reinsurance recoverable (10,342) (6,782) (6,067) ----------- ---------- ---------- Net balance, January 1 271,658 208,477 196,320 Losses and loss adjustment expenses incurred (principally In respect of defaults occurring in) Current year 191,904 159,293 146,884 Prior years (88,825) (46,611) (11,168) ----------- ---------- ---------- Total losses and loss adjustment expenses 103,079 112,682 135,716 Losses and loss adjustment expense payments (principally in respect of defaults occurring in) Current year (4,825) (1,798) (12,503) Prior years (84,034) (96,890) (111,056) ----------- ---------- ---------- Total payments (88,859) (98,688) (123,559) Forestview reserves, at acquisition (Note 6) - 42,528 - Pinebrook reserves, at acquisition - 1,093 - PMI Ltd reserves, at acquisition - 4,473 - ----------- ---------- ---------- Net balance, December 31 285,878 270,565 208,477 Reinsurance recoverable 9,211 11,435 6,782 ----------- ---------- ---------- Balance, December 31 $ 295,089 $ 282,000 $ 215,259 =========== ========== ==========
As a result of changes in estimates of ultimate losses resulting from insured events in prior years, the provision for losses and loss adjustment expenses, net of reinsurance recoverable, decreased by $88.8 million, $46.6 million and $11.2 million in 2000, 1999 and 1998, respectively, due to the impact of a favorable interest rate environment on loss mitigation activities and to lower than expected claims in California. Such estimates were based on management's analysis of various economic trends, including the real estate market and unemployment rates, and their effect on recent claim rate and claim severity experience. NOTE 6. REINSURANCE The Company utilizes reinsurance to reduce net risk in force to meet regulatory risk-to-capital requirements and to comply with the regulations that limit the maximum coverage to 25% for any single risk. The Company's reinsurance agreements provide for a recovery of a portion of losses and loss expenses from reinsurers, and reinsurance recoverable are recorded as assets. The Company remains liable if the reinsurers are unable to satisfy their obligations under the agreements. Reinsurance estimates are based on the Company's actuarial analysis of the applicable business; amounts the Company will ultimately recover could differ materially from amounts recorded in reinsurance recoverable. Reinsurance recoverable on paid losses was $9.2 million and $11.4 million at December 31, 2000 and 1999, respectively. Prepaid reinsurance premiums were $1.8 million and $1.7 million at December 31, 2000 and 1999, respectively. In December 1993, PMI decided to cease writing Old Pool business, except for honoring certain commitments in existence prior to the discontinuation of this business. Concurrently, PMI entered into a reinsurance agreement with Forestview Mortgage Insurance Co. ("Forestview"), a wholly owned subsidiary of Allstate, to cede all future Old Pool premiums and net losses from PMI to Forestview. In July of 1999, PMI and Forestview received regulatory approval of a Recapture Agreement executed in March 1999 to commute the Old Pool reinsurance arrangement retroactive to January 1, 1999. The Recapture Agreement also included the commutation of an insignificant second lien primary insurance arrangement between the parties. During 1999, PMI entered into a reinsurance arrangement with three reinsurers to provide coverage for a 10-year period in the event of catastrophic losses. PMI paid the reinsurers a total one-time premium of $16.4 million of which a substantial portion will be recovered by PMI should losses not reach catastrophic levels. This agreement does not transfer risk in accordance with SFAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, and therefore is being reported in accordance with SOP 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Risk. The expense attributable to the expiration of coverage provided under the contract was $2.2 million and $1.9 million in 2000 and 1999, respectively. The effects of reinsurance on the primary premiums written, premiums earned and losses and loss adjustment expenses of the Company's operations for the year ended December 31 are as follows:
(In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Premiums written Direct $ 676,777 $ 597,551 $ 518,101 Assumed 2,209 8,999 6,557 Ceded (39,924) (35,296) (35,558) ----------- ----------- ----------- Net premiums written $ 639,062 $ 571,254 $ 489,100 =========== =========== =========== Premiums earned Direct $ 671,602 $ 586,590 $ 521,338 Assumed 1,800 6,445 2,517 Ceded (39,040) (34,412) (32,629) ----------- ----------- ----------- Net premiums earned $ 634,362 $ 558,623 $ 491,226 =========== =========== =========== Losses and loss adjustment expenses Direct $ 106,301 $ 115,180 $ 131,692 Assumed (643) 3,109 838 Ceded (2,579) (5,607) 3,186 ----------- ----------- ----------- Net losses and loss adjustment expenses $ 103,079 $ 112,682 $ 135,716 =========== =========== ===========
NOTE 7. INCOME TAXES The components of income tax expense are as follows:
(In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Current $ 37,565 $ 6,942 $ 7,302 Deferred 76,089 78,678 69,286 ----------- ----------- ----------- Total income tax expense $ 113,654 $ 85,620 $ 76,588 =========== =========== ===========
The components of the income tax expense for 2000 include a foreign provision for current tax expense of $4.7 million and deferred tax expense of $1.9 million primarily related to PMI Ltd. A reconciliation of the statutory federal income tax rate to the effective tax rate reported on income before income taxes is as follows:
2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% Tax-exempt income (6.0) (6.8) (7.2) State income tax, net 0.4 0.5 0.4 Foreign income tax (0.3) 0.2 - Other 1.3 0.6 0.5 ---- ---- ---- Effective income tax rate 30.4% 29.5% 28.7% ---- ---- ----
Section 832(e) of the Internal Revenue Code permits mortgage guaranty insurers to deduct, within certain limitations, additions to statutory contingency reserves. (See Note 14.) This provision was enacted to enable mortgage guaranty insurers to increase statutory unassigned surplus through the purchase of non- interest bearing "tax and loss bonds" from the federal government. The tax and loss bonds purchased are limited to the tax benefit of the deduction for additions to the contingency reserve. The Company purchased tax and loss bonds of $103.4 million, $73.5 million and $47.4 million in 2000, 1999 and 1998, respectively. The Company paid income taxes of $12.5 million, $10.5 million and $8.4 million in 2000, 1999 and 1998, respectively. The components of the deferred income tax assets and liabilities at December 31 are as follows: (In thousands) 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Discount on loss reserves $ 6,597 $ 6,253 Unearned premium reserves 1,265 4,867 Alternative minimum tax credit carryforward 49,414 39,911 Pension costs 6,065 4,406 Other assets 8,862 7,981 --------- --------- Total deferred tax assets 72,203 63,418 Deferred tax liabilities: Statutory contingency reserve 61,905 89,092 Deferred policy acquisition costs 22,154 23,549 Unrealized net gains on investments 36,976 11,001 Software development costs 12,071 7,570 Equity earnings of unconsolidated affiliates 6,640 3,493 Other liabilities 7,438 4,353 --------- --------- Total deferred tax liabilities 147,184 139,058 --------- --------- Net deferred tax liability $ 74,981 $ 75,640 ========= =========
NOTE 8. BENEFIT PLANS Full-time employees and certain part-time employees of the Company participate in The PMI Group, Inc. Retirement Plan ("Plan"), a noncontributory defined benefit plan. The Plan has been funded by the Company to the fullest extent permitted by federal income tax rules and regulations. Also, certain employees' earning in excess of $170,000 per year participate in The PMI Group, Inc. Supplemental Employee Retirement Plan, a noncontributory defined benefit plan. Benefits under both plans are based upon the employee's length of service, average annual compensation and estimated social security retirement benefits. The Company provides certain health care and life insurance benefits for retired employees ("OPEB Plan"). Generally, qualified employees may become eligible for these benefits if they retire in accordance with the Company's established retirement policy and are continuously insured under the Company's group plans or other approved plans for 10 or more years prior to retirement. The Company shares the cost of the retiree medical benefits with retirees based on years of service with the Company's share being subject to a 5% limit on annual medical cost inflation after retirement. The Company has the right to modify or terminate these plans. The following table presents certain information regarding the Company's Benefit Plans as of December 31:
Pension Benefits Other Benefits ----------------------------------------- -------------------------------------- (In thousands, except percentages) 2000 1999 1998 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at January 1 $ 25,537 $ 18,376 $ 11,381 $ 3,952 $ 4,219 $ 3,112 Service cost 5,955 5,443 3,796 574 578 434 Interest cost 2,725 1,710 1,074 410 320 255 Actuarial loss (gain) 1,614 1,046 2,861 (92) (1,139) 435 Benefits paid (1,207) (1,038) (736) (30) (26) (17) ---------- ----------- --------- --------- --------- --------- Benefit obligation at December 31 34,624 25,537 18,376 4,814 3,952 4,219 ---------- ----------- --------- --------- --------- --------- Change in plan assets Fair value of plan assets at January 1 13,894 8,877 5,204 - - - Actual return on plan assets 1,296 2,397 366 - - - Company contribution 3,155 3,658 4,043 30 26 17 Benefits paid (1,209) (1,038) (736) (30) (26) (17) ---------- ----------- --------- --------- --------- --------- Fair value of plan assets at December 31 17,136 13,894 8,877 - - - ---------- ----------- --------- --------- --------- --------- Funded status Funded (underfunded) status of plan at December 31 (17,488) (11,643) (9,499) (4,814) (3,952) (4,219) Unrecognized actuarial loss (gain) 4,357 2,891 3,583 (1,532) (1,460) (320) Unrecognized prior service cost - - - 225 245 265 ---------- ----------- --------- --------- --------- --------- Accrued and recognized benefit cost $ (13,131) $ (8,752) $ (5,916) $ (6,121) $ (5,167) $ (4,274) ========== =========== ========= ========= ========= ========= Components of net periodic benefit cost Service cost $ 5,954 $ 5,443 $ 3,796 $ 574 $ 578 $ 434 Interest cost 2,725 1,710 1,074 411 320 255 Expected return on assets (1,362) (893) (515) - - - Prior service cost amortization - - - 20 20 20 Actuarial loss (gain) recognized 216 234 (68) (20) - (26) ---------- ----------- --------- --------- --------- --------- Net periodic benefit cost $ 7,533 $ 6,494 $ 4,287 $ 985 $ 918 $ 683 ========== =========== ========= ========= ========= ========= Weighted-average assumptions Discount rate 7.75% 8.00% 6.75% 7.75% 8.00% 6.75% Expected return on plan assets 8.50% 8.50% 8.50% N/A N/A N/A Rate of compensation increase 5.50% 5.50% 5.50% N/A N/A N/A Health care cost trend on covered charges N/A N/A N/A 6.00% 6.00% 6.00%
Sensitivity of retiree welfare results. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
One-Percentage- One-Percentage- (In thousands) Point Increase Point Decrease - ------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 221 $ 171 Effect on accumulated postretirement benefit obligation 958 752
Savings and Profit Sharing Plans. Certain employees of the Company are eligible to participate in The PMI Group, Inc. Savings and Profit Sharing Plan ("401K Plan") covering both salaried and hourly employees. Eligible employees who participate in the 401K Plan receive, within certain limits, matching Company contributions. Costs relating to the 401K Plan amounted to $2.4 million, $2.2 million, and $1.7 million for 2000, 1999 and 1998, respectively. NOTE 9. FINANCIAL INSTRUMENTS In the normal course of business, the Company invests in various financial assets and incurs various financial liabilities. The estimated fair value amounts of certain liabilities indicated below have been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value and, accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange.
2000 1999 ---------------------------- ---------------------------- Carrying Estimated Carrying Estimated (In thousands) Value Fair Value Value Fair Value - ---------------------------------------------------------------------------------------------------------------------- 6.75% Long-term debt $ 99,609 $ 99,859 $ 99,542 $ 92,252 8.309% Redeemable preferred capital securities $ 99,109 $ 94,992 $ 99,075 $ 90,041 7.00% Bank Note $ 37,210 $ 39,000 $ 45,825 $ 47,300
A number of the Company's significant assets and liabilities, including deferred policy acquisition costs, property and equipment, loss reserves, unearned premiums and deferred income taxes are not considered financial instruments. NOTE 10. DEBT AND CREDIT FACILITIES Long-term Debt - On November 15, 1996, the Company issued unsecured debt securities in the face amount of $100.0 million ("Notes"). The Notes mature and are payable on November 15, 2006 and are not redeemable prior to maturity. No sinking fund is required or provided for prior to maturity. Interest on the Notes is 6.75% and is payable semiannually. Interest payments of $6.8 million were made during 2000, 1999 and 1998. Bank Note - On August 3, 1999, PMI Holdings, along with TPG as guarantor, entered into a credit agreement with Bank of America, N.A. ("Bank"). PMI Holdings borrowed $37.2 million (A$70.5 million "Loan") at a 6-month adjustable interest rate which equals the Australia Bank Bill Buying Rate plus a specified margin that is dependant on the TPG's senior debt rating. The proceeds of the Loan were used to finance the purchase of PMI Ltd. Principal payments in equal 10% installments are due annually beginning August 3, 2001 and continue through August 3, 2005. The final 50% principal payment is due August 3, 2006. Concurrently, on August 3, 1999, PMI Holdings along with TPG as guarantor entered into a Swap Transaction ("Swap") with the Bank. The Swap effectively fixed the interest rate on the Loan to 7.0%. The net interest effect of the Swap is reported as an adjustment of interest expense. The fair value of the Swap agreement is not recognized in the financial statements. Other provisions of the Swap do not have a material effect on the Loan. Interest payments on the note of $3.0 million were made during 2000 and no interest payments were made during 1999. Future principal payments of the bank note are as follows: (In thousands) Principal Payments - -------------------------------------------------------------------------------- Year ending December 31: 2001 $ 3,721 2002 3,721 2003 3,721 2004 3,721 2005 3,721 2006 18,605 ------------------ Total $ 37,210 ================== Lines of Credit - The Company has a line of credit agreement ("Line") with Bank of America in the amount of $25.0 million and commitment fee of 8.0/6.5 basis points. The line has final maturity of December 2001and may be used for general corporate purposes. A Chase Manhattan Credit Agreement expired in February 2001. There were no amounts outstanding on both Lines at December 31, 2000 and 1999. NOTE 11. COMMITMENTS AND CONTINGENCIES Leases - The Company leases certain office facilities and equipment. Minimum rental commitments under non-cancelable operating leases with a remaining term of more than one year as of December 31, 2000 are as follows: (In thousands) Lease Commitments - -------------------------------------------------------------------------------- Year ending December 31: 2001 $ 9,938 2002 8,345 2003 6,169 2004 4,846 2005 574 Thereafter 1,169 ------------------ Total $ 31,041 ================== The Company renewed its corporate headquarters lease for 5 years in 1999. On December 29, 2000, the Company executed a purchase agreement for a seven story commercial building to serve as the new World Headquarters. The total purchase price was $74.0 million in cash, with an initial deposit of $4.5 million paid on December 29, 2000 and the final progress payment due at closing, which is expected to be in December 2001. The Company intends to sublease its current corporate facilities after vacancy in the first quarter of 2002. The impact of such a subleasing arrangement is not included in the above amounts. Total rent expense for all leases was $11.3 million, $9.6 million and $9.0 million in 2000, 1999 and 1998, respectively. Legal Proceedings - On December 15, 2000, the Company announced that PMI entered into an agreement with the plaintiffs to settle the putative class action litigation captioned Baynham et al. v. PMI Mortgage Insurance Company. PMI denied all facts and allegations in the lawsuit that alleged violations of Section 8 of the Real Estate Settlement Procedures Act (RESPA). To account for the settlement, PMI took an after-tax charge against fourth quarter 2000 earnings of $0.08 per share, which is the estimated cost of settlement less anticipated insurance recovery. The charge is based, in part, upon an estimate of insurance payments the Company will receive from its insurance carriers as reimbursement for certain costs and expenses incurred by, and to be incurred by, the Company in connection with its defense and settlement of the action. The Company is currently negotiating with its insurance carriers with respect to the amount of any such payments. There can be no assurance that the Company's estimate of the amount of insurance payments will be achieved and such an event could have an adverse effect on the Company's results of operations. Various other legal actions and regulatory reviews are currently pending that involve the Company and specific aspects of its conduct of business. In the opinion of management, the ultimate liability in one or more of these actions is not expected to have a material effect on the financial condition or results of operations of the Company. NOTE 12. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURE OF THE COMPANY On February 4, 1997, TPG, through a wholly-owned trust, privately issued $100.0 million of 8.309% preferred capital securities, Series A ("Capital Securities"). The Capital Securities are redeemable after February 1, 2007, at a premium or upon occurrence of certain tax events, and mature on February 1, 2027. The net proceeds, totaling $99.0 million, were used for general corporate purposes, including common stock repurchases and additions to the investment portfolio. The Capital Securities were issued by PMI Capital I ("Issuer Trust"). The sole asset of the Issuer Trust consists of $103.1 million principal amount of a junior subordinated debenture ("Debenture") issued by TPG to the Issuer Trust. The Debenture bears interest at the rate of 8.309% per annum and matures on February 1, 2027. The amounts due to the Issuer Trust under the Debenture and the related income statement amounts have been eliminated in the Company's consolidated financial statements. Distributions on the Capital Securities occur on February 1 and August 1 of each year. The obligations of TPG under the Debenture and a related guarantee and expense agreement constitute a full and unconditional guarantee by TPG of the Issuer Trust's obligations under the Capital Securities. The Capital Securities are subject to mandatory redemption under certain circumstances. Distribution payments of $8.3 million were made in 2000 and 1999, respectively. NOTE 13. DIVIDENDS AND SHAREHOLDERS' EQUITY Dividends - PMI's ability to pay dividends to TPG is limited by, among other restrictions, state insurance laws including the laws of the state of Arizona. Arizona law provides that PMI may pay out of any available surplus account without prior approval of the Director of the Arizona Department of Insurance dividends during any 12-month period not to exceed the lesser of 10% of policyholders' surplus as of the preceding year end, or the last calendar year's investment income. Other state insurance laws restrict the payment of dividends from the unassigned surplus account only. 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 the ability (directly or indirectly) 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 2000, PMI paid $50 million to TPG representing a return of capital, which was approved by the Arizona Department of Insurance. Preferred Stock - The Company's restated certificate of incorporation authorizes the Board of Directors to issue up to 5,000,000 shares of preferred stock of TPG in classes or series and to fix the designations, preferences, qualifications, limitations or restrictions of any class or series with respect to the rate and nature of dividends, the price and terms and conditions on which shares may be redeemed, the amount payable in the event of voluntary or involuntary liquidation, the terms and conditions for conversion or exchange into any other class or series of the stock, voting rights and other terms. The Company may issue, without the approval of the holders of common stock, preferred stock which has voting, dividend or liquidation rights superior to the common stock and which may adversely affect the rights of holders of common stock. Pursuant to the Runoff Support Agreement (see Note 16), the Company has agreed that, in the event that Allstate makes a payment contemplated by the Allstate Support Agreements or the Runoff Support Agreement, Allstate will have the right to receive preferred stock of TPG or PMI with a liquidation preference equal to the amount of such payment. Such preferred stock will rank senior in right of payment to the issuer's common stock and, so long as such preferred stock is outstanding, the issuer thereof will be prohibited from paying any dividends or making any other distributions on its common stock. Equity Incentive Plan and Directors Plan - During 1999, the Company amended and restated The PMI Group, Inc. Equity Incentive Plan ("Equity Incentive Plan") and The PMI Group, Inc. Stock Plan for Non-Employee Directors ("Directors Plan") The Equity Incentive Plan provides for awards of both non-qualified stock options and incentive stock options, stock appreciation rights, restricted stock subject to forfeiture and restrictions on transfer, and performance awards entitling the recipient to receive cash or common stock in the future following the attainment of performance goals determined by the Board of Directors. Generally, options are granted with an exercise price equal to the market value on the date of grant, expire ten years from the date of grant and have a three-year vesting period. The Directors Plan provides that each director who is not an employee of the Company or its subsidiaries will receive an annual grant of up to 450 shares of common stock and will receive stock options for 3,750 shares annually, after an initial option of up to 6,000 shares. The shares will be granted on June 1 of each year or as soon as administratively practicable after each anniversary of the director's commencement of service. The following is a summary of the stock option activity in the Equity Incentive Plan and the Directors Plan during 2000, 1999 and 1998:
2000 1999 1998 ------------------------------ ----------------------------- ----------------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average Under Option Exercise Price Under Option Exercise Price Under Option Exercise Price - ------------------------------------------------------------------------------------------------------------------------------------ Outstanding at beginning of year 1,820,495 $ 30.74 1,375,051 $ 35.83 924,582 $ 28.20 Granted 644,667 39.06 588,756 29.54 549,975 47.36 Exercised (245,987) 59.22 (106,120) 25.07 (77,892) 23.78 Forfeited (93,373) 35.36 (37,192) 42.93 (21,614) 42.81 --------- --------- --------- Outstanding at end of year 2,125,802 36.05 1,820,495 34.26 1,375,051 35.83 ========= ========= ========= Exercisable at year end 879,514 $ 32.96 746,398 $ 30.74 604,467 $ 26.05 Weighted-average fair market value of options granted during the year $ 39.12 $ 29.54 $ 47.36 Reserved for future grants 1,746,581 - 2,304,749 - 597,218 -
Note: The weighted average remaining contractual life of shares under option was 7.4 years (for an exercise price between $19.66 and $63.94) in 2000; 8.0 years ($19.66 and $50.83) in 1999; and 8.0 years ($32.14 and $76.25) in 1998. As discussed in Note 2, the Company accounts for stock-based compensation under APB No. 25 and its related interpretations. SFAS No. 123, Accounting for Stock- Based Compensation, requires the disclosure of pro-forma net income and earnings per share using the fair value method. The fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions for 2000, 1999, and 1998, respectively: dividend yield of 0.30%, 0.35% and 0.26%; expected volatility range of 29.15% to 33.44%, 30.77% to 32.52%, and 21.92% to 23.15%; risk-free interest rates of 6.33% to 5.09%, 5.12% to 5.79%, and 5.45% to 5.58%; and an expected life of four years following the vesting. Forfeitures are recognized as they occur. If the computed fair values of the 2000, 1999 and 1998 awards had been amortized to expense over the vesting period of the awards, the Company's net income, basic net income per share and diluted net income per share would have been reduced to the pro forma amounts indicated below: (In thousands, except per share amounts) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------- Net income: As reported $ 260,212 $ 204,466 $ 190,360 Pro-forma 255,811 201,503 187,776 Basic earnings per share: As reported $ 5.88 $ 4.55 $ 4.04 Pro-forma 5.78 4.49 3.99 Diluted earnings per share: As reported $ 5.78 $ 4.52 $ 4.02 Pro-forma 5.68 4.45 3.97
Equity Stock Purchase Plan - In February 1999, the Company's Board of Directors adopted the 1999 PMI Group, Inc. Employee Stock Purchase Plan ("ESPP") and shareholder approval was granted during the Company's 1999 Annual Meeting. A total of 300,000 shares of the Company's authorized but unissued common stock has been made available under the ESPP. The ESPP allows eligible employees to purchase shares of the Company's stock at a discount of 15 percent of the beginning-of-period or end-of-period (each period being a six month enrollment period) fair market value of the stock, whichever is lower. Under the ESPP, the Company sold approximately 23,638 and 13,578 shares in 2000 and 1999, respectively. The Company applies APB 25 in accounting for the ESPP. The pro forma effect on the Company's net income and earnings per share had compensation cost been determined under SFAS 123 was deemed immaterial in 2000. NOTE 14. STATUTORY ACCOUNTING The Company's domestic insurance subsidiaries prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by their respective state's Department of Insurance, which is a comprehensive basis of accounting other than GAAP. Currently, "prescribed" statutory accounting practices are interspersed throughout state insurance laws and regulations, the National Association of Insurance Commissioners' (NAIC) Accounting Practices and Procedures Manual and a variety of other NAIC publications. "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The NAIC revised the Accounting Practices and Procedures Manual in process referred to as Codification. The revised manual was adopted by the respective states and will be effective January 1, 2001. The revised manual has changed, to some extent, prescribed statutory accounting practices and will result in changes to the accounting practices that the Company's insurance subsidiaries use to prepare their statutory-basis financial statements. The cumulative effect of changes in accounting principles adopted to conform to the revised Accounting Practices and Procedures Manual will be reported as an adjustment to surplus as of January1, 2001. Management believes the impact of these changes will not result in a significant reduction in the Company's insurance subsidiaries' statutory-basis capital and surplus. The statutory net income, statutory surplus and contingency reserve liability of PMI as of and for the years ended December 31 are as follows: (In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Statutory net income $ 276,946 $ 270,301 $ 214,040 ----------------- ----------------- ---------------- Statutory surplus $ 159,528 $ 134,133 $ 165,459 ----------------- ----------------- ---------------- Contingency reserve liability $ 1,457,991 $ 1,238,140 $ 1,028,440 ----------------- ----------------- ----------------
The differences between the statutory net income and equity presented above for PMI and the consolidated net income and equity presented on a GAAP basis primarily represent the differences between GAAP and statutory accounting practices as well as the results of operations and equity of other Company subsidiaries. NOTE 15. BUSINESS SEGMENTS The Company's reportable operating segments include Domestic Mortgage Insurance, International Mortgage Insurance, and Title Insurance. Key products and accounting policies for each of the reportable segments are disclosed in Note 2, "Business and Summary of Significant Accounting Policies." The Other segment includes the income and expenses of the holding company, the results from MSC, and the activity of an inactive broker-dealer. Intersegment transactions are not significant. The Company evaluates performance primarily based on segment net income. The following tables present information about reported segment income (loss) and segment assets as of and for the periods indicated:
International Mortgage Mortgage 2000 Guaranty Guaranty Title Consolidated (in thousands) Insurance Insurance Insurance Other Total - ------------------------------------------------------------------------------------------------------------------------------------ Premiums earned $ 503,750 $ 26,628 $ 103,984 $ - $ 634,362 ------------- ----------------- ------------- ----------- ---------------- Net underwriting income (expenses) before tax-external customers $ 277,043 $ 13,724 $ 7,628 $ (25,641) $ 272,754 Investment income & net realized capital gains 87,197 12,126 1,890 6,775 107,988 Equity in earnings of affiliates 8,601 (237) - 3,279 11,643 Interest expense (19) (2,705) - (7,486) (10,210) Distributions on preferred capital securities - - - (8,309) (8,309) ------------- ----------------- ------------- ----------- ---------------- Income (loss) before income tax expense 372,822 22,908 9,518 (31,382) 373,866 Income tax benefit (expense) (114,234) (6,501) (3,274) 10,355 (113,654) ------------- ----------------- ------------- ----------- ---------------- Net income (loss) $ 258,588 $ 16,407 $ 6,244 $ (21,027) $ 260,212 ------------- ----------------- ------------- ----------- ---------------- Total assets $ 2,052,814 $ 174,006 $ 53,275 $ 112,562 $ 2,392,657 ------------- ----------------- ------------- ----------- ----------------
International Mortgage Mortgage 1999 Guaranty Guaranty Title Consolidated (in thousands) Insurance Insurance Insurance Other Total ----------------------------------------------------------------------------------------------------------------------------------- Premiums earned $ 447,214 $ 11,291 $ 100,118 $ - $ 558,623 ============= ================= ============= =========== =============== Net underwriting income (expenses) before tax-external customers $ 202,508 $ 6,910 $ 10,897 $ (9,015) $ 211,300 Investment income & net realized capital gains 79,020 4,611 1,633 3,326 88,590 Equity in earnings of affiliates 5,567 - - 1,494 7,061 Interest expense (3) (1,307) - (7,244) (8,554) Distributions on preferred capital securities - - - (8,311) (8,311) ------------- ----------------- ------------- ----------- ---------------- Income (loss) before income tax expense 287,092 10,214 12,530 (19,750) 290,086 Income tax benefit (expense) (88,628) (3,469) (4,422) 10,899 (85,620) ------------- ----------------- ------------- ----------- ---------------- Net income (loss) $ 198,464 $ 6,745 $ 8,108 $ (8,851) $ 204,466 ============= ================= ============= =========== =============== Total assets $ 1,764,125 $ 182,586 $ 46,484 $ 107,567 $ 2,100,762 ============= ================= ============= =========== ===============
Mortgage 1998 Guaranty Title Consolidated (in thousands) Insurance Insurance Other Total - ----------------------------------------------------------------------------------------------------------------------- Premiums earned $ 411,922 $ 79,304 $ - $ 491,226 ============= ================= ============= ================ Net underwriting income (expenses) before tax-external customers $ 172,414 $ 9,606 $ (9,049) $ 172,971 Investment income & net realized capital gains 97,989 1,427 6,676 106,092 Equity in earnings of affiliates 2,900 - 325 3,225 Interest expense (3) - (7,026) (7,029) Distributions on preferred capital securities - - (8,311) (8,311) ------------- ----------------- ------------- ---------------- Income (loss) before income tax expense 273,300 11,033 (17,385) 266,948 Income tax benefit (expense) (78,732) (4,182) 6,326 (76,588) ------------- ----------------- ------------- ---------------- Net income (loss) $ 194,568 $ 6,851 $ (11,059) $ 190,360 ============= ================= ============= ================ Total assets $ 1,643,482 $ 42,165 $ 92,223 $ 1,777,870 ============= ================= ============= ================
The Company did not have any major customers that accounted for more than 10% of its consolidated revenues for any of the years presented. NOTE 16. CAPITAL SUPPORT AGREEMENTS PMI's claims-paying ratings from certain national rating agencies have, in the past, been based in significant part on various capital support commitments from Allstate ("Allstate Support Agreements"). On October 27, 1994, the Allstate Support Agreements were terminated with respect to policies issued after October 27, 1994, but continue in modified form (as so modified, the "Runoff Support Agreement") for policies written prior to such termination. Under the terms of the Runoff Support Agreement, Allstate may, at its option, either directly pay or cause to be paid, claims relating to policies written during the terms of the respective Allstate Support Agreements if PMI fails to pay such claims or, in lieu thereof, make contributions directly to PMI or TPG. In the event any amounts were so paid or contributed (which possibility management believes is remote), Allstate would receive subordinated debt or preferred stock of PMI or TPG in return. No payment obligations have arisen under the Runoff Support Agreement. The Runoff Support Agreement provides PMI with additional capital support for rating agency purposes. The Runoff Support Agreement contains certain covenants, including covenants that (i) PMI will write no new business after its risk-to-capital ratio equals or exceeds 23 to 1; (ii) PMI will pay no dividends if, after the payment of any such dividend, PMI's risk-to-capital ratio would equal or exceed 23 to 1; and (iii) on the date that any of the following events occur: (A) PMI's risk-to- capital ratio exceeds 24.5 to 1, (B) Allstate shall have paid any claims relating to PMI policies directly to a policyholder or by paying an amount equal to such claims to PMI (or to TPG for contribution to PMI) pursuant to the Runoff Support Agreement, or (C) any regulatory order is issued restricting or prohibiting PMI from making full or timely payments under policies, PMI will transfer substantially all of its assets in excess of $50.0 million to a trust account established for the payment of claims. On September 30, 1999, a CMG Capital Support Agreement was executed by PMI and CUNA Mutual Investment Corp. whereby both parties agreed to contribute funds, under specified conditions, so as to maintain CMG's risk-to-capital at or below 18.0 to 1. As a 50% owner of CMG, PMI's obligation under the agreement is limited to an aggregate amount of $15 million, exclusive of capital contributions made prior to September 30, 1999. The previous CMG Capital Support Agreement, dated June 6, 1996, was superceded by execution of the new agreement. On December 31, 2000, CMG's risk-to capital ratio was 15.4 to 1. On June 6, 1999, a Capital Support Agreement was entered into between PMI and PMI Ltd, whereby PMI agrees that it will provide funds necessary to ensure that PMI Ltd is able to maintain a sufficient level of capital at all times. In addition, the agreement states that in no event shall the net assets of PMI Ltd be less than 2% of the net aggregate risk of PMI Ltd plus A$50.0 million. As of December 31, 2000, the Company was in compliance with all covenants included in its capital support agreements. NOTE 17. QUARTERLY RESULTS (UNAUDITED)
First Quarter Second Quarter Third Quarter Fourth Quarter ------------------------- ------------------------- ------------------------- ------------------------ 2000 1999 2000 1999 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands, except per share amounts) Revenues $ 179,418 $ 155,251 $ 187,893 $ 156,173 $ 195,046 $ 178,194 $ 200,211 $ 180,506 ---------- --------- --------- --------- --------- --------- --------- --------- Net income $ 59,990 $ 43,652 $ 64,979 $ 49,459 $ 69,256 $ 54,503 $ 65,983 $ 56,852 ---------- --------- --------- --------- --------- --------- --------- --------- Basic EPS $ 1.36 $ 0.97 $ 1.47 $ 1.10 $ 1.57 $ 1.22 $ 1.49 $ 1.27 ---------- --------- --------- --------- --------- --------- --------- --------- Diluted EPS $ 1.34 $ 0.96 $ 1.45 $ 1.09 $ 1.53 $ 1.21 $ 1.46 $ 1.26 ---------- --------- --------- --------- --------- --------- --------- --------- Diluted operating EPS* $ 1.33 $ 0.96 $ 1.45 $ 1.09 $ 1.51 $ 1.20 $ 1.57 $ 1.26 ---------- --------- --------- --------- --------- --------- --------- ---------
* Diluted operating earnings per share represents diluted earnings per share excluding realized capital gains and their related income tax effect, and the litigation settlement charges of $0.08 per share after tax in the fourth quarter of 2000. Earnings per share is computed independently for the quarters presented. Therefore, the sum of the quarterly earnings per share amounts may not equal the total computed for the year. All periods have been adjusted to reflect the company's 3 for 2 stock split. REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors The PMI Group, Inc. We have audited the accompanying consolidated balance sheet of The PMI Group, Inc. and subsidiaries (the Company) as of December 31, 2000 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of the Company as of December 31, 1999 and for the two years then ended were audited by other auditors whose report dated January 20, 2000, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2000 financial statements referred to above present fairly, in all material respects, the consolidated financial position of The PMI Group, Inc. and subsidiaries at December 31, 2000, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Los Angeles, California January 19, 2001 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of The PMI Group, Inc.: We have audited the accompanying consolidated balance sheet of The PMI Group, Inc. and subsidiaries as of December 31, 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 1999 and 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the PMI Group, Inc. and subsidiaries as of December 31, 1999, and the results of their operations and their cash flows for the years ended December 31, 1999 and 1998, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP San Francisco, California January 20, 2000 EX-21.1 6 0006.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 ------------ THE PMI GROUP, INC. -- SUBSIDIARIES ----------------------------------- Name Under Which Subsidiary Does Jurisdiction Subsidiary Name Business (If different) of Incorporation - -------------------------------------------------------------------------------- PMI Mortgage Insurance Co. Arizona American Pioneer Title Insurance Co. Chelsea Title Company Florida Residential Guaranty Co. Arizona PMI Mortgage Guaranty Co. Arizona TPG Insurance Co. Vermont CLM Technologies, Ltd. California TPG Segregated Portfolio Cayman Company (Cayman) Islands PMI Mortgage Insurance Australia Australia (Holdings) Pty Limited PMI Mortgage Insurance Ltd Australia TPG Reinsurance Company Limited Ireland PMI Mortgage Insurance Company Ireland Limited EX-23.1 7 0007.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 ------------ CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of The PMI Group, Inc. of our report dated January 19, 2001, included in the 2000 Annual Report to Shareholders of The PMI Group, Inc. Our audits also included the financial statement schedules of The PMI Group, Inc. as of and for the year ended December 31, 2000 listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in: ----------------------------------------------- Registration Statement On Number Form ----------------------------------------------- 333-92636 S-8 ----------------------------------------------- 333-99378 S-8 ----------------------------------------------- 333-47473 S-8 ----------------------------------------------- 333-66829 S-8 ----------------------------------------------- 333-81679 S-8 ----------------------------------------------- 333-32190 S-8 ----------------------------------------------- 333-48035 S-3 ---------------------------------------------- 333-67125 S-3 ----------------------------------------------- 333-29777 S-4 ----------------------------------------------- of our report dated January 19, 2001, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules as of and for the year ended December 31, 2000 included in this Annual Report (Form 10-K) of The PMI Group, Inc. /s/ Ernst & Young LLP Los Angeles, California March 28, 2001 EX-23.2 8 0008.txt INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.2 ------------ INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 333- 92636, No. 333-99378, No. 333-47473, No. 333-66829, No. 333-81679, and No. 333- 32190 of The PMI Group, Inc. (the "Company") on Form S-8 and Registration Statements No. 333-48035, and No. 333-67125 of the Company on Form S-3 and Registration Statement No. 333-29777 of the Company on Form S-4 of our reports dated January 20, 2000 appearing in and incorporated by reference in this Annual Report on Form 10-K of the Company for the year ended December 31, 2000. /s/ Deloitte & Touche LLP San Francisco, California March 26, 2001 EX-23.3 9 0009.txt INDEPENDENT AUDITORS' REPORT EXHIBIT 23.3 ------------ INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of The PMI Group, Inc.: We have audited the consolidated financial statements of The PMI Group, Inc. and subsidiaries as of December 31, 1999, and for the years ended December 31, 1999 and 1998, and have issued our report thereon dated January 20, 2000; such consolidated financial statements and report are included in your 2000 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedules as of December 31, 1999 and for the years ended December 31, 1999 and 1998 of The PMI Group, Inc. and subsidiaries, listed in item 14(a) 2. These consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, represent fairly, in all material respects, the information set forth therein. /s/ Deloitte & Touche LLP San Francisco, California January 20, 2000 -----END PRIVACY-ENHANCED MESSAGE-----