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, 2003

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)

Delaware	3003 Oak Road Walnut Creek, California 94597	94-3199675
(State of Incorporation)	(Address of principal executive offices)	(I.R.S. Employer Identification No.)

(925) 658-7878

(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, $0.01 par value	New York Stock Exchange Pacific Exchange
Preferred Stock Purchase Rights	New York Stock Exchange Pacific Exchange
Corporate Units	New York Stock 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.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes  x  No  ¨

The market value of the voting stock (common stock) held by non-affiliates of the registrant as of the close of business on June 30, 2003 was $2,371,655,002 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 registrant’s common stock, as of close of business on February 27, 2004: 95,461,912

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for registrant’s Annual Meeting of Stockholders to be held on May 27, 2004 are incorporated by reference into Items 10 through 14 of Part III.

TABLE OF CONTENTS

Cautionary Statement		1
PART I
Item 1.	Business	2
	A.    Overview of Operations—The PMI Group, Inc.	2
	B.    U.S. Mortgage Insurance Operations	2
	1.      Products	3
	2.      Competition	5
	3.      Customers	6
	4.      Business Composition	6
	5.      Sales and Product Development	9
	6.      Underwriting Practices	9
	7.      Affordable Housing	11
	8.      Defaults and Claims	12
	9.      Reinsurance	18
	10.    Regulation	18
	11.    Financial Strength Ratings	22
	C.    International Operations, Financial Guaranty and Other Strategic Investments	22
	1.      International Operations	23
	Australia and New Zealand	23
	Europe	24
	Hong Kong	25
	2.       Financial Guaranty Insurance and Reinsurance	25
	FGIC Corporation	25
	RAM Re	28
	3.      Residential Lender Services	28
	APTIC	28
	Fairbanks	29
	D.    Investment Portfolio	29
	E.    Employees	31
Item 2.	Properties	31
Item 3.	Legal Proceedings	31
Executive Officers of Registrant		33
PART II
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters	35
Item 6.	Selected Financial Data	37
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	87
Item 8.	Financial Statements and Supplementary Data	89
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	131
Item 9A.	Controls and Procedures	131
PART III
Item 10.	Directors and Executive Officers of the Registrant	132
Item 11.	Executive Compensation	132
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	132
Item 13.	Certain Relationships and Related Transactions	132
Item 14.	Principal Accountant Fees and Services	132
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	133

Cautionary Statement Regarding Forward-Looking Statements

Statements we make or incorporate by reference in this and other documents filed with the Securities and Exchange Commission that are not historical facts, that 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, we caution that, while we believe the assumption to be reasonable and make it in good faith, assumed facts almost always vary from actual results, and the difference between assumed facts and actual results can be material. Where, in any forward-looking statement, we express an expectation or belief as to future results, there can be no assurance that the expectation or belief will result. Our actual results may differ materially from those expressed in our forward-looking statements. Forward-looking statements involve a number of risks or uncertainties including, but not limited to, the Risk Factors addressed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in Item 7. Other risks are referred to from time to time in our periodic filings with the Securities and Exchange Commission. All of our forward-looking statements are qualified by and should be read in conjunction with our risk disclosures. Except as may be required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I

Item 1. Business

A. Overview of Operations—The PMI Group, Inc.

The PMI Group, Inc. is an international provider of credit enhancement as well as other products that promote homeownership and facilitate mortgage transactions in the capital markets.

Our U.S. mortgage insurance operations generated 80% of our consolidated revenues and 82% of our consolidated net income in 2003. Our primary operating subsidiary, PMI Mortgage Insurance Co., or PMI, is a leading U.S. residential mortgage insurer. Residential mortgage insurance protects lenders and investors against potential losses in the event of borrower default. Its insurer financial strength is currently rated “AA+” (“Excellent”) with a negative outlook by Standard & Poor’s, or S&P, “Aa2” (“Excellent”) with a stable outlook by Moody’s Investors Service, or Moody’s, and “AA+” (“Very Strong”) with a stable outlook by Fitch Ratings, or Fitch.

Our international operations offer mortgage insurance and other credit enhancement products. Through our Australian subsidiaries, we believe we were one of the leading providers of mortgage insurance in Australia and New Zealand in 2003. Our Irish subsidiary, headquartered in Dublin, Ireland, offers mortgage insurance and mortgage credit enhancement products throughout Europe. PMI also reinsures residential mortgage insurance in Hong Kong.

On December 18, 2003, we became the lead investor in FGIC Corporation, an insurance holding company whose subsidiary, Financial Guaranty Insurance Company, or FGIC, is primarily engaged in the business of providing financial guaranty insurance for municipal bonds and asset-backed securities. We also have a significant interest in RAM Reinsurance Company, Ltd., or RAM Re, a financial guaranty reinsurance company based in Bermuda.

In the United States, we offer title insurance through our subsidiary, American Pioneer Title Insurance Company, or APTIC, and we participate in the mortgage loan servicing markets through a strategic investment. On October 27, 2003, we announced that we had entered into a definitive agreement to sell APTIC for $115 million in cash, subject to post-closing adjustments.

Our consolidated net income was $299.4 million for the year ended December 31, 2003. As of December 31, 2003, our consolidated total assets were $4.8 billion, including our investment portfolio of $2.8 billion as of that date. Our consolidated shareholders’ equity was $2.8 billion as of December 31, 2003. See Item 8. Financial Statements and Supplementary Data—Note 20. Business Segments, for financial information regarding our business segments. S&P has assigned us “A+” counterparty credit and senior unsecured debt ratings (negative outlook), Fitch has assigned us “A+” long term issuer and senior debt ratings (stable outlook), and Moody’s has assigned us an “A1” senior unsecured debt rating (stable outlook).

Our website address is http://www.pmigroup.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports are available free of charge on our website via a hyperlink as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

B. U.S. Mortgage Insurance Operations

Residential mortgage insurance facilitates the sale of low down-payment mortgages in the mortgage capital markets and expands homeownership opportunities by enabling borrowers to buy homes with down-payments of less than 20%. PMI provides primary mortgage insurance, or primary insurance, and pool mortgage insurance, or pool insurance, against losses in the event of borrower default. PMI’s mortgage insurance products are purchased by lenders and investors, including Fannie Mae and Freddie Mac, or the GSEs, and the Federal Home Loan

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Banks, seeking protection against default risk, capital relief or credit enhancement for mortgage transactions in the capital markets. PMI is licensed in all 50 states, the District of Columbia, Puerto Rico, Guam and the Virgin Islands. PMI is incorporated in Arizona and headquartered in Walnut Creek, California.

1. Products

Primary Insurance

Primary insurance provides mortgage default protection to lenders and 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 coverage percentage selected by the insured by the loss amount on the defaulted loan, which includes any unpaid loan balance, delinquent interest and certain expenses associated with the loan’s default and property foreclosure. In lieu of paying the coverage percentage of the loss amount on a defaulted loan, PMI may pay the loss amount and take title to the mortgaged property.

PMI’s primary new insurance written, or NIW, for the year ended December 31, 2003 was $57.3 billion. PMI’s primary insurance in force and primary risk in force at December 31, 2003 were $105.2 billion and $24.7 billion, respectively. Primary insurance in force refers to the current principal balance of all outstanding mortgage loans with primary insurance coverage as of a given date. Primary risk in force is the aggregate dollar amount equal to the product of each individual insured mortgage loan’s current principal balance multiplied by the loan’s specified primary insurance coverage percentage.

PMI acquires primary insurance on a loan-by-loan basis (flow channel) and in bulk transactions (bulk channel). While their terms vary, bulk transactions generally involve bidding upon and, if successful, insuring a large group of loans on agreed terms. Some bulk transactions contain a risk-sharing component under which the insured shares in losses. Bulk transactions may involve loans that will be securitized, and in these instances, PMI may be asked to provide “down to” insurance coverage sufficient to reduce the insured’s exposure on each loan down to a percentage of the property value selected by the insured. PMI issued approximately $7 billion of primary insurance through the bulk channel in 2003, which accounted for approximately 12% of PMI’s NIW for 2003. In 2002, approximately 7% of PMI’s NIW was acquired through the bulk channel.

Premium payments may be paid to PMI on a monthly, annual or single premium basis. Monthly payment plans represented 91% of NIW in 2003 and 95% of NIW in 2002. As of December 31, 2003, monthly plans represented 92% of PMI’s primary risk in force. Single premium plan payments may be refundable if coverage is canceled by the insured, which generally occurs when the loan is repaid, the loan amortizes to a sufficiently low amount, or the value of the property has increased significantly.

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. Similarly, PMI may not cancel mortgage insurance coverage except for events of nonpayment of premiums or certain material violations of PMI’s master policies. With respect to PMI’s flow channel, the insured, the holder of the loan, or the loan’s mortgage servicer may generally cancel mortgage insurance coverage at any time. The GSEs’ guidelines 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 Homeowners Protection Act of 1998 also provides for the automatic termination, or cancellation upon a borrower’s request, of private mortgage insurance upon satisfaction of certain conditions.

The GSEs are the predominant purchasers of conventional mortgage loans in the United States, providing a direct link between mortgage origination and the capital markets. The GSEs may purchase conventional mortgages with high ratios of the original loan amount to the value of the property, or LTVs, 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

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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 thus, the lender’s cost of doing business may be adversely affected. Consequently, lenders tend to originate loans that can be sold in the secondary market utilizing mortgage insurance from insurers deemed eligible by the GSEs. Lenders that purchase private mortgage insurance in connection with the sale of loans to the GSEs must comply with the GSEs’ mortgage insurance coverage percentage requirements. The GSEs have some discretion to increase or decrease the amount of mortgage insurance coverage they require on loans, provided that minimum charter requirements are met. PMI is a GSE-authorized mortgage insurer.

Pool Insurance

Traditional Pool Insurance.    Prior to 2002, PMI offered “traditional” pool insurance, which covers the entire loss on a defaulted mortgage loan that exceeds the claim payment under any primary insurance coverage, up to a stated aggregate loss limit, or stop loss limit, for all of the loans in a pool. PMI offered traditional pool insurance primarily to two different customer segments: lenders and the GSEs (GSE Pool), and capital market participants (Old Pool).

Modified Pool Insurance.    PMI offers modified pool insurance products that, in addition to having stop loss limits and other risk reduction features, have exposure limits on each individual loan in the pool. To date, PMI has issued modified pool insurance principally to the GSEs as supplemental coverage and to other mortgage capital markets participants. PMI issued all of its modified pool insurance through bulk-type transactions between 2001 and 2003.

Unless otherwise noted, primary insurance statistics in this report do not include pool insurance.

Captive Reinsurance

Captive reinsurance is a reinsurance product in which PMI shares portions of its risk written on loans originated by certain lenders with captive reinsurance companies, or captive reinsurers, affiliated with such lenders. In return, a proportionate amount of PMI’s gross premiums written is ceded to the captive reinsurers. PMI’s captive reinsurance agreements primarily provide for excess-of-loss reinsurance, under which 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 up to the maximum coverage level. PMI is also a party to two quota share captive reinsurance agreements under which the captive reinsurer assumes a pro rata share of all losses in return for a pro rata share of the premiums collected. We believe that captive reinsurance provides PMI with an additional means by which to manage its portfolio risk and enhance capital efficiency.

In 2003, the percentages of primary NIW, primary insurance in force and total primary risk in force subject to captive reinsurance agreements increased. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations, U.S. Mortgage Insurance Operations, Premiums written and earned. These increases were driven by heavy refinance activity and a higher percentage of NIW generated by lenders with captive reinsurance programs. We anticipate that higher levels of captive reinsurance cessions will continue to reduce PMI’s premiums earned, and that the percentage of PMI’s primary risk in force subject to captive reinsurance agreements will continue to increase as a percentage of total risk in force.

Other Risk-Sharing Products

In addition to captive reinsurance, PMI offers other risk-sharing products, including layered co-insurance, a primary insurance program under which the insured retains liability for losses between certain levels of aggregate losses. PMI also offers various products designed for, and in cooperation with, the GSEs and lenders that involve some aspect of risk-sharing.

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Joint Venture—CMG Mortgage Insurance Company

CMG Mortgage Insurance Company and its affiliates, or CMG, offer mortgage insurance for loans originated by credit unions. CMG is a joint venture, equally owned by PMI and CUNA Mutual Investment Corporation, or CMIC. CMIC is part of the CUNA Mutual Group, which provides insurance and financial services to credit unions and their members. Both PMI and CMIC provide services to CMG. At December 31, 2003, CMG had $12.6 billion of primary insurance in force. CMG’s financial results are reported in PMI’s financial statements under the equity method of accounting in accordance with generally accepted accounting principles in the United States, or GAAP. CMG’s operating results are not included in PMI’s results shown in Part I of this Report on Form 10-K, unless otherwise noted.

Under the terms of the restated joint venture agreement effective as of June 1, 2003, CMIC has the right on September 8, 2015, or earlier under certain limited conditions, 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 of PMI’s interest. PMI and CMIC have also entered into a capital support agreement for the benefit of CMG in order to maintain CMG’s claims-paying ability rating at “AA-” by S&P and “AA” by Fitch. CMG is a GSE-authorized mortgage insurer.

2. Competition

U.S. Private Mortgage Insurance Industry

The U.S. private mortgage insurance industry consists of eight active mortgage insurers: PMI; CMG; 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.; Radian Guaranty Inc.; Republic Mortgage Insurance Co., an affiliate of Old Republic International; and Triad Guaranty Insurance Corp.

U.S. and State Government Agencies

PMI and other private mortgage insurers compete with federal and state government agencies that sponsor their own mortgage insurance programs. The private mortgage insurers’ principal government competitor is the Federal Housing Administration, or FHA, and to a lesser degree, the Veterans Administration, or 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,
	2003		2002		2001		2000		1999
FHA/VA	36.4	%	35.6	%	37.3	%	41.4	%	47.6	%
Private Mortgage Insurance	63.6		64.4		62.7		58.6		52.4
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Source: FHA, VA, Mortgage Insurance Companies of America and Inside Mortgage Finance.

Effective January 1, 2004, the U.S. Housing and Urban Development Department, or HUD, in accordance with its index, increased the maximum single-family loan amount that the FHA can insure to $290,319 in high-cost areas. While there is no maximum VA loan amount, lenders will generally limit VA loans to $240,000. Private mortgage insurers have no limit as to maximum individual loan amounts that they can insure. Increases in the amount that these agencies can insure could cause future demand for private mortgage insurance to decrease.

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Federal Home Loan Banks.    The Federal Home Loan Banks, or FHLBs, purchase single-family conforming mortgage loans originated by participating member institutions. Purchases of secondary mortgage loans by participating FHLBs increased in 2002 and 2003. Although the FHLBs are not required to purchase insurance for mortgage loans, they currently use mortgage insurance on substantially all mortgage loans with an LTV above 80% and have become a source of increasing new business for PMI. Any expansion of the FHLBs’ ability to use, or increased use of, alternatives to mortgage insurance could reduce the demand for private mortgage insurance and harm our financial condition and results of operations.

Fannie Mae and Freddie Mac—The GSEs

Mortgage insurers, including PMI, compete with the GSEs when the GSEs seek to assume mortgage default risk that could be covered by mortgage insurance. The GSEs have introduced programs that allow lenders to purchase reduced mortgage insurance coverage, as well as programs that provide for the restructuring of existing mortgage insurance with reduced amounts of primary insurance coverage and the addition of pool insurance coverage. In the past, Freddie Mac 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 LTV mortgages.

Mortgage Lenders

PMI and other private mortgage insurers compete 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 mortgages that have a first mortgage lien with an LTV of 80%, a 10% second mortgage lien, and 10% of the purchase price from the borrower’s funds, or an 80/10/10. This 80/10/10 product and other similar products have reduced the available market for primary insurance. These products also compete with mortgage insurance as an alternative for lenders selling loans in the mortgage capital markets. PMI believes that the use of 80/10/10 loans increased significantly in 2003 and 2002 due primarily to the narrower differential in banks’ interest rates for the second mortgage lien in those years, and may continue to increase in the future.

3. Customers

PMI’s customers are primarily mortgage lenders, savings institutions, commercial banks and investors, including the GSEs, the FHLBs, and other capital market participants. As the beneficiary under PMI’s master policies is the owner of the insured loan, the purchaser of that loan is entitled to the policy benefits. The GSEs, as the predominant purchasers of conventional mortgage loans in the U.S., are the beneficiaries of a substantial majority of PMI’s mortgage insurance coverage.

In 2003, PMI’s top ten customers generated approximately 42% of PMI’s premiums earned compared to approximately 44% in 2002.

4. Business Composition

Persistency; Policy Cancellations

Historically, a significant percentage of PMI’s premiums earned has been generated from insurance policies written in previous years. Consequently, the length of time that insurance remains in force is a key determinant of PMI’s revenues and earnings. Lower interest rates beginning in 2001 have resulted in heavy mortgage refinance activity, causing PMI’s policy cancellations to increase and thereby negatively impacting earned premiums. For example, calendar year 2003 exhibited the lowest average interest rate in the period 1993 to 2003 and was the third consecutive year of declines in those rates. PMI’s persistency rate for its entire primary portfolio decreased to 44.6% at December 31, 2003 from 62.0% at December 31, 2001. The persistency rate is the percentage of primary insurance policies at the beginning of a 12-month period that remains in force at the end of that period.

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The following table shows average annual mortgage interest rates and PMI’s primary portfolio persistency rates from 1993 to 2003.

	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003
Average Annual Mortgage Interest Rate*	7.3%	8.4%	7.9%	7.8%	7.6%	6.9%	7.4%	8.1%	7.0%	6.5%	5.8%
Persistency Rate**	70%	83.6%	86.4%	83.3%	80.8%	68.0%	71.9%	80.3%	62.0%	56.2%	44.6%

* Average annual thirty year fixed mortgage interest rate derived from Freddie Mac and Mortgage Bankers Association data.

** Annual persistency rate for calendar year based upon PMI’s entire primary insurance in force.

The declining interest rate environment in the last three years has been a major factor in shortening the length of time our primary insurance in force has remained in effect. The cumulative percentages of primary loans in force for policy years 2000 through 2003 are lower than for comparably aged policy years in the 1993 through 1999 period.

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PMI’s Risk in Force.    PMI’s primary risk in force was $24.7 billion as of December 31, 2003 and $25.2 billion as of December 31, 2002. The composition of PMI’s primary and pool risk in force is summarized in the table below. The table is based upon information available on the date of mortgage origination.

	As of December 31,
	2003			2002			2001			2000			1999
Primary Risk in Force (in percentages)*
LTV:
Above 97s		8.6	%		2.8	%		0.7	%		0.1	%		—
97s		7.4			6.9			5.6			5.5			4.9	%
95s		37.6			41.3			43.1			45.7			46.8
90s		37.0			39.0			39.9			39.8			42.2
Loan Type:
Fixed		90.4	%		90.9	%		90.3	%		90.5	%		92.7	%
ARM		9.6			9.2			9.7			9.5			7.3
Mortgage Term:
25 years and under		7.9	%		7.3	%		6.2	%		5.1	%		6.0	%
Over 25 years and up to 30 years		91.9			92.4			93.6			94.5			93.6
Over 30 years		0.3			0.3			0.3			0.4			0.4
Property Type:
Single-family detached		85.8	%		87.6	%		88.6	%		88.8	%		88.9	%
Condominium, townhouse, cooperative		10.0			8.5			8.0			8.2			8.5
Multi-family dwelling and other		4.2			3.9			3.4			3.0			2.6
Occupancy Status:
Primary residence		94.8	%		95.6	%		96.3	%		97.2	%		98.0	%
Second home		2.2			1.8			1.6			1.5			1.2
Non-owner occupied		3.0			2.6			2.2			1.3			0.8
Loan Amount:
$100,000 or less		21.9	%		23.6	%		24.3	%		23.2	%		24.0	%
Over $100,000 and up to $250,000		63.4			64.6			65.8			68.2			68.6
Over $250,000		14.8			11.9			9.8			8.6			7.4
GSE conforming loans**		93.9	%		92.9	%		91.5	%		N/A			N/A
GSE non-conforming**		6.1			7.1			8.6			N/A			N/A
Less-than-A Quality		11.9	%		11.9	%		11.6	%		N/A			N/A
Non-Traditional		13.8	%		12.8	%		12.4	%		N/A			N/A
Pool Risk in Force (in millions)
GSE Pool	$	485.3		$	794.1		$	801.3		$	785.6		$	681.2
Old Pool		656.8			863.8			1,114.1			1,295.4			1,407.8
Modified Pool		1,390.9			1,159.6			414.5			15.9			N/A
Other Traditional Pool		252.2			310.1			211.6			153.6			102.9

* Due to rounding, the sums of the percentages may not total 100%.

** GSE conforming loans are loans with principal balances that do not exceed the maximum single-family principal balance loan limit eligible for purchase by the GSEs. In 2003, the maximum single-family principal balance loan limit generally was $322,700.

• High LTV Loans.    LTV is the ratio of the original loan amount to the value of the property. In PMI’s experience, 95s, mortgages with LTVs between 90.01% and 95.00%, have higher claims frequencies than those of 90s, mortgages with LTVs between 85.01% and 90.00%. PMI believes that loans with LTVs higher than 95% have higher risk characteristics than 95s.

• Fixed v. Adjustable Rate Mortgages.    Based on PMI’s experience, the claims frequency of adjustable rate mortgages, or ARMs, is generally higher than on fixed rate loans.

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• Less-than-A Quality and Non-Traditional Loans.    PMI insures less-than-A quality loans and non-traditional loans through its primary flow and bulk channels, as well as through its modified pool products. PMI defines less-than-A quality loans to include loans with FICO scores (a credit score provided by Fair, Isaac and Company) generally less than 620. PMI considers a loan to be non- traditional if it does not conform to GSE loan size limits or if it includes certain other characteristics such as reduced documentation of the borrower’s income, deposit information and/or employment. In 2003, 3% of all modified pool insurance written was of less-than-A quality and 55% was non-traditional. Nearly all of the non-traditional modified pool insurance written in 2003 was classified as such because of reduced documentation for the underlying loans and not because of any particular credit characteristic.

The following table shows PMI’s primary risk in force by FICO score as of December 31, 2003, 2002 and 2001:

	Percentage of Primary Risk in Force by FICO Score as of December 31,
	2003		2002		2001
FICO Score:
Less than 575	3.3	%	3.3	%	3.4	%
575—619	8.6		8.7		8.1
620—679	32.7		30.8		28.9
680—719	23.2		23.2		23.2
720 and above	30.5		32.2		34.5
Unreported	1.7		1.9		1.8

We expect higher default rates and claim payment rates for high LTV loans, ARMs, less-than-A quality loans and non-traditional loans. PMI offers pre- and post-purchase borrower counseling to borrowers with high LTV loans in an effort to reduce the risk of default on those loans. PMI also believes that the structure of its modified pool products mitigates the risk of loss to PMI from the less-than-A quality loans and non-traditional loans insured by those products. PMI incorporates its assumptions into its pricing. However, there can be no assurance that the premiums earned and the associated investment income will prove adequate to compensate for future losses from these loans.

5. Sales and Product Development

PMI employs a sales force located throughout the country to sell its products and provide services to lenders located throughout the United States. PMI’s sales force receives compensation comprised of a base salary and incentive compensation tied to performance objectives. PMI’s product development department has primary responsibility for advertising, sales materials and the creation of new products and services.

6. Underwriting Practices

Risk Management Approach

PMI analyzes its primary insurance business based upon the historical performance of risk factors of individual loan profiles. PMI uses national and territorial underwriting guidelines to evaluate the potential risk of default on mortgage loans submitted for insurance coverage. PMI has developed and refined its national guidelines over time, taking into account its loss experience and the GSEs’ underwriting guidelines. PMI’s underwriting guidelines generally allow PMI to place mortgage insurance coverage on any mortgage loan accepted by the GSEs’ automated underwriting systems for purchase by the GSEs.

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PMI’s underwriting guidelines are based, in part, on several statistical models that PMI employs to predict default and to measure performance as well as capital requirements. The pmiAURA^SM System, a proprietary system developed by PMI, includes economic and demographic information and assigns a risk score corresponding to the predicted likelihood of an insurance policy going to claim.

Underwriting Process

To obtain mortgage insurance on a specific mortgage loan, a customer typically submits an application and supporting documentation to PMI. If the loan is approved for mortgage insurance, PMI issues a certificate of insurance to the customer. During the last several years, advances in technology have enabled PMI to offer its customers the option of electronic submission of applications and electronic receipt of insurance commitments and certificates. In 2003, 80% of PMI’s primary insurance commitments (excluding bulk transactions) were issued electronically, compared to 69% in 2002. PMI expects the use of electronic delivery mechanisms by customers to continue to increase.

Delegated Underwriting.    More than 60% of PMI’s flow NIW is underwritten pursuant to a delegated underwriting program that allows approved lenders, subject to routine audit by PMI, to determine whether loans meet program guidelines and are thus eligible for mortgage insurance. If a lender participating in the program commits PMI to insure a loan that fails to meet all of the applicable underwriting guidelines, PMI is obligated to insure such a loan except under certain narrowly-drawn exceptions, such as a failure to meet maximum LTV criteria. Delegated underwriting enables PMI to meet mortgage lenders’ demands for immediate insurance coverage of certain loans. Delegated underwriting has become standard industry practice. 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.

Non-Delegated Underwriting.    Customers that are not approved to participate in the delegated program generally must submit to PMI an application for each loan, supported by various documents. Verifications of the borrower’s employment, income and funds needed for the loan closing are required in addition to other documents, unless the loan is submitted by a lender that has been approved to participate in PMI’s Quick Application Program. This 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. Currently, PMI performs non-delegated underwriting on less than 5% of all insured loans.

Bulk Primary and Modified Pool Transactions.    Bulk primary insurance and modified pool insurance transactions generally involve PMI bidding for a customer’s delivery to PMI of a portfolio of loans that have been previously underwritten and closed under one or more loan programs. PMI evaluates each transaction on a loan-by-loan basis and as a portfolio. In the loan-by-loan review, PMI analyzes the characteristics of each loan and compares them to forecasts of performance generated by proprietary performance and pricing models. In the portfolio review, PMI analyzes the diversity and the aggregate risk characteristics of the portfolio as a whole. PMI also reviews the risks and potential mitigating factors inherent in the proposed coverage structure, which may include, among other things, coverage limits, stop loss limits, or deductibles.

In some cases, PMI provides commitments for the future delivery of bulk primary or modified pool transactions. The same processes described above are used to review an indicative portfolio of loans. PMI’s commitments are contingent upon a loan-by-loan review of the actual loans delivered and allow for adjustments if the characteristics of the actual delivery vary from those of the indicative portfolio.

Contract Underwriting

Contract underwriting services are provided by PMI’s wholly-owned subsidiary, PMI Mortgage Services Co., or MSC. MSC enables customers to improve the efficiency and quality of their operations by outsourcing all

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or part of their mortgage loan underwriting. MSC provides contract underwriting services for mortgage loans for which PMI provides mortgage insurance and for mortgage loans for which PMI does not provide insurance. MSC also performs the contract underwriting activities of CMG.

As a part of its contract underwriting services, MSC provides to its customers monetary and other remedies, including loan indemnifications under certain circumstances, in the event that MSC fails to properly underwrite a mortgage loan. MSC paid $13.1 million in contract underwriting remedies in 2003, compared to $6.5 million in 2002. Worsening economic conditions or other factors that could lead to increases in PMI’s primary insurance default rate could also cause the number and magnitude of the remedies that must be offered by MSC to further increase. Such an increase could have a material adverse effect on our consolidated financial condition and results of operations.

New policies processed by MSC contract underwriters represented 25% of PMI’s NIW in 2003, compared to 30% in 2002. 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 us is related to the volume of mortgage originations and/or refinancing.

7. Affordable Housing

Expanding homeownership opportunities for low- and moderate-income individuals and communities is an important priority of PMI. PMI’s approach to affordable lending is to develop products and services that assist responsible borrowers who may not qualify for mortgage loans under traditional underwriting practices. These products and services do not accommodate borrowers who have failed to manage their affairs responsibly; rather they seek to identify those home buyers who have met or will meet their obligations in a timely and conscientious manner. The beneficiaries of these programs have included recent immigrants who have not established traditional credit histories, borrowers not accustomed to using traditional savings institutions, borrowers with less than five percent for a down-payment, and home buyers who, although consistently employed, lack the stability traditionally associated with having a single employer due to the nature of their employment.

To further promote affordable housing, PMI has entered into risk-sharing agreements 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 lending goals and by Native American tribes and housing authorities to provide homeownership opportunities to traditionally underserved populations. Under such agreements, the mortgage insurance is structured so that financial responsibility is shared between the lender, Native American tribe or housing authority, and PMI.

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, the American Homeownership and Counseling Institute, the National Association of La Raza and the National Association of Real Estate Professionals. In addition, PMI has developed partnerships with local organizations in an effort to expand homeownership opportunities and promote community revitalization.

Although programs offered under PMI’s affordable housing initiatives receive the same credit and actuarial analysis as all other standard programs, some programs utilize affordable underwriting guidelines established by lenders that differ from PMI’s criteria. PMI believes that some of its insured affordable housing loans may carry higher risks than its other insured loans. 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.

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8. Defaults and Claims

Defaults

PMI’s claim process begins with notification by the insured to PMI of a default on an insured loan. “Default” is defined in PMI’s master policies 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 policies require 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 a reduction of income, unemployment, divorce, illness, inability to manage credit and interest rate levels. 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 most cases, in a claim to PMI.

Primary defaults.    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. Default rates are shown by region based on location of the underlying property.

	Primary Default Rates by Region as of the Year Ended December 31,
	2003		2002		2001
Region
Pacific(1)	3.18	%	3.35	%	2.67	%
New England(2)	3.23		2.75		1.50
Northeast(3)	4.52		4.13		3.07
South Central(4)	4.56		4.06		2.75
Mid-Atlantic(5)	3.30		3.22		2.50
Great Lakes(6)	6.50		5.72		3.47
Southeast(7)	5.00		4.77		3.09
North Central(8)	4.30		4.07		2.76
Plains(9)	4.04		3.75		2.67
Total Portfolio	4.53		4.18		2.86

(1) Includes California, Hawaii, Nevada, Oregon and Washington.

(2) Includes Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.

(3) Includes New Jersey, New York and Pennsylvania.

(4) Includes Alaska, Arizona, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Utah.

(5) Includes Delaware, Maryland, Virginia, Washington, D.C. and West Virginia.

(6) Includes Indiana, Kentucky, Michigan and Ohio.

(7) Includes Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee.

(8) Includes Illinois, Minnesota, Missouri and Wisconsin.

(9) Includes Idaho, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota and Wyoming.

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	Percent of PMI’s Primary Risk in Force as of December 31,		PMI’s Default Rates for Top Ten States by Primary Risk in Force(1)
			Default Rate as of December 31,
	2003		2003		2002		2001		2000		1999
California	9.3	%	3.08	%	3.20	%	2.56	%	2.26	%	2.59	%
Florida	9.2		3.89		4.15		3.03		2.91		3.00
Texas	7.0		5.02		4.27		2.86		2.13		2.06
Illinois	4.8		4.55		4.39		3.46		2.60		2.03
Georgia	4.8		5.99		5.13		3.11		2.31		1.95
New York	4.1		4.52		4.35		3.22		2.94		2.85
Washington	4.1		3.51		3.39		2.72		1.75		1.62
Ohio	3.5		6.86		5.80		3.57		2.63		2.01
Pennsylvania	3.4		4.64		4.21		3.11		2.47		2.64
North Carolina	3.0		6.18		5.91		3.33		1.95		1.81

(1) Top ten states as determined by primary risk in force as of December 31, 2003.

Claim activity is not spread evenly throughout the coverage period of a primary insurance book of business. Based on PMI’s experience, the majority of claims on traditional primary insurance loans occur in the third through sixth years after loan origination, and relatively few claims are paid during the first two years after loan origination. Primary insurance written from the period of January 1, 1997 through December 31, 2001 represented 23% of PMI’s primary insurance in force at December 31, 2003. This portion of PMI’s book of business is in its expected peak claim period with respect to traditional primary loans. We believe that loans in PMI’s less-than-A quality and non-traditional primary book will have earlier incidences of default than loans in PMI’s traditional book. Loans in PMI’s non-traditional primary book generally begin to peak 18 to 22 months after origination.

The following table sets forth the dispersion of PMI’s primary insurance in force and risk in force as of December 31, 2003, by year of policy origination and average annual mortgage interest rate since PMI began operations in 1972.

	Insurance and Risk in Force by Policy Year and Average Coupon Rate
	Average Rate(1)		Primary Insurance in Force		Percent of Total		Primary Risk in Force		Percent of Total
			(In thousands)				(In thousands)
Policy Year
1972-1992	9.3	%	$	629,594	0.6	%	$	129,390	0.5	%
1993	7.3			917,599	0.9			189,218	0.8
1994	8.4			860,102	0.8			186,970	0.8
1995	7.9			672,872	0.6			177,970	0.7
1996	7.8			968,645	0.9			262,617	1.1
1997	7.6			1,012,097	1.0			273,482	1.1
1998	6.9			3,203,998	3.1			822,760	3.3
1999	7.4			4,126,019	3.9			1,046,685	4.2
2000	8.1			3,193,947	3.0			738,213	3.0
2001	7.0			12,589,057	12.0			2,881,614	11.7
2002	6.5			24,882,271	23.6			5,830,326	23.6
2003	5.8			52,184,526	49.6			12,129,103	49.2
Total Portfolio			$	105,240,727	100.0	%	$	24,668,348	100.0	%

(1) Average annual mortgage interest rate derived from Freddie Mac and Mortgage Bankers Association data.

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Pool defaults. The number of pool loans PMI insured steadily decreased during 2003, primarily due to heavy mortgage refinance activity. Accordingly, the number of outstanding delinquent loans decreased in 2003. In 2003, pool claims paid represented approximately 9% of PMI’s total claims paid.

Claims and Policy Servicing

Primary insurance claims paid by PMI in 2003 increased to $175.0 million from $99.8 million in 2002. Pool insurance claims paid by PMI in 2003 (excluding Old Pool) increased to $17.2 million from $10.0 million in 2002. Old Pool claims paid by PMI in 2003 decreased to $0.1 million from $0.6 million in 2002.

The frequency of defaults is not directly proportional 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 in the underlying property 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 likelihood of a defaulted loan being reinstated is minimal, PMI works with the servicer of the loan for a 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 PMI’s master policies.

Within 60 days after a primary insurance claim and supporting documentation have been filed, PMI has the option of:

• paying the coverage percentage specified in the certificate of insurance multiplied by the loss amount;

• in the event the property is sold pursuant to an agreement made prior to or during the 60-day period after the claim is filed, which we refer to as a prearranged sale, paying the lesser of (1) 100% of the loss amount less the proceeds of sale of the property or (2) the coverage percentage multiplied by the loss 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 referred to as real estate owned, or REO.

While PMI attempts to choose the claim settlement option which best mitigates the amount of its claim payment, PMI generally settles by paying the coverage percentage multiplied by the loss amount. In 2003 and 2002, PMI settled 23% and 22%, respectively, of the primary insurance claims processed for payment on the basis of a prearranged sale. In 2003 and 2002, PMI exercised the option to acquire the property on approximately 8% and 7%, respectively, of the primary claims processed for payment. At December 31, 2003, PMI owned $37.0 million of REO valued at the lower of cost or estimated realizable value.

Claim severity.    The severity of a claim, which is the ratio of the claim paid to the original risk in force relating to the loan, depends in part upon the specified coverage percentage for that loan. A higher coverage percentage on a loan generally decreases the potential severity of a claim on that loan, even though the claim amount may increase. PMI generally charges higher premium rates for higher coverage. PMI’s average primary coverage percentage was 24% for NIW in 2003 and in 2002.

The main determinants of the severity of a claim are the value of the underlying property, accrued interest on the loan, expenses advanced by the insured and foreclosure expenses, and the amount of mortgage insurance coverage placed on the loan. These amounts depend in part on the time required to complete foreclosure, which varies depending on state laws. Pre-foreclosure sales, acquisitions and other early workout efforts help to reduce overall claim severity. The average primary claim severity level has decreased from 100% in 1994 to 81% in 2003. PMI’s primary claim severity level in 2002 was 77%.

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Pool claims.    Pool claims are generally filed after the underlying property is sold. PMI settles a pool claim in accordance with the agreed upon terms of the applicable pool insurance policy, which includes a stop loss limit and, in some cases, a specified deductible. Subject to such stop loss limit and any deductible, PMI generally covers 100% of the loss minus net proceeds from the sale of the property and any primary claim proceeds. Other pool insurance policies may include a maximum coverage percentage or a defined benefit. Claims relating to policies with a maximum coverage percentage are settled at the lesser of the actual loss or the maximum coverage set forth in the applicable policy. Claims relating to policies with defined benefits are settled at the maximum coverage percentage set forth in the applicable policy. PMI settles pool claims immediately upon receipt of all supporting documentation.

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Loan Performance

The table below shows cumulative losses paid by PMI at the end of each successive year after the year of original policy issuance, referred to as a “policy year,” expressed as a percentage of the cumulative premiums written on such policies.

Percentage of Cumulative Primary Insurance Losses Paid (Gross)

To Cumulative Primary Insurance Premiums Written

Years Since Policy Issue	Policy Issue Year (Loan Closing Year)
	1982	1983	1984	1985	1986	1987	1988	1989	1990	1991	1992
1	0.9	0.3	0.2	—	0.1	—	—	—	—	—	—
2	38.1	14.8	9.8	4.5	1.5	0.4	0.1	0.3	0.7	0.8	1.1
3	112.1	47.3	44.0	18.7	5.2	2.0	2.0	3.6	7.1	6.6	6.9
4	166.3	83.0	83.1	35.2	8.7	5.1	6.1	10.8	17.8	16.9	16.3
5	180.9	129.3	114.3	47.4	12.2	9.7	11.6	21.9	31.7	28.9	28.3
6	229.6	165.9	127.1	56.4	15.6	13.1	18.5	32.4	41.8	39.8	36.1
7	251.0	177.5	135.9	60.7	18.5	17.5	23.1	40.3	50.5	47.4	40.3
8	265.4	184.6	139.3	63.0	21.3	20.7	26.2	45.7	56.2	51.3	41.5
9	265.7	187.7	141.9	65.0	24.1	23.0	29.1	49.6	59.2	52.7	41.3
10	264.4	189.8	142.6	65.3	25.8	25.1	31.5	51.7	60.9	52.6	41.1
11	263.8	191.0	142.9	65.9	27.4	26.5	33.6	52.8	61.4	52.7	41.0
12	264.4	191.3	142.6	65.8	28.4	27.8	34.6	53.1	61.4	52.7	41.0
13	263.3	191.1	142.1	65.8	28.8	28.4	35.0	53.3	61.4	52.6
14	262.2	190.6	141.7	65.9	29.0	28.6	35.2	53.3	61.4
15	261.5	190.1	141.5	66.0	29.1	28.5	35.2	53.2
16	260.8	189.8	141.3	66.0	29.1	28.5	35.2
17	260.4	189.5	141.0	66.0	29.1	28.6
18	259.8	189.5	140.9	66.0	29.1
19	259.6	189.5	140.8	66.0
20	259.6	189.4	140.8
21	259.5	189.5
22	259.5
	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003
1	—	—	0.1	—	—	—	0.1	1.2	1.1	0.1	0.1
2	1.0	1.0	2.8	2.9	2.3	1.2	2.7	10.2	6.6	4.5
3	5.5	6.5	10.4	8.3	5.8	3.8	5.9	21.8	22.5
4	13.4	13.7	15.4	11.9	8.7	5.7	8.6	35.2
5	18.7	18.0	18.2	14.2	10.4	6.7	11.1
6	21.1	20.1	19.2	15.3	11.1	7.7
7	21.9	20.9	20.1	15.8	11.9
8	22.0	21.3	20.3	16.1
9	21.8	21.3	20.4
10	21.6	21.3
11	21.7

The above table shows that, measured by gross cumulative losses paid relative to cumulative premiums written, or the cumulative loss payment ratios, the performance of policies originally issued in the years 1982 through 1984 was adverse, with cumulative loss payment ratios for those years ranging from 259.5% to 140.8%

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at the end of 2003. Such adverse experience was significantly impacted by deteriorating economic and real estate market conditions in the “Oil Patch” states in the 1980s. In 1985, PMI adopted substantially more conservative underwriting standards which we believe, along with increased premium rates and generally improving economic conditions, contributed to the lower cumulative loss payment ratios in subsequent years.

The table also shows the general improvement in PMI’s cumulative loss payment ratios since policy year 1985, relative to 1984 and earlier. This reflects both improved claims experience and higher premium rates charged by PMI for policy years 1985 and later. All policy years through 1995 have cumulative loss payment ratios at the end of 2003 that differ by no more than 0.1% from the end of 2002, an indication that these ratios have stabilized and reached their ultimate development for each of these policy years.

A major factor affecting the development of these loss ratios was the relatively low level of interest rates throughout 2003. These low rates led to record numbers of mortgage refinances in 2003, materially decreasing the amount of business remaining in book years before 2003. This had the effect of decreasing the remaining premium flow from these book years and putting upward pressure on the cumulative loss payment ratios.

Policy years 1986 through 1988 have developed to cumulative loss payment ratios between 28.6% and 35.2%. Policy years 1989 through 1992 have developed to somewhat higher ratios between 41.0% and 61.4%, reflecting both higher levels of claims on California loans insured in those years, as well as higher prepayment speeds when market rates dropped to relatively low levels from late 1992 through early 1994. Loss payment ratios continued to decline year-to-year after 1993 (21.1% at the end of six years), bottoming out at 7.7% at the end of six years for the 1998 policy year, a record low. The declines were due to an improvement in California’s economy and a strong national economy with no material regional weaknesses. The 1999 policy year is developing at a level slightly higher than 1998, but still at very low levels. Given the small amount of business left in the 1996 through 1999 books, further development is expected to be small.

The 2000 and 2001 book years have developed to ratios comparable to the 1985 book year at similar policy ages of 4 and 3 years, respectively, but for different reasons. The 1985 book year, which reached a ratio of 35.2% at the end of 4 years, was driven primarily by loss development. The 2000 and 2001 book years, on the other hand, reaching ratios of 35.2% and 22.5% at the end of four and three years, respectively, are being driven by the dual factors of significantly higher prepayments and higher claims payments than the previous years. The higher levels of claims combined with the lower levels of accumulated premiums have led to this increase in ratios.

The higher levels of claims in the 2000 and 2001 policy years were a result of an expansion into less-than-A quality and non-traditional loan product offerings. These loan types generally have shorter lives and earlier incidence of default than A quality and traditional loans, leading to earlier emergence of claims and shorter streams of premium income. The large volume of refinances in A quality business written in 2000 and 2001 experienced in 2003 decreased the accumulated premium received from those policy years, affecting the loss payment ratio development by increasing the ratio of claims paid to premiums received.

The 2002 book year is developing favorably compared to 2000 and 2001, due to lower levels of prepayments and lower levels of claims. The lower levels of prepayments are due to generally lower weighted average interest rates on loans insured in 2002 compared to 2000 and 2001.

Loss Reserves

A 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 default. To recognize the liability for unpaid losses related to the loans in default, PMI, in accordance with industry practice, establishes loss reserves in respect of loans in default based upon the estimated claim rate and estimated average claim amount of loans in default. Included in loss reserves are loss adjustment expense (LAE) reserves, and incurred but not reported (IBNR) reserves. These reserves are

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estimates and there can be no assurance that PMI’s reserves will prove to be adequate to cover ultimate loss developments on reported defaults. Consistent with industry accounting practices, PMI does not establish loss reserves for estimated potential defaults that may occur in the future. For a full discussion of our loss reserving policy and process, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates, Reserves for Losses and LAE. For a reconciliation of the beginning and ending reserve for losses and loss adjustment expenses on a consolidated basis, see Item 8. Financial Statements and Supplementary Data—Note 10. Losses and Loss Adjustment Expenses Reserves.

9. Reinsurance

Reinsurance is used as a capital and risk management tool by 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 agreement, where the assuming reinsurer’s liability to the policyholder is substituted for that of PMI.

PMI has a 5% quota share reinsurance agreement in place with a participating reinsurer relating to primary insurance business written by PMI from 1994 through 1997. Under the terms of this agreement, the reinsurer will indemnify PMI for 5% of all losses paid under the reinsured primary insurance business to which PMI ceded 5% of the related premiums less a ceding commission. Effective January 1, 2001, PMI commenced reinsuring its wholly-owned Australian subsidiary, PMI Mortgage Insurance Ltd, on an excess-of-loss basis. Under the terms of the agreement, for each of the calendar years from 2001 through 2005, PMI is obligated to indemnify PMI Mortgage Insurance Ltd for losses that exceed 130% of PMI Mortgage Insurance Ltd’s net earned premiums for each such year, but not for losses that exceed 220% of such net earned premiums. The agreement provides for automatic one-year extensions, unless terminated upon prior notice by either party. Upon such notice of termination, the agreement would continue in effect in the year of such notice and for the next four calendar years.

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 to retain the premiums (and related risk) on deep coverage business, The PMI Group formed several wholly-owned subsidiaries including Residential Guaranty Co., or RGC, Residential Insurance Co., or RIC, and PMI Mortgage Guaranty Co., or PMG, to provide reinsurance of such deep coverage to PMI. PMI uses reinsurance provided by its reinsurance affiliates solely for purposes of compliance with statutory coverage limits. CMG also uses reinsurance provided by its reinsurance affiliate to comply with statutory limits.

In 1997, PMI began offering GSE Pool insurance to select lenders and aggregators. In connection with the pool insurance policies issued, PMI may only retain 25% of the risk covered by such policies. PMI reinsures the remaining risk though RGC, PMG and RIC.

As discussed in Section B.1, Products, above, PMI also reinsures portions of its risk written on loans originated by certain lenders with captive reinsurers affiliated with such lenders. PMI also offers reinsurance products in Asia through its Hong Kong branch. (See Item 1, Section C.1, International Operations—Hong Kong, below.)

10. Regulation

State Regulation

General.    Our mortgage 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.

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Mortgage insurers are generally restricted by state insurance laws and regulations to writing mortgage insurance business only. This restriction prohibits our mortgage insurance subsidiaries from directly writing other types of insurance. The non-insurance subsidiaries of The PMI Group are not subject to regulation under state insurance laws except with respect to transactions with their insurance affiliates.

Insurance Holding Company Regulations.    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, and the interrelationships and transactions among, 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.

The PMI Group is treated as an insurance holding company under the laws of the State of Arizona. The Arizona insurance laws govern, among other things, certain transactions in our common stock and certain transactions between or among The PMI Group and its Arizona subsidiaries (PMI, PMG, RGC and RIC). Specifically, no person may, directly or indirectly, offer to acquire or acquire voting securities of The PMI Group or any one of the Arizona subsidiaries, if after consummation thereof, such person would be in control, directly or indirectly, of such entity, unless such person obtains the Arizona Director of Insurance’s prior approval. For purposes of the foregoing, “control” is rebuttably presumed to exist if such person, following acquisition, would, directly or indirectly, own, control or hold with the power to vote or hold proxies representing 10% or more of the entity’s voting securities. In addition, all material transactions involving PMI, PMG, RGC and/or RIC and any of their affiliates are subject to prior approval of the Director of Insurance, and shall be disapproved if they are found not to be “fair and reasonable.” PMI, on behalf of itself and its affiliates, is required to file an annual insurance holding company system registration statement with the Arizona, Florida and Wisconsin Departments of Insurance (and any other states that so request) disclosing all interaffiliate relationships, transactions and arrangements that occurred or were in effect during the prior calendar year, and providing information on The PMI Group, the holding company’s “ultimate controlling person.” PMI must also submit and update biographical information of the officers and directors of the holding company’s insurance subsidiaries, as well as officers and directors of The PMI Group.

The insurance holding company laws and regulations are substantially similar in Florida (where our title insurance company APTIC is domiciled) and Wisconsin (where CMG, Commercial Loan Insurance Corporation, or CLIC, and WMAC Credit Insurance Corporation, or WMAC Credit, are domiciled), and transactions among these subsidiaries, or any one of them and another affiliate (including The PMI Group) are subject to regulatory review and approval in the respective states of domicile. FGIC Corporation and FGIC are subject to regulation under insurance holding company statutes of New York, where FGIC is domiciled, as well as other jurisdictions where FGIC is licensed to do insurance business.

Reserves.    Our mortgage insurance subsidiaries are required under the insurance laws of their state of domicile 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. Contingency reserves are required to be held for ten years (and then released into surplus), although earlier releases may be authorized by state insurance regulators in certain cases. At December 31, 2003, PMI had statutory policyholders’ surplus of $519.4 million and statutory contingency reserves of $2.0 billion.

Dividends.    PMI’s ability to pay shareholder dividends (including returns of capital) is limited, among other things, by the insurance laws of Arizona and other states. PMI’s other Arizona subsidiaries are subject to the same statutory limitations as PMI. In October 2003, RGC paid an $8.4 million ordinary shareholder dividend. Under Arizona law, PMI may pay dividends out of available surplus without prior approval of the Arizona Director of Insurance, 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. PMI is permitted to pay ordinary dividends (as such are termed under the Arizona statute) to The PMI

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Group of $51.9 million in 2004 without prior approval of the Arizona Director of Insurance, provided that any such dividends must be paid after the first anniversary of PMI’s 2003 dividends, which were made in June 2003. 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 of Insurance. In 2003, PMI paid an extraordinary stockholder dividend of $100 million to The PMI Group. This dividend will be added to any proposed dividends to be paid within the subsequent twelve months to determine if such future dividends are “extraordinary”, and as such, would require the Arizona Director of Insurance’s prior approval. The Arizona Director of Insurance 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.

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 surplus and contingency reserves. Under Florida law, PMI’s surplus following a shareholder dividend must not be less than the greater of (i) 10% of its liabilities (excluding contingency reserves) or (ii) $4 million. As of year-end 2003, PMI’s liabilities (excluding contingency reserves) were $611.1 million, meaning shareholder dividends in 2004 may not reduce PMI’s statutory surplus below $61.1 million. CMG and APTIC face shareholder dividend/distribution restrictions similar to those imposed on PMI.

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 jurisdiction in which each is licensed to transact business. In most U.S. jurisdictions, policy forms must be filed prior to their use. In some U.S. jurisdictions, forms must also be approved prior to use.

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 or unaccredited reinsurers. Under such laws, if a reinsurer is not admitted or accredited in such states, the domestic company (e.g., PMI) 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. In addition, Arizona prohibits reinsurance unless the reinsurance agreements meet certain requirements even if no statutory financial statement credit is to be taken.

Examination.    Our licensed insurance and reinsurance subsidiaries 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. PMI was examined by the Arizona Director of Insurance in 2003 for the five year period ending December 31, 2002. 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. Likewise, the insurance departments of Florida and Wisconsin perform periodic financial and market conduct examinations of insurers domiciled in their jurisdictions.

National Association of Insurance Commissioners.    The National Association of Insurance Commissioners, or NAIC, has developed a rating system, the Insurance Regulatory Information System, or IRIS, primarily intended to assist state insurance departments in overseeing the statutory financial condition of all insurance

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companies operating within their respective states. IRIS consists of 12 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.

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; purchasers of mortgage loans such as Freddie Mac and Fannie Mae; and governmental insurers such as 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 material adverse effect on PMI. Legislation that increases the number of persons eligible for FHA or VA mortgages could have a material adverse effect on our ability to compete with the FHA or VA.

The Homeowners Protection Act, or HPA, provides for the automatic termination, or cancellation upon a borrower’s request, of private mortgage insurance upon satisfaction of certain conditions. HPA applies to owner-occupied residential mortgage loans regardless of lien priority and to borrower-paid mortgage insurance closed after July 29, 1999. FHA loans are not covered by HPA. Under HPA, automatic termination of mortgage insurance would generally occur once the LTV reaches 78%. A borrower who has a “good payment history”, as defined by HPA, 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.

The Real Estate Settlement and Procedures Act of 1974, or RESPA, applies to most residential mortgages insured by PMI. Mortgage insurance has been considered in some cases to be 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. RESPA is enforced by HUD and also provides for private rights of action.

HUD has proposed a rule under RESPA whereby lenders and other packagers of loans would be given the choice of offering a “Guaranteed Mortgage Package” or providing a “Good Faith Estimate” where the estimated fees are subject to a 10% tolerance. Qualifying packages would be entitled to a “safe harbor” from RESPA’s anti-kickback rules. Mortgage insurance is included in the package “to the extent upfront premium is charged.” HUD’s proposed rule has been submitted to the Office of Management and Budget for its review. It is unclear in what form, if any, HUD’s proposed rule will be implemented or what its impact, if any, will be on the mortgage insurance industry.

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, or HMDA. 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 the Mortgage Insurance Companies of America entered voluntarily into an agreement with the Federal Financial Institutions Examinations Council to report the same data on loans submitted for insurance as is required for most mortgage lenders under HMDA.

Privacy and Information Security.    The Gramm-Leach-Bliley Act of 1999, or GLB, imposes 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. With respect to PMI, GLB is enforced by state insurance regulators. Many of the states have enacted legislation implementing GLB and establishing information security regulation. Some states have enacted privacy laws which impose compliance obligations beyond GLB.

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In Europe, the collection and use of personal information is subject to strict regulation. The European Union’s Data Protection Directive establishes a series of privacy requirements that EU member states are obliged to enact in their national legislation. European countries that are not EU member states have similar privacy requirements in their national laws. These requirements apply to all businesses, including insurance companies. In general, companies may process personal information only if consent has been obtained from the persons concerned or if certain other conditions are met.

The U.S.A. Patriot Act of 2001, or the Patriot Act, contains anti-money laundering provisions and financial transparency laws and mandates the implementation of various new regulations applicable to financial services companies including insurance companies. The Patriot Act seeks to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. Anti-money laundering laws outside the U.S. contain similar provisions. In September 2002, the U.S. Treasury Department proposed anti-money laundering rules under the Patriot Act, which exempt property and casualty insurers, including our mortgage insurance subsidiaries.

Fair Credit Reporting Act.    The Fair and Accurate Transactions Act of 2003, or FACTA, amends and reauthorizes certain provisions of the Fair Credit Reporting Act, or FCRA, including provisions which direct the Federal Trade Commission, or FTC, and the Federal Reserve Board, or FRB, to promulgate regulations requiring notice to any consumer receiving an extension or grant of credit based on a counter offer by the creditor on material terms, including interest rate, that are materially less favorable than the terms generally available from the creditor to consumers, based in whole or in part on a consumer report. The FTC and FRB have proposed an effective date of December 1, 2004, for the regulation implementing this provision. It is not clear at this point what that regulation will provide or what its impact, if any, will be on our mortgage insurance operations.

11.    Financial Strength Ratings

PMI has been assigned the following insurer financial strength ratings: “AA+” by S&P with a negative outlook; “Aa2” by Moody’s with a stable outlook; and “AA+” by Fitch with a stable outlook.

PMI’s financial strength ratings have been based in part on the third party reinsurance agreements discussed above and on a capital support commitment from Allstate Insurance Company. Under the terms of a runoff support agreement with Allstate, in the event (i) PMI’s risk-to-capital ratio exceeds 23 to 1, (ii) PMI’s statutory policyholder surplus is less than $15.0 million, or (iii) a third party beneficiary brings a claim under the runoff support agreement, then Allstate may, at its option, in satisfaction of certain obligations it may have under such agreement (A) pay to PMI (or to The PMI Group for contribution to PMI) an amount equal to claims relating to policies written prior to termination of the Allstate support agreements which are not paid by PMI or (B) pay such claims directly to the policyholder. In the event Allstate makes any payment contemplated by the runoff support agreement, Allstate will be entitled to receive, at its option, subordinated debt or preferred stock of PMI or The PMI Group, as applicable, in return. However, we believe that the possibility of Allstate making such a payment is remote because we have several courses of action available to us to maintain PMI’s risk-to-capital ratio at the requisite level.

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 at least two of the following three ratings: “AA-” by Fitch or S&P, or “Aa3” by Moody’s.

C. International Operations, Financial Guaranty and Other Strategic Investments

In January 2003, we announced the formation of a new wholly-owned subsidiary, PMI Capital Corporation, to manage our international mortgage operations and strategic investments. Revenues for the year ended December 31, 2003 from our consolidated subsidiaries, PMI Australia, PMI Europe and APTIC, were approximately 36% of our consolidated revenues compared with approximately 29% in 2002 and 25% in 2001.

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These amounts do not include equity earnings from our unconsolidated strategic investments, which are accounted for in our consolidated financial statements on the equity method of accounting in accordance with GAAP. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations— International Operations and Item 8. Financial Statements and Supplementary Data—Note 20. Business Segments, for additional information about geographic areas. Also, the results of operations for APTIC were classified as discontinued operations in the fourth quarter of 2003 and prior periods have been reclassified accordingly.

1. International Operations

Our international mortgage insurance and credit enhancement operations include our operations in Australia and New Zealand, the European Union and Hong Kong.

Australia and New Zealand

We offer mortgage insurance in Australia and New Zealand through our wholly-owned subsidiaries, PMI Mortgage Insurance Ltd, or PMI Ltd, and PMI Indemnity Limited, or PMI Indemnity. The combined operations of PMI Ltd and PMI Indemnity are referred to as PMI Australia. PMI Australia is headquartered in Sydney, Australia, and has offices throughout Australia and New Zealand. PMI Australia’s financial strength is rated “AA” by S&P and Fitch, and “Aa3” by Moody’s.

At December 31, 2003, the total assets of PMI Australia were $703.8 million compared to $442.4 million at December 31, 2002. We did not hedge the foreign exchange exposure in Australian dollars to U.S. dollars in 2003. The average exchange rate was 0.6529 U.S. dollars per Australian dollar in 2003 compared to 0.5440 in 2002.

Single premiums and 100% coverage characterize Australian mortgage insurance, known as “lenders mortgage insurance,” or LMI. 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 earns the single premium in its financial statements over time according to an actuarially determined multi-year schedule. Premiums are partly refundable if the policy is canceled within the first year.

LMI provides insurance coverage for the unpaid loan balance, including selling costs and expenses, following the sale of the security property. Historically, losses normally range from 20% to 30% of the original loan amount. “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 ranges between 20% and 30%.

The majority of the loans insured by PMI Australia are variable interest rate loans with terms up to 30 years. Changes in interest rates impact the frequency of defaults and claims with respect to these loans. Given that mortgage interest is not tax deductible in Australia or New Zealand on owner-occupied properties, borrowers have a strong incentive to reduce their principal balance by amortizing or prepaying their mortgages.

The five largest Australian banks collectively provide 60% or more of Australia’s residential housing finance. Other market participants in Australian and New Zealand mortgage lending include regional banks, building societies, credit unions and non-bank mortgage originators. PMI Australia’s five largest customers provided 58% of PMI Australia’s 2003 gross premium written. PMI Australia’s principal competitor is a wholly-owned subsidiary of General Electric Corporation. PMI Australia increased its market share in the Australian mortgage insurance market over 2002 in terms of gross premiums written due to a major competitor leaving the market and increased business from a large customer.

A significant portion of PMI Australia’s business is acquired through quota share reinsurance agreements with its lending customers. These quota share reinsurance agreements typically contain a contractual period

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under which the lender commits to send PMI Australia a prescribed proportion of business. PMI Australia wrote approximately 46% of its new business premiums under these agreements in 2003, compared to 41% in 2002. PMI Indemnity is not a party to such quota share reinsurance agreements.

In 2003, both PMI Ltd and PMI Indemnity maintained their S&P ratings of “AA” with a negative outlook and “AA-”, respectively, and their Moody’s ratings of “Aa3” with a positive outlook, and received affirmation by Fitch of their “AA” rating. On February 18, 2004, Moody’s announced that it had placed the insurance financial strength rating of PMI Ltd under review for a possible upgrade. PMI Australia is a party to capital support agreements in which PMI agrees to provide funds to ensure that both PMI Ltd. and PMI Indemnity are able to maintain prudent levels of capital to maintain their credit ratings.

For discussion on PMI Australia’s loss reserves, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies and Estimates, Reserves for Losses and LAE—International Operations.

PMI Australia is subject to regulation and examination by both the Australia and New Zealand regulatory authorities concerning many aspects of its business, including the ability to pay dividends.

Europe

PMI Mortgage Insurance Company Limited, or PMI Europe, is a mortgage insurance and credit enhancement company incorporated and located in Dublin, Ireland, with an affiliated sales company incorporated in the United Kingdom and located in London. PMI Europe is fully authorized to provide credit, suretyship and miscellaneous financial loss insurance by the Irish Financial Services Regulatory Authority. PMI Europe’s authorization enables it to offer its products in all of the European Union member states. PMI Europe’s claims paying ability is rated “AA” by S&P and Fitch, and “Aa3” by Moody’s. These ratings are based upon PMI Europe’s initial capitalization, its management expertise, a capital support agreement provided by PMI, and a guarantee by The PMI Group of PMI’s obligations under the capital support agreement.

PMI Europe currently offers capital markets products, excess-of-loss reinsurance and primary insurance, all of which are related to credit default risk on residential mortgage loans. Capital markets products are designed to support secondary market transactions, notably credit-linked notes, collateralized debt obligations, mortgage-backed securities or synthetic securities transactions (principally, credit default swap transactions). Lenders frequently engage in these transactions to reduce the capital they must hold pursuant to local banking capital regulations or to provide funding for their mortgage lending activities. As of December 31, 2003, PMI Europe had provided credit protection with respect to German and United Kingdom residential mortgage loans.

At December 31, 2003, 26% of PMI Europe’s risk in force stemmed from nine credit default swap transactions, all of which were designed primarily to allow the mortgage lenders involved to reduce the level of required regulatory capital. In three of these transactions, PMI Europe assumed a “first loss,” unrated risk position. In the remaining transactions, PMI Europe’s risk position was rated at least investment grade, the majority being rated AAA. Competitors in this product line include mortgage insurance companies, financial guaranty insurance companies, banks, and traditional bond investors. Many of these competitors have significantly greater financial resources than PMI Europe.

PMI Europe also offers excess-of-loss reinsurance coverage. Excess-of-loss reinsurance is typically provided to a lender’s captive reinsurance company to reduce that captive lender’s “catastrophic” risk exposure. These transactions are believed to be risk-remote in that the lender or its captive insurer assumes a significant amount of “first loss” risk. This insurance structure is used frequently in the United Kingdom by its largest mortgage lenders. PMI Europe completed one excess-of-loss reinsurance transaction in 2003. As of December 31, 2003, less than 1% of PMI’s Europe’s risk in force stemmed from excess-of-loss reinsurance. Potential competitors with respect to these products include mortgage insurance companies and multi-line insurers.

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PMI Europe’s third product line, primary insurance, is similar to the products offered in the U.S., Australia and New Zealand. Primary insurance is mortgage insurance applied to, priced, and settled on each loan. In Europe today, this product is only purchased regularly in the United Kingdom and Ireland. PMI Europe is attempting to develop greater interest and use of primary insurance in other European countries. Potential competitors at the moment include mortgage insurers and multi-line insurers.

In October 2003, PMI Europe entered into a definitive agreement to acquire the U.K. lenders’ primary insurance portfolio from Royal & Sun Alliance Insurance Group plc, or R&SA. The portfolio to be acquired consists of U.K. residential mortgage loans originated in 1993 and subsequent years. The portfolio covers approximately $15 billion of original insured principal value and $2.3 billion of remaining exposure. R&SA transferred all loss reserves and unearned premium reserves associated with the portfolio to PMI Europe totaling approximately $55 million as of October 6, 2003. Included in the reserves transferred was approximately $47 million in unearned premium reserves. R&SA also agreed to provide excess-of-loss reinsurance to PMI Europe with respect to the portfolio. Under the terms of the agreement, R&SA and PMI Europe share certain economic benefits if loss performance is better than expected. The acquisition is subject to U.K. and Irish regulatory approval and U.K. court approval, which is anticipated to take approximately six to nine months, and other customary closing conditions.

As an interim measure, TPG Reinsurance Company Limited, or TPG Re, the parent of PMI Europe, has reinsured the R&SA portfolio on a 100% quota share basis effective July 1, 2003, which reinsurance will remain in place until the date the portfolio is transferred to PMI Europe following court approval. PMI Europe has guaranteed TPG Re’s obligations under the reinsurance arrangement. As of December 31, 2003, 74% of our European operations’ risk in force stemmed from this reinsurance transaction. Once the portfolio is transferred to PMI Europe, the reinsurance agreement will be terminated.

To limit our exposure in the event of severe economic circumstances, R&SA has agreed to reinsure TPG Re in respect of the R&SA portfolio for $55 million of losses in excess of the first $55 million. As of December 31, 2003, R&SA has deposited approximately $10.8 million with TPG Re to partly secure its obligations under the excess-of-loss contract. TPG Re’s rights and interests under the excess-of-loss contract, as well as the $10.8 million deposit, will transfer to PMI Europe upon transfer of the R&SA portfolio.

For discussion on PMI Europe’s loss reserves, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies and Estimates, Reserves for Losses and LAE—International Operations.

Hong Kong

Through its Hong Kong branch, PMI has entered into a reinsurance agreement with the Hong Kong Mortgage Corporation, or HKMC, a public sector entity created to add liquidity to the Hong Kong residential mortgage market. HKMC is a direct insurer of residential mortgages with LTVs of up to 90%. PMI, among other insurers, provides reinsurance coverage on amounts over 70% LTV. For the year ended December 31, 2003, PMI reinsured $469.3 million of loans under its reinsurance agreement with HKMC. Insurance in force was $1.264 billion at December 31, 2003, compared to $959.4 million at December 31, 2002.

2. Financial Guaranty Insurance and Reinsurance

FGIC Corporation

The PMI Group is the strategic investor in a group of investors that acquired Financial Guaranty Insurance Company, or FGIC, together with its immediate holding company, FGIC Corporation, from General Electric Capital Corporation, or GECC, on December 18, 2003 for a total value of $2.18 billion, including a $284 million earnings dividend paid by FGIC prior to closing. The investor group includes affiliates of The Blackstone Group,

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The Cypress Group and CIVC Partners L.P. GECC retained a 5% common equity interest in FGIC Corporation. PMI is the largest shareholder with an ownership interest of approximately 42% of the outstanding common stock of FGIC Corporation. We account for this investment under the equity method of accounting in accordance with Accounting Principles Board (APB) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock and, accordingly, the investment is not consolidated. We believe that this investment will provide us with the opportunity to realize our strategic goal of becoming a global provider of credit enhancement products across multiple asset and risk classes, which would include achieving a major presence in the primary financial guaranty industry.

FGIC is primarily engaged in the business of providing financial guaranty insurance for municipal bonds and asset-backed securities. FGIC began its financial guaranty insurance operations in 1983. The financial guaranty insurance policies which FGIC insures typically guarantee scheduled payments on an issuer’s obligations. Upon a payment default on an insured obligation, FGIC is generally required to pay the principal and interest due in accordance with the obligation’s original payment schedule. FGIC’s financial strength is rated “AAA” by S&P and Fitch, and “Aaa” by Moody’s. FGIC is licensed to engage in financial guaranty insurance in all 50 states, the District of Columbia, the Commonwealth of Puerto Rico and through a branch in the United Kingdom. FGIC Corporation’s senior unsecured debt is rated “AA” by S&P, “Aa2” by Moody’s and “AA” by Fitch.

To date, FGIC has provided financial guaranty insurance primarily for municipal obligations and, to a lesser extent, for asset-backed securities. Municipal obligations include general obligation bonds supported by the issuer’s taxing power and special revenue bonds and other special obligations of state and local governments supported by the issuer’s ability to impose and collect fees and charges for public services or specific projects. Asset-backed obligations are generally issued in structured transactions backed by pools of assets such as residential mortgage loans, consumer or trade receivables, securities or other assets having an ascertainable cash flow or market value. As of December 31, 2003, $206.7 billion of FGIC’s total net par outstanding, or 91.6% of FGIC’s total net par outstanding, represented insurance of municipal obligations.

To date, FGIC has participated on a selective basis in the asset-backed obligation market. Asset-backed obligations or securitizations are secured by or payable from a specific pool of assets held by a special purpose issuing entity. FGIC’s focus in the asset-backed obligation market has been on mortgage-backed securities, particularly securities backed by home equity lines of credit.

At December 31, 2003, FGIC Corporation had consolidated total assets of $3.0 billion, including $2.8 billion of cash and investment securities. At December 31, 2003, FGIC’s statutory capital base under statutory accounting practices was $1.8 billion.

Our stockholders agreement with the other members of the investor group provides for certain corporate governance arrangements with respect to FGIC Corporation. The stockholders agreement provides, among other things, that we will select five of the 14 board members, and that an unaffiliated Chairman of the Board will be selected by the Blackstone funds and Cypress funds subject to our reasonable approval. We have also designated one of our directors as the non-executive Vice-Chairman of FGIC and FGIC Corporation.

Pursuant to the stockholders agreement, a number of important corporate matters with respect to FGIC and FGIC Corporation may not be acted on without the approval of specified members of the board of directors and, in some cases, without the approval of specified members of the investor group. These corporate matters include, among other things, approval of the annual business plan, removal of the chief executive officer, a public offering of equity securities and a merger, consolidation or sale of all or substantially all assets. The duration of the approval requirements varies by matter and in some instances terminates upon a public offering of FGIC Corporation common stock in which the aggregate public offering price is at least $100 million, or a qualified public offering.

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We and the other parties to the stockholders agreement have agreed not to sell any of our shares of FGIC Corporation common stock until all preferred securities issued to GECC, or the securities into which they have been converted, in connection with the acquisition have been redeemed in full or otherwise cease to be outstanding. Even if all such securities have been redeemed or cease to be outstanding, we and the other parties to the stockholders agreement have agreed not to sell any of our shares until the earlier of the fifth anniversary of closing or a qualified public offering. Once these transfer restrictions described above have lapsed, no member of the investor group may sell shares of common stock of FGIC Corporation without first offering to sell those shares to FGIC Corporation and the other stockholders at the price that the selling stockholder would be willing to sell such shares to a third party. Except as described below, this right of first offer will terminate upon a qualified public offering.

In addition, after the fifth anniversary of the closing but prior to a qualified public offering, and assuming that the preferred securities issued to GECC, or the securities into which they have been converted, have been redeemed in full or otherwise cease to be outstanding, we, or the Blackstone funds and the Cypress funds collectively, will be entitled to cause the other to sell all its shares to a third party. We, or the Blackstone funds and the Cypress funds collectively, must control at least 40% of the then outstanding FGIC Corporation common stock (other than any shares issued in private offerings following the closing) to exercise this right. This right can only be exercised in connection with a sale in a bona fide arm’s length transaction to a third party unaffiliated with the investor or investors initiating the sale and is subject to limitations regarding the type of consideration that must be offered. This right will continue even after a qualified public offering so long as we, or the Blackstone funds and the Cypress funds collectively, continue to hold equity securities of FGIC Corporation representing at least 85% of their respective original equity securities and at least 25% of the outstanding shares of common stock (other than any shares issued in private offerings following the closing) and as long as the price per share of common stock in the sale meets specified criteria. No stockholder can exercise this right to force a sale without first offering that stockholder’s shares to FGIC Corporation and the other stockholders under the right of first offer described above.

Under the stockholders agreement, we may not purchase any shares offered to us pursuant to the right of first offer described above (unless offered by a Blackstone fund or a Cypress fund) to the extent that the purchase would cause us to own more than 49% of the outstanding FGIC Corporation common stock. In addition, following a qualified public offering, we generally may not purchase any additional shares of FGIC Corporation common stock until the earlier of (1) the fifth anniversary of the qualified public offering or (2) the date that the Blackstone funds and the Cypress funds hold equity securities of FGIC Corporation representing less than 33% of the shares of common stock held by them at closing. The standstill limitation described in the preceding sentence will terminate automatically in the event of specified acquisitions or offers to acquire ownership of FGIC Corporation equity securities by third parties. Finally, so long as the Blackstone funds or the Cypress funds own any FGIC Corporation equity securities, we may not purchase or sell any FGIC Corporation common stock if the purchase or sale would reasonably be expected to result in a downgrade of the then current financial strength ratings of FGIC Corporation or FGIC.

FGIC’s ability to pay dividends is subject to restrictions contained in the insurance laws and related regulations of New York and other states where FGIC is licensed to do insurance business. Under New York insurance law, FGIC may pay dividends out of statutory earned surplus, provided that statutory surplus after any dividend may not be less than the minimum required paid-in capital and provided that together with all dividends declared or distributed by FGIC during the preceding 12 months, the dividends do not exceed the lesser of (1) 10% of policyholders’ surplus as of its last statement filed with the New York superintendent or (2) adjusted net investment income during this period. In addition, in accordance with the normal practice of the New York Insurance Department in connection with change in control applications, FGIC Corporation is subject to commitments to the department that it will prevent FGIC from paying any dividends for a period of two years from the date of the acquisition by the investor group without the prior written consent of the department.

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RAM Re

We own 24.9% of RAM Holdings Ltd. and RAM Holdings II Ltd., or RAM Re Holdings, which are the holding companies for RAM Re. The RAM Re holding companies’ other major shareholders include Transatlantic Reinsurance Company, CIVC Partners, Greenwich Street Capital Partners, MBIA Insurance Corp. and High Ridge Capital Partners. RAM Re commenced business in February 1998 with the purpose of reinsuring municipal, structured finance and international debt obligations originally underwritten by “AAA”-rated guarantors. RAM Re provides reinsurance to primary financial guarantor companies that market credit enhancement of debt securities through insurance on scheduled payments on an issuer’s obligations. RAM Re’s insured portfolio consists primarily of municipal securities and structured products, principally asset-backed securities. RAM Re’s major customers include Ambac Financial Group, Inc., MBIA Insurance Corp., Financial Security Assurance, Inc. and FGIC.

The financial guaranty policies which RAM Re reinsures typically cover full and timely payment of scheduled principal and interest on debt securities. A reinsurer receives its share of the premium from the primary insurer, and typically pays a ceding commission to the primary insurer as compensation for underwriting expenses. Insurance is ceded by the primaries to the reinsurers either on a treaty or facultative basis. Treaty reinsurance typically involves an agreement covering a defined class of business where the reinsurer must assume, and the insurer must cede, a portion of all risks defined by the terms of the treaty. In facultative agreements, reinsurance is negotiated on a case-by-case basis for coverage of individual transactions or business segments, giving both parties control over the credit process. In recent years, treaty policies have become more prominent.

RAM Re is currently rated “AAA” by S&P and “Aa3” by Moody’s. RAM Re and its holding companies are subject to regulation under the laws of Bermuda.

3. Residential Lender Services

APTIC

On October 27, 2003, we announced that we had entered into a definitive agreement to sell APTIC for $115 million in cash, subject to post-closing adjustment, to a subsidiary of Fidelity National Financial. The transaction is subject to regulatory approvals and other customary closing conditions, and we expect it to close in the first half of 2004. In accordance with Statement of Financial Accounting Standards No. 144, the results of operations for APTIC were classified as discontinued operations in the fourth quarter of 2003 and prior periods have been reclassified accordingly. We expect to realize a gain on the sale of APTIC in the first or second quarter of 2004.

APTIC is licensed in 45 states and the District of Columbia. 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. 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. Based on direct premiums written during 2002, APTIC is ranked fourth among the 28 active title insurers conducting business in Florida. For the year ended December 31, 2003, 48% of APTIC’s premiums earned came from its Florida operations, compared to 47% in 2002.

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 97% of APTIC’s premiums earned for the years ended December 31, 2003 and 2002.

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 The PMI Group.

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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.

Fairbanks

As of December 31, 2003, our ownership interest is approximately 57% and our investment balance in Fairbanks is approximately $115.8 million. Fairbanks’ wholly-owned subsidiary, Fairbanks Capital Corp., or Fairbanks Capital, services single-family residential mortgages and specializes in the resolution of nonperforming, subperforming, subprime, Alternative A, and home equity loans. Fairbanks is headquartered in Salt Lake City, Utah and maintains servicing facilities in Salt Lake City, Utah, Hatboro, Pennsylvania, Jacksonville, Florida and Austin, Texas. Fairbanks’ Austin facility is scheduled to close at the end of March 2004.

Established in 1989, Fairbanks Capital initially acquired subperforming and nonperforming loans for its own portfolio. It later began managing and resolving non-performing loans and servicing subprime products for third parties, transitioning itself to a third-party servicer of subprime, Alternative A and home equity products. As of December 31, 2003, Fairbanks Capital serviced approximately $41 billion in mortgages, compared to approximately $49 billion as of December 31, 2002.

Fairbanks utilizes various notes payable and line of credit arrangements to finance servicing advances that it makes in the normal course of business and to finance the acquisition of mortgage servicing rights. These borrowing arrangements require repayment of the financed amount as servicing receivables are collected or in the case of mortgage servicing rights, using monthly amortizing payments not to exceed 18 months. Financing counterparties include various Wall Street investment banks and national commercial lenders. Fairbanks’ total notes payable, cash and cash equivalents and shareholders’ equity as of December 31, 2003 were $244.6 million, $29.8 million and $132.0 million, respectively. As of December 31, 2003, Fairbanks owned approximately $114.7 million of purchased mortgage servicing rights.

Fairbanks Capital’s business is subject to extensive regulation, supervision and licensing by various state and federal agencies. On the federal level, Fairbanks Capital’s business is regulated by, among other statutes and regulations, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, RESPA, the Truth in Lending Act and the Home Ownership and Equity Protection Act of 1994. Fairbanks Capital is also subject to the laws of the states in which it is licensed as a mortgage servicer or debt collector relating to its practices, procedures and type and amount of fees it can collect from borrowers. For a discussion of litigation actions and regulatory matters facing Fairbanks, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations, Other and —Risk Factors.

D. Investment Portfolio

As of December 31, 2003, The PMI Group and its consolidated subsidiaries had total cash and cash equivalents of $397.1 million and investments of $2.8 billion. The U.S. companies included in the consolidated financial statements (including The PMI Group, PMI, RGC, PMG, RIC, CLIC and WMAC), or the U.S. Portfolio, held cash and cash equivalents and investments of $2.4 billion as of December 31, 2003. The U.S. Portfolio is managed by The PMI Group’s Corporate Finance and Administration Department under The PMI Group and Subsidiaries Investment Policy Statement, or the Policy, as adopted by The PMI Group’s Board of Directors. A small percentage of the U.S. Portfolio is invested in common stock of publicly traded corporations and is managed by an external investment advisor, Weiss, Peck & Greer. APTIC’s portfolio has not been included in the totals above due to its pending sale.

The principal objective of the Policy is to attain consistent and competitive after-tax total returns. The Policy emphasizes optimizing the level of income, while maintaining adequate levels of liquidity, safety and

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preservation of capital. Portfolio appreciation and minimization of taxes are secondary objectives. The Policy sets forth permissible investor sector allocation ranges, fixed income duration range, and per issuer credit based limits.

As of December 31, 2003, based on market value and excluding cash and cash equivalents, approximately 90% of the U.S. Portfolio was invested in fixed income securities and approximately 10% was invested in equity securities. 96% of the fixed income investments were rated “A” or better by at least one nationally recognized securities rating organization, and of those, 63% were rated “AAA,” 22% were rated “AA,” and 11% were rated “A.” The fixed income portfolios’ modified duration was 4.6 years as of December 31, 2003.

Investments held by The PMI Group’s insurance subsidiaries (i.e., PMI, RGC, PMG, RIC, CLIC, and WMAC) are subject to the insurer investment laws of each of the states in which they are licensed. These statutes, designed to preserve insurer assets for the protection of policyholders, set limits on the percentage of assets that an insurer can hold in certain investment categories (e.g., under Arizona law, no more than 20% in equity securities) and with a single issuer (e.g., 10% under Arizona law).

PMI Australia and PMI Europe’s investments are subject to the investment policies adopted by their respective boards of directors and are managed by investment advisory firms under separate investment management agreements. The PMI Group’s Corporate Finance and Administration Department regularly reviews the investments of PMI Australia and PMI Europe. Their boards of directors also review the respective investment portfolios on a quarterly basis. PMI Australia and PMI Europe’s investment policies specify that the portfolios must have a concentration of investments in intermediate-term, high-grade bonds.

As of December 31, 2003, PMI Australia had $642.1 million in cash and cash equivalents and investments managed by Deutsche Asset Management. The investment portfolio consists mainly of high-grade Australian currency-denominated fixed income securities issued by sovereign, semi-government, and corporate entities. At December 31, 2003, the portfolio’s duration was 4.1 years. The entire Australian bond portfolio is rated “A” or better. The portfolio also contains a small allocation of investments in Australian equity securities.

As of December 31, 2003, PMI Europe had cash and cash equivalents and investments of $194.4 million, which is largely managed by Morgan Stanley Investment Management. The investment portfolio consists of Euro and U.K. Sterling currency-denominated fixed income securities issued by sovereign, agency, and corporate entities. The portfolio’s duration was 4.3 years at December 31, 2003. PMI Europe’s portfolio did not contain investments in equity securities as of year end.

Our unconsolidated strategic investments which have significant investment portfolios are: FGIC, which is currently managed by GE Asset Management and will be managed by Blackrock Financial and Wellington Management later in 2004; CMG, managed by CIMCO; and RAM Re, managed by MBIA Asset Management. The PMI Group’s ownership interest in the foregoing entities is approximately 42%, 50%, and 25%, respectively. The Corporate Finance and Administration Department reviews these entities’ investment portfolios and strategies on a quarterly basis. Through our representation on their boards of directors, we have limited ability to influence their investment management.

Foreign Currency Exchange Risk

We are subject to foreign currency risk exposure due to operations in foreign countries whose currencies fluctuate relative to the U.S. dollar, the basis of our consolidated financial reporting. The risk falls into two general categories: economic exposure and transaction exposure. Economic exposure is defined as the unexpected change between anticipated net cash flow in currencies other than the U.S. dollar and the actual results that are reflected in our consolidated financial statements after translation. In 2003, PMI estimates that weakness in the U.S. dollar relative to the Australian dollar and Euro created a positive variation to consolidated net income which amounted to $8.7 million based on the applicable exchange rates as of December 31, 2002.

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Transaction exposure refers to currency risk related to specific transactions and is defined as occurring between the time a firm commitment in a foreign currency is entered into, and the time the cash is actually paid. Under The PMI Group, Inc. and Subsidiaries Derivative Use Plan’s Foreign Exchange Policy Guidelines, we are authorized to hedge our transaction exposure through the purchase of forward currency contracts. PMI had no transactions of this nature in 2003.

E. Employees

As of December 31, 2003, The PMI Group, together with its wholly-owned subsidiaries and CMG had 1,328 full-time and part-time employees, of which 752 persons performed services primarily for PMI, 179 were employed by PMI Australia, six were employed by PMI Europe, 24 performed services primarily for CMG, and an additional 367 persons were employed by APTIC. Our employees are not unionized and we consider our employee relations to be good. In addition, MSC had 478 temporary workers and contract underwriters as of December 31, 2003.

Item 2. Properties

We currently lease approximately 120,800 square feet of office space in Walnut Creek, California for our home office from PMI Plaza LLC, a wholly-owned subsidiary of PMI, which lease terminates in 2009. PMI is in the process of subleasing its former home office of approximately 100,000 square feet in San Francisco under a lease which expires in December 2004. The remaining rent owed on this lease has been accrued as a charge associated with our relocation to Walnut Creek in August 2002. PMI leases branch offices throughout the United States and its operations data center in Rancho Cordova, California. PMI will consolidate certain field underwriting and sales offices and reduce the number of field personnel in 2004. We conduct our international operations in leased facilities in Ireland, the United Kingdom, Italy, Australia, New Zealand and Hong Kong.

Item 3. Legal Proceedings

Fairbanks and Fairbanks Capital’s servicing practices have been the subject of investigations by the FTC, HUD and the Department of Justice. On November 12, 2003, the FTC and HUD announced that they had reached a settlement of their ongoing investigations of Fairbanks. We have guaranteed approximately two-thirds of the funds that may become due to its lenders under a $30.7 million letter of credit, which may be drawn upon by the FTC as security for a portion of a $40 million redress fund as part of the settlement. The settlement is contingent upon the settlement order of the federal district court in Massachusetts becoming finally effective, which will occur upon the related final settlement of certain class action litigation (see below). If the FTC were to file an enforcement action against Fairbanks, it might also name us in such a proceeding.

Fairbanks has entered into a settlement agreement with the plaintiffs in certain of the putative class action suits pending against it. The settlement agreement provides for the payment by Fairbanks of attorney’s fees and costs, the implementation of the $40 million redress fund negotiated jointly with the FTC, a “reverse or reimburse” program through which affected customers’ accounts will be credited or refunds will be issued for certain previously assessed amounts, and a stipulation regarding its future operations. There can be no assurance that the court will approve the settlement. In addition, PMI has been named as a defendant in several actions relating to the practices of Fairbanks. With the exception of two actions in California, both of which have been stayed, the actions in which PMI has been named as a defendant have been dismissed without prejudice or settled by Fairbanks Capital. If the Fairbanks Capital settlement of the class action litigation described above is effected, that settlement will include a release of PMI.

HUD’s criminal investigation into Fairbanks Capital’s servicing practices has concluded, and Fairbanks believes that the Department of Justice criminal investigation is closed. Regulatory agencies in five states in which Fairbanks Capital does a significant amount of business have indicated that, notwithstanding the settlement by Fairbanks with the FTC and HUD, they intend to require Fairbanks Capital to refund to consumers

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in their respective states amounts that they allege Fairbanks Capital had improperly collected and to enter into consent decrees regulating various aspects of Fairbanks Capital’s business. In addition, Fairbanks has entered into a consent order with the State of Maryland under which it has agreed to change certain of its practices under Maryland law and refund certain amounts to Maryland borrowers. For information regarding legal and regulatory matters with respect to Fairbanks, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors.

On June 24, 2003, an action against APTIC was filed in the Circuit Court of the State of Florida, Broward County, seeking certification of a statewide class of consumers and alleging that, under Florida laws and regulations applicable to title insurance companies, APTIC was required to but failed to disclose to the plaintiffs that they were entitled to a reduced fee on the title insurance policies purchased by plaintiffs in connection with refinancings of their mortgages. APTIC is also subject to a similar lawsuit in the Supreme Court of New York, County of Nassau, and may be subject to additional similar lawsuits in the future. APTIC intends to vigorously defend these claims. These actions seek, among other things, damages and declaratory and injunctive relief. APTIC intends to vigorously defend these claims. However, we cannot be sure that the outcome of this or any similar litigation will not materially affect our consolidated financial position or results of operations.

The appeal in Baynham, et al. v. PMI Mortgage Insurance Co., arising from PMI’s earlier settlement of a class action in the 11^th Federal Circuit in Georgia, has been dismissed after a settlement among the plaintiffs and certain objectors in the class action. As a result of dismissal of the appeal, the settlement in the underlying class action has proceeded. We have previously disclosed the terms of the settlement in our annual report on Form 10-K for the year ended December 31, 2002. PMI has taken charges in 2000, 2001 and 2002 in the amount of its estimated contribution to the settlement of the underlying class action. Settlement proceeds were distributed to plaintiffs in December 2003 and January 2004, and the settlement agreement’s three year injunction expired on December 31, 2003. The injunction, which extended to all members, present and future, of the putative class, provided 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 with the GSEs, met the minimum requirements for risk transfer and cost recovery specified in the injunction, they would be deemed to be in compliance with RESPA and other applicable laws. The injunction also prohibited 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.

In April 2002, PMI commenced litigation in the United States District Court for the Northern District of California (PMI Mortgage Insurance Co. v. American International Specialty Lines Insurance Company, et al.) to obtain reimbursement from its former insurance carriers for costs incurred in connection with its defense and settlement of the Baynham action. In November 2002, PMI and its former insurance carriers filed competing motions for summary judgment on the issue of whether the activities of PMI that were the subject of the Baynham action were “professional services” and, therefore, covered under the relevant insurance policies. On December 16, 2002, the District Court denied PMI’s motion for summary judgment and granted the insurance carriers’ motion for summary judgment. PMI’s appeal is currently pending.

In June 2003, an action against PMI was filed in the federal district court of Orlando, Florida, seeking certification of a nationwide class of consumers who allegedly were required to pay for private mortgage insurance written by PMI and whose loans allegedly were insured at greater than PMI’s “best available rate.” The action alleges violations of FCRA. PMI intends to vigorously defend this action. This action seeks, among other things, damages and declaratory and injunctive relief. PMI intends to vigorously defend these claims. However, we cannot be sure that the outcome of this or any similar litigation will not materially affect our consolidated financial position or results of operations.

Various other legal actions and regulatory reviews are currently pending that involve us and specific aspects of our 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 our consolidated financial condition, results of operations or cash flows.

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EXECUTIVE OFFICERS OF REGISTRANT

Set forth below is certain information regarding The PMI Group’s executive officers as of February 27, 2004.

W. ROGER HAUGHTON, 56, is Chairman of the Board and Chief Executive Officer of The PMI Group and Chairman of PMI. He brings more than 33 years of experience to his positions. Mr. Haughton joined us in 1985 from Allstate Insurance Company, where he held various underwriting positions since 1969. He served as President and Chief Executive Officer of PMI from January 1993 until January 2004. He became President, Chief Executive Officer and a director of The PMI Group when The PMI Group went public in April 1995, and was elected Chairman of the Board in May 1998. A graduate of the University of California at Santa Barbara, Mr. Haughton holds a B.A. in economics. He is a member of the executive committee and past President and current Vice 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. Mr. Haughton is a member of the Board of Directors of Habitat for Humanity International, and is on the board and is a former Chairman of Social Compact, a Washington D.C. organization dedicated to promoting revitalization of America’s inner cities. He is also on the executive committee and board of San Francisco’s Bay Area Council. Mr. Haughton is a trustee for the University of California at Santa Barbara, and he also serves on the policy advisory boards for both the Fisher Center for Real Estate & Urban Economics at the University of California at Berkeley and the School of Real Estate at the University of San Diego.

L. STEPHEN SMITH, 54, has been President and Chief Operating Officer of The PMI Group and PMI since September 1998, and has been Chief Executive Officer of PMI since January 2004. 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 The PMI Group in January 1995. Prior thereto, he held various executive positions since 1991. Mr. Smith joined us in 1979. Mr. Smith is a member of our Board of Directors.

BRADLEY M. SHUSTER, 49, has been President, International and Strategic Investments of The PMI Group and President and Chief Executive Officer of PMI Capital Corporation since January 1, 2003. Prior thereto, he was Executive Vice President Corporate Development of The PMI Group 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 The PMI Group, in September 1995. Prior to joining PMI, he was an audit partner with the accounting firm of Deloitte & Touche LLP, where he was employed from January 1978 to July 1995.

VICTOR J. BACIGALUPI, 60, has been Senior Executive Vice President, General Counsel and Secretary of The PMI Group and PMI since February 2003. Prior thereto he was Executive Vice President, General Counsel and Secretary of The PMI Group and PMI since August 1999, and Senior Vice President, General Counsel and Secretary of The PMI Group and PMI since November 1996. Prior to joining The PMI Group, he was a partner in the law firm of Bronson, Bronson & McKinnon LLP, San Francisco, California since February 1992.

DONALD P. LOFE, JR., 47, has been Executive Vice President of The PMI Group and PMI since January 2003 and has been Chief Financial Officer of The PMI Group and PMI since April 1, 2003. Prior to joining The PMI Group, Mr. Lofe was Senior Vice President, Corporate Finance for the CNA Financial Corporation from October 1998 until January 2003. From October 1991 until November 1998, Mr. Lofe was an audit partner with the accounting firm of PricewaterhouseCoopers LLP, where he was employed for approximately 20 years. Mr. Lofe is a certified public accountant.

JOHN H. FULFORD, 54, has been Executive Vice President and Managing Director, Lender Services of PMI Capital Corporation since February 2003. From August 2001 to January 2003, he was Executive Vice President, National Sales of The PMI Group and PMI. Prior thereto Mr. Fulford was Senior Vice President, National Sales of The PMI Group and PMI since August 1997. Prior to joining The PMI Group, he served as

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Senior Vice President, Marketing at Fannie Mae from February 1996 to March 1997 and as Senior Vice President for the company’s Western Region from May 1985 to February 1997. Prior thereto, Mr. Fulford was a Vice President at Fannie Mae since 1983.

DANIEL L. ROBERTS, 53, has been Executive Vice President, Chief Information Officer of The PMI Group and PMI since March 1, 2000. Prior thereto he was Senior Vice President, Chief Information Officer of The PMI Group and PMI since December 1997. Prior to joining The PMI Group, he was Vice President and Chief Information Officer of St. Joseph Health System, a position he held since he joined that 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 LLP from July 1985 to December 1990. Since August 2001, Mr. Roberts has served on the Board of Directors of Versant Corporation and he serves on the Audit and Nominating Committees of that Board.

DAVID H. KATKOV, 48, has been Executive Vice President, Field Operations and Product Development of The PMI Group and PMI since February 2004. Prior thereto he was Executive Vice President, National Accounts and Product Development from February 2003 to February 2004 and Executive Vice President Product Development, Pricing, and Portfolio Management from August 2001 to February 2003. Mr. Katkov commenced his employment with PMI in 1992 and has held executive positions in marketing and related functions. Prior to joining PMI, Mr. Katkov was a Vice President of US Bank Corporation, Minneapolis, Minnesota.

REINHARD B. KOESTER, 38, has been Executive Vice President, Chief Risk Officer of The PMI Group since October 2003. Prior thereto he was Group Senior Vice President, Chief Corporate Risk Officer of The PMI Group and had held that position since joining The PMI Group on February 17, 2003. Prior to joining The PMI Group, Mr. Koester was a Vice President at Goldman, Sachs & Co. since 1998.

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PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

Common Stock

The PMI Group is listed on the New York Stock Exchange and the Pacific Exchange under the trading symbol “PMI.” As of February 27, 2004, there were approximately 47 stockholders of record.

The following table shows the high, low and closing common stock prices by quarter from the New York Stock Exchange Composite Listing for the years ended December 31, 2003 and 2002:

	2003						2002
	High		Low		Close		High		Low		Close
First quarter	$	32.25	$	24.03	$	25.55	$	38.23	$	32.95	$	37.88
Second quarter		31.90		25.56		26.84		44.00		37.26		38.20
Third quarter		36.21		26.85		33.75		39.15		26.18		27.21
Fourth quarter		39.38		33.79		37.23		33.15		24.82		30.04

Preferred Stock

The PMI Group’s Board of Directors is authorized to issue up to 5,000,000 shares of preferred stock of The PMI Group 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 PMI Group may issue, without the approval of the holders of common stock, preferred stock that 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 PMI Group has reserved up to 400,000 shares of preferred stock for issuance under the Rights Plan described below.

Preferred Share Purchase Rights Plan

On January 13, 1998, The PMI Group adopted a Preferred Share Purchase Rights Plan, or the Rights Plan. Under the Rights Plan, all stockholders 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 PMI Group’s common stock and no certificates will be issued until certain triggering events occur. The Rights Plan has a ten year term from the record date, but The PMI Group’s Board of Directors will review the merits of redeeming or continuing the Rights Plan annually. Rights issued under the plan will be exercisable only if a person or group acquires 10% or more of The PMI Group’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 PMI Group’s common stock, all rights holders except the buyer will be entitled to acquire The PMI Group’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 institutional investors to acquire up to a 15% ownership interest before the rights would become exercisable.

Payment of Dividends and Policy

The PMI Group has paid regular dividends on its common stock of:

• $0.0375 per share in each quarter since the quarter ended June 30, 2003;

• $0.025 per share (as adjusted for our 2-for-1 stock split on June 17, 2002) in each of the five quarters in the period from April 1, 2002 through June 30, 2003;

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• $0.02 per share (as adjusted for our 2-for-1 stock split on June 17, 2002) in each of the eleven quarters in the period from July 1, 1999 through March 31, 2002; and

• $0.0166 per share (as adjusted for our 3-for-2 stock split on August 16, 1999 and for our 2-for-1 stock split on June 17, 2002) in each of the sixteen quarters in the period from July 1, 1995 through June 30, 1999.

The payment of future dividends is subject to the discretion of our Board of Directors, which will consider, among other factors, our operating results, overall financial condition and capital requirements, as well as general business conditions. The PMI Group, as a holding company, is dependent upon dividends and any other permitted payments from its subsidiaries to enable it to pay dividends and to service outstanding debt. PMI’s ability to pay dividends or make distributions or returns of capital to The PMI Group is affected by state insurance laws, credit agreements, rating agencies, the discretion of insurance regulatory authorities and the terms of our runoff support agreement with Allstate Insurance Company and capital support agreements with our subsidiaries. See Item. 1, Section B. 10., Regulation, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources and —Risk Factors, and Item 8. Financial Statements and Supplementary Data—Note 16. Dividends and Shareholders’ Equity.

Stock Repurchases

In 1998, The PMI Group’s Board of Directors authorized a stock repurchase program in the amount of $100 million. In the first quarter of 2003, we repurchased approximately $20 million of common stock of The PMI Group, and there is no available balance remaining under the 1998 authorization.

On February 20, 2003, The PMI Group’s Board of Directors authorized a new stock repurchase program in the amount of $100 million. As of the date of this report, no repurchases have occurred under this authorization.

Equity Compensation Plan Information

For information on securities authorized for issuance under The PMI Group’s equity compensation plan, refer to Item 3 in The PMI Group’s Proxy Statement for its Annual Meeting for Stockholders, which is incorporated by reference herein.

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Item 6. Selected Financial Data

The following financial data should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data.

THE PMI GROUP, INC. AND SUBSIDIARIES

NINE-YEAR SUMMARY OF FINANCIAL DATA

	As of and for the Years Ended December 31,
	2003			2002			2001			2000			1999			1998			1997			1996			1995
	(Dollars in thousands, except per share data or otherwise noted)
Summary of consolidated operations
Net premiums written	$	876,001		$	691,607		$	600,288		$	535,078		$	471,135		$	409,796		$	372,113		$	349,809		$	271,320
Premiums earned	$	696,928		$	676,857		$	597,221		$	530,378		$	458,505		$	411,922		$	394,010		$	359,527		$	286,056
Net investment income		149,779			120,581			129,773			105,665			86,447			80,055			80,424			66,776			62,918
Equity in earnings (loss) from unconsolidated subsidiaries		4,597			44,225			18,788			11,880			7,061			3,225			1,455			1,547			(605	)
Net realized investment gains		84			1,329			11			432			509			24,611			19,584			14,296			11,934
Other		40,333			39,126			28,643			8,309			15,825			20,335			7,949			6,948			4,705
Total revenues		891,721			882,118			774,436			656,664			568,347			540,148			503,422			449,094			365,008
Losses and loss adjustment expenses		209,088			157,575			108,830			100,992			111,678			135,097			150,366			150,643			110,963
Amortization of deferred policy acquisition costs		89,327			83,416			81,782			77,337			80,252			60,280			43,395			48,302			52,881
Other underwriting and operating expenses		175,693			144,877			128,730			95,317			81,846			73,364			58,520			30,343			23,476
Lease abandonment and relocation costs		—			12,183			—			—			—			—			—			—			—
Litigation settlement charge		—			12,222			—			—			—			—			—			—			—
Interest expense		20,815			17,654			15,218			10,361			8,705			7,181			6,907			941			47
Distributions on mandatorily redeemable preferred securities		3,676			4,030			7,604			8,309			8,309			8,311			7,617			—			—
Total losses and expenses		498,599			431,957			342,164			292,316			290,790			284,233			266,805			230,229			187,367
Income from continuing operations before income taxes		393,122			450,161			432,272			364,348			277,556			255,915			236,617			218,865			177,641
Income taxes from continuing operations		118,814			124,545			129,655			110,380			81,198			72,405			65,339			62,598			44,445
Income from continuing operations		274,308			325,616			302,617			253,968			196,358			183,510			171,278			156,267			133,196
Income from discontinued operations before income taxes		26,893			20,628			14,694			9,518			12,531			11,033			6,249			4,595			2,900
Income taxes from discontinued operations		7,186			7,199			5,294			3,274			4,423			4,182			2,218			1,591			865
Income from discontinued operations		19,707			13,429			9,400			6,244			8,108			6,851			4,031			3,004			2,035
Income before extraordinary items and cumulative effect of a change in accounting principle		294,015			339,045			312,017			260,212			204,466			190,360			175,309			159,271			135,231
Extraordinary gain on write off of negative goodwill, net of income taxes of $408		5,418			—			—			—			—			—			—			—			—
Extraordinary loss on early extinguishment of debt, net of income tax benefit of $2,588		—			—			(4,805	)		—			—			—			—			—			—
Cumulative effect of accounting change		—			7,172			—			—			—			—			—			—			—
Net Income	$	299,433		$	346,217		$	307,212		$	260,212		$	204,466		$	190,360		$	175,309		$	159,271		$	135,231
Tax rate for continuing operations		30.2	%		27.7	%		30.0	%		30.3	%		29.3	%		28.3	%		27.6	%		28.6	%		25.0	%

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THE PMI GROUP, INC. AND SUBSIDIARIES

NINE-YEAR SUMMARY OF FINANCIAL DATA—(Continued)

	As of and for the Years Ended December 31,
	2003			2002			2001			2000			1999			1998			1997			1996			1995
	(Dollars in thousands, except per share data or otherwise noted)
U.S Mortgage Insurance Operating Ratios
Loss ratio		36.2	%		24.5	%		18.1	%		19.0	%		24.7	%		32.8	%		38.2	%		41.9	%		38.8	%
Expense ratio (1)		22.0	%		25.3	%		25.5	%		26.7	%		29.4	%		25.5	%		22.7	%		18.6	%		25.5	%
Combined ratio		58.2	%		49.8	%		43.6	%		45.7	%		54.1	%		58.3	%		60.9	%		60.5	%		64.3	%
Consolidated Balance Sheet Data
Total assets	$	4,794,289		$	3,517,049		$	2,989,952		$	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	$	346,939		$	333,569		$	303,816		$	287,088		$	273,645		$	206,132		$	192,211		$	190,425		$	183,615
Long-term debt	$	819,543		$	422,950		$	422,950		$	136,819		$	145,367		$	99,476		$	99,409		$	99,342		$	—
Mandatorily redeemable preferred securities	$	—		$	48,500		$	48,500		$	99,109		$	99,075		$	99,040		$	99,006		$	—		$	—
Shareholders’ equity	$	2,784,029		$	2,193,833		$	1,786,688		$	1,499,211		$	1,217,268		$	1,097,515		$	1,061,180		$	986,862		$	870,503
Return on equity		12.3	%		17.1	%		18.5	%		19.3	%		17.7	%		17.7	%		17.2	%		17.1	%		17.2	%
Average Shares Outstanding (2) (in thousands)
Basic		89,915			89,843			88,887			88,507			89,787			94,181			100,157			104,855			105,009
Diluted		91,045			91,380			90,668			90,037			90,488			94,598			100,531			105,120			105,367
Per Share Data (2)
Net income
Basic	$	3.33		$	3.85		$	3.46		$	2.94		$	2.28		$	2.02		$	1.75		$	1.51		$	1.29
Diluted	$	3.29		$	3.79		$	3.39		$	2.89		$	2.26		$	2.01		$	1.75		$	1.50		$	1.29
Cash dividends declared	$	0.13		$	0.10		$	0.08		$	0.08		$	0.07		$	0.07		$	0.07		$	0.07		$	0.07
PMI Operating and Statutory Data
New primary insurance written (in millions)	$	57,301		$	47,803		$	46,235		$	27,295		$	28,733		$	27,820		$	15,307		$	17,883		$	14,459
New primary policies issued		381,249			332,234			335,213			206,493			219,038			211,161			119,190			142,900			119,631
Direct primary insurance in force (in millions)	$	105,241		$	107,579		$	109,158		$	96,914		$	86,729		$	80,682		$	77,787		$	77,312		$	71,430
Direct primary risk in force (in millions)	$	24,668		$	25,188		$	25,772		$	23,559		$	21,159		$	19,324		$	18,092		$	17,336		$	15,130
Number of primary policies in force		827,225			874,202			882,846			820,213			749,985			714,210			698,831			700,084			657,800
Persistency		44.6	%		56.2	%		62.0	%		80.3	%		71.9	%		68.0	%		80.8	%		83.3	%		86.4	%
Default rate		4.53	%		4.18	%		2.86	%		2.21	%		2.12	%		2.31	%		2.38	%		2.19	%		1.98	%
Statutory capital	$	2,561,765		$	2,192,712		$	1,900,709		$	1,617,519		$	1,372,273		$	1,193,899		$	1,114,342		$	988,475		$	824,156
Risk-to-capital ratio		9.1:1			11.3:1			13.0:1			14.1:1			14.8:1			14.9:1			14.6:1			15.9:1			15.8:1

(1) Expense ratio is the ratio of underwriting expenses to net premiums written. 2002 expense ratio includes lease abandonment and relocation costs as well as litigation settlement charge.

(2) Share data has been split-adjusted.

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Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT

Statements made or incorporated by reference from time to time 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: (i) our expectations that expenditures on new strategic investments will decline in the near term, that a significant portion of net income derived from our Financial Guaranty segment will be generated by our investment in FGIC Corporation, and that we will realize a gain on the sale of APTIC; and (ii) our expectations with respect to PMI’s persistency rate and incurred losses in 2004, the size of the U.S. mortgage origination market in 2004, and potential expense savings relating to PMI’s consolidation of certain field underwriting offices.

When a forward-looking statement includes an underlying assumption, we caution that, while we believe the assumption to be reasonable and make it in good faith, assumed facts almost always vary from actual results, and the difference between assumed facts and actual results can be material. Where, in any forward-looking statement, we express an expectation or belief as to future results, there can be no assurance that the expectation or belief will result. Our actual results may differ materially from those expressed in any forward-looking statement made by us. Forward-looking statements involve a number of risks of uncertainties including, but not limited to, the risks described under the heading “Risk Factors.” All forward-looking statements are qualified by and should be read in conjunction with those risk factors. Except as may be required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview of Our Business

We are an international provider of credit enhancement as well as other products that promote homeownership and facilitate mortgage transactions in the capital markets. We divide our business into four segments:

• U.S. Mortgage Insurance Operations.    We offer mortgage insurance products in the U.S. that enable borrowers to buy homes with low down-payment mortgages. Net income from U.S. Mortgage Insurance Operations was $245.5 million in 2003, primarily derived from PMI.

• International Operations.    We offer mortgage insurance and other credit enhancement products in Europe, Australia, New Zealand and Hong Kong. In October 2003, we entered into a definitive agreement to acquire the U.K. lenders’ mortgage insurance portfolio from Royal & Sun Alliance, or R&SA. The portfolio consists of U.K. residential mortgage loans originated in 1993 and subsequent years and covers approximately $15 billion of original insured principal value and approximately $2.3 billion of remaining exposure. The acquisition is subject to U.K. and Irish regulatory approval and U.K. court approval, which is anticipated to take approximately six to nine months, and other customary closing conditions. Net income from our International Operations segment was $78.6 million in 2003, primarily derived from our Australian and New Zealand operations.

• Financial Guaranty.    On December 18, 2003, we became the lead investor in FGIC Corporation, whose subsidiary, FGIC, primarily provides financial guaranty insurance. We also have a significant interest in RAM Re, a financial guaranty reinsurance company based in Bermuda. Net income from our Financial Guaranty segment was $10.4 million in 2003.

• Other.    Our Other segment consists of holding company and contract underwriting revenue and expenses, equity in earnings (losses) primarily from our unconsolidated strategic investment Fairbanks and the discontinued operations of our title insurance subsidiary, APTIC. On October 27, 2003, we announced that we had reached a definitive agreement to sell APTIC for $115 million in cash, subject to

39

post-closing adjustments. The transaction is subject to regulatory approvals and other customary closing conditions and is expected to close in the first half of 2004. Our Other segment generated a net loss of $35.1 million in 2003, primarily due to losses at Fairbanks and contract underwriting operations.

Our goal is to become a global provider of credit enhancement products across multiple asset and risk classes and to continue to diversify our product offerings beyond mortgage insurance, while at the same time expanding our mortgage insurance product offerings. The percentage of our consolidated net income generated by our International and Financial Guaranty segments has increased from 14% in 2001, to 15% in 2002, to 29% in 2003. We expect that our expenditures on new strategic investments will significantly decline in the near term as we concentrate on managing, growing and diversifying the product offerings in our principal businesses of mortgage insurance, other mortgage-related credit enhancement products and financial guaranty insurance.

Revenues and Expenses

Our revenues from continuing operations consist primarily of:

• premiums earned on our U.S. and international mortgage insurance policies and credit enhancement products;

• net investment income on our investment portfolios;

• equity in earnings (losses) from our unconsolidated subsidiaries; and

• other income, including fees from contract underwriting services.

Our expenses consist primarily of:

• claims paid to policyholders, claims-related expenses and changes in reserves;

• amortization of deferred policy acquisitions costs;

• underwriting, acquisition and policy servicing costs, contract underwriting costs and remedies, and general administration and overhead expenses;

• interest and financing expenses; and

• income taxes.

Conditions and Trends Affecting our Business

Overview of 2003 Financial Results

Our consolidated net income was $299.4 million in 2003, compared to $346.2 million in 2002. U.S. economic conditions in 2003 adversely affected our U.S. Mortgage Insurance Operations segment and, accordingly, our consolidated financial results. The U.S. economic recession contributed to increases in U.S. Mortgage Insurance Operations claims paid and our consolidated losses and loss adjustment expenses in 2003. Low U.S. mortgage interest rates leading to a record mortgage refinance market adversely affected U.S. Mortgage Insurance Operations premiums earned and expenses. There can be no assurance that these conditions will not continue in 2004. In addition, our share of the net losses at Fairbanks due to its regulatory issues, rating agency downgrades and related matters negatively impacted our consolidated net income. Favorable economic conditions in Australia and New Zealand, including a vibrant housing market and strengthening Australian dollar, contributed to net income growth in our International Operations segment in 2003, positively affecting our consolidated financial results.

Approximately 17% of our consolidated total revenues in 2003 was interest and dividend income associated with our investment portfolio of approximately $2.8 billion. Accordingly, the performance of corporate and municipal bond and securities markets in the U.S., Australia and Europe can significantly affect our consolidated

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financial results. Our primary goal in managing our investment portfolios is to achieve a predictable level of income while maintaining adequate levels of liquidity, safety and preservation of capital; growth is a secondary consideration and the realization of taxable gains is minimized. A substantial portion of our investment portfolio is invested in fixed income securities.

Trends and Conditions Affecting Financial Performance

U.S. Mortgage Insurance Operations.    The financial performance of our U.S. Mortgage Insurance Operations segment is affected by a number of factors, including:

• Policy Cancellations (Persistency).    Lower interest rates in 2002 and 2003 resulted in heavy mortgage refinance activity and caused PMI’s policy cancellations to increase. PMI’s persistency rate, the percentage of insurance policies at the beginning of a 12-month period that remain in force at the end of that period, was 44.6% at December 31, 2003 compared to 56.2% at December 31, 2002. Low persistency caused PMI’s revenues, cash available for investment and insurance in force to decline in 2003. We do not expect PMI’s persistency rate to increase significantly during 2004 unless mortgage interest rates significantly increase and refinance activity significantly declines from 2003 levels.

• New Insurance Written (NIW).    While PMI’s NIW increased by 20% in 2003, insurance in force and premiums earned decreased because NIW did not exceed the loss of insurance in force through policy cancellations. Changes in NIW can affect the average age of PMI’s insurance in force and, therefore, the portion of PMI’s insurance in force that consists of policies in their peak claims-paying years. Changes in NIW can also affect PMI’s average coverage levels and, therefore, PMI’s premiums written and earned. PMI’s ability to write new mortgage insurance is influenced by, among other factors, the sizes of the U.S. mortgage origination, purchase money mortgage, and private mortgage insurance markets. We currently expect the mortgage origination and refinance mortgage markets to decrease in 2004 compared to 2003, especially if U.S. mortgage interest rates increase or remain at current levels.

• PMI’s Loss Experience and Reserves.    PMI’s claims paid increased in 2003 compared to 2002 as a result of the aging of PMI’s insurance portfolio, higher levels of unemployment and higher claim rates associated with a portion of its portfolio that contains non-traditional and less-than-A quality mortgage loans. A significant majority of PMI’s mortgage insurance claims occur between the second and fifth years after loan origination. Approximately 85% of PMI’s insurance in force at December 31, 2003 was written after January 1, 2001. We expect PMI’s losses associated with claims paid to increase in 2004 compared to 2003 as a result of the aging of PMI’s relatively young insurance portfolio, unemployment in the U.S. and the non-traditional and less-than-A quality mortgage loans in the portfolio. Changes in economic conditions may not necessarily be reflected in PMI’s claims development in the quarter or year in which they occur.

• Captive Reinsurance.    Captive reinsurance is a reinsurance product in which PMI shares portions of its risk written on loans originated by certain lenders. In return, a portion of PMI’s gross premiums written is ceded to the captive reinsurers. At December 31, 2003, approximately 50% of PMI’s insurance in force was subject to captive reinsurance agreements, compared to approximately 43% at December 31, 2002. The increase was driven by refinance activity resulting in heavy cancellations of policies not subject to captive reinsurance and a higher percentage of NIW being generated by lenders with captive reinsurance arrangements. We expect that the percentage of our insurance in force that involves captive reinsurance will further increase in 2004, thereby negatively impacting PMI’s net premiums written and earned.

• Underwriting and Operating Expenses.    The profitability of our business depends in part on our ability to control our underwriting and operating expenses. Our expense ratio, the ratio of underwriting expenses to net premiums written, in our U.S. Mortgage Insurance Operations segment has been adversely affected by lower persistency, which has reduced PMI’s premiums written, by the increased use of captive reinsurance, which decreases premiums written without a necessarily corresponding

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decrease in underwriting expenses, and by increased acquisition costs associated with higher levels of NIW.

• Alternative Forms of Credit Enhancement—80/10/10s.    80/10/10 loans, which include a first mortgage lien with an LTV of 80%, a 10% second mortgage lien and a 10% down-payment, and other similar forms of credit enhancement reduce the available market for primary insurance. We believe that the use of 80/10/10 loans increased significantly in 2003 and 2002.

• Regulatory and Legislative Environment.    At any point in time, there are multiple proposals and initiatives for statutory and regulatory changes that may significantly affect the mortgage insurance industry as well as PMI’s business. We may also be impacted by changes in regulations affecting the GSEs, including changes to the risk-based capital rules, and as a result of changes in the GSEs’ eligibility guidelines.

International Operations.    The financial performance of our International Operations segment is affected by the following factors, among others:

• PMI Australia.    PMI Australia’s mortgage insurance coverage is typically purchased with a single, lump-sum premium. Accordingly, policy cancellations do not negatively impact PMI Australia’s revenue but rather decrease its overall claim risk and increase net premiums earned. PMI Australia’s losses and loss adjustment expenses decreased significantly in 2003 partly as a result of a strong housing market. We expect the rate of Australian home price appreciation to moderate in 2004. The Australian and New Zealand economies performed well in 2003 and PMI Australia’s results are closely tied to developments in those economies.

• PMI Europe.    To date, PMI Europe has derived most of its revenues from capital markets products. PMI Europe intends to utilize its pending acquisition of the R&SA portfolio to expand into the first-loss mortgage insurance market in the U.K. PMI Europe’s ability to expand its business in the U.K. and elsewhere in Europe depends in part on the degree to which its products are accepted in Europe’s secondary mortgage market and as a method to reduce capital requirements with respect to the New Basel Capital Accord (Basel II).

• Currency Exchange Fluctuations.    The performance of our International Operations is subject to currency exchange fluctuations, particularly by fluctuations in the exchange rates between the U.S. dollar, the Australian dollar, pounds sterling and Euro. Based on the exchange ratio at December 31, 2002, 2003 net income for our International Operations segment benefited by $8.7 million from changes in foreign exchange rates in 2003.

Financial Guaranty.    As a result of our recent strategic investment in FGIC Corporation, we expect that a significant portion of net income derived from our Financial Guaranty segment will be generated by our investment in FGIC Corporation. Although we own a significant portion of the equity of FGIC Corporation and are able to appoint representatives to its board of directors, we do not control the operations of FGIC Corporation. Factors affecting FGIC Corporation’s financial performance include the maintenance of FGIC’s ratings, interest rate movements, the level of public financings and FGIC’s ability to expand into new markets.

Other.    Factors affecting the financial performance of our Other segment include:

• Fairbanks.    Our equity in losses from Fairbanks for 2003 totaled $17.7 million. Fairbanks’ losses in 2003 were primarily attributable to expenses relating to its settlement of certain regulatory actions and civil class action lawsuits, associated restructuring expenses and operating losses. Fairbanks still faces significant regulatory issues and pending class action litigation. In 2003, the rating agencies downgraded Fairbanks Capital’s servicer ratings. As a result of these downgrades, Fairbanks Capital is no longer qualified to be named as a primary servicer on future residential mortgage-backed securities, or RMBS, transactions rated by Moody’s or S&P. Fairbanks Capital may serve as a subservicer on these rated transactions under certain circumstances. Fairbanks is attempting to obtain upgrades of its servicer ratings in 2004 so that it may

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regain its qualification to be named as primary servicer on future RMBS transactions rated by Moody’s and S&P. Even if it is successful in its efforts, Fairbanks may not regain profitability this year. We regularly evaluate our investment balance in Fairbanks for impairment in accordance with GAAP. Through December 31, 2003, we reported our equity in Fairbanks’ results on a one-month lag basis.

• Contract Underwriting Services.    New policies processed by contract underwriters represented 25% of PMI’s NIW in 2003, compared to 30% in 2002. We anticipate that loans underwritten by us will continue to make up a significant percentage of PMI’s NIW. As a part of contract underwriting services, we provide monetary, indemnification and other remedies to customers in the event of a failure to properly underwrite a mortgage loan. Contract underwriting remedies paid in 2003 totaled $13.1 million.

• Other.    Net income in 2003 from our Other segment included net investment income, net income from APTIC, classified as discontinued operations, expenses related to salaries and other corporate overhead, and interest expense and distributions on our mandatorily redeemable preferred securities.

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RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

Consolidated Results

The following table presents our consolidated financial results for the years ended December 31, 2003, 2002 and 2001.

								Percentage Change
	2003		2002		2001			2003 vs. 2002		2002 vs. 2001
	(Dollars in millions, except per share data)
Revenues:
Premiums earned	$	696.9	$	676.9	$	597.2		3	%	13	%
Net investment income		149.8		120.6		129.8		24	%	(7	)%
Equity in earnings from unconsolidated strategic investments		4.6		44.2		18.8		(90	)%	135	%
Net realized investment gains		0.1		1.3		—		(92	)%	—
Other income		40.3		39.1		28.6		3	%	37	%
Total revenues		891.7		882.1		774.4		1	%	14	%
Losses and expenses:
Losses and loss adjustment expenses		209.1		157.6		108.8		33	%	45	%
Amortization of deferred policy acquisition costs		89.3		83.4		81.8		7	%	2	%
Other underwriting and operating expenses		175.7		144.9		128.7		21	%	13	%
Lease abandonment and relocation costs		—		12.2		—		—		—
Litigation settlement charge		—		12.2		—		—		—
Interest expense and distributions on mandatorily redeemable preferred securities		24.5		21.7		22.8		13	%	(5	)%
Total losses and expenses		498.6		432.0		342.1		15	%	26	%
Income from continuing operations before income taxes		393.1		450.1		432.3		(13	)%	4	%
Income taxes from continuing operations		118.8		124.5		129.7		(5	)%	(4	)%
Income from continuing operations		274.3		325.6		302.6		(16	)%	8	%
Income from discontinued operations before income taxes		26.9		20.6		14.7		31	%	40	%
Income taxes from discontinued operations		7.2		7.2		5.3		—		36	%
Income from discontinued operations		19.7		13.4		9.4		47	%	43	%
Income before extraordinary items and cumulative effect of a change in accounting principle		294.0		339.0		312.0		(13	)%	9	%
Extraordinary gain on write off of negative goodwill, net of income taxes of $0.4 million		5.4		—		—		—		—
Extraordinary loss on extinguishment of debt, net of income tax benefit of $2.6 million		—		—		(4.8	)	—		—
Cumulative effect of a change in accounting principle		—		7.2		—		—		—
Net income	$	299.4	$	346.2	$	307.2		(14	)%	13	%
Diluted earnings per share	$	3.29	$	3.79	$	3.39		(13	)%	12	%

Consolidated net income for 2003 decreased by 14% over 2002, due primarily to increases in losses and loss adjustment expenses and other underwriting and operating expenses in our U.S. Mortgage Insurance Operations. Total revenues in 2003 were impacted by increases in premiums earned in our International Operations and an increase in net investment income, offset by a decrease in equity in earnings from unconsolidated strategic

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investments, principally from Fairbanks, and the decrease in persistency in U.S. Mortgage Insurance Operations. Consolidated net income for 2002 increased by 13% over 2001, largely attributable to the increases in premiums earned and equity in earnings from our consolidated strategic investments, partially offset by higher losses and underwriting and operating expenses.

Premiums earned represent the amount of premiums recognized as revenue for accounting purposes. The increase in premiums earned in 2003 over 2002 was attributable primarily to increased premiums earned by PMI Australia, offset by cumulative adjustments for ceded premiums of $8.4 million recorded in the fourth quarter of 2003 (see U.S. Mortgage Insurance Operations—Premiums written and earned below). The increase in premiums earned in 2002 over 2001 was due primarily to the growth of the primary mortgage insurance portfolio and an increase in the volume of modified pool insurance written in our U.S. Mortgage Insurance Operations.

The increase in net investment income in 2003 over 2002 was due to growth in our investment portfolio combined with adjustments to increase interest income related to accretion of discounts and call premiums. Our investment portfolio grew primarily as a result of excess cash flows from operations. During the fourth quarter of 2003, we made adjustments to reflect the appropriate accounting treatment related to the accretion of discounts and call premiums on bonds that have been called for early redemption. The adjustment related to the periods 2000 through 2003 and included a reclassification of $5.2 million of net realized gains to interest income as well as a positive yield adjustment of $5.1 million to reflect the accretion of purchase discounts and call premiums. The net effects of these adjustments were an increase in net investment income of $10.3 million and a decrease in net realized investment gains of $5.2 million. The decrease in net investment income in 2002 over 2001 was primarily the result of the deployment of capital with respect to PMI Plaza, and a decline in the portfolio yield.

We account for our unconsolidated strategic investments and limited partnerships using the equity method of accounting. The decrease in equity earnings from our unconsolidated strategic investments and limited partnerships in 2003 over 2002 was due primarily to losses at Fairbanks, our proportionate share of which was $17.7 million in 2003 compared to $22.4 million of net income in 2002. The increase in equity earnings from our unconsolidated strategic investments in 2002 over 2001 was primarily attributable to the increase in our ownership of Fairbanks to 57% in 2002 and the growth in Fairbanks’ servicing portfolio.

Included in net realized investment gains and losses are impairment losses recognized for financial reporting purposes on certain impaired securities in our investment portfolio and other investments. Impairment losses were $0.5 million in 2003, compared to $6.9 million in 2002 and $3.2 million in 2001. In September 2003, we sold our ownership interests in Truman Capital Founders, LLC and Truman Capital Advisors, LLC, or Truman, and incurred a $3.6 million loss, which was included in net realized investment gains and losses.

The increases in other income in 2003 and 2002 were largely attributable to higher fees generated from our contract underwriting services. Contract underwriting services are included in our Other segment.

The increase in our losses and loss adjustment expenses in 2003 over 2002 was the result of an increase in claims paid in our U.S. Mortgage Insurance Operations, and an increase in loss reserves for PMI Europe, partially offset by a reduction of loss reserves for PMI Australia. The increase in losses and LAE in 2002 over 2001 was the result of higher levels of claims in our U.S. Mortgage Insurance Operations (see Critical Accounting Policies and Estimates, Reserves for Losses and LAE below).

The increase in other underwriting and operating expenses in 2003 over 2002 was due largely to the increases in underwriting and operating expenses in our U.S. and Australian operations and an increase in remedy expenses in our contract underwriting services. The increase in other underwriting and operating expenses in 2002 over 2001 was the result of increased contract underwriting expenses associated with higher contract underwriting activity.

The increase in interest expense and distribution on mandatorily redeemable preferred securities was due to the interest on the equity units issued in November 2003.

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In October 2003, we reached a definitive agreement to sell our title insurance operations, American Pioneer Title Insurance Company, or APTIC, for $115 million in cash subject to post-closing adjustments. The transaction is subject to regulatory approvals and other customary closing conditions and is expected to close in the first half of 2004. In accordance with Statement on Financial Accounting Standards, or SFAS, No. 144, Accounting for Impairment or Disposal of Long-Live Assets, the results of APTIC are classified as discontinued operations with prior periods adjusted for comparability. We expect to realize a gain on the transaction upon receiving regulatory approval.

We recognized an extraordinary (after-tax) gain of $5.4 million, which was our share of negative goodwill recognized by FGIC Corporation resulting from the application of purchase accounting adjustments. Due to subsequent refinements of FGIC Corporation’s purchase accounting adjustments, this extraordinary (after-tax) gain was $3.0 million larger than estimated in our January 27, 2004 earnings press release.

Segment Results

During the fourth quarter of 2003, we changed our reporting segments primarily to reflect our investment in FGIC and the pending sale of APTIC, which has been accounted for as discontinued operations. The following table presents net income (loss) for each of our segments for the years ended December 31, 2003, 2002 and 2001.

									Percentage Change
	2003			2002		2001			2003 vs. 2002		2001
	(Dollars in millions)
U.S. Mortgage Insurance Operations	$	245.5		$	280.8	$	283.7		(13	)%	(1	)%
International Operations		78.6			48.4		40.2		62	%	20	%
Financial Guaranty		10.4			2.8		2.4		271	%	17	%
Other		(35.1	)		14.2		(19.1	)	—		—
Consolidated Net Income	$	299.4		$	346.2	$	307.2		(14	)%	13	%

U.S. Mortgage Insurance Operations

The results of our U.S. Mortgage Insurance Operations include the operating results of PMI and affiliated U.S. mortgage insurance and reinsurance companies. CMG is accounted for under the equity method of accounting and its results are recorded as equity in earnings from unconsolidated strategic investments. U.S. Mortgage Insurance Operations’ results are summarized in the table below.

							Percentage Change
	2003		2002		2001		2003 vs. 2002		2002 vs. 2001
	(Dollars in millions)
Premiums earned	$	592.8	$	611.1	$	550.9	(3	)%	11	%
Equity in earnings from unconsolidated strategic investments	$	13.6	$	12.4	$	10.7	10	%	16	%
Losses and LAE	$	214.7	$	149.9	$	99.5	43	%	51	%
Underwriting and operating expenses	$	151.1	$	132.6	$	137.2	14	%	(3	)%
Lease abandonment and relocation costs		—	$	9.3		—	—		—
Litigation settlement charge		—	$	12.2		—	—		—
Net income	$	245.5	$	280.8	$	283.7	(13	)%	(1	)%

Premiums written and earned—PMI’s net premiums written refers to the amount of premiums recognized based on effective coverage during a given period, net of refunds, and net of premiums ceded primarily, but not

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exclusively, under captive reinsurance agreements. In captive reinsurance agreements, PMI transfers portions of its risk written on loans originated by certain lender-customers to captive reinsurance companies affiliated with such lender-customers. In return, a proportionate amount of PMI’s gross premiums written is ceded to captive reinsurance companies. The components of PMI’s net premiums written and premiums earned are as follows:

										Percentage Change
	2003			2002			2001			2003 vs. 2002		2002 vs. 2001
	(Dollars in millions)
Gross premiums written	$	847.2		$	722.3		$	615.8		17	%	17	%
Ceded premiums, net of assumed premiums		(128.0	)		(97.2	)		(61.1	)	32	%	59	%
Cumulative adjustment of ceded premiums		(8.4	)		—			—		—		—
Refunded premiums		(25.7	)		(16.1	)		(17.7	)	60	%	(9	)%
Net premiums written	$	685.1		$	609.0		$	537.0		12	%	13	%
Premiums earned	$	592.8		$	611.1		$	550.9		(3	)%	11	%

The increase in premiums written for 2003 over 2002 was largely due to a single transaction in which PMI restructured certain existing primary insurance policies, relating primarily to less-than-A quality loans, with an aggregate unpaid principal balance of $2.9 billion. PMI and the customer canceled the existing contract and PMI returned unearned premiums under the initial contract to the customer of approximately $6 million. PMI issued a new policy which provides primary insurance coverage for the life of each affected loan in exchange for a single premium of approximately $114 million. Approximately $5 million of this premium was earned in the fourth quarter of 2003, with the balance to be earned over the next ten years. The increase in premiums written in 2002 over 2001 was due to an increase in modified pool insurance written and growth in the primary insurance portfolio.

The increases in ceded premiums were driven primarily by the increasing percentage of primary insurance in force subject to captive reinsurance agreements. Heavy refinance volume resulted in an increasing penetration of loans subject to captive reinsurance agreements in PMI’s portfolio.

In 2003, 54% of primary NIW was subject to captive reinsurance agreements compared to 56% in 2002 and 45% in 2001. This decrease was due primarily to an increase in the amount of NIW PMI received through its bulk channel in 2003 compared to 2002. NIW received through the bulk channel generally is not subject to captive reinsurance agreements; accordingly, the level of bulk activity impacts the percentage of primary new insurance subject to captive reinsurance agreements. As of December 31, 2003, approximately 50% of primary insurance and risk in force were subject to captive reinsurance agreements, compared to approximately 43% at December 31, 2002 and approximately 33% at December 31, 2001. We anticipate that captive reinsurance cessions will continue to reduce PMI’s net premiums written and earned, and that PMI’s primary risk in force subject to captive reinsurance agreements will continue to increase as a percentage of total risk in force.

During the fourth quarter of 2003, we made cumulative adjustments to ceded premiums of $8.4 million pre-tax, which decreased premiums earned. The adjustments were made to reflect a more appropriate accounting treatment of captive reinsurance premium cessions related to the periods from 1998 through 2003.

Upon cancellation of certain insurance coverage, PMI refunds the portion of premiums that is unearned to the borrowers or servicers. The increases in refunded premiums in 2003 over 2002 and 2002 over 2001 were due primarily to the refund associated with the single transaction discussed above, and to an increase in policy cancellations resulting from refinance activities (see Primary insurance and risk in force below).

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PMI’s premiums earned decreased in 2003 over 2002, reflecting the impact of lower persistency, an increase in ceded premiums under captive reinsurance agreements, the cumulative adjustments to ceded premiums, and a reduction in PMI’s unearned premium reserve. During the first quarter of 2003, we completed a review of PMI’s unearned premium reserve and loss reserves for its pool insurance business and determined that the actual loss development was lower than underwriting expectations. Accordingly, we reduced the unearned premium reserve to match actual loss experience, which resulted in $7.1 million of additional premiums earned in the first quarter of 2003. The increase in premiums earned in 2002 over 2001 was attributable to an increase in modified pool written and growth in primary insurance portfolio.

Losses and LAE—PMI’s total losses and LAE represent claims paid, certain expenses related to default notification and claim processing, and changes in loss reserves during the applicable period. PMI’s total losses and LAE and related claims data are shown in the following table.

							Percentage Change
	2003		2002		2001		2003 vs. 2002		2002 vs. 2001
	(Dollars in millions or as otherwise noted)
Claims paid including LAE	$	204.6	$	121.4	$	88.6	69	%	37	%
Change in net loss reserves		10.1		28.5		10.9	(65	)%	161	%
Total losses and LAE	$	214.7	$	149.9	$	99.5	43	%	51	%
Number of primary claims paid		7,501		4,860		3,695	54	%	32	%
Average primary claim size (in thousands)	$	23.3	$	20.5	$	21.4	14	%	(4	)%

The increase in claims paid and total losses and LAE in 2003 over 2002 was due to increases in the average primary claim size, the percentage of delinquent loans going to claim, and the total number of primary loans in default. The increase in the average primary claim size was the result of increases in the average principal balance of loans and deeper coverage amounts, principally on bulk loans which represented a larger percentage of all claims in 2003 than in 2002. PMI’s delinquent primary bulk loans that result in claims generally reach claims status more quickly than primary flow loans. This faster rate to claim allows less time for equity appreciation or loss mitigation by PMI and, accordingly, generally leads to higher claims paid. The increases in the percentage of delinquent loans going to claim and the number of primary loans in default were caused by higher levels of unemployment in the economy and the seasoning of PMI’s primary portfolio. Claims paid and LAE include amounts paid on pool claims. Pool claims paid was $17.3 million in 2003, compared to $10.6 million in 2002. The increase was primarily due to seasoning of PMI’s modified pool portfolio and the economic factors described above. The increases in 2002 over 2001 claims paid and total losses and LAE were due to higher default and claim rates associated with the maturation of PMI’s primary insurance business and PMI’s GSE Pool insurance portfolio, the increases in less-than-A quality loans and non-traditional loans in PMI’s 2000 insurance portfolio, and generally weaker economic conditions and higher unemployment rates throughout the U.S.

During the second quarter of 2003, we assessed the reasonableness of our estimate of reserves for LAE. As a result of this assessment, we decreased PMI’s LAE reserves by approximately $14 million and reduced the allocation of claim related expenses from operating expenses to LAE. PMI’s case and incurred but not reported reserves were increased by approximately the same amount of the reduction to LAE reserves according to our best estimate for loss reserves as of June 30, 2003. For a discussion of changes in net loss reserves, see Critical Accounting Policies and Estimates, Reserves for Losses and LAE, below.

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PMI’s primary default data are presented in the table below.

							Percentage Change /Variance
	As of December 31,						2003 vs. 2002		2002 vs. 2001
	2003		2002		2001
Primary loans in default	37,445		36,537		25,228		2	%	45	%
Primary default rate	4.53	%	4.18	%	2.86	%	0.35	pps	1.32	pps
Primary default rate excluding bulk transactions	3.89	%	3.52	%	2.54	%	0.37	pps	0.98	pps
Primary default rate for bulk transactions	9.45	%	10.37	%	5.55	%	(0.92	)pps	4.82	pps

The increase in PMI’s primary loans in default as of December 31, 2003 over December 31, 2002 was primarily the result of the seasoning of PMI’s portfolio, particularly its bulk portfolio acquired in and after 2000, and weaker economic conditions. The increase in 2002 over 2001 was primarily the result of the weaker economy in the U.S. and the seasoning of PMI’s portfolio. The increases in PMI’s primary default rates in 2003 and 2002 were driven by increases in primary loans in default and declines in the number of policies in force. The default rates for bulk transactions at December 31, 2003 and 2002 were higher than the overall primary default rates due primarily to the higher concentration of less-than-A quality and non-traditional loans (see Credit characteristics below) in PMI’s bulk portfolio.

As of December 31, 2003, PMI’s modified pool insurance (see Modified pool insurance below) default rate was 5.45% with 10,368 modified pool loans in default, compared to a default rate of 4.27% with 7,070 loans in default at December 31, 2002. The increase was primarily due to the seasoning of this portfolio and the condition of the U.S. economy. PMI believes that its modified pool insurance products’ risk reduction features, including a stated stop loss limit, exposure limits on each individual loan in the pool, and deductibles, in some instances, reduce PMI’s potential for loss exposure on loans insured by those products. PMI’s default rate for GSE Pool (see Pool insurance below) at December 31, 2003 was 3.60% with 3,870 GSE Pool loans in default compared to a default rate of 1.48% with 6,250 loans in default as of December 31, 2002. The increase in the default rate and the decrease in loans in default were driven by a decline in the number of loans covered by GSE pool policies.

Total underwriting and operating expenses—PMI’s total underwriting and operating expenses are as follows:

							Percentage Change
	2003		2002		2001		2003 vs. 2002		2002 vs. 2001
	(Dollars in millions)
Amortization of deferred policy acquisitions costs	$	78.9	$	76.5	$	76.6	3	%	—
Other underwriting and operating expenses		72.1		56.1		60.6	29	%	(7	)%
Lease abandonment and relocation costs		—		9.3		—	—		—
Litigation settlement charge		—		12.2		—	—		—
Total underwriting and operating expenses	$	151.0	$	154.1	$	137.2	(2	)%	12	%
Policy acquisition costs incurred and deferred	$	84.2	$	76.6	$	77.6	10	%	(1	)%

Policy acquisition costs consist of direct costs related to PMI’s acquisition, underwriting and processing of new insurance including contract underwriting and sales-related activities. These costs are initially recorded as assets and amortized against related premium revenue for each policy year book of business. Policy acquisition costs incurred and deferred are variable and fluctuate with the volume of new insurance applications processed and NIW, and are offset by increased efficiency from the use of PMI’s electronic origination and delivery

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methods. Electronic delivery accounted for 80% of PMI’s insurance commitments from its primary flow channel in 2003, compared to 69% in 2002 and 52% in 2001.

Other underwriting and operating expenses consist of all other costs that are not attributable to the acquisition of new business and that are recorded as expenses when incurred. The increase in other underwriting and operating expenses in 2003 over 2002 was due to payroll and related expenses, depreciation and premium taxes. The decrease in 2002 over 2001 was due in part to higher ceding commissions related to captive reinsurance agreements and contract underwriting expense allocations. PMI incurs underwriting expenses related to contract underwriting services for mortgage loans without mortgage insurance coverage. These costs are allocated to MSC, which is reported in the Other segment, thereby reducing U.S. Mortgage Insurance Operation’s underwriting and operating expenses. Contract underwriting expenses allocated to MSC were $44.3 million in 2003, $46.1 million in 2002 and $38.8 million in 2001. The increase in allocations in 2002 over 2001 reflects higher contract underwriting activity.

As previously discussed, we completed an analysis of LAE during the second quarter of 2003 which resulted in a decrease of reserves for LAE and a corresponding decrease to LAE allocation from operating expenses. The effect of this adjustment on operating results was a reduction to the allocation of operating expenses to LAE by approximately $1 million per quarter, thereby increasing other underwriting and operating expenses beginning in the second quarter of 2003.

PMI will consolidate certain field underwriting offices and reduce the number of field personnel in 2004. This consolidation is expected to result in expense savings beginning in 2005. We expect aggregate charges for the present value of the remaining lease obligations and payroll related expenses to total between $3 million and $4 million.

Ratios—PMI’s loss, expense and combined ratios are shown below.

	2003		2002		2001		Variance
							2003 vs. 2002		2002 vs. 2001
Loss ratio	36.2	%	24.5	%	18.1	%	11.7	pps	6.4	pps
Expense ratio	22.0	%	25.3	%	25.5	%	(3.3)	pps	(0.2)	pps
Combined ratio	58.2	%	49.8	%	43.6	%	8.4	pps	6.2	pps

PMI’s loss ratio is the ratio of total losses and LAE to premiums earned. The increases in the loss ratios in 2003 and 2002 were primarily driven by increases in total incurred losses. PMI’s expense ratio is the ratio of underwriting and operating expenses to net premiums written. The declines in PMI’s expense ratios in 2003 and 2002 were attributable partly to the increases in net premiums written. The expense ratio in 2002 included $9.3 million of expenses related to the relocation of the Company’s headquarters and a $12.2 million charge related to litigation settlement. The combined ratio is the sum of the loss ratio and the expense ratio.

Primary NIW—The components of PMI’s primary NIW are as follows:

	2003		2002		2001		Percentage Change
							2003 vs. 2002		2002 vs. 2001
	(Dollars in millions)
Primary NIW:
Primary NIW—flow channel	$	50,236	$	44,650	$	39,720	13	%	12	%
Primary NIW—bulk channel		7,065		3,153		6,517	124	%	(52	)%
Total primary NIW	$	57,301	$	47,803	$	46,237	20	%	3	%

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PMI’s increases in primary NIW in 2003 and 2002 were driven by higher volumes of residential mortgage originations and refinance activities due to the historically low interest rate environment. As estimated by Mortgage Bankers Association of America, total U.S. residential mortgage originations were $3.4 trillion in 2003, $2.5 trillion in 2002 and $2.1 trillion in 2001.

Traditional pool insurance—Prior to 2002, PMI offered certain pool insurance products to lenders and the GSEs, or GSE Pool, and to the capital markets, or Old Pool. GSE Pool and Old Pool products insure all losses on individual loans held within a pool of insured loans up to the stop loss limit for the entire pool. GSE Pool risk in force was $0.5 billion at December 31, 2003, $0.8 billion at December 31, 2002 and $0.8 billion at December 31, 2001. Old Pool risk in force was $0.7 billion as of December 31, 2003, $0.9 billion as of December 31, 2002 and $1.1 billion as of December 31, 2001.

Modified pool insurance—In 2003, PMI wrote $358.9 million of modified pool risk, compared to $807.9 million in 2002 and $398.8 million in 2001. The decrease in 2003 was due to a reduction in demand by our principal customer for this product. Modified pool risk in force was $1,390.9 million at December 31, 2003, $1,159.6 million at December 31, 2002 and $414.5 million at December 31, 2001.

Primary insurance and risk in force—Primary insurance in force and risk in force for PMI are shown in the table below.

	As of December 31,									Percentage Change /Variance
										2003 vs. 2002		2002 vs. 2001
	2003			2002			2001
	(Dollars in millions, except percentages)
Primary insurance in force	$	105,241		$	107,579		$	106,364		(2	)%	1	%
Primary risk in force	$	24,668		$	25,188		$	25,009		(2	)%	1	%
Pool risk in force	$	2,859		$	3,128		$	2,542		(9	)%	23	%
Policy persistency rate *—primary		44.6	%		56.2	%		62.0	%	(11.6	)pps	(5.8	)pps

* Persistency rate, as of any date, is the percentage of insurance policies 12 months prior to that date which remain in force on that date.

The decreases in primary insurance in force and risk in force at December 31, 2003 compared to December 31, 2002 were primarily driven by higher policy cancellations. The moderate increases in 2002 primary insurance in force and risk in force from 2001 were driven by a higher volume of primary NIW, partially offset by policy cancellations. Policy cancellations increased by 28% to $59.6 billion in 2003, compared to an increase of 30% to $46.6 billion in 2002 and an increase of 110% to $35.8 billion in 2001. Low mortgage interest rates in 2003 and 2002 resulted in heavy mortgage refinancing activity, which have caused PMI’s policy cancellations to increase and PMI’s policy persistency rate to decline.

Credit characteristics—PMI insures less-than-A quality loans and non-traditional loans through all of its acquisition channels. PMI defines less-than-A quality loans to include loans with FICO scores generally less than 620. PMI considers a loan non-traditional if it does not conform to GSE requirements, including loan size limits, or if it includes certain characteristics such as reduced documentation verifying the borrower’s income, deposit information and/or employment. A small number of loans insured by PMI include both less-than-A quality and non-traditional characteristics. Less-than-A quality and non-traditional loans that resulted in claims in 2003 and 2002 generally had deeper coverage and, in the case of bulk loans, reached claims status more quickly than A quality and traditional loans, contributing to higher average claim amounts in PMI’s less-than-A quality and non-traditional portfolio. PMI generally expects higher default and delinquency rates and faster prepayment speeds for less-than-A quality loans and non-traditional loans than for PMI’s A quality and traditional loans. However, in 2003 and 2002, PMI’s less-than-A quality and non-traditional loans exhibited slower prepayment speeds than PMI’s A quality and traditional loans.

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The following table presents PMI’s less-than-A quality loans and non-traditional loans as percentages of its flow channel and bulk channel primary NIW and modified pool insurance written.

	Years Ended December 31,
	2003				2002				2001
	(Dollars in millions, except percentages)
Less-than-A quality loan amounts and as a percentage of:
Primary NIW—flow channel	$	3,618	7	%	$	4,600	10	%	$	3,528	9	%
Primary NIW—bulk channel		2,501	35	%		342	11	%		2,510	39	%
Total primary NIW		6,119	11	%		4,942	10	%		6,038	13	%
All modified pool insurance written		525	3	%		6,092	33	%		2,906	35	%
Total primary and modified pool insurance written	$	6,644	9	%	$	11,034	17	%	$	8,944	16	%
Non-traditional loan amounts and as a percentage of:
Primary NIW—flow channel	$	7,296	15	%	$	5,349	12	%	$	4,376	11	%
Primary NIW—bulk channel		1,513	21	%		1,343	43	%		2,502	38	%
Total primary NIW		8,809	15	%		6,692	14	%		6,878	15	%
All modified pool insurance written		8,845	55	%		3,145	17	%		1,432	17	%
Total primary and modified pool insurance written	$	17,654	24	%	$	9,837	15	%	$	8,310	15	%

Nearly all of the modified pool insurance written classified as non-traditional received such classification as a result of the reduced documentation for the underlying loans and not as a result of any particular credit characteristic. The following table presents PMI’s less-than-A quality loans, non-traditional loans or both as percentages of primary risk in force.

	Years Ended December 31,
	2003		2002		2001
As a percentage of primary risk in force:
Less-than-A quality loans	12	%	12	%	12	%
Less-than-A quality loans with FICO scores below 575 *	3	%	3	%	3	%
Non-traditional loans	14	%	13	%	12	%
Less-than-A quality, non-traditional or both	25	%	23	%	22	%

* Less-than-A with FICO scores below 575 is a subset of less-than-A quality loan portfolio.

The percentage of PMI’s primary risk in force comprised of loans with LTV’s above 97% has increased from 0.7% as of December 31, 2001, to 2.8% as of December 31, 2002, to 8.6% as of December 31, 2003. LTV is the ratio of the original loan amount to the value of the property. This increase is due, in part, to changes in a number of state statutes and regulations to permit the issuance of mortgage insurance on such loans, and to the expansion of underwriting guidelines by lenders and PMI as a result of market out-reach efforts. We believe that loans with LTVs greater than 97% have higher risk characteristics than loans below 97% LTV and we incorporate this assumption into our pricing.

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International Operations

International Operations include the results of our Australian holding company, PMI Mortgage Insurance Australia (Holdings) Pty Limited, and operating subsidiaries, PMI Mortgage Insurance Ltd and PMI Indemnity Limited, collectively referred to as PMI Australia; our Irish subsidiaries, PMI Mortgage Insurance Company Limited and TPG Reinsurance Company Limited, collectively referred to as PMI Europe; and PMI’s Hong Kong reinsurance revenues. Reporting of financial and statistical information for International Operations is subject to currency rate fluctuations in translation to U.S. dollar reporting. International Operations’ results are summarized as follows:

	2003		2002		2001		Percentage Change
							2003 vs. 2002		2002 vs. 2001
	(USD in millions)
Premiums earned	$	104.0	$	65.7	$	46.3	58	%	42	%
Losses, expenses and interest	$	25.2	$	27.7	$	22.3	(9	)%	24	%
Net income	$	78.6	$	48.4	$	40.2	62	%	20	%

The change in foreign exchange rates from December 31, 2002 to December 31, 2003 favorably impacted our International Operations’ net income by $8.7 million for 2003. The foreign currency translation impact for 2003 is calculated using average monthly exchange rates compared to ending period spot rates as of December 31, 2002. The favorable impact in 2003 was primarily driven by exchange rate growth in the Australian dollar and, to a lesser extent, exchange rate growth in the Euro, relative to the U.S. dollar.

PMI Australia

The table below sets forth the results of PMI Australia for the years ended December 31, 2003, 2002 and 2001.

	2003			2002			2001			Percentage Change
										2003 vs. 2002		2002 vs. 2001
	(USD in millions, except percentages)
Net premiums written	$	127.8		$	74.4		$	55.9		72	%	33	%
Premiums earned	$	85.0		$	59.9		$	43.6		42	%	37	%
Net investment income and other		26.7			18.3			23.3		46	%	(21	)%
Losses and LAE		(8.2	)		7.1			9.3		—		(24	)%
Underwriting and operating expenses		27.5			19.1			11.1		44	%	72	%
Interest expense		—			—			1.5		—		—
Income taxes		30.0			15.9			12.7		89	%	25	%
Income before cumulative effect of a change in accounting principle		62.4			36.1			32.3		73	%	12	%
Cumulative effect of a change in accounting principle		—			7.2			—		—		—
Net income	$	62.4		$	43.3		$	32.3		44	%	34	%
Loss ratio		(9.6	)%		11.9	%		21.3	%	(21.5	)pps	(9.4	)pps
Expense ratio		21.6	%		25.7	%		19.9	%	(4.1	)pps	5.8	pps

The increase in PMI Australia’s net income in 2003 over 2002 was attributable to a decrease in losses and LAE and an increase in premiums written and earned. The increase in PMI Australia’s net income in 2002 over 2001 was due to an increase in premiums written and earned and the cumulative effect of a change in accounting

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principle related to the write-off of negative goodwill. In addition, we made cumulative adjustments in 2002 for PMI Australia to conform its results to GAAP as applied in the U.S., and such adjustments resulted in an increase in PMI Australia’s premiums earned by $6.3 million, a decrease in net investment income by $9.8 million, an increase in realized investment gains by $4.4 million, and a decrease in amortization of deferred policy acquisition costs by $1.0 million.

The reported results of PMI Australia were favorably affected by the appreciation of the Australian dollar in 2003 and 2002. The average USD/AUD currency exchange rate was 0.6529 in 2003, 0.5440 in 2002 and 0.5201 in 2001.

Premiums written and earned—In addition to currency exchange rate appreciation, the increases in PMI Australia’s net premiums written and premiums earned in 2003 over 2002 were due to growth in its NIW and insurance portfolio, which was attributable to strong mortgage market activity and a reduction in the number of market participants underwriting mortgage insurance. The increases in 2002 over 2001 were due to an increase in NIW and the acquisition of PMI Indemnity Limited, which was completed in September 2001.

Net investment income—In addition to currency exchange rate appreciation, the increase in net investment income in 2003 over 2002 was attributable to growth of the investment portfolio. The decrease in 2002 over 2001 was primarily the result of the cumulative adjustments discussed above. PMI Australia’s investment portfolio, including cash and cash equivalents, was $642.1 million at December 31, 2003 compared to $401.5 million at December 31, 2002 and $300.9 million at December 31, 2001. The growth was driven by positive cash flows from operations. The pre-tax book yield under U.S. GAAP was 5.21% at December 31, 2003, 6.06% at December 31, 2002 and 6.60% at December 31, 2001. The decrease in the pre-tax book yield in 2003 compared to 2002 was primarily due to the lower interest rate environment in 2003 and to adjustments made to conform to U.S. GAAP.

Losses and LAE—The decrease in losses and LAE in 2003 over 2002 was largely due to an $8.0 million reduction in loss reserves, which resulted from our third quarter 2003 review of PMI Australia’s loss provisioning. PMI Australia has continued to experience lower levels of claim payments and declining default rates attributable primarily to the current low interest rate environment, low unemployment levels and home value appreciation. The decrease in 2002 over 2001 was due to declines in average claim size and claim payments. PMI Australia’s default rate at December 31, 2003 was 0.17%, compared with 0.30% at December 31, 2002 and 0.28% at December 31, 2001.

Underwriting and operating expenses—The increase in underwriting and operating expenses in 2003 over 2002 was due primarily to increases in payroll and related expenses, profit commissions and special project related expenses. The increase in 2002 over 2001 was due to the acquisition of PMI Indemnity in 2002 and a $4.5 million reduction in underwriting and operating expenses in 2001 as a result of the amortization of negative goodwill.

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Primary NIW and risk in force—PMI Australia’s primary NIW includes flow channel insurance and insurance on residential mortgage-backed securities, or RMBS. In Australia, an active securitization market exists due in part to the relative absence of government sponsorship of the mortgage market. RMBS transactions include insurance on seasoned portfolios comprised of prime credit quality loans that have LTVs often below 80%. The following table presents the components of PMI Australia’s primary NIW, insurance in force and risk in force for the years ended December 31, 2003, 2002 and 2001.

	2003		2002		2001		Percentage Change
							2003 vs. 2002		2002 vs. 2001
	(USD in millions)
Flow insurance written	$	19,383	$	11,478	$	7,950	69	%	44	%
RMBS insurance written		6,044		3,045		4,504	98	%	(32	)%
Total primary NIW	$	25,427	$	14,523	$	12,454	75	%	17	%
Primary insurance in force	$	87,909	$	54,117	$	40,317	62	%	34	%
Primary risk in force	$	79,294	$	48,747	$	36,576	63	%	33	%

In addition to the appreciation of the Australian dollar, the increase in primary NIW in 2003 over 2002 was driven by a reduction in the number of market participants that underwrite mortgage insurance, and strong market activity in Australia. The increase in 2002 over 2001 was driven by the inclusion of PMI Indemnity’s business and the strong Australian economy. The increases in primary insurance in force and risk in force at December 31, 2003 compared to December 31, 2002 were driven primarily by the volume of NIW during the past 12 months. The increases in primary insurance in force and risk in force at December 31, 2002 compared to December 31, 2001 were largely driven by the acquisition of PMI Indemnity’s business and the increase in NIW.

PMI Europe

The following table sets forth the results of PMI Europe for the years ended December 31, 2003, 2002 and 2001.

	2003		2002		2001
	(USD in millions)
Total revenues	$	13.2	$	2.1	$	0.3
Net investment income		5.5		0.9		6.7
Losses and LAE		2.6		0.5		—
Underwriting and operating expenses		3.2		0.9		0.4
Income tax		1.9		0.1		1.1
Net income	$	11.0	$	1.5	$	5.5

The reported results of PMI Europe were favorably affected by the appreciation of the Euro in 2003. The average USD/Euro currency exchange rate was 1.1329 for 2003 and 0.9461 for 2002 and to 0.8961 for 2001.

In addition to currency exchange rate appreciation, the increases in total revenues in 2003 and 2002 were attributable to increases in premiums earned driven by continued growth of PMI Europe’s portfolio, particularly the acquisition of the U.K. lenders’ mortgage insurance portfolio from R&SA. Net income for 2001 consisted primarily of net investment income, including currency re-measurement gains.

In October 2003, PMI Mortgage Insurance Company Limited entered into a definitive agreement to acquire a portion of R&SA’s U.K. lenders’ mortgage insurance portfolio. The portfolio to be acquired consists of U.K. residential mortgage loans originated in 1993 and subsequent years. The portfolio covers approximately $15

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billion of original insured principal value and $2.3 billion of remaining exposure. R&SA transferred all loss reserves and unearned premium reserves associated with the portfolio to PMI Europe totaling $55 million, of which $47 million were unearned premium reserves. R&SA has also agreed to provide excess-of-loss reinsurance to PMI Europe with respect to the portfolio under certain conditions. Under the terms of the agreement, R&SA and PMI Europe will share certain economic benefits if loss performance is better than expected. The acquisition is subject to U.K. and Irish regulatory approval, followed by U.K. court approval, which is anticipated to take approximately six to nine months, and other customary closing conditions. TPG Reinsurance Company Limited, or TPG Re, the parent of PMI Mortgage Insurance Company Limited, has agreed to reinsure the R&SA portfolio to be acquired on a 100% quota share basis prior to regulatory and court approval.

PMI Europe’s net investment income includes interest and dividend income from its investment portfolio, gains and losses on currency re-measurement, realized investment gains and losses from investment activity, and currency exchange gains and losses when investments are sold. Gains and losses on currency re-measurement represent the revaluation of monetary assets and liabilities held by PMI Europe that are denominated in non-functional currencies into the functional currency, the Euro. PMI Europe incurred re-measurement losses of $34,000 in 2003 compared to re-measurement losses of $0.9 million in 2002. PMI Europe reduced its exposure to foreign exchange re-measurement fluctuations in early 2003 by reducing the amount of investments held in currencies other than the Euro. In October 2003, PMI Europe’s investments in Pounds Sterling increased by approximately 39 million Pounds Sterling in connection with its pending acquisition of the U.K. lenders’ mortgage insurance portfolio from R&SA. However, as these investments are available-for-sale debt securities, changes in market value due to currency re-measurement are recognized in other comprehensive income.

The increases in net investment income in 2003 over 2002 were primarily due to increases in interest and dividend income driven by growth of the investment portfolio. PMI Europe’s investment portfolio, including cash and cash equivalents, as of December 31, 2003, was $194.4 million compared to $94.2 million as of December 31, 2002 and $77.9 million as of December 31, 2001. The growth of the investment portfolio was driven by R&SA’s transfer of funds to PMI Europe, positive cash flows from operations and by the appreciation of the Euro relative to the U.S. dollar. The pre-tax book yield was 4.5% at December 31, 2003 and 4.7% at December 31, 2002 and 3.9% at December 31, 2001. PMI Europe incurred net realized investment gains of $0.5 million in 2003 compared with $1.6 million net realized investment losses in 2002, and $0.1 million net realized investment losses in 2001.

Losses and LAE increased in 2003 over 2002 due to increases in reserves for losses and claims. PMI Europe increased its loss reserves in 2003 primarily as a result of the additional risk acquired in the R&SA and other 2003 transactions. Claims paid totaled $0.8 million in 2003; no claims were paid in 2002 or 2001.

The increases in underwriting and operating expenses in 2003 and 2002 over the respective prior years were due primarily to increases in staff and costs associated with expansion efforts.

In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 requires certain credit default swaps entered into by PMI Europe beginning in July 1, 2003 to be accounted for as derivatives and reported on the consolidated balance sheet at fair value, with subsequent changes in fair value recorded in earnings. In addition, as required by Emerging Issues Task Force (EITF) No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities, for certain derivative contracts entered into by PMI Europe where the fair value cannot be determined by reference to quoted market prices, current market transactions for similar contracts, or based on a valuation technique incorporating observable market data or inputs, initial fair value related to the derivative contracts are deferred and recognized in earnings in proportion to the expiration of the associated insured risk. Gains or losses are recognized in earnings at inception for all other derivative contracts where the fair value can be determined in such a manner. During 2003, PMI Europe entered into two transactions which were classified as derivatives in accordance with SFAS No. 149. However, initial fair value gains were deferred in accordance with

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EITF No. 02-3. As of December 31, 2003, $3.8 million of deferred gains related to initial fair value were included in other assets, of which $0.1 million was included in other income. Subsequent changes in the value of derivative contracts totaling $0.6 million of loss were also included in other income.

As of December 31, 2003, PMI Europe had assumed $2.9 billion of risk on $24.3 billion of mortgages on properties in the United Kingdom, and $230.6 million of risk on $7.3 billion of mortgages on properties in Germany. In September 2003, PMI Europe completed a German credit enhancement transaction with the assumption of approximately $25.3 million of first loss credit risk on $1.2 billion of German residential mortgages. As of December 31, 2003, PMI Europe had assumed first loss position default risk (including the R&SA acquired portfolio) of $2.3 billion.

Hong Kong

The following table sets forth the results of PMI’s Hong Kong reinsurance revenues for the years ended December 31, 2003, 2002 and 2001.

	2003		2002		2001		Percentage Change
							2003 vs. 2002		2002 vs. 2001
	(USD in millions)
Gross reinsurance premiums assumed	$	7.7	$	5.9	$	7.1	31	%	(17	)%
Reinsurance premiums earned	$	5.3	$	3.6	$	2.5	47	%	44	%

PMI’s Hong Kong branch reinsures mortgage risk for the Hong Kong Mortgage Corporation. The increase in gross reinsurance premiums assumed in 2003 over 2002 was due primarily to an increase in mortgage origination activity in Hong Kong. The decrease in 2002 gross reinsurance premiums assumed was the result of a

reduction in the penetration rate of the Hong Kong Mortgage Corporation’s mortgage insurance program and the effect of a risk retention agreement between PMI and the Hong Kong Mortgage Corporation.

Financial Guaranty

Our Financial Guaranty segment, which consists of our investments in FGIC and RAM Re, reported net income of $10.4 million for 2003, compared to $2.8 million for 2002 and $2.4 million for 2001. The increase in 2003 over 2002 was largely attributable to our investment in FGIC. We closed the FGIC transaction on December 18, 2003. Equity earnings from FGIC in 2003 was $2.4 million (pre-tax) excluding an extraordinary gain of $5.4 million (after tax) related to our share of negative goodwill written off by FGIC in connection with purchase accounting adjustments.

Our equity in earnings (pre-tax) from RAM Re totaled $4.2 million for 2003, $4.2 million for 2002 and $3.6 million for 2001. The equity in earnings from RAM Re for 2003 were unchanged compared to 2002 as a result of RAM Re’s $6.0 million increase to its provisions for losses and $1.9 million of other-than-temporary impairment to its investment portfolio, offset by an increase in RAM Re’s premiums earned in 2003. In 2003, we invested $24.4 million of a total of $92 million of additional capital raised by RAM Re. Our ownership interest percentage as a result of this capital investment remained the same.

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Other

The results of our Other segment include: other income and related operating expenses of MSC; investment income, interest expense and corporate overhead of The PMI Group; the results of Commercial Loans Insurance Co. and WMAC Credit Insurance Corporation; equity in earnings (losses) from Fairbanks; and the discontinued operations of APTIC. Our Other segment results are summarized as follows:

	2003			2002		2001			Percentage Change
									2003 vs. 2002		2002 vs. 2001
	(Dollars in millions)
Equity in earnings (losses) from unconsolidated strategic investments	$	(15.6	)	$	27.6	$	4.5		—		—
Other income	$	40.1		$	38.5	$	27.8		4	%	38	%
Other operating expenses	$	58.9		$	54.1	$	40.6		9	%	33	%
Interest expense and distributions on mandatorily redeemable preferred securities	$	24.3		$	21.5	$	21.2		13	%	1	%
Income from discontinued operations*	$	19.7		$	13.4	$	9.4		47	%	43	%
Net income (loss)	$	(35.1	)	$	14.3	$	(19.1	)	—		—

* Net income from APTIC.

The net loss of $35.1 million in 2003 compared to net income of $14.3 million in 2002 was primarily the result of losses at Fairbanks and increases in contract underwriting remedy expenses, partially offset by increased net income from APTIC which has been classified as discontinued operations due to its pending sale.

The decrease in equity in earnings in 2003 over 2002 was due primarily to Fairbanks’ losses, our proportionate share of which was $17.7 million pre-tax in 2003. The growth in equity earnings in 2002 over 2001 was attributable to the increase in our ownership percentage of Fairbanks to 57% in 2002. In 2003, we sold our ownership interests in Truman for $6.5 million, resulting in a $3.6 million pre-tax realized loss, which was included in net realized investment gains and losses. We contributed an aggregate of $13.6 million in capital to Truman including our initial investment and received $8.3 million in capital distributions and $6.0 million of distributed earnings prior to the sale of this investment.

The net loss from Fairbanks was largely a result of its recording aggregate expenses of approximately $55 million pre-tax in connection with its preliminary settlement of potential civil charges with the FTC and HUD. These charges included the costs of settlement, estimated costs of potential settlements of certain putative class actions, and the estimated costs relating to certain pending state regulatory actions. Our proportionate share of such expected aggregate expenses was $17.8 million after tax. As of December 31, 2003, our investments in Fairbanks totaled $141.8 million, consisting of $115.8 million book value of equity investment and $26.0 million of related party receivables. We evaluated these investments as of December 31, 2003 and determined that there was no other-than-temporary decline in the carrying value. Accordingly, we have not recognized an impairment charge with respect to our total investment in Fairbanks. We will continue to evaluate our investment balance for potential impairment in accordance with GAAP.

The terms of the settlement with the FTC and HUD require changes in Fairbanks’ operations and the creation of a $40 million redress fund for the benefit of consumers to remedy the violations of law alleged by the FTC and HUD. We have guaranteed approximately two-thirds of Fairbanks’ obligations under a $30.7 million letter of credit which may be drawn upon by the FTC as security for a portion of the $40 million redress fund. In addition, in connection with the restructuring of certain of Fairbanks Capital’s financing arrangements in October 2003, we entered into a guarantee of approximately $7 million principal amount of certain of Fairbanks Capital’s outstanding senior secured debt, together with accrued interest thereon.

Other income, which was generated by MSC, increased in 2003 and 2002 due primarily to increased contract underwriting activity in connection with heavy mortgage originations and refinance volume. Other

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operating expenses, which were incurred by MSC and The PMI Group, Inc., increased in 2003 over 2002 due to increased salary expense and other corporate overhead and contract underwriting remedies expenses. The increase in other operating expenses in 2002 over 2001 was due to increased contract underwriting activity and increased salary expense and other corporate overhead.

Taxes

Our effective tax rate was 30.2% for 2003, compared to 27.7% for 2002 and 30.0% for the 2001. Our effective tax rate can vary for a number of reasons, including differences in the proportion of earnings taxed at lower marginal tax rates in certain foreign jurisdictions and differences in the proportion of tax-exempt earnings relative to consolidated pre-tax income. The increase in our effective tax rate in 2003 over 2002 was due primarily to the loss related to Fairbanks recorded at an effective tax benefit of 7% compared to the statutory rate of 35%. The decrease in 2002 over 2001 was attributable to a larger portion of income derived from PMI Australia and Fairbanks, which have lower effective tax rates than PMI.

Liquidity and Capital Resources

Sources of Funds

The PMI Group’s principal sources of funds are (i) dividends from certain of its insurance subsidiaries, (ii) investment income from its investment portfolio and (iii) funds that may be raised in the capital markets. The PMI Group’s ability to access these sources depends on, among other things, the financial performance of The PMI Group’s subsidiaries, regulatory restrictions on the ability of The PMI Group’s insurance subsidiaries to pay dividends, The PMI Group’s and its subsidiaries’ ratings by the rating agencies and restrictions and agreements to which The PMI Group or its subsidiaries’ are subject that restrict their ability to pay dividends, incur debt or issue equity securities.

Dividends

PMI’s ability to pay dividends to The PMI Group is affected by state insurance laws, credit agreements, credit rating agencies and the discretion of insurance regulatory authorities. The laws of Arizona, PMI’s state of domicile for insurance regulatory purposes, provide that PMI may pay out of any available surplus account, without prior approval of the Director of the Arizona Department of Insurance, dividends during any 12-month period in an amount not to exceed the lesser of 10% of policyholders’ surplus as of the preceding year end or the last calendar year’s investment income.

In addition to Arizona, other states may limit or restrict PMI’s ability to pay shareholder dividends. For example, California and New York prohibit mortgage insurers from declaring dividends except from undivided profits remaining above the aggregate of their paid-in capital, paid-in surplus and contingency reserves. During 2003, with the approval of the Arizona Department of Insurance, PMI paid aggregate cash dividends of $100 million to The PMI Group. Under Arizona law, PMI would be able to pay dividends of approximately $51.9 million in 2004 without the prior permission of the Arizona Department of Insurance. During 2003, Residential Guaranty Co., one of our Arizona-domiciled insurance subsidiaries, paid approximately $8.4 million of dividends to The PMI Group, which it was able to do without prior permission from the Arizona Department of Insurance.

PMI’s ability to pay dividends is also subject to restriction under the terms of a runoff support agreement with Allstate. In particular, PMI may not pay a dividend if, after the payment of that dividend, PMI’s risk-to-capital ratio would equal or exceed 23 to 1. As of December 31, 2003, PMI’s risk-to-capital ratio was 9.1 compared to 11.3 at December 31, 2002.

The laws of Florida limit the payment of dividends by APTIC to The PMI Group without the approval of the Florida Department of Insurance to, subject to certain conditions, the greater of (i) 10% of policyholders’ surplus derived from realized net operating profits and net realized capital gains, or (ii) APTIC’s entire net operating

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profits and realized net capital gains derived during the immediately preceding calendar year. As with PMI, the various credit rating agencies and insurance regulatory authorities have broad discretion to affect the payment of dividends to The PMI Group by APTIC. In 2003, APTIC did not pay any dividends to The PMI Group, compared to $2.5 million in 2002. In 2004, APTIC paid $13 million in dividends to The PMI Group. While APTIC would be able to pay additional dividends of $1.4 million in 2004 without prior permission from the Florida Department of Insurance, APTIC’s ability to pay future dividends to The PMI Group is limited by the definitive agreement we entered into to sell APTIC.

In addition to its consolidated subsidiaries, The PMI Group may in the future derive funds from its unconsolidated equity investments, including its investment in FGIC Corporation, which is the parent corporation of FGIC. FGIC’s ability to pay dividends is subject to restrictions contained in the insurance laws and related regulations of New York and other states where FGIC is licensed to do insurance business. Under New York insurance law, FGIC may pay dividends out of statutory earned surplus, provided that statutory surplus after any dividend may not be less than the minimum required paid-in capital and provided that together with all dividends declared or distributed by FGIC during the preceding 12 months, the dividends do not exceed the lesser of (i) 10% of policyholders’ surplus as of its last statement filed with the New York superintendent or (ii) adjusted net investment income during this period. In addition, in accordance with the normal practice of the New York Insurance Department in connection with change in control applications, FGIC Corporation is subject to commitments to the department that it will prevent FGIC from paying any dividends for a period of two years from the date of the acquisition, or December 18, 2005, without the prior written consent of the department.

In addition, so long as any senior preferred stock or class B common stock issued upon conversion of that preferred stock is outstanding, FGIC Corporation’s certificate of incorporation generally prohibits the payment of dividends or other payments on any of FGIC Corporation’s capital stock, except the senior preferred stock, without the consent of the holder of two-thirds of the outstanding shares of that preferred stock (or the class B common stock issued upon conversion of that preferred stock). This restriction does not apply to cash dividends declared and paid on the class A common stock after the ninth anniversary of the closing of the FGIC Corporation investment provided that those dividends are paid from retained earnings in excess of the amount of FGIC Corporation’s retained earnings on the closing date of such investment, the amount of the dividends in any fiscal year does not exceed one-third of one percent of FGIC Corporation’s stockholders’ equity, and equivalent dividends are paid on the class B common stock.

The stockholders agreement between The PMI Group and the other investors in FGIC Corporation also restricts the payment of dividends by FGIC Corporation. The stockholders agreement provides that FGIC Corporation will not declare or pay cash dividends to holders of its common stock prior to the earlier of the fifth anniversary of the closing of the investment and the completion of the first underwritten public offering of FGIC Corporation’s common stock, and, in any event, that such dividends will not be paid prior to the redemption of FGIC Corporation’s senior preferred stock and class B common stock.

FGIC Corporation is further restricted in the payment of dividends by the terms of its 6% senior notes, due 2034. Except as described in the following sentence, FGIC Corporation may not pay dividends unless the amount of the dividends, together with other similar payments, or restricted payments, during any fiscal year does not exceed the greater of (i) 30% of FGIC Corporation and its subsidiaries’ consolidated net income for the previous fiscal year and (ii) 2.5% of FGIC Corporation’s stockholders’ equity on its and its subsidiaries’ consolidated balance sheet as of the end of the previous fiscal year. FGIC Corporation may make restricted payments regardless of amount so long as the payments would not reasonably be expected to cause an adverse change to either (i) the then current insurance financial strength rating and outlook of FGIC or (ii) FGIC Corporation’s then current senior unsecured debt rating and outlook.

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Consolidated Investment Portfolio

Our consolidated investment portfolio holds primarily investment grade securities comprised of readily marketable fixed income and equity securities. At December 31, 2003, the fair value of these securities in our consolidated investment portfolio increased to $2.8 billion from $2.5 billion at December 31, 2002. The increase was primarily the result of positive cash flows from consolidated operations and unrealized gains in our portfolio. As interest rates, market and other economic conditions change, we expect the market value of the securities in our investment portfolio to be affected.

Our consolidated investment portfolio consists primarily of publicly traded municipal bonds, U.S. and foreign government bonds and corporate bonds. In accordance with SFAS No. 115, our entire investment portfolio is designated as available-for-sale and reported at fair value, and the change in fair value is recorded in accumulated other comprehensive income.

The following table summarizes our consolidated investment portfolio as of December 31, 2003 and 2002:

	Cost or Amortized Cost		Gross Unrealized					Fair Value
			Gains		(Losses)
	(Dollars in thousands)
December 31, 2003
Fixed income securities
Municipal bonds	$	1,488,780	$	116,983	$	(142	)	$	1,605,621
Foreign governments		466,730		2,673		(2,487	)		466,916
Corporate bonds		423,914		15,849		(1,420	)		438,343
U.S. government and agencies		20,245		2,210		(1	)		22,454
Mortgage-backed securities		19,787		1,063		—			20,850
Total fixed income securities		2,419,456		138,778		(4,050	)		2,554,184
Equity securities
Common stocks		92,640		24,401		(313	)		116,728
Preferred stocks		105,795		5,292		(17	)		111,070
Total equity securities		198,435		29,693		(330	)		227,798
Short-term investments		20,603		3,200		—			23,803
Total	$	2,638,494	$	171,671	$	(4,380	)	$	2,805,785
December 31, 2002
Fixed income securities
Municipal bonds	$	1,320,423	$	120,503	$	(110	)	$	1,440,816
Corporate bonds		435,221		19,661		(113	)		454,769
Foreign governments		279,522		7,085		(40	)		286,567
Mortgage-backed securities		56,305		2,599		(3	)		58,901
U.S. government and agencies		20,585		2,620		—			23,205
Total fixed income securities		2,112,056		152,468		(266	)		2,264,258
Equity securities
Common stocks		75,094		7,032		(2,579	)		79,547
Preferred stocks		88,475		2,186		(4,588	)		86,073
Total equity securities		163,569		9,218		(7,167	)		165,620
Short-term investments		31,986		3,427		(7	)		35,406
Total	$	2,307,611	$	165,113	$	(7,440	)	$	2,465,284

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The following table summarizes the rating distributions of our consolidated investment portfolio.

	As of December 31,
	2003		2002
AAA or equivalent	64.6	%	62.5	%
AA	21.7		19.7
A	10.0		11.3
BBB and BB	2.9		6.1
Below investment grade	0.8		0.4
Total	100.0	%	100.0	%

Net Investment Income

The significant components of net investment income are presented in the following table.

	2003			2002			2001
	(Dollars in thousands)
Fixed income securities	$	135,162		$	111,083		$	107,699
Equity securities		7,965			4,142			10,785
Short-term investments		7,920			7,235			12,720
Investment income before expenses		151,047			122,460			131,204
Investment expenses		(1,268	)		(1,879	)		(1,431	)
Net investment income	$	149,779		$	120,581		$	129,773

Net investment income increased in 2003 over 2002 primarily due to growth in our investment portfolio and $10.3 million in pre-tax adjustments in 2003 to reflect the appropriate accounting treatment related to the accretion of discounts and call premiums on bonds that have been called for early redemption. The decrease in 2002 over 2001 was primarily attributable to cumulative adjustments by PMI Australia in 2002 of $11.2 million that decreased interest income. Our pre-tax book yield was 5.38% at December 31, 2003, down from 5.56% at December 31, 2002, and 5.95% at December 31, 2001. The decreases reflect the lower interest rate environment. The decrease in the book yield for 2003 also reflects our higher cash positions in anticipation of our liquidity needs related to the FGIC acquisition.

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Net Realized Gains (Losses)

The components of net realized investment gains (losses) are presented in the following table.

	2003			2002			2001
	(Dollars in thousands)
Fixed income securities
Gross gains	$	7,119		$	16,944		$	11,129
Gross losses		(6,560	)		(7,779	)		(1,722	)
Net gains		559			9,165			9,407
Equity securities:
Gross gains		7,274			7,986			12,503
Gross losses		(3,996	)		(15,881	)		(18,698	)
Net gains (losses)		3,278			(7,895	)		(6,195	)
Short-term investments
Gross gains		—			59			—
Gross losses		(289	)		—			(3,201	)
Net gains (losses)		(289	)		59			(3,201	)
Investment in unconsolidated subsidiaries
Gross gains		363			—			—
Gross losses		(3,827	)		—			—
Net losses		(3,464	)		—			—
Net realized gains before income taxes		84			1,329			11
Income taxes		(28	)		(465	)		(4	)
Total net realized gains after income taxes	$	56		$	864		$	7

Net realized gains decreased $0.8 million after-tax in 2003 compared with 2002. The decrease was due mainly to a reduction in fixed income sales activity in 2003, partially offset by an $11.2 million increase in net gains pre-tax in our equities portfolio due to favorable market conditions during 2003. In addition, other-than-temporary impairment of our equity portfolio was $0.3 million in 2003 compared to $6.9 million in 2002. During 2003 we sold our ownership interest in Truman, an unconsolidated subsidiary, and recognized a realized loss of $3.6 million.

Our accumulated other comprehensive income consists of changes in unrealized net gains and losses on investments, less realized gains and losses in the current period earnings and currency translation gains and losses, net of deferred taxes.

Debt and Equity Financing

We currently intend to negotiate a credit facility in the range of $100 million to $150 million to be available for general corporate purposes.

We manage our capital resources based on our cash flows, total capital and rating agency requirements. As of December 31, 2003, our shareholders’ equity was $2.8 billion. Our long-term debt outstanding at December 31, 2003 was $819.5 million, consisting of the following:

• $360.0 million in principal amount of 2.50% Senior Convertible Debentures due July 15, 2021 issued by The PMI Group;

• $62.9 million in principal amount of 6.75% Notes due November 15, 2006 issued by The PMI Group;

• $51.5 million 8.309% subordinated debentures due February 1, 2027 issued to an unconsolidated subsidiary trust of The PMI Group; and

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• $345 million in principal amount of senior notes, maturing on November 15, 2008, with a coupon initially of 3% per annum.

The senior notes described above relate to our issuance in November 2003 of 13.8 million 5.875% equity units with a stated value of $25 per unit. The units include the senior notes and stock purchase contracts to purchase, no later than November 15, 2006, up to 9,032,100 shares of common stock for an aggregate purchase price of $345 million. Contract adjustment payments will be made on the stated value of the equity units at a rate of 2.875% per annum. Also in November 2003, we issued 5,750,000 shares of our common stock for an aggregate purchase price of approximately $220 million. As a result of the increase in our aggregate indebtedness upon completion of these recent transactions, our ability to issue significant amounts of additional indebtedness, while maintaining The PMI Group’s senior debt ratings and outlook and PMI’s financial strength ratings and outlook, is more limited. Accordingly, we do not anticipate effecting significant additional debt financings in the near term except the proposed credit facility described above.

The terms of the 2.50% Senior Convertible Debentures due July 15, 2021 provide that the holders of the debentures may require The PMI Group to repurchase outstanding debentures on July 15, 2004, 2006, 2008, 2011 and 2016 at a purchase price equal to the principal amount of the debentures to be repurchased plus accrued and unpaid interest. Instead of paying the purchase price in cash, we may pay all or a portion of the purchase price in common stock, valued at 97.5% of the average sale price of the common stock over a specified period, provided that the shares of common stock to be issued are registered under the Securities Act, if required. If the holders were to require us to repurchase the debentures on July 15, 2004, we presently have sufficient cash resources to fund such a repurchase.

Uses of Funds

The PMI Group’s principal uses of funds are payments of dividends to shareholders, common stock repurchases, investments and acquisitions, and interest payments. The PMI Group’s available funds (consisting of cash and cash equivalents and investments) were $307.9 million at December 31, 2003, compared to $356.5 million at December 31, 2002. In the normal course of business, we evaluate The PMI Group’s capital and liquidity needs in light of its debt-related costs, holding company expenses, our dividend policy, and rating agency considerations. It is our present intention to maintain between $75 million to $100 million of liquidity at our holding company for rating agency purposes. We believe that we have sufficient cash to meet all of our short- and medium-term obligations, and that we maintain excess liquidity to support our operations.

We currently do not expect to engage in significant additional strategic investments in the near future. However, if we wish to provide additional capital to our existing operations or want to increase our equity investment in FGIC Corporation as opportunities become available, we may need to increase the cash and investment securities held by The PMI Group. Our ability to raise additional funds for these purposes will be dependent on our ability to access the debt or equity markets and/or cause our insurance subsidiaries to pay dividends, subject to rating agency and insurance regulatory considerations and the risk-to-capital limitations described above. The stockholders agreement entered into in connection with our investment in FGIC Corporation restricts our ability to increase our equity interest in FGIC Corporation and, accordingly, we cannot be sure that, if we desire to do so, we will have opportunities to increase our ownership of FGIC Corporation in the near term or at all.

Although we currently have no plans to make significant additional capital contributions to our consolidated subsidiaries or strategic investments, business opportunities or unanticipated developments could require capital contributions. For example, as discussed under “—Ratings”, FGIC’s ability to conduct its business successfully depends in part on the triple-A financial strength ratings assigned to it by Moody’s, S&P and Fitch. We believe that FGIC has adequate capital to meet its current and anticipated needs. However, if there was a significant deterioration in FGIC’s operating results or rating agency concerns with respect to FGIC’s business, we could find it necessary to contribute substantial additional capital to maintain FGIC’s ratings in the future.

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During the first quarter of 2003, we repurchased approximately $20 million of our common stock, completing a $100 million stock repurchase program authorized in 1998. In February 2003, The PMI Group’s Board of Directors authorized a new stock repurchase program in the amount of $100 million. To date, no repurchases have occurred under this authorization.

Cash Flows

On a consolidated basis, our principal sources of funds are cash flows generated by our insurance subsidiaries, investment income derived from our investment portfolios and debt and equity financings by The PMI Group as described above. It is one of the goals of our cash management policy to ensure that we have sufficient funds on hand to pay these obligations when they are due. We believe that we have sufficient cash to meet these and other of our short- and medium-term obligations.

Consolidated cash flows generated by operating activities, including premiums, investment income, underwriting and operating expenses and losses, was $559 million in 2003 compared to $400 million in 2002. The increase in 2003 over 2002 was primarily due to premiums written of $114 million associated with the restructuring of certain existing U.S. primary insurance policies, and PMI Australia’s increased business activities, which primarily consist of single premium products.

Consolidated cash flows generated by investing activities, including purchases and sales of investments, investments in unconsolidated subsidiaries, and capital expenditures, was $1.0 billion in 2003 and $333 million in 2002. This increase was due primarily to our investment in FGIC of $611 million.

Consolidated cash flows generated by financing activities, including proceeds from issuance of debt and equity, repayment of debt, purchase of treasury stock and dividends paid to shareholders, was $528.7 million in 2003 and $16.0 million in 2002. The variance was due primarily to the issuance of the equity units of $345 million and common stock of approximately $220 million.

Off-Balance Sheet Arrangements

We have guaranteed approximately two-thirds of the funds that may become due under a $30.7 million letter of credit which may be drawn upon by the FTC as security for a portion of a $40 million redress fund to be established pursuant to the terms of the settlement reached by Fairbanks with the FTC and HUD. In addition, we have guaranteed approximately $7 million of obligations owed by Fairbanks to its principal lenders in connection with the refinancing of amounts owed to another creditor.

Under certain circumstances, when we make an underwriting error in the course of providing contract underwriting services to a customer, we issue to the customer a loan indemnification. Such an indemnification is in lieu of paying a monetary remedy to the customer at the time the underwriting error is discovered and, accordingly, is usually issued on a loan by loan basis. While the terms of the indemnifications vary, each indemnification generally requires us to reimburse the customer for any costs (excess of insurance recoverables) it incurs as a result of the borrower’s default on the loan in question. If the indemnified loan remains current, or is repaid or refinanced, we have no actual liability under the indemnification. As of December 31, 2003, we estimate that the total principal balance for indemnified loans was between approximately $85 million and $125 million. For a variety of factors, we believe our contingent liability with respect to these indemnifications to be significantly lower than this amount. The factors include the following: (i) we generally only indemnify performing loans; (ii) we expect only a small portion of the indemnified loans to default; (iii) loans in default may not cause our customers to incur losses due to home appreciation and the underlying security; and (iv) we expect a portion of these loans to be refinanced, or their indemnification coverage to expire, in the near- to mid-term. In 2003, we paid customers approximately $2.5 million pursuant to loan indemnifications.

As of December 31, 2003, we had committed to fund, if called upon to do so, approximately $7.6 million of additional equity in certain limited partnership investments.

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Commitments and Contingencies

Our contractual obligations include long-term debt, capital lease obligations, operating lease obligations and purchase obligations. Most of our capital expenditure commitments will be used for technology improvements. We have lease obligations under certain non-cancelable operating leases. Minimum rental payments under these operating leases as well as the obligation recorded under capital leases are provided in the table below.

	Less Than 1 Year		1-2 Years		3-5 Years		More Than 5 Years		Total
	(Dollars in thousands)
Long-term debt obligations	$	—	$	62,950	$	345,000	$	411,593	$	819,543
Capital lease obligations		1,332		222		—		—		1,554
Operating lease obligations		10,019		4,726		6,296		7,119		28,160
Purchase obligations		1,456		305		720		—		2,481
Total	$	12,807	$	68,203	$	352,016	$	418,712	$	851,738

Capitalized costs associated with software developed for internal use was $22.5 million in 2003 and $25.2 million in 2002. We expect to continue to invest in internally developed software.

Capital Support Obligations

PMI has entered into various capital support agreements with its Australian and European subsidiaries that could require PMI to make additional capital contributions to those subsidiaries for rating agency purposes. With respect to the Australian and European subsidiaries, The PMI Group guarantees the performance of PMI’s capital support obligations. In 2001, PMI executed a capital support agreement whereby it agreed to contribute funds, under specified conditions, to maintain CMG’s risk-to-capital ratio at or below 18.0 to 1. PMI’s obligation under the agreement is limited to an aggregate of $37.7 million, exclusive of capital contributions that PMI made prior to April 10, 2001. On December 31, 2003, CMG’s risk-to-capital ratio was 13.4.

Ratings

The rating agencies have assigned the following ratings to The PMI Group and certain of its wholly-owned subsidiaries:

• Standard & Poor’s Ratings Service, or S&P, has assigned The PMI Group counterparty credit and senior unsecured debt ratings of “A+” and a preferred stock rating of “A-”; has assigned PMI Mortgage Insurance Co. counterparty credit and financial strength ratings of “AA+;” and has assigned PMI Australia and PMI Europe financial strength ratings of “AA.” S&P’s outlook with respect to these ratings is negative.

• Fitch Ratings, or Fitch, has assigned The PMI Group “A+” long-term issuer and senior debt ratings; has assigned PMI a “AA+” insurer financial strength rating; has assigned PMI Australia and PMI Europe insurer financial strength ratings of “AA;” and has assigned PMI Capital I, the issuer of the 8.309% Capital Securities, an “A+” capital securities rating. Fitch’s rating outlook is stable with respect to these ratings.

• Moody’s Investors Service, or Moody’s, has assigned an “A1” senior unsecured debt rating, stable outlook, with respect to The PMI Group’s 2.50% Senior Convertible Debentures and the 5.875% equity units; has assigned PMI an “Aa2” (stable outlook) insurance financial strength rating; has assigned PMI Australia an “Aa3” (positive outlook) insurance financial strength rating; and has assigned PMI Europe an “Aa3” (stable outlook) insurance financial strength rating.

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In connection with our December 18, 2003 investment in FGIC Corporation, S&P, Fitch and Moody’s each affirmed their ratings of The PMI Group and PMI.

Any significant decreases in our ratings may adversely affect the ratings of FGIC Corporation and FGIC. FGIC’s ability to attract new business and to compete with other triple-A rated financial guarantors is largely dependent on its triple-A financial strength ratings. Also, the stockholders agreement entered into in connection with the acquisition of FGIC Corporation provides that The PMI Group will not acquire a majority of the voting stock of FGIC Corporation or cause its designees to constitute a majority of FGIC Corporation’s Board of Directors unless, at the time of such action, Moody’s, S&P and Fitch, as applicable, reaffirm FGIC’s then current financial strength rating and outlook and FGIC Corporation’s then current senior unsecured debt rating and outlook. The value of our investment in FGIC Corporation, and our ability to increase our ownership interest in FGIC Corporation in the future, to the extent opportunities arise to do so, depend in part on The PMI Group’s and PMI’s ratings and on the views of the rating agencies with respect to any such transaction.

Determinations of ratings by the rating agencies are affected by a variety of factors, including macroeconomic conditions, economic conditions affecting the mortgage insurance industry, changes in regulatory conditions that may affect demand for mortgage insurance, competition, the need for us to make capital contributions to our subsidiaries and underwriting and investment losses.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

“Management’s Discussion and Analysis of Financial Condition and Results of Operation,” as well as disclosures included elsewhere in this Annual Report on Form 10-K, are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingencies. Actual results may differ significantly from these estimates under different assumptions or conditions. We believe that the following critical accounting policies involved significant judgments and estimates used in the preparation of our financial statements.

Reserves for Losses and LAE

We establish reserves for losses and LAE to recognize the liability of unpaid losses related to insured mortgages that are in default. We do not rely on a single estimate to determine our loss reserves. To ensure the reasonableness of the best estimates, we develop scenarios using generally recognized actuarial projection methodologies that result in a range of possible losses and LAE. Each scenario in the loss reserve model is assigned different weightings based upon actual claims experience in prior years to project the current liability. Our best estimate was slightly above the midpoint of our actuarially determined range of losses for 2003, primarily due to reserves for PMI Australia. Changes in loss reserves can materially affect our consolidated net income. The process of reserving losses requires us to forecast the interest rate and the housing market environments, which are highly uncertain and requires significant management judgment. In addition, different estimates could have been used in the current period, and changes in the accounting estimates are reasonably likely to occur from period to period based on the economic conditions. We review the judgments made in our prior period estimation process and adjust our current assumptions as appropriate. While our assumptions are based in part upon historical data, the loss provisioning process is complex and subjective and, therefore, the ultimate liability may vary significantly from our estimates.

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The following table shows the reasonable range of loss and LAE reserves, as determined by our actuaries, and recorded reserves for losses and LAE (gross of reinsurance recoverables) as of December 31, 2003 on a segment and consolidated basis.

	As of December 31, 2003
	Low		High		Recorded
	(Dollars in millions)
U.S. Mortgage Insurance Operations	$	285.3	$	362.9	$	325.3
International Operations*		19.3		22.0		21.7
Consolidated loss and LAE reserves, gross of reinsurance recoverable	$	304.6	$	384.9	$	347.0

* International Operations includes PMI Australia and PMI Europe. Loss reserves for PMI Europe were $11.5 million at December 31, 2003, the majority of which were reserves acquired in connection with the R&SA mortgage insurance portfolio acquisition. An actuarial range for PMI Europe’s reserves has not been established.

U.S. Mortgage Insurance Operations—We establish PMI’s reserves for losses and LAE based upon our estimate of unpaid losses and LAE on (i) reported mortgage loans in default and (ii) estimated defaults incurred but not reported to PMI by its customers. As of December 31, 2003, our actuaries determined that PMI’s reasonable range of loss and LAE reserves was $285.3 million to $362.9 million. As of December 31, 2003, PMI’s reserves for losses and LAE were $325.3 million (gross of reinsurance recoverable), which represented our best estimate and approximately the midpoint of the actuarial range of loss. We believe the amount recorded represents the most likely outcome within the actuarial range.

Our best estimate of PMI’s loss and LAE reserves is derived primarily from our analysis of PMI’s default and recovery experience. The key assumptions used in the estimation process are expected claim rates, average claim sizes, and costs to settle claims. We evaluate our assumptions in light of PMI’s historical patterns of claim payment, loss experience in past and current economic environments, the seasoning of PMI’s various books of business, PMI’s coverage levels, the credit quality profile of PMI’s portfolios, and the geographic mix of PMI’s business. Our assumptions are influenced by historical loss patterns and are adjusted to reflect recent loss trends. Our assumptions are also influenced by our assessment of current and future economic conditions, including trends in housing prices, unemployment and interest rates. Our estimation process uses generally recognized actuarial projection methodologies. As part of our estimation process, we also evaluate various scenarios representing possible losses and LAE under different economic assumptions. With respect to PMI’s reserves at December 31, 2003, our recording of $325.3 million, the approximate mid-point of the actuarial range, was influenced by our belief that PMI’s number of delinquencies, average claim rate and average claim size are currently less volatile relative to prior periods.

Our current recorded loss reserve balance represents an increase of $9.6 million from PMI’s reserve balance at December 31, 2002. Our increase to the reserve balance at December 31, 2002 was due primarily to increases in reported delinquency inventory, expected higher proportions of those delinquencies developing into claims and higher mortgage insurance coverage levels on pending delinquencies leading to higher average claim sizes.

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The table below provides a reconciliation of our U.S. Mortgage Insurance segment’s beginning and ending reserves for losses and LAE for each the periods indicated:

	2003			2002			2001
	(Dollars in millions)
Balance at January 1,	$	315.7		$	289.4		$	281.7
Reinsurance recoverable		(3.8	)		(6.1	)		(9.2	)
Net balance at January 1,		311.9			283.3			272.5
Losses and LAE incurred (principally with respect to defaults occurring in)
Current year		218.3			235.0			242.6
Prior years		(3.6	)		(85.2	)		(143.1	)
Total incurred		214.7			149.8			99.5
Losses and LAE payments (principally with respect to defaults occurring in)
Current year		(10.2	)		(8.1	)		(8.7	)
Prior years		(194.4	)		(113.1	)		(80.0	)
Total payments		(204.6	)		(121.2	)		(88.7	)
Net balance at December 31,		322.0			311.9			283.3
Reinsurance recoverable		3.3			3.8			6.1
Balance at December 31,	$	325.3		$	315.7		$	289.4

The above loss reserve reconciliation is presented to display the components of our loss reserve and LAE changes for the periods presented. Losses and LAE payments of $204.6 million, $121.2 million and $88.7 million for the periods ended 2003, 2002 and 2001, respectively, reflect amounts paid during the period presented and are not subject to estimation because they are derived solely from the actual timing of payments made. Losses and LAE incurred, net of changes to prior years, of $214.7 million, $149.8 million and $99.5 million for the periods ended 2003, 2002 and 2001, respectively, are management’s best estimates of ultimate losses and LAE and, therefore, are subject to estimation. Within the total losses and LAE incurred line item are reductions to incurred related to prior periods of $3.6 million, $85.2 million and $143.1 million for the periods ended 2003, 2002 and 2001, respectively. By setting out losses and LAE incurred by accident year, the table below breaks down the 2003, 2002 and 2002 reductions in reserves by particular accident years.

									Changes in Incurred
	Losses and LAE Incurred								2003 vs. 2002			2002 vs. 2001			2001 vs. 2000
Accident Year	2003		2002		2001		2000
	(Dollars in millions)
1998 and prior	$	693.9	$	694.9	$	696.3	$	703.5	$	(1.0	)	$	(1.4	)	$	(7.2	)
1999		69.4		70.0		72.1		89.9		(0.6	)		(2.1	)		(17.8	)
2000		103.6		101.4		97.6		215.7		2.2			3.8			(118.1	)
2001		183.8		157.1		242.6		—		26.7			(85.5	)		—
2002		204.1		235.0		—		—		(30.9	)		—			—
2003		218.3		—		—		—		—			—			—
Total									$	(3.6	)	$	(85.2	)	$	(143.1	)

The $3.6 million, $85.2 million and $143.1 million reductions in 2003, 2002 and 2001 over prior years, respectively, were due to re-estimations of ultimate loss rates from those established at the original notice of default, updated through the period presented. These re-estimations of ultimate loss rates are the result of management’s periodic review of estimated claim amounts in light of actual claim amounts, loss development data or ultimate claim rates. The $3.6 million reduction in prior years’ reserves during 2003 was due primarily to (i) our reallocation of reserves predominantly between the accident years 2002 and 2001 and (ii) favorable PMI pool portfolio loss development trends. The $85.2 million and $143.1 million total reductions in prior years’ reserves during 2002 and 2001, respectively, were due primarily to more favorable loss trends than expected

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compared to PMI’s historic loss experience, evidenced by lower claim amounts, a robust real estate market and strong home price appreciation.

International Operations—PMI Australia’s reserves for losses and LAE are based upon estimated unpaid losses and LAE on reported defaults and estimated defaults incurred but not reported. The key assumptions we use to derive PMI Australia’s loss and LAE reserves include estimates of PMI Australia’s expected claim rates, average claim sizes, claims handling expenses and net expected future claim recoveries. These assumptions are evaluated in light of the same factors used by PMI. As of December 31, 2003, the actuarial range for PMI Australia’s reserves for losses and LAE ranged from $7.8 million to $10.5 million. As of December 31, 2003, PMI Australia’s reserves for losses and LAE were $10.2 million, which represented our best estimate and a decrease of $7.1 million from PMI Australia’s reserve balance of $17.3 million at December 31, 2002. The $7.1 million reduction in PMI Australia’s reserves for losses and LAE since December 31, 2002 was due primarily to a decline in the rate of defaults developing into claims as well as a reduction in default rates, both attributable to strong economic conditions in Australia. The reserves released were established primarily in the years 2002 through 2003. We recorded reserves in Australia of $10.2 million, at the high end of the actuarial range of loss, in light of the factors described above and were also influenced by Australian insurance regulations requiring higher confidence levels for reserve balances and our belief that the recent low loss rates experienced by PMI Australia may be unsustainable in the future.

PMI Europe’s loss reserves at December 31, 2003 were $11.5 million compared to $0.5 million at December 31, 2002. This increase was due primarily to the fourth quarter 2003 acquisition of the R&SA portfolio, which included reserves of $8 million. The remaining increase was due to additional risk written by PMI Europe during 2003. Currently we do not determine an actuarial range of loss for PMI Europe loss reserves. As we accumulate additional loss data related to the acquired portfolio, we anticipate determining an actuarial range of loss. We establish PMI Europe’s loss reserves for credit default swap transactions consummated before July 1, 2003, primary insurance and excess-of-loss reinsurance. Revenue, losses and other expenses associated with credit default swaps executed on or after July 1, 2003 are recognized through a derivative accounting treatment in accordance with SFAS No. 149. PMI Europe’s loss reserving methodology contains three components: case reserves, IBNR reserves, and reserves on risk-remote positions. Case and IBNR reserves are based upon PMI Europe’s estimation of incurred loss. Reserves on risk-remote positions are based on the assumption that even in transactions where the likelihood of loss to PMI Europe is remote, a series of such transactions represent an increased likelihood that some small percentage of these transactions may experience losses. Therefore, PMI Europe has calculated reserves on risk-remote positions based upon historical bond default rates at the corresponding rating levels.

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The following table provides a reconciliation of our International Operations segment’s beginning and ending reserves for losses and loss adjustment expenses for each of the last three years:

	2003			2002			2001
	(Dollars in millions)
Balance at January 1,	$	17.8		$	14.4		$	5.4
Reinsurance recoverable		—			—			—
Net balance at January 1,		17.8			14.4			5.4
Losses and loss adjustment expenses incurred (principally with respect to defaults occurring in)
Current year		9.8			11.1			9.5
Prior years		(15.4	)		(3.5	)		(0.2	)
Total incurred		(5.6	)		7.6			9.3
Losses and loss adjustment expenses payments (principally with respect to defaults occurring in)
Current year		(0.6	)		(1.5	)		(1.6	)
Prior years		(2.7	)		(4.4	)		(2.9	)
Total payments		(3.3	)		(5.9	)		(4.5	)
Acquisitions of insurance portfolio and wholly-owned subsidiary		7.9			—			4.9
Foreign currency translations		4.9			1.7			(0.7	)
Net balance at December 31,		21.7			17.8			14.4
Reinsurance recoverable		—			—			—
Balance at December 31,	$	21.7		$	17.8		$	14.4

The $15.4 million reduction in losses and LAE incurred relating to prior years in 2003 was primarily due to the reduction in PMI Australia’s loss reserves in the third quarter of 2003.

Investments

Other-Than-Temporary Impairment—We have a formal review process for all securities in our investment portfolio, including a review for impairment losses. Factors considered when assessing impairment include:

• a decline in the market value of a security by 15% or more below cost or amortized cost for a continuous period of at least six months;

• a decline in the market value of a security for a continuous period of 12 months;

• recent credit downgrades of the applicable security or the issuer by the rating agencies;

• the financial condition of the applicable issuer;

• whether scheduled interest payments are past due; and

• whether we have the ability and intent to hold the security for a sufficient period of time to allow for anticipated recoveries in fair value.

If we believe a decline in the value of a particular investment is temporary, we record the decline as an unrealized loss on our consolidated balance sheet under “accumulated other comprehensive income” in shareholder’s equity. If we believe the decline is “other-than-temporary,” we write-down the carrying value of the investment and record a realized loss in our consolidated statement of operations. Our assessment of a decline in value includes management’s current assessment of the factors noted above. If that assessment changes in the future, we may ultimately record a loss after having originally concluded that the decline in value was temporary. Other-than-temporary declines in the fair value of the investment portfolio were $0.3 million in 2003 and $6.9 million in 2002.

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The following table shows our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2003.

	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(Dollars in thousands)
Fixed income securities:
Municipal bonds	$	10,032	$	(142	)	$	—	$	—		$	10,032	$	(142	)
Foreign governments		275,581		(2,487	)		—		—			275,581		(2,487	)
Corporate bonds		103,920		(1,420	)		—		—			103,920		(1,420	)
U.S. government and agencies		145		(1	)		—		—			145		(1	)
Total fixed income securities		389,678		(4,050	)		—		—			389,678		(4,050	)
Equity securities:
Common stocks		11,598		(262	)		1,510		(51	)		13,108		(313	)
Preferred stocks		2,948		(17	)		—		—			2,948		(17	)
Total equity securities		14,546		(279	)		1,510		(51	)		16,056		(330	)
Total	$	404,224	$	(4,329	)	$	1,510	$	(51	)	$	405,734	$	(4,380	)

We have determined that there was no other than temporary impairment in our consolidated investment portfolio as of December 31, 2003. Unrealized losses in the fixed income portfolio are primarily due to interest rate fluctuations during the year and as such do not qualify for other than temporary impairment as we have the ability to hold until maturity. The remaining unrealized losses do not meet the criteria established in our policy and as such are not considered impaired.

The following table provides the composition of fixed income securities with an unrealized loss at December 31, 2003 in relation to the total of all fixed income securities with an unrealized loss by contractual maturities.

	Percent of Market Value		Percent of Unrealized Loss		Number of Items
	(Dollars in thousands)
Due in one year or less	2.6	%	0.2	%	3
Due after one year through five years	35.8		27.4		47
Due after five years through ten years	51.1		56.3		51
Due after ten years	10.5		16.1		15
Total fixed income securities	100.0	%	100.0	%	116

Revenue Recognition

We generate a significant portion of our revenues from mortgage insurance premiums on either a monthly, annual or single payment basis. Monthly premiums are earned as coverage is provided. Annual premiums are earned on a monthly pro-rated basis over the year of coverage. Single premiums are initially deferred as unearned premiums and earned over the expected policy terms. The earning cycle for single premium products is based on a range of seven to fifteen years, and the rates used to determine the earnings are estimates based on the expiration of risk. Single premiums written accounted for approximately 27% of gross premiums written from mortgage insurance in 2003. The premiums earning process begins with the notification of risk generally upon receipt of initial premium payment. Earnings pattern calculation is an estimation process and, accordingly, we review our premium earning cycle regularly and any adjustments to the estimates are reflected in the current period’s operating results.

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Deferred Policy Acquisition Costs

Our policy acquisition costs are related to the issuance of primary mortgage insurance policies, including acquiring, underwriting and processing new business, as well as sales related activities. We defer policy acquisition costs when incurred and amortize these costs in proportion to estimated gross profits for each policy year. The estimates for each policy year are monitored regularly to reflect actual experience and any changes to persistency or loss development. We review our estimation process on a regular basis and any adjustments made to the estimates are reflected in the current period’s operating results. Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed recoverable amounts, after considering investment income.

Impairment Analysis of Investments in Unconsolidated Subsidiaries

Periodically, or as events dictate, the Company evaluates potential impairment of its investments in unconsolidated subsidiaries. Accounting Principles Board (APB) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, provides criteria for determining potential impairment. In the event a loss in value of an investment is determined to be an other-than-temporary decline, an impairment charge would be recognized in the consolidated statement of operations. Evidence of a loss in value that could indicate impairment might include, but would not necessarily be limited to, the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. Realized gains or losses resulting from the sale of the Company’s ownership interests of unconsolidated subsidiaries are recognized in net realized investment gains or losses in the consolidated statement of operations.

As of December 31, 2003, our total investments in Fairbanks totaled $141.8 million, consisting of $115.8 million book value of equity investment and $26.0 million of related party receivables. We evaluated these investments as of December 31, 2003 and determined that there was no other-than-temporary decline in the carrying value. Accordingly, we have not recognized an impairment charge with respect to our total investment in Fairbanks. We will continue to evaluate our investment balance in Fairbanks for potential impairment in accordance with GAAP.

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Risk Factors

Economic factors have adversely affected and may continue to adversely affect PMI’s loss experience and demand for mortgage insurance.

PMI’s loss experience has materially increased over the past year and could continue to increase as a result of: national or regional economic recessions; declining values of homes; higher unemployment rates; higher levels of consumer credit; deteriorating borrower credit; interest rate volatility; war or terrorist activity; or other economic factors. These factors could also materially reduce demand for housing and, consequently, demand for mortgage insurance.

Concentration of PMI’s primary insurance in force could increase claims and losses and harm our financial performance.

We could be affected by economic downturns in specific regions of the United States where a large portion of PMI’s business is concentrated. As of December 31, 2003, 9.3% of PMI’s primary risk in force was located in California, 9.2% was located in Florida and 7.0% was located in Texas. In addition, refinancing of mortgage loans can have the effect of concentrating PMI’s insurance in force in economically weaker areas of the U.S.

If interest rates decline, home values increase or mortgage insurance cancellation requirements change, the length of time that PMI’s policies remain in force and our revenues could decline.

A significant percentage of the premiums PMI earns each year is generated from insurance policies written in previous years. As a result, a decrease in the length of time that PMI’s policies remain in force could cause our revenues to decline. Factors that lead to borrowers canceling their mortgage insurance include: current mortgage interest rates falling below the rates on the mortgages underlying PMI’s insurance in force, which frequently results in borrowers refinancing their mortgages; and appreciation in home values experienced by the homes underlying the mortgages PMI insures.

If the volume of low down payment home mortgage originations declines, the amount of insurance that PMI writes could decline, which could result in a decline in our future revenue.

A decline in the volume of low down payment mortgage originations could reduce the demand for private mortgage insurance and consequently, our revenues. The volume of low down payment mortgage originations is affected by, among other factors: the level of home mortgage interest rates; domestic economy and regional economic conditions; consumer confidence; housing affordability; 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.

Since PMI generally cannot cancel mortgage insurance policies or adjust renewal premiums, unanticipated claims could cause our financial performance to suffer.

PMI generally cannot cancel the mortgage insurance coverage that it provides or adjust renewal premiums during the life of a mortgage insurance policy. As a result, the impact of unanticipated claims generally cannot be offset by premium increases on policies in force or limited by non-renewal or cancellation of insurance coverage. The premiums PMI charges may not be adequate to compensate us for the risks and costs associated with the insurance coverage provided to PMI’s customers. An increase in the number or size of unanticipated claims could adversely affect our consolidated financial condition and results of operations.

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The premiums PMI charges for mortgage insurance on less-than-A quality loans and non-traditional loans, and the associated investment income, may not be adequate to compensate for future losses from these products.

PMI’s insurance written includes less-than-A quality loans and non-traditional loans. The credit quality, loss development and persistency on these loans can vary significantly from PMI’s traditional A quality loan business. For example, PMI’s primary bulk portfolio is experiencing higher delinquency and claims rates, and higher average claims paid amounts, than PMI’s primary flow portfolios due, in part, to the higher concentration of less-than-A quality and non-traditional loans in the bulk portfolio. We expect that PMI will continue to experience higher default rates for less-than-A quality and non-traditional loans than for its A quality loans. We cannot be sure that the premiums that PMI charges on less-than-A quality loans and non-traditional loans will adequately offset the associated risk.

PMI’s primary risk in force consists of mortgage loans with high loan-to-value ratios and adjustable rate mortgages, which generally result in more claims than mortgage loans with lower loan-to-value ratios and fixed rate mortgages.

In our experience, mortgage loans with high loan-to-value ratios have higher claims frequency rates than mortgages with lower loan-to-value ratios. At December 31, 2003, approximately 54% of PMI’s primary risk in force consisted of mortgages with loan-to-value ratios greater than 90%. Risk in force is the dollar amount equal to the product of each individual insured mortgage loan’s current principal balance and the percentage specified in the insurance policy of the claim amount that would be payable if a claim were made.

Also as of December 31, 2003, approximately 10% of PMI’s primary risk in force consisted of adjustable rate mortgages, which we refer to as ARMs. In our experience, ARMs have claims frequency rates that exceed the rates associated with PMI’s book of business as a whole. We cannot be sure that the premiums that PMI charges will adequately offset the associated risk of higher loan-to-value loans and ARMs.

PMI’s loss experience may increase as PMI’s policies continue to age.

The majority of claims with respect to primary insurance written through PMI’s flow channel have historically occurred during the third through the sixth years after issuance of the policies. PMI’s primary bulk loans that result in claims generally reach claims status more quickly than primary flow loans. As of December 31, 2003, approximately 92% of PMI’s primary risk in force was written after December 31, 1998 and 73% was written after December 31, 2001. Accordingly, a significant majority of PMI’s primary portfolio is in, or approaching, its peak claim years. We believe PMI’s loss experience may increase as PMI’s policies age. If the claim frequency on PMI’s risk in force significantly exceeds the claim frequency that was assumed in setting PMI’s premium rates, our consolidated financial condition and results of operations would be 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 regularly reviewed and 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. Any adjustments, which may be material, resulting from these reviews are reflected in our consolidated results of operations. Our consolidated financial condition and results of operations could be harmed if our reserve estimates are insufficient to cover the actual related claims paid and loss-related expenses incurred.

PMI delegates underwriting authority to mortgage lenders which could cause PMI to insure mortgage loans outside of its underwriting guidelines, and thereby increase claims and losses.

A significant percentage of PMI’s new insurance written is underwritten pursuant to a delegated underwriting program under which certain mortgage lenders may determine whether mortgage loans meet PMI’s program guidelines and commit us to issue mortgage insurance. We may expand the availability of delegated

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underwriting to additional customers. If an approved lender commits us to insure a mortgage loan, PMI may not refuse, except in limited circumstances, to insure, or rescind coverage on, that loan even if it reevaluates that loan’s risk profile and determines the risk profile to be unacceptable or the lender fails to follow PMI’s delegated underwriting guidelines.

If we fail to properly underwrite mortgage loans when we provide contract underwriting services, we may be required to provide monetary and other remedies to the customer. In addition, we may not be able to recruit a sufficient number of qualified underwriting personnel.

Our subsidiary MSC provides contract underwriting services for a fee. As a part of the contract underwriting services, MSC provides monetary and other remedies to its customers in the event that it fails to properly underwrite a mortgage loan. As a result, we assume credit and interest rate risk in connection with our contract underwriting services. Generally, the scope of the remedies provided by MSC is in addition to those contained in PMI’s master policies. Contract underwriting services apply to a significant percentage of PMI’s insurance in force and the costs relating to the investigation and/or provision of remedies could have a material adverse effect on our consolidated financial condition and results of operations. Worsening economic conditions or other factors that could increase PMI’s default rate could also cause the number and severity of remedies to increase.

The number of available and qualified underwriting personnel is limited, and there is heavy price competition among mortgage insurance companies for such personnel. MSC’s inability to recruit and maintain a sufficient number of qualified underwriters at a low cost could harm our consolidated financial condition and results of operations.

The risk-based capital rule issued by the Office of Federal Housing Enterprise Oversight could require us to obtain a claims-paying ability rating of “AAA” and could cause PMI’s business to suffer.

The Office of Federal Housing Enterprise Oversight, or OFHEO, has issued a risk-based capital rule that treats credit enhancements issued by private mortgage insurance companies with claims-paying ability ratings of “AAA” more favorably than those issued by private mortgage insurance companies with “AA” ratings. The rule also provides capital guidelines for Fannie Mae and Freddie Mac, or the GSEs, in connection with their use of other types of credit protection counterparties in addition to mortgage insurers. PMI has an “AA+” rating. Although it has not occurred to date, if the rule resulted in the GSEs increasing their use of either “AAA”-rated mortgage insurers instead of “AA”-rated entities or credit protection counterparties other than mortgage insurers, our consolidated financial condition and results of operations could be adversely affected. Legislation is pending in Congress concerning the GSEs which would empower a new regulator to issue new capital rules for the GSEs. We cannot estimate whether this legislation will be enacted, its content or its impact on our consolidated financial condition and results of operations.

If mortgage lenders and investors select alternatives to private mortgage insurance, the amount of insurance that PMI writes could decline, which could reduce our revenues and profits.

Alternatives to private mortgage insurance include: (1) government mortgage insurance programs, including those of the Federal Housing Administration, or FHA, and the Veterans Administration, or VA; (2) 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; (3) member institutions providing credit enhancement on loans sold to a Federal Home Loan Bank, or FHLB; (4) investors holding mortgages in their portfolios and self-insuring; (5) mortgage lenders maintaining lender recourse or participation with respect to loans sold to the GSEs; and (6) investors using credit enhancements as a partial or complete substitute to private mortgage insurance.

These alternatives, or new alternatives to private mortgage insurance that may develop, could reduce the demand for private mortgage insurance and cause our revenues and profitability to decline. Over the past several

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years, the volume of 80/10/10 loans as an alternative to loans requiring mortgage insurance has increased significantly and may continue to do so for the foreseeable future.

Although the FHLBs are not required to purchase insurance for mortgage loans, they currently use mortgage insurance on substantially all mortgage loans with a loan-to-value ratio above 80%. If the FHLBs were to purchase uninsured mortgage loans or increase the loan-to-value ratio threshold above which they require mortgage insurance, the market for mortgage insurance could decrease, and we could be adversely affected.

The OFHEO risk-based capital rule (discussed above) may allow large financial entities such as banks, financial guarantors, insurance companies and brokerage firms to provide or arrange for products that may efficiently substitute for some of the capital relief provided to the GSEs by private mortgage insurance. Our consolidated financial condition and results of operations could be harmed if the GSEs were to use these products in lieu of mortgage insurance. See “The institution of new eligibility guidelines by Fannie Mae could harm our profitability and reduce our operational flexibility,” below, for a discussion of Fannie Mae’s ability to purchase mortgage insurance from other than existing approved mortgage insurers.

Our revenues and profits could decline if PMI loses market share as a result of industry competition or if our competitive position suffers as a result of our inability to introduce and successfully market new products and programs.

The principal sources of PMI’s 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; and alternatives to private mortgage insurance discussed above.

If PMI is unable to compete successfully against other insurers or private mortgage insurance alternatives or 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, our business will suffer.

Legislation and regulatory changes, including changes impacting the GSEs, could significantly affect PMI’s business and could reduce demand for private mortgage insurance.

Mortgage origination transactions are subject to compliance with various federal and state consumer protection laws, including the Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act, the fair Housing Act, the Homeowners Protection Act, the Federal Fair Credit Reporting Act, the Fair Debt Collection Practices Act and others. Among other things, these laws prohibit payments for referrals of settlement service business, require fairness and non-discrimination in granting or facilitating the granting of credit, require cancellation of insurance and refunding of unearned premiums under certain circumstances, govern the circumstances under which companies may obtain and use consumer credit information, and define the manner in which companies may pursue collection activities. Changes in these laws or regulations could adversely affect the operations and profitability of our mortgage insurance business.

Congress is currently considering proposed legislation relating to the regulatory oversight of the GSEs. Under certain proposals, regulatory oversight of the GSEs would be conducted by a new federal agency with authority over the GSEs’ products and marketing activities, the GSEs’ minimum capital standards as well as their risk-based capital requirements. We do not know what form, if any, such legislation will take or, if it will be enacted, or its impact, if any, on our financial condition and results of operations.

In addition, increases in the maximum loan amount or other features of the FHA mortgage insurance program can reduce the demand for private mortgage insurance. Future legislative and regulatory actions could decrease the demand for private mortgage insurance, which could harm our consolidated financial condition and results of operations.

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Our business and financial performance could suffer if PMI were to lose the business of a major customer.

Through their various origination channels, PMI’s top ten customers accounted for approximately 42% of PMI’s premiums earned in 2003. A single customer represented 13% of PMI’s earned premiums in 2003. Mortgage insurers, including PMI, may acquire significant percentages of their business through negotiated transactions (including bulk primary and modified pool insurance) with a limited number of customers. The loss of a significant customer could reduce our revenue, and if not replaced, harm our consolidated financial condition and results of operations.

PMI could lose premium revenue if the GSEs reduce the level of private mortgage insurance coverage required for low down payment mortgages or reduce their need for mortgage insurance.

The GSEs are the beneficiaries on a substantial majority of the insurance policies we issue as a result of their purchases of home loans from lenders or investors. The GSEs offer programs that require less mortgage insurance coverage on mortgages approved by their automated underwriting systems. In the past Freddie Mac and, more recently, Fannie Mae, have indicated their intent to reduce their use or required level of mortgage insurance. If the reduction in required levels of mortgage insurance becomes widely accepted by mortgage lenders, or if the GSEs further reduce mortgage insurance coverage requirements for loans they purchase, PMI’s premium revenue would decline and our consolidated financial condition and results of operations could suffer.

Products introduced by the GSEs, if widely accepted, could harm our profitability.

The GSEs have products for which they will, upon receipt from lenders of loans with primary insurance, restructure the mortgage insurance coverage by reducing the amount of primary insurance coverage and adding a second layer of insurance coverage, usually in the form of pool insurance. Under these programs, the GSEs may provide services to the mortgage insurer and the mortgage insurer may be required to pay fees to the GSEs for the benefits provided through the reduced insurance coverage or the services provided. These new products may prove to be less profitable than PMI’s traditional mortgage insurance business and, if they become widely accepted, could harm our consolidated financial condition and results of operations.

Lobbying activities by large mortgage lenders calling for expanded federal oversight and legislation relating to the role of the GSEs in the secondary mortgage market could damage PMI’s relationships with those mortgage lenders and the GSEs.

The GSEs, mortgage lenders and PMI jointly develop and make available various products and programs. These arrangements involve the purchase of PMI’s mortgage insurance products and frequently feature cooperative arrangements between the parties. FM Policy Focus, a lobbying organization representing financial services and housing-related trade associations, including the Mortgage Insurance Companies of America and several large mortgage lenders, supports increased federal oversight of the GSEs. The GSEs have criticized the activities of FM Policy Focus. FM Policy Focus, the GSEs and other groups are engaged in extensive lobbying activities with respect to proposed legislation which would change the way GSEs are regulated. These activities could polarize Fannie Mae, Freddie Mac, members of FM Policy Focus, PMI’s customers and us. Any such polarization could limit PMI’s opportunities to do business with the GSEs as well as with some mortgage lenders. Either of these outcomes could harm our consolidated financial condition and results of operations.

The implementation of new eligibility guidelines by Fannie Mae could harm our profitability and reduce our operational flexibility.

Fannie Mae has revised its approval requirements for mortgage insurers, including PMI, with the guidelines effective January 1, 2005. The guidelines cover substantially all areas of PMI’s mortgage insurance operations, require the disclosure of certain activities and new products, give Fannie Mae the right to purchase mortgage insurance from other than existing approved mortgage insurers, including insurers that are either rated below

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“AA” or are unrated, and provide Fannie Mae with increased rights to revise the eligibility standards of insurers. We do not know how Fannie Mae will enforce the terms of the guidelines, especially in those areas in which it has retained significant discretion, such as the right to purchase mortgage insurance from other than existing approved mortgage insurers. Depending on how the guidelines are implemented, our operational flexibility as well as our profitability could suffer.

HUD’s proposed RESPA reform regulation, if implemented in its current form, could harm our profitability.

The Real Estate Settlement Procedures Act of 1974, or RESPA, prohibits paying lenders for the referral of settlement services, including mortgage insurance. HUD has proposed a rule under RESPA which if implemented as proposed would, among other things, give lenders and other packagers the option of offering a Guaranteed Mortgage Package, or GMP, or providing a good faith estimate of settlement costs subject to a 10% tolerance level. To promote the use of a GMP, qualifying packages would be entitled to a “safe harbor” from litigation under RESPA’s anti-kickback rules. Mortgage insurance and title insurance are included in the package to the extent an upfront premium is charged. This could encompass some, but not all, of the policies written and the premiums charged by a mortgage insurer or a title insurer with respect to a single loan. Inclusion in the package could cause settlement service providers, such as mortgage insurers and title insurers, to experience reductions in the prices of their services or products, which could harm our profitability. HUD’s proposed rule has been submitted to the Office of Management and Budget for review. We do not know what form, if any, the final rule will ultimately take.

We could be adversely affected by legal actions under RESPA.

RESPA precludes PMI from providing services or products to mortgage lenders free of charge, charging fees for services that are lower than their reasonable or fair market value, and paying fees for services that others provide that are higher than their reasonable or fair market value. A number of lawsuits have challenged the actions of private mortgage insurers, including PMI, under RESPA, alleging that the insurers have provided products or services at improperly reduced prices in return for the referral of mortgage insurance. We and several other mortgage insurers, without admitting any wrongdoing, reached a settlement in these cases, which includes an injunction that prohibited certain specified practices and details the basis on which mortgage insurers may provide agency pool insurance, captive mortgage reinsurance, contract underwriting and other products and services and be deemed to be in compliance with RESPA. The injunction expired on December 31, 2003, and it is not clear whether the expiration of the injunction will result in new litigation against private mortgage insurers to extend the injunction or to seek damages under RESPA. Our competitors could change their pricing structure or business practices after the expiration of the injunction. U.S. federal and state officials are authorized to enforce RESPA and to seek civil and criminal penalties. We cannot predict whether civil, regulatory or criminal actions might be brought against us or other mortgage insurers. Any such proceedings could have an adverse effect on our consolidated financial condition and results of operations.

Mortgage lenders increasingly require PMI to reinsure a portion of the mortgage insurance default risk on mortgages that they originate with their captive reinsurance companies, which reduces PMI’s net premiums written.

An increasing percentage of PMI’s new insurance written is being generated by customers with captive reinsurance companies, and we expect that this trend will continue. See “Business—U.S. Mortgage Operations—Products—Captive Reinsurance”. If PMI does not provide its customers with acceptable risk-sharing structured transactions, including potentially increasing levels of premium cessions in captive reinsurance agreements, PMI’s competitive position may suffer. An increase in captive reinsurance agreements will negatively impact PMI’s net premiums written, which may negatively impact the yield that we obtain on net premiums earned for customers with captive reinsurance agreements.

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A downgrade of PMI’s claims-paying ability could materially harm our financial performance.

PMI’s claims-paying ability is currently rated “AA+” (“Excellent”) by S&P, “Aa2” (“Excellent”) by Moody’s, and “AA+” (“Very Strong”) by Fitch.

These ratings may be revised or withdrawn at any time by one or more of the rating agencies and are based on factors relevant to PMI’s policyholders and are not applicable to our common stock or debt. The rating agencies could lower or withdraw our ratings at any time as a result of a number of factors, including: underwriting or investment losses; the necessity to make capital contributions to our subsidiaries pursuant to capital support agreements; other adverse developments in PMI’s financial condition or results of operations; or changes in the views of rating agencies of our risk profile or of the mortgage insurance industry.

If PMI’s claims-paying ability rating falls below “AA-” from S&P or “Aa3” from Moody’s, investors, including Fannie Mae and Freddie Mac, may not purchase mortgages insured by PMI. Such a downgrade could also negatively affect our holding company ratings or the ratings of our other licensed insurance subsidiaries or our ability to further implement our strategic diversification program. Any of these events would harm our consolidated financial condition and results of operations.

An increase in PMI’s risk-to-capital ratio could prevent it from writing new insurance, which would seriously harm our financial performance.

The state of Arizona, PMI’s state of domicile for insurance regulatory purposes, and other states limit the amount of insurance risk that may be written by PMI, based on a variety of financial factors, primarily the ratio of net risk in force to statutory capital, or the risk-to-capital ratio.

PMI’s risk-to-capital ratio is also affected by capital requirements necessary to maintain our credit ratings 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 or other requirements. Accordingly, we may be required to meet capital requirements that are higher than statutory or other capital requirements to satisfy rating agency requirements.

To control its risk-to-capital ratio, PMI may seek capital contributions from The PMI Group or third party credit enhancements, or may be required to reduce the amount of new business written. The PMI Group may not be able to raise additional funds, or do so on a timely basis, in order to make a capital contribution to PMI. In addition, third party credit enhancements 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, which in turn could limit its ability to write new business, impair PMI’s ability to pay dividends to The PMI Group and seriously harm our consolidated financial condition and results of operations.

Our ongoing ability to pay dividends to our shareholders and meet our obligations primarily depends upon the receipt of dividends and returns of capital from our insurance subsidiaries and our investment income.

We are a holding company and conduct all of our business operations through our subsidiaries. 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 as well as to pay dividends to our shareholders 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.

In addition, a protracted economic downturn, or other factors, could cause issuers of the fixed-income securities that we and FGIC and RAM Re own to default on principal and interest payments, which could cause

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our investment returns and net income to decline and reduce our ability to maintain all of our capital and liquidity needs.

If we are unable to keep pace with the technological demands of our customers or with the technology-related products and services offered by our competitors, our business and financial performance could be significantly harmed.

Participants in the mortgage lending and mortgage insurance industries rely on e-commerce and other technology to provide and expand their products and services. Our customers generally require that we provide our products and services electronically via the Internet or electronic data transmission, and the percentage of our new insurance written and claims processing which is delivered electronically has increased. We expect this trend to continue, and accordingly, we believe that it is essential that we continue to invest substantial resources in maintaining electronic connectivity with our customers and, more generally, in e-commerce and technology. Our business may suffer if we do not keep pace with the technological demands of our customers and the technological capabilities of our competitors.

While we are protesting assessments we received, and intend to protest any future assessment we may receive, from the California Franchise Tax Board, we cannot provide assurance as to the ultimate outcome of these matters.

We received notices of assessment from the California Franchise Tax Board, or FTB, for 1997 through 2000 in amounts totaling $13.9 million, not including the federal tax benefits from the payment of such assessment or interest that might be included on amounts, if any, ultimately paid to the FTB. As of December 31, 2003, we had $4.7 million of reserve relating to the assessments for the years 1997 through 2000. We could be subject to additional assessments relating to years after 2000. We have not reserved amounts for years after 2000. While we are protesting the assessments we have received, we cannot provide assurance as to the ultimate outcome of this matter.

An adverse outcome of litigation against PMI or any of our other subsidiaries could harm our consolidated financial position and results of operations.

In June 2003, an action against PMI was filed in the federal district court of Orlando, Florida seeking certification of a nationwide class of consumers who allegedly were required to pay for private mortgage insurance written by PMI and whose loans allegedly were insured at less than PMI’s “best available rate”. The action alleges violations of the federal Fair Credit Reporting Act. In September 2003, an action against our wholly-owned title insurance company, American Pioneer Title Insurance Company, or APTIC, was filed in Florida state court seeking certification of a statewide class of consumers and alleging that, under Florida laws and regulations applicable to title insurance companies, APTIC was required to but failed to disclose to the plaintiffs that they were entitled to a reduced fee on the title insurance policies purchased by plaintiffs in connection with refinancings of their mortgages. APTIC is also subject to a similar lawsuit in New York and may be subject to additional similar lawsuits in the future. These actions seek, among other things, damages and declaratory and injunctive relief. PMI and APTIC intend to vigorously defend these respective claims. However, we cannot be sure that the outcome of the litigation or any similar litigation will not materially affect our consolidated financial position or results of operations. See Item 1.C.3. Residential Lender Services regarding our pending sale of APTIC.

Our international insurance subsidiaries subject us to numerous risks associated with international operations.

We have subsidiaries in Australia and Europe. We have committed and may in the future commit additional significant resources to expand our international operations. Accordingly, in addition to the general economic and insurance business-related factors discussed above, we are subject to a number of risks associated with our international business activities. These risks include: the need for regulatory and third party approvals; challenges in attracting and retaining key foreign-based employees, customers and business partners in international markets; economic downturns in targeted foreign mortgage origination markets; interest rate volatility in a

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variety of countries; unexpected changes in foreign regulations and laws; the 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 successfully develop and market products appropriate to the foreign market, including the development and marketing of credit enhancement products to European lenders and for mortgage securitizations; and natural disasters and other events (e.g., toxic contamination) that would damage properties and that could precipitate borrower default.

Our Australian and New Zealand mortgage insurance operations, PMI Australia, is subject to many of the same risks facing PMI.

Like PMI, the financial results of our Australian and New Zealand mortgage insurance operations, or PMI Australia, are affected by domestic and regional economic conditions, including movements in interest and unemployment rates, and property value fluctuations. These economic factors could impact PMI Australia’s loss experience or the demand for mortgage insurance in the markets PMI Australia serves. PMI Australia is also subject to significant regulation. Future legislative or regulatory changes could adversely affect PMI Australia. PMI Australia’s primary regulator, the Australian Prudential Regulatory Authority, or APRA, is considering, and has sought comment on, a proposal to eliminate the requirement that mortgage insurance companies be mono-line insurers. If adopted, this proposal could facilitate the entry of new competitors in the Australian mortgage insurance market.

PMI Australia is currently rated “AA” by S&P and Fitch and “Aa3” by Moody’s. These ratings are based in part upon a capital support agreement between PMI and PMI Australia and a guarantee of that agreement by The PMI Group. Termination or amendment of this support structure could negatively impact PMI Australia’s ratings. PMI Australia’s business is dependent on maintaining its ratings. Any negative impact on its ratings will negatively affect its financial results.

PMI Australia’s five largest customers provided 58% of PMI Australia’s 2003 gross premiums written. PMI Australia’s loss of a significant customer, if not replaced, could harm PMI Australia’s and our consolidated financial condition and results of operations.

We may not be able to execute our strategy to expand our European operations.

We have devoted resources to expand our European operations, PMI Europe, and we plan to continue these efforts. The success of our efforts will depend partly upon legislative and regulatory policies in Europe that support homeownership and provide capital relief for institutions that obtain credit enhancement with respect to their mortgage loan portfolios. If European legislative and regulatory agencies do not adopt such policies, our European operations may be adversely affected.

PMI Europe is currently rated “AA” by S&P and Fitch and “Aa3” by Moody’s. These ratings are based in part upon a capital support agreement between PMI and PMI Europe and a guarantee of that agreement by The PMI Group. Termination or amendment of this support structure could negatively impact PMI Europe’s ratings. PMI Europe’s business is dependent on maintaining its ratings. Any negative impact on its ratings will negatively affect its financial results.

The performance of our unconsolidated strategic investments could harm our consolidated financial results.

We have made significant investments in the equity securities of several privately-held companies, including FGIC Corporation, the parent of Financial Guaranty Insurance Company, or FGIC, a financial guaranty insurer, Fairbanks, the parent of Fairbanks Capital, a third-party servicer of single-family residential mortgages, and RAM Holdings Ltd. and RAM Holdings II Ltd., which are the holding companies for RAM Re, a financial guaranty reinsurance company based in Bermuda.

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Our investments in FGIC Corporation, Fairbanks and RAM Re are accounted for on the equity method of accounting in our consolidated financial statements. Our investments in our unconsolidated strategic investments together with CMG Mortgage Insurance Company totaled $937.8 million as of December 31, 2003, compared to $289.8 million as of December 31, 2002. The nature of the businesses conducted by these companies differs significantly from our core business of providing residential mortgage insurance. These companies are subject to a number of significant risks that arise from the nature of their businesses. Some of the various risks affecting Fairbanks and FGIC Corporation are discussed below. Because we do not control these companies, we are dependent upon the management of these companies to independently operate their businesses and, accordingly, we may be unable to take actions unilaterally to avoid or mitigate those risks.

Investigations by regulatory agencies into Fairbanks’ activities and private litigation involving Fairbanks could harm Fairbanks’ business and adversely affect our investment in Fairbanks.

Fairbanks and Fairbanks Capital’s servicing practices have been the subject of investigations by the FTC, HUD and the Department of Justice. On November 12, 2003 the FTC and HUD announced that they had reached a settlement of their ongoing investigations of Fairbanks. The settlement requires changes in Fairbanks’ operations and the creation of a $40 million redress fund for the benefit of consumers to remedy the violations of law alleged by the FTC and HUD. We have guaranteed approximately two-thirds of the funds that may become due to Fairbanks’ lenders under a $30.7 million letter of credit, which may be drawn upon by the FTC as security for a portion of a $40 million redress fund as part of the settlement. The settlement is contingent upon the final order of the federal district court in Massachusetts becoming effective, which will occur upon the related settlement of certain class action litigation (see below). The FTC staff has indicated that the FTC will file an enforcement action against Fairbanks if the settlement order does not become effective. Fairbanks’ financial condition and results of operations could be adversely impacted if the settlement does not become effective and the FTC commences an enforcement action against it.

HUD’s criminal investigation into Fairbanks Capital’s servicing practices has concluded, and Fairbanks believes that the Department of Justice criminal investigation is closed. A criminal indictment could have a material adverse effect on Fairbanks and its business and, therefore, on our investment in Fairbanks.

Fannie Mae has found certain business practices at Fairbanks Capital to be out of compliance with a servicing agreement between the parties. Fairbanks Capital and Fannie Mae have agreed that Fairbanks Capital will not service any new Fannie Mae-owned loans without the approval of Fannie Mae.

Regulatory agencies in five states in which Fairbanks Capital does a significant amount of business have indicated that, notwithstanding the settlement by Fairbanks with the FTC and HUD, they intend to require Fairbanks Capital to refund to consumers in their respective states amounts that they allege Fairbanks Capital had improperly collected and to enter into consent decrees regulating various aspects of Fairbanks Capital’s business. In addition, Fairbanks has entered into a consent order with the State of Maryland under which it has agreed to change certain of its practices under Maryland law and refund certain amounts to Maryland borrowers. Other states could also seek to require such refunds or consent orders. If Fairbanks is unable to resolve the issues with the state regulatory agencies, those regulatory agencies may bring administrative or other actions against Fairbanks or Fairbanks Capital seeking to change its business practices, require refunds and, potentially, monetary penalties or revocation of Fairbanks Capital’s license to conduct its business in such states.

Fairbanks and Fairbanks Capital are subject to private litigation, including a number of putative class action suits, alleging violations of federal and state laws governing the activities of servicers. We expect that as a result of the publicity surrounding lending and servicing practices, Fairbanks Capital may be subject to other putative class action suits in the future. Fairbanks has entered into a settlement agreement with the plaintiffs in certain of these cases which provides for the payment by Fairbanks of attorney’s fees and costs, the implementation of the $40 million redress fund negotiated jointly with the FTC, a “reverse or reimburse” program through which affected customers’ accounts will be credited or refunds will be issued for certain previously assessed amounts,

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and a stipulation regarding its future operations. There can be no assurance that the Court will approve the settlement. Fairbanks’ financial condition and results of operations could be negatively impacted if such settlement is not finalized. In addition, PMI has been named as a defendant in several actions relating to the practices of Fairbanks. With the exception of two actions in California, both of which have been stayed, the actions in which PMI has been named as a defendant have been dismissed without prejudice or settled by Fairbanks Capital. If the Fairbanks Capital settlement of the class action litigation described above is effected, that settlement will also include a release of PMI. PMI could be named as a defendant in additional actions with respect to Fairbanks in the future.

Our investment in Fairbanks, and consequently our consolidated financial results, could be negatively impacted by the ultimate resolution of the state regulatory actions, the class action litigation, and/or pending FTC and HUD actions involving Fairbanks and Fairbanks Capital. If the FTC/HUD settlement is not implemented, the class action settlements are not finalized, or Fairbanks Capital is required as a result of state regulatory proceedings to make significant payments or changes to its business practices so that it becomes materially more expensive to operate, Fairbanks’ financial condition and results of operations could be adversely affected. Furthermore, regulatory actions and putative class actions have generated negative publicity for Fairbanks Capital which has caused and may continue to cause Fairbanks Capital to suffer losses in its customer base. These losses could also harm our investment in Fairbanks.

As of December 31, 2003, our total investment balance in Fairbanks was approximately $142 million, consisting of approximately $116 million book value of equity investment and approximately $26 million in subordinated participation interests and advances to Fairbanks. In addition, we have guaranteed an aggregate of $7 million of Fairbanks’ indebtedness as well as approximately two-thirds of Fairbanks’ obligations under a $30.7 million letter of credit related to the pending settlement with the FTC and HUD. Our total investment could become impaired or uncollectible as a result of the risks involving Fairbanks, which would harm our consolidated financial condition and results of operations. We have evaluated our total investment in Fairbanks as of December 31, 2003 and have not recognized an impairment charge with respect to our investment. Developments with respect to regulatory and litigation matters involving Fairbanks, Fairbanks Capital’s ratings, Fairbanks Capital’s credit facilities and Fairbanks’ business prospects generally could require us to recognize an impairment charge with respect to our investment in Fairbanks in the future.

If the FTC initiates an action against us relating to the activities of Fairbanks, our business could suffer.

The settlement by the FTC and HUD of proposed civil charges against Fairbanks includes a release by the FTC and HUD in favor of us and our employees who served as directors of Fairbanks relating to the claims and conduct alleged or that could have been alleged in the FTC and HUD actions with respect to Fairbanks’ loan servicing practices. If the settlement is not implemented by the Court, or if the settlement is implemented and is subsequently overturned on appeal, the FTC may choose to bring an action against us. The filing of an FTC action against us could lead to regulatory actions by other regulatory agencies or private litigation against us, could impact our ability to obtain regulatory approvals necessary to carry out our present or future plans and operations, and could result in negative publicity that might adversely affect our business. Any such action brought against us by the FTC could seriously harm our consolidated financial position and results of operations.

Fairbanks Capital has undergone ratings downgrades that have adversely affected its business, and any future downgrade could seriously harm Fairbanks and the value of our investment in Fairbanks.

As a result of Fairbanks Capital’s ratings downgrades by S&P, Moody’s and Fitch, and unless and until there are upgrades in these ratings, Fairbanks Capital is no longer qualified to be named as a primary servicer on future residential mortgage-backed securities, or RMBS, transactions rated by Moody’s or S&P. While Fairbanks Capital may serve as a subservicer on these rated transactions under certain circumstances, its inability to be named as a primary servicer has adversely affected its results of operations. Future negative rating agency actions could also negatively impact Fairbanks and could have a material adverse effect on Fairbanks. As a result of the

84

recent developments discussed above, Fairbanks Capital’s ability to continue to service its existing servicing portfolios and to acquire new portfolios in the future is uncertain. Fairbanks has a limited number of customers and losses in Fairbanks’ customer base due to rating agency actions or otherwise could have an adverse effect on Fairbanks and our investment in Fairbanks.

Fairbanks Capital is highly leveraged and, if it were to lose access to, or default on, its debt facilities, Fairbanks might be unable to fund its operations or pay its debts as they come due.

Fairbanks Capital is highly leveraged and dependent upon debt facilities with lenders to make servicing and delinquency advances in the regular course of its business, and for other business purposes. If Fairbanks Capital were to lose access to debt facilities for any reason, Fairbanks Capital would be unable to continue funding its operations or pay its debts as they become due. In addition, an event of default under one or more of Fairbanks Capital’s significant debt facilities could accelerate Fairbanks Capital’s obligation to repay amounts outstanding under its debt facilities and could cause Fairbanks Capital to lose access to funding, either of which could prevent Fairbanks Capital from continuing to operate. If Fairbanks Capital were to cease operations, the value of our investment in Fairbanks would be seriously harmed and we might be required to write off our entire investment in Fairbanks.

In order to complete the FGIC investment, we employed a significant portion of our borrowing capacity and significantly increased our leverage. Accordingly, we may not be able to raise significant amounts of capital in the near term without the use of equity.

Our ability to borrow money is constrained by a number of factors, including the impact of borrowings on our ratings. In November, 2003, we offered and sold equity units which consist in part of $345 million aggregate principal amount of our 3.0% senior notes due November 15, 2008. As a result of the equity units offering, we have used a significant portion of our borrowing capacity and have significantly increased our leverage. As a result, among other things, we may be limited in our ability to raise significant amounts of capital, in the event that we need to do so, without the use of equity. Future issuances of our common stock may adversely affect our stock price. In addition, the degree to which we are leveraged will limit our ability to obtain financing for working capital, acquisitions or other purposes.

We expect that a significant portion of our net income will be derived from FGIC and its financial guaranty business. Accordingly, we will be subject to various risks and uncertainties associated with the financial guaranty business.

We expect that a significant portion of our net income will be derived from FGIC and its financial guaranty business. Accordingly, we will be subject to all the risks and uncertainties associated with that business. In addition, FGIC has historically operated its financial guaranty business principally in one market segment—municipal finance. We currently expect that FGIC will expand its business lines and products into other markets and asset classes that historically have experienced higher default rates than municipal finance. The risks and uncertainties to which we will be exposed as a result of the FGIC acquisition include the following, among others:

• The ability of a triple-A rated financial guarantor to compete is heavily dependent on maintaining such ratings. We cannot be sure that FGIC will be able to maintain its ratings. FGIC’s ability to compete with other triple-A rated financial guarantors and otherwise to engage in its business as currently conducted, and FGIC Corporation’s consolidated results of operations and financial condition, would be materially and adversely affected by any reduction in FGIC’s ratings or the announcement of a potential reduction or change in outlook.

• FGIC is subject to extensive competition. We cannot be sure that FGIC will be able to continue to compete effectively in its current markets or in any markets or asset classes into which it expands.

85

• The financial guaranty business is subject to extensive regulation. Future legislative, regulatory or judicial changes affecting the financial guaranty industry or municipal or asset-backed obligations or markets, including changes in tax laws, could adversely affect FGIC’s business.

• FGIC establishes specific reserves for the net present value of estimated losses on particular insured obligations when, in management’s opinion, the likelihood of a future loss is probable and the amount of the ultimate loss that FGIC expects to incur can be reasonably estimated. FGIC also establishes reserves to cover those impaired credits on its credit watch list. These latter reserves are designed to recognize the potential for claims on credits that have migrated to an impaired level where there is an increased probability of payment default, but that are not presently or imminently in payment default. Although FGIC’s loss reserves are regularly reviewed and updated, they are necessarily based on estimates and subjective judgments about the outcome of future events. We cannot be sure that losses in FGIC’s insured portfolio will not exceed by a material amount the loss reserves previously established by FGIC or that additional significant reserves will not need to be established.

• Demand for financial guaranty insurance is dependent upon many factors beyond FGIC’s control, including interest rate fluctuations, availability of alternative structures and market acceptance of financial guaranty products.

• Any expansion by FGIC into other markets and other asset classes will entail risks associated with engaging in new business lines, including, among others, the challenges in attracting and retaining employees with relevant experience and establishing name recognition in new markets and obtaining new experience in those markets and asset classes, as well as the risk that FGIC may not appropriately price insurance written in new business lines to compensate for the associated risk.

• Terrorism and other hostilities may adversely impact the ratings of specific obligations insured by FGIC, and could lead to a significantly higher rate of default for those obligations.

• FGIC’s insurance portfolio contains concentrations of sellers, servicers and obligors, some of which are significant. An adverse event with respect to one or more of these concentrations could result in disproportionate and significant losses to FGIC.

• As of December 31, 2003, approximately 8% of our U.S. investment portfolio consists of FGIC-insured non-refunded bonds. As a result of our investment in FGIC, we have amended our investment policy to provide that no more than $200 million of our U.S. investment portfolio consists of FGIC-insured non-refunded bonds.

86

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

As of December 31, 2003 and 2002, our investment portfolio was $2.8 billion and $2.5 billion, respectively. The fair value of investments in our portfolio is calculated from independent market quotations, and is interest rate sensitive and subject to change based on interest rate movements. As of December 31, 2003, 91% of our investments were long-term fixed income securities, including municipal bonds, U.S. and foreign government bonds and corporate bonds. As interest rates fall the fair value of fixed income securities increases, and as interest rates rise the fair value of fixed income securities decreases. The following table summarizes the estimated change in fair value net of related income taxes on our investment securities based upon specified changes in interest rates as of December 31, 2003:

	Estimated Increase (Decrease) in Fair Value
	(Dollars in thousands)
300 basis point rise	$	(366,909	)
200 basis point rise		(246,756	)
100 basis point rise		(113,481	)
100 basis point decline		104,948
200 basis point decline		202,691
300 basis point decline		293,957

These hypothetical estimates of changes in fair value are primarily related to our fixed-income securities as the fair values of fixed-income securities fluctuate with increases or decreases in interest rates. The effective duration of our fixed-income investment portfolio was 4.7 years at December 31, 2003, and we do not expect to recognize any adverse impact to our consolidated net income or cash flows based on the above projection.

As of December 31, 2003, $557.1 million of our invested assets were held by PMI Australia and were predominantly denominated in Australian dollars. The value of the Australian dollar strengthened relative to the U.S. dollar to 0.7520 U.S. dollars at December 31, 2003 compared to 0.5616 at December 31, 2002 and 0.5094 at December 31, 2001. As of December 31, 2003, $174.2 million of our invested assets were held by PMI Europe and were predominantly denominated in Euros. The value of the Euro appreciated relative to the U.S. dollar to 1.2595 U.S. dollars at December 31, 2003, compared to 1.0492 at December 31, 2002 and 0.8895 at December 31, 2001. See Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.

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Item 8.    Financial Statements and Supplementary Data

	Page
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001	90
Consolidated Balance Sheets as of December 31, 2003 and 2002	91
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2003, 2002 and 2001	92
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001	94
Notes to Consolidated Financial Statements	95
Report of Independent Auditors	130

89

THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2003		2002		2001
	(Dollars in thousands, except per share data)
REVENUES
Premiums earned	$	696,928	$	676,857	$	597,221
Net investment income		149,779		120,581		129,773
Equity in earnings from unconsolidated subsidiaries		4,597		44,225		18,788
Net realized investment gains		84		1,329		11
Other income		40,333		39,126		28,643
Total revenues		891,721		882,118		774,436
LOSSES AND EXPENSES
Losses and loss adjustment expenses		209,088		157,575		108,830
Amortization of deferred policy acquisition costs		89,327		83,416		81,782
Other underwriting and operating expenses		175,693		144,877		128,730
Lease abandonment and relocation costs		—		12,183		—
Litigation settlement charge		—		12,222		—
Interest expense		20,815		17,654		15,218
Distributions on mandatorily redeemable preferred securities		3,676		4,030		7,604
Total losses and expenses		498,599		431,957		342,164
Income from continuing operations before income taxes		393,122		450,161		432,272
Income taxes from continuing operations		118,814		124,545		129,655
Income from continuing operations		274,308		325,616		302,617
Income from discontinued operations before income taxes (Note 19)		26,893		20,628		14,694
Income taxes from discontinued operations		7,186		7,199		5,294
Income from discontinued operations		19,707		13,429		9,400
Income before extraordinary items and cumulative effect of a change in accounting principle		294,015		339,045		312,017
Extraordinary gain on write off of negative goodwill, net of income taxes of $408 (Note 6)		5,418		—		—
Extraordinary loss on early extinguishment of debt, net of income tax benefit of $2,588		—		—		(4,805	)
Cumulative effect of a change in accounting principle		—		7,172		—
NET INCOME	$	299,433	$	346,217	$	307,212
PER SHARE DATA
Basic:
Continuing operations	$	3.05	$	3.62	$	3.40
Discontinued operations		0.22		0.15		0.11
Extraordinary gain (loss)		0.06		—		(0.05	)
Cumulative effect of a change in accounting principle		—		0.08		—
Basic net income	$	3.33	$	3.85	$	3.46
Diluted:
Continuing operations	$	3.01	$	3.56	$	3.34
Discontinued operations		0.22		0.15		0.10
Extraordinary gain (loss)		0.06		—		(0.05	)
Cumulative effect of a change in accounting principle		—		0.08		—
Diluted net income	$	3.29	$	3.79	$	3.39

See accompanying notes to consolidated financial statements.

90

THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	As of December 31,
	2003			2002
	(Dollars in thousands, except per share data)
ASSETS
Investments—available-for-sale, at fair value:
Fixed income securities	$	2,554,184		$	2,264,258
Equity securities:
Common		116,728			79,547
Preferred		111,070			86,073
Short-term investments		23,803			35,406
Total investments		2,805,785			2,465,284
Cash and cash equivalents		397,096			203,470
Investments in unconsolidated subsidiaries		937,846			289,795
Accrued investment income		39,187			35,090
Deferred policy acquisition costs		102,074			85,210
Premiums receivable		62,082			58,287
Reinsurance receivable and prepaid premiums		53,524			60,078
Reinsurance recoverable		3,275			3,846
Property, equipment and software, net of accumulated depreciation		172,218			164,685
Related party receivables		27,840			2,322
Other assets		75,500			63,926
Assets—discontinued operations		117,862			85,056
Total assets	$	4,794,289		$	3,517,049
LIABILITIES
Reserves for losses and loss adjustment expenses	$	346,939		$	333,569
Unearned premiums		469,001			232,877
Long-term debt		819,543			422,950
Reinsurance payable		57,960			40,506
Deferred income taxes		94,079			80,820
Other liabilities and accrued expenses		178,521			131,772
Liabilities—discontinued operations		44,217			32,222
Total liabilities		2,010,260			1,274,716
Commitments and contingencies (Notes 10 and 15)
Company-obligated mandatorily redeemable preferred capital securities of subsidiary trust holding solely junior subordinated deferrable interest debenture of the Company		—			48,500
SHAREHOLDERS’ EQUITY
Preferred stock—$0.01 par value; 5,000,000 shares authorized; none issued or outstanding		—			—
Common stock—$0.01 par value; 250,000,000 shares authorized, 111,336,954 and 105,587,554 shares issued; 95,161,721 and 89,943,406 shares outstanding		1,114			1,056
Additional paid-in capital		441,508			267,234
Treasury stock, at cost (16,175,233 and 15,644,148 shares)		(344,195	)		(342,093	)
Retained earnings		2,437,576			2,149,877
Accumulated other comprehensive income, net of deferred taxes		248,026			117,759
Total shareholders’ equity		2,784,029			2,193,833
Total liabilities, mandatorily redeemable preferred securities and shareholders’ equity	$	4,794,289		$	3,517,049

See accompanying notes to consolidated financial statements.

91

THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Year ended December 31
	Comprehensive Income			Common Stock
				Shares	Amount
	(Dollars and shares in thousands)
BALANCE, DECEMBER 31, 2000				105,588	$	1,056
Stock grants for the exercise of stock options				—		—
Shares issuance under ESPP				—		—
Issuance of treasury stock				—		—
Dividends declared				—		—
Net income	$	307,212		—		—
Change in unrealized losses on investments, net of deferred tax benefit $6,830		(11,324	)	—		—
Reclassification of realized gains included in net income, net of tax		(7	)	—		—
Change in currency translation loss		(10,379	)	—		—
Other comprehensive income	$	285,502
BALANCE, DECEMBER 31, 2001				105,588		1,056
Stock grants for the exercise of stock options				—		—
Shares issuance under ESPP				—		—
Repurchase of common stock				—		—
Dividends declared				—		—
Net income	$	346,217		—		—
Change in unrealized gains on investments, net of deferred taxes of $21,253		46,074		—		—
Reclassification of realized gains included in net income, net of tax		(864	)	—		—
Change in currency translation gain		31,758		—		—
Other comprehensive income	$	423,185
BALANCE, DECEMBER 31, 2002				105,588		1,056
Stock grants for the exercise of stock options				—		—
Shares issuance under ESPP				—		—
Issuance of common stock, net				5,749		58
Purchase contract, including costs				—		—
Repurchase of common stock				—		—
Dividends declared				—		—
Net income	$	299,433		—		—
Change in unrealized gains on investments, net of deferred taxes of $7,172		13,498		—		—
Reclassification of realized gains included in net income, net of tax		(56	)	—		—
Change in currency translation gain		116,825		—		—
Other comprehensive income	$	429,700
BALANCE, DECEMBER 31, 2003				111,337	$	1,114

See accompanying notes to consolidated financial statements.

92

Year ended December 31
Additional Paid-in Capital		Treasury Stock								Accumulated Other Comprehensive Income
		Shares		Amount			Retained Earnings						Total
(Dollars and shares in thousands)
$267,234		(16,874	)	$	(343,331	)	$	1,511,751		$	62,501		$	1,499,211
—		318			6,444			—			—			6,444
—		53			1,074			—			—			1,074
—		78			1,581			—			—			1,581
—		—			—			(7,124	)		—			(7,124	)
—		—			—			307,212			—			307,212
—		—			—			—			(11,324	)		(11,324	)
—		—			—			—			(7	)		(7	)
—		—			—			—			(10,379	)		(10,379	)
267,234		(16,425	)		(334,232	)		1,811,839			40,791			1,786,688
—		931			17,674			—			—			17,674
—		67			1,272			—			—			1,272
—		(217	)		(26,807	)		—			—			(26,807	)
—		—			—			(8,179	)		—			(8,179	)
—		—			—			346,217			—			346,217
—		—			—			—			46,074			46,074
—		—			—			—			(864	)		(864	)
—		—			—			—			31,758			31,758
267,234		(15,644	)		(342,093	)		2,149,877			117,759			2,193,833
—		649			15,907			—			—			15,907
—		70			1,710			—			—			1,710
207,860		—			—			—			—			207,918
(33,586	)	—			—			—			—			(33,586	)
—		(1,250	)		(19,719	)		—			—			(19,719	)
—		—			—			(11,734	)		—			(11,734	)
—		—			—			299,433			—			299,433
—		—			—			—			13,498			13,498
—		—			—			—			(56	)		(56	)
—		—			—			—			116,825			116,825
$441,508		(16,175	)	$	(344,195	)	$	2,437,576		$	248,026		$	2,784,029

See accompanying notes to consolidated financial statements.

93

THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2003			2002			2001
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	299,433		$	346,217		$	307,212
Net income from discontinued operations		(19,707	)		(13,429	)		(9,400	)
Extraordinary gain from write off of negative goodwill		(5,418	)		—			—
Extraordinary charge from early extinguishment of debt		—			—			4,805
Cumulative effect of a change in accounting principle		—			(7,172	)		—
Income from continuing operations before extraordinary items and change in accounting principle		274,308			325,616			302,617
Adjustments to reconcile net income before extraordinary items and change in accounting principle to net cash provided by operating activities:
Net realized investment gains		(84	)		(1,329	)		(11	)
Equity in earnings from unconsolidated subsidiaries		(4,597	)		(44,225	)		(18,788	)
Depreciation and amortization		16,157			14,876			8,987
Deferred income taxes		12,852			19,213			(11,624	)
Changes in:
Accrued investment income		(4,097	)		(244	)		(11,868	)
Deferred policy acquisition costs		(16,864	)		(7,307	)		(10,894	)
Premiums receivable		(3,795	)		(772	)		(16,151	)
Reinsurance receivable, net of payable		24,007			(3,698	)		(340	)
Reinsurance recoverable		571			2,222			3,143
Reserves for losses and loss adjustment expenses		13,368			29,754			16,728
Unearned premiums		236,124			24,297			37,714
Income taxes payable		3,987			(9,650	)		6,326
Other		4,871			52,317			56,458
Net cash provided by operating activities		556,808			401,070			362,297
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of fixed income securities		822,002			626,243			321,807
Proceeds from sales of equity securities		63,283			71,850			119,170
Investment purchases:
Fixed income securities		(1,122,145	)		(760,966	)		(778,423	)
Equity securities		(94,899	)		(99,556	)		(104,990	)
Net change in short-term investments		12,326			(7,166	)		64,237
Proceeds from sales of investments in unconsolidated subsidiaries		10,929			—			—
Investments in unconsolidated subsidiaries, net of distributions		(645,412	)		(38,349	)		(54,840	)
Acquisitions of wholly-owned subsidiaries		—			—			(60,166	)
Change in related party receivables		(25,518	)		(3,381	)		260
Capital expenditures and capitalized software, net of dispositions		(30,136	)		(125,712	)		(23,017	)
Net cash used in continuing operations		(1,009,570	)		(337,037	)		(515,962	)
Net effect of discontinued operations		(1,104	)		2,288			2,522
Net cash used in investing activities		(1,010,674	)		(334,749	)		(513,440	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt		334,650			—			—
Net proceeds from issuance of senior convertible debentures		—			—			351,900
Proceeds from repurchase transactions		249,030			—			—
Repayment of repurchase transactions		(249,030	)		—			—
Net proceeds from issuance of common stock		207,918			—			—
Purchase of treasury stock		(19,719	)		(26,807	)		—
Proceeds from issuance of treasury stock		17,617			18,946			9,099
Extinguishment of debt and redeemable securities		—			—			(131,675	)
Dividends paid to shareholders		(11,734	)		(8,179	)		(7,124	)
Net cash provided by (used in) financing activities		528,732			(16,040	)		222,200
Effect of the change in currency translations on cash		116,825			31,758			(10,245	)
Net increase in cash and cash equivalents		193,626			82,039			60,812
Cash and cash equivalents at beginning of year		203,470			121,431			60,619
Cash and cash equivalents at end of year	$	397,096		$	203,470		$	121,431
Cash paid during the years:
Interest paid and preferred securities distributions	$	20,460		$	16,059		$	10,427
Income taxes paid, net of refunds	$	38,203		$	31,591		$	22,130
Non-cash investing and financing activities:
Capital lease obligations incurred for equipment	$	1,201		$	1,062		$	—
Increase in long-term debt due to deconsolidation of trust	$	51,593		$	—		$	—
Decrease in mandatorily redeemable preferred securities due to deconsolidation of trust	$	48,500		$	—		$	—
Purchase contract liability with corresponding offset to equity	$	30,851		$	—		$	—

See accompanying notes to consolidated financial statements.

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THE PMI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.    BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of The PMI Group, Inc. (“The PMI Group”), a Delaware corporation; its direct and indirect wholly-owned subsidiaries, PMI Mortgage Insurance Co. (“PMI”), an Arizona corporation; American Pioneer Title Insurance Company (“APTIC”), a Florida corporation reported as discontinued operations; PMI Mortgage Insurance Ltd and PMI Indemnity Limited, Australian mortgage insurance companies, and their holding company, PMI Mortgage Insurance Australia (Holdings) Pty Limited (collectively, “PMI Australia”); PMI Mortgage Insurance Company Limited and its holding company TPG Reinsurance Co. Ltd, Irish insurance corporations (collectively, “PMI Europe”); and other insurance, reinsurance and non-insurance subsidiaries. The PMI Group and its subsidiaries are collectively referred to as the “Company.” All material intercompany transactions and balances have been eliminated in consolidation.

On December 18, 2003, the Company completed its acquisition of a 42% ownership interest in Financial Guaranty Insurance Company (“FGIC”), together with its immediate holding company FGIC Corporation, from General Electric Capital Corporation (“GECC”). The Company is the strategic investor in a group of investors, and funded $611 million in cash of the $1.6 billion total purchase price. FGIC is a leading triple-A rated monoline bond insurer. FGIC provides financial guaranty insurance policies for public finance and structured finance obligations issued by clients in both the public and private sectors. In connection with the acquisition of FGIC, the Company issued 5.75 million shares of common stock and 13.8 million of 5.875% equity units. The investment in FGIC is accounted for under the equity method of accounting.

In addition to FGIC, the Company has equity ownership interests in Fairbanks Capital Holding Corp. (“Fairbanks”), a servicer of single-family residential mortgages; CMG Mortgage Insurance Company (“CMG”), which conducts residential mortgage insurance business; and through the holding companies, RAM Holdings Ltd. and RAM Holdings II Ltd., RAM Reinsurance Company, Ltd. (“RAM Re”), a financial guaranty reinsurance company based in Bermuda.

NOTE 2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). 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, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Risks and uncertainties—PMI is dependent upon mortgage originators to provide mortgage loans to insure. In the event any of its ten largest customers choose to stop providing PMI with mortgage loans to insure, the Company’s ability to generate new insurance business could be adversely affected. Our U.S. Mortgage Insurance Operations’ ten largest customers generated approximately 42% and 44% of its premiums earned in 2003 and 2002, respectively.

The Company’s various U.S. insurance subsidiaries are subject to comprehensive federal and state regulation. The Company’s Australian and Irish insurance subsidiaries are subject to similarly comprehensive regulation. These regulations are generally intended to protect policyholders, rather than to benefit investors. Although their scope varies, applicable laws and regulations 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. The licensing of the Company’s insurance subsidiaries, their premium rates,

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their forms and policies offered to customers, their financial statements and periodic financial reporting, and their permissible investments and adherence to financial standards relating to statutory surplus, dividends to the Company and other criteria of solvency are all subjects of detailed regulation.

The Company establishes loss reserves to recognize the liability of unpaid losses related to insured 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 of settling claims. These estimates are regularly reviewed and updated using currently available information. Any adjustments due to positive or adverse developments, which may be material, resulting from these reviews would impact current reserve requirements. Our reserves may not be adequate to cover ultimate loss development on incurred defaults. Our consolidated financial condition, results of operations or cash flows could be seriously harmed if our reserve estimates are insufficient to cover the actual related claims paid and loss-related expenses incurred.

The Company has made significant investments in the equity securities of several privately-held companies including FGIC and Fairbanks. The nature of the businesses conducted by these companies differs significantly from our core business of providing residential mortgage insurance. These companies are subject to a number of significant risks that arise from the nature of their businesses. In addition, we have limited ability to control these companies and, accordingly, may be unable to take actions unilaterally to avoid or mitigate those risks.

The Company expects that a significant portion of its consolidated net income will be derived from FGIC and its financial guaranty business. Accordingly, we are subject to all the risks and uncertainties associated with that business. The financial guaranty business is subject to extensive regulation. Future legislative, regulatory or judicial changes may affect the financial guaranty industry or municipal or asset-backed obligations or markets. Any expansion by FGIC into other markets and other asset classes will entail risks and uncertainties associated with its ability to maintain a triple-A rating and to compete with other monoline financial guaranty insurance companies.

Significant accounting policies are as follows:

Investments—The Company has designated its entire portfolio of fixed income and equity securities as available- for-sale. These securities are recorded at fair value based on quoted market prices with unrealized gains and losses, net of deferred income taxes, accounted for as a component of accumulated other comprehensive income in shareholders’ equity. The Company evaluates its investments regularly to determine whether there are declines in value and whether such declines meet the definition of other-than-temporary impairment in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities. The fair value of a security below cost or amortized cost for consecutive quarters is a potential indicator of an other-than-temporary impairment. When the Company determines a security has suffered an other-than-temporary impairment, the impairment loss is recognized, to the extent of the decline, as a realized investment loss in the current period’s earnings.

The Company’s short-term investments have maturities of greater than three and less than 12 months when purchased and are carried at fair value. Realized gains and losses on sales of investments are determined on a specific-identification basis. Investment income consists primarily of interest and dividends. Interest income and preferred stock dividends are recognized on an accrual basis. Dividend income on common stock is recognized on the date of declaration. Net investment income represents interest and dividend income, net of expenses.

Cash and Cash Equivalents—The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

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Investments in Unconsolidated Subsidiaries—Investments in the Company’s unconsolidated subsidiaries include both equity investees and unconsolidated majority owned subsidiaries. Investments in equity investees with ownership interests of 20-50% are generally accounted for on the equity method of accounting, and investments of less than 20% ownership interest are generally accounted for on the cost method of accounting if the Company does not have significant influence over the entity. Limited partnerships with ownership interests greater than 3% but less than 50% are primarily accounted for using the equity method of accounting. The Company reports the equity earnings of FGIC and CMG on a current month basis, Fairbanks on a one-month lag basis, and all other unconsolidated subsidiaries on a one-quarter lag basis. Management is evaluating the possibility of eliminating the one-month lag reporting for Fairbanks in the first quarter of 2004 due to efficiencies Fairbanks has achieved in its monthly closing process. The book value of the investments in the Company’s unconsolidated subsidiaries includes the Company’s share of net unrealized gains and losses in the unconsolidated subsidiaries’ investment portfolio.

Although the Company’s ownership percentage of Fairbanks exceeds 50%, the Company reports its investment in Fairbanks using the equity method of accounting due to an agreement among the shareholders of Fairbanks limiting the Company’s ability to control the operations of Fairbanks. This treatment is in accordance with guidance provided by Emerging Issues Task Force Issue (“EITF”) No. 96-16, Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights.

Periodically, or as events dictate, the Company evaluates potential impairment of its investments in unconsolidated subsidiaries. APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, provides criteria for determining potential impairment. In the event a loss in value of an investment is determined to be an other-than-temporary decline, an impairment charge would be recognized in the consolidated statement of operations. Evidence of a loss in value that could indicate impairment might include, but would not necessarily be limited to, the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. Realized gains or losses resulting from the sale of the Company’s ownership interests of unconsolidated subsidiaries are recognized in net realized investment gains or losses in the consolidated statement of operations.

The Securities and Exchange Commission (“SEC”) requires public companies to disclose condensed financial statement information in the footnotes for significant equity investees and unconsolidated majority owned subsidiaries, individually or in the aggregate, if (i) the Company’s investments in and advances to the subsidiaries are in excess of 10% of the total consolidated assets of the Company, (ii) the Company’s proportionate share of unconsolidated majority owned subsidiaries’ total assets is in excess of 10% of total consolidated assets of the Company, or (iii) income from continuing operations before income taxes, extraordinary items and the cumulative effect of a change in accounting principle of the unconsolidated subsidiaries is in excess of 10% of such income of the Company. Furthermore, if certain of the above tests exceed 20% by any unconsolidated subsidiary; separate financial statements of that unconsolidated subsidiary are required to be included in SEC filings. As of December 31, 2003, the Company’s equity investees and unconsolidated majority owned subsidiary exceeded the 10% test in the aggregate and, accordingly, condensed financial statements on a combined basis are provided in Note 23.

Deferred Policy Acquisition Costs—The Company defers certain costs in its mortgage insurance operations relating to the acquisition of new insurance and amortizes these costs against related premium revenue in order to match costs and revenues. These costs are primarily associated with the acquisition, underwriting and processing of new business, including 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 related to

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the issuance of mortgage insurance business are initially deferred and reported as deferred policy acquisition costs. SFAS No. 60, Accounting and Reporting for Insurance Enterprises, specifically excludes mortgage guaranty insurance from its guidance relating to the amortization of deferred policy acquisition costs. Consistent with industry accounting practice, amortization of these costs for each underwriting year book of business is charged against revenue in proportion to estimated gross profits. Estimated gross profits are composed of earned premiums, interest income and losses and loss adjustment expenses. The estimates for each underwriting year are monitored regularly to reflect actual experience and any changes to persistency or loss development. Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed recoverable amounts, after considering investment income.

Property, Equipment and Software—Property and equipment, including software, are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to 39 years. Leasehold improvements are recorded at cost and amortized over the lesser of the useful life of the assets or the remaining term of the related lease.

Under the provisions of Statement of Position (“SOP”) No. 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use, the Company capitalizes costs incurred during the application development stage related to software developed for internal-use purposes and for which it has no substantive plan to market externally. Capitalized costs are amortized on a straight-line basis over the estimated useful life of the asset at such time as the software is ready for its intended use, which is generally three to seven years.

Related Party Receivables—These receivables include non-trade receivables from unconsolidated subsidiaries. The balance is comprised of approximately $23 million of subordinated participation interests in Fairbanks debt, which was part of a debt restructuring completed in the second quarter of 2003. The participation bears interest at LIBOR plus 2.5% and is payable monthly. The balance may begin to be repaid as early as June 2004, with the balance due and payable in September 2004. In addition, the Company has approximately $3 million of advances to Fairbanks related to other matters.

Derivatives—Until the quarter ended June 30, 2003, the Company’s use of derivative financial instruments was generally limited to reducing its exposure to interest rate risk and currency exchange risk by utilizing interest rate and currency swap agreements that are accounted for as hedges. However, in April 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 requires certain credit default swaps entered into by PMI Europe beginning in July 1, 2003 to be accounted for as derivatives and reported on the consolidated balance sheet at fair value, and subsequent changes in fair value are recorded in earnings. In addition, as required by EITF No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities, for certain derivative contracts entered into by PMI Europe where the fair value cannot be determined by reference to quoted market prices, current market transactions for similar contracts, or based on a valuation technique incorporating observable market data or inputs, initial fair value related to the derivative contracts are deferred and recognized in earnings in proportion to the expiration of the associated insured risk. Gains or losses are recognized in earnings at inception for all other derivative contracts where the fair value can be determined in such a manner.

During 2003, PMI Europe entered into two transactions which were classified as derivatives in accordance with SFAS No. 149. However, initial fair value gains were deferred in accordance with EITF No. 02-3. As of December 31, 2003, approximately $3.8 million of deferred gains related to initial fair value of these derivative contracts was included in other assets, of which $0.1 million was recognized in consolidated net income in 2003 and was included in other income. In addition, a loss of $0.6 million related to the change in value of derivative contracts was also included in other income.

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Special Purpose Entities—Certain insurance transactions entered into by PMI and PMI Europe require the use of foreign special purpose wholly-owned subsidiaries that are consolidated in the Company’s consolidated financial statements.

Losses and Loss Adjustment Expenses—The reserves for mortgage insurance losses and loss adjustment expenses are the estimated claim settlement costs on notices of default that have been received by the Company, as well as loan defaults that have been incurred but have not been reported by the lenders. SFAS No. 60 specifically excludes mortgage guaranty insurance from its guidance relating to reserves for losses. Consistent with industry accounting practices, the Company does not establish loss reserves for future claims on insured loans that are not currently in default. The Company establishes loss reserves on a case-by-case basis when insured loans are identified as currently in default using estimated claim rates and average claim amounts for each report year, net of salvage recoverable. The Company also reserves for defaults that have been incurred but have not been reported to the Company prior to the close of an accounting period, using estimated claim rates and claim amounts applied to the estimated number of defaults not reported. The reserve levels as of the balance sheet date represent management’s best estimate of existing losses incurred. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known. Such adjustments to the extent of increasing or decreasing loss reserves, are recognized in current period results of operations.

Reinsurance—The Company uses reinsurance to reduce net risk in force, optimize capital allocation, and comply with a statutory provision adopted by several states that limits the maximum mortgage insurance coverage to 25% for any single risk. The Company’s reinsurance agreements typically provide for a recovery of a proportionate level of claim expenses from reinsurers, and reinsurance recoverable is recorded as an asset. The Company remains liable to its policyholders if the reinsurers are unable to satisfy their obligations under the agreements as with all reinsurance contracts. Reinsurance recoverable on paid losses and loss 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 as reinsurance recoverable. Reinsurance transactions are recorded in accordance with the provisions of the reinsurance agreements and the accounting guidance provided in SFAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts.

Revenue Recognition—Mortgage guarantee insurance policies are contracts that are generally non-cancelable by the insurer, are renewable at a fixed price, and provide payment of premiums on a monthly, annual or single basis. Upon renewal, the Company is not able to re-underwrite or re-price its policies. SFAS No. 60 specifically excludes mortgage guarantee insurance from its guidance relating to the earning of insurance premiums. Premiums written on a monthly basis are earned as coverage is provided. Monthly premiums accounted for approximately 62% of gross premiums written from the Company’s mortgage insurance operations in 2003, 75% in 2002 and 79% in 2001. Premiums written on an annual basis are amortized on a monthly pro rata basis over the year of coverage. Primary mortgage insurance premiums written on policies covering more than one year are referred to as single premiums. A portion of revenue on single premiums is recognized in consolidated net income in the current period, and the remaining portion is deferred as unearned premiums and earned over the expected life of the policy, a range of seven to 15 years. Rates used to determine the earning of single premiums are estimates based on actuarial analysis of the expiration of risk. Accordingly, the unearned premiums represent the portion of premiums written that is applicable to the estimated unexpired risk of insured loans.

Business Segment—During the fourth quarter of 2003, the Company changed its reportable segments to reflect the change in management’s views on operating segments primarily as a result of the investment in FGIC and the pending sale of APTIC, which has been accounted for as discontinued operations. The Company’s reportable operating segments are U.S. Mortgage Insurance Operations, International Operations, Financial

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Guaranty and Other. U.S. Mortgage Insurance Operations includes the results of PMI Mortgage Insurance Co., affiliated U.S. reinsurance companies and equity in earnings of CMG. International Operations include the results of PMI Australia, PMI Europe and the results of operations for Hong Kong. Financial Guaranty includes the equity in earnings of FGIC and RAM Re. The Other segment includes the income and expenses of the holding company, equity in earnings or losses of Fairbanks and limited partnerships, contract underwriting operations and dormant insurance companies. Segment information for prior years has been reclassified to conform to the current year presentation.

Stock-Based Compensation—The Company accounts for stock-based compensation to employees and directors using the intrinsic value method prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations. Under APB Opinion No. 25, compensation cost for stock-based awards is measured as the excess, if any, of the market price of the underlying stock on the grant date over the employees’ exercise price for the stock options. As all options have been granted with an exercise price equal to the fair value at the date of the grants, no compensation expense has been recognized for the Company’s stock option program. SFAS No. 123, Accounting for Stock-Based Compensation, requires the pro forma disclosure of net income and earnings per share using the fair value method, and provides that the employers may continue to account for the stock-based compensation under APB Opinion No. 25. SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, amends SFAS No. 123 and requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

The fair value of stock-based compensation to employees is calculated using an option pricing model developed to estimate the fair value of freely tradable and fully transferable options without vesting restrictions, which differ from the Company’s stock option program. The model also requires considerable judgment, including assumptions regarding future stock price volatility and expected time to exercise, which greatly affect the calculated value.

The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

	2003		2002		2001
Dividend yield	0.42	%	0.23	%	0.28	%
Expected volatility	37.46	%	36.70	%	36.92	%
Risk-free interest rate	4.03	%	5.02	%	5.41	%
Expected life (years) from grant date	6.0		6.0		6.0

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SFAS No. 123 requires pro forma disclosure of net income and earnings per share using the fair value method. If the computed fair values of the awards had been amortized to expense over the vesting period of the awards, the Company’s consolidated net income, basic net income per share and diluted net income per share would have been reduced to the pro forma amounts indicated below:

	2003			2002			2001
	(Dollars in thousands, except per share amounts)
Net income:
As reported	$	299,433		$	346,217		$	307,212
Less: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(10,700	)		(11,611	)		(8,768	)
Pro forma	$	288,733		$	334,606		$	298,444
Basic earnings per share:
As reported	$	3.33		$	3.85		$	3.46
Pro forma		3.21			3.72			3.35
Diluted earnings per share:
As reported	$	3.29		$	3.79		$	3.39
Pro forma		3.17			3.66			3.29

Income Taxes—The Company accounts for income taxes using the liability method in accordance with SFAS No. 109, Accounting for Income Taxes. The liability method measures the expected future tax effects of temporary differences at the enacted tax rates applicable for the period in which the deferred asset or liability is expected to be realized or settled. Temporary differences are differences between the tax basis of an asset or liability and its reported amount in the financial statements that will result in future increases or decreases in taxes owed on a cash basis compared to amounts already recognized as tax expense in the consolidated statement of operations.

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 either the year-end spot exchange rates or historical rates. Revenues and expenses are translated at weighted-average exchange rates. Gains and losses on currency re-measurement incurred by PMI Australia and PMI Europe represent the revaluation of assets and liabilities denominated in non-functional currencies into the functional currency, the Australian dollar and Euro, respectively. The effects of translating operations with a functional currency other than the reporting currency are reported as a component of accumulated other comprehensive income included in consolidated shareholders’ equity.

Comprehensive Income—Comprehensive income includes net income, foreign currency translation gains or losses, changes in unrealized gains and losses on investments, and the reclassification of realized gains and losses previously reported in comprehensive income. The Company reports the components of comprehensive income in its consolidated statements of stockholders’ equity.

Stock Split—In 2002, the Company effected a two-for-one stock split in the form of a stock dividend. All common share and per share data have been adjusted to reflect the stock split.

Earnings Per Share—Basic earnings per share (“EPS”) excludes dilution and is based on consolidated net income available to common stockholders and the actual weighted-average of the common stock shares that are

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outstanding during the period. Diluted EPS is based on consolidated net income available to common stockholders and the weighted-average of dilutive common stock shares outstanding during the period. The weighted-average dilutive common stock shares reflect the potential increase of common stock shares if outstanding securities were converted into common stock, or if contracts to issue common stock, including stock options issued by the Company that have a dilutive impact, were exercised. Consolidated net income available to common stockholders is the same for computing basic and diluted EPS. The convertible debt and equity units outstanding have not been included in the calculation of diluted shares outstanding as they are antidilutive for the periods presented.

The following is a reconciliation of the weighted-average of the common stock shares used to calculate basic EPS to the weighted-average common stock shares used to calculate diluted EPS for the years ended December 31, 2003, 2002 and 2001:

	2003	2002	2001
	(Shares in thousands)
Weighted-average shares for basic EPS	89,915	89,843	88,887
Weighted-average stock options and other dilutive components	1,130	1,537	1,781
Weighted-average shares for diluted EPS	91,045	91,380	90,668

Reclassifications—Certain items in the prior year’s consolidated financial statements have been reclassified to conform to the current year’s presentation.

NOTE 3.    NEW ACCOUNTING STANDARDS

In February 2004, the FASB issued EITF No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The issue relates to determining the meaning of other-than-temporary impairment and its application to investments classified as available-for-sale or held-to-maturity under SFAS No. 115, and investments accounted for under the cost method or the equity method. This issue is effective for fiscal years ending after December 15, 2003. It requires disclosure of quantitative information related to aging of unrealized losses for investments as well as qualitative discussion regarding considerations in reaching conclusions that impairments are not other-than-temporary.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. In October 2003, FASB voted to defer the effective date for applying certain provisions of SFAS No. 150 including the provision which would require the Company to reclassify its Company-obligated mandatorily redeemable preferred securities to liabilities on the consolidated balance sheet. It is uncertain at this time if the provision will be required in the future or eliminated entirely. Currently, the Company does not believe the adoption of this pronouncement will have a material impact to its consolidated financial condition or results of operations.

In January 2003, the FASB issued FASB Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities, which provides guidance on identifying and assessing interests in variable interest entities to determine if consolidation or deconsolidation of that entity is required. FIN No. 46 requires consolidation of existing

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unconsolidated variable interest entities if the entities do not effectively disperse risk among the parties involved. In October 2003, FASB deferred the effective date for applying the provisions of FIN No. 46 until the end of the first interim or annual period ending after December 15, 2003. Upon adoption of FIN No. 46, as revised, at December 31, 2003, the Company deconsolidated the trust subsidiary that issued mandatorily redeemable preferred securities. The mandatorily redeemable preferred securities outstanding in the amount of $48.5 million are no longer recognized. As of December 31, 2003, the Company recognized $51.6 million of junior subordinated debentures which are included in long-term debt and $3.1 million representing its investment in the trust in other assets.

In August 2002, the FASB issued FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other, prescribing the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this guidance are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The additional disclosure requirements of FIN No. 45 are included in Commitments and Contingencies footnote. The Company has determined that the effect of the adoption of this pronouncement was not material as of December 31, 2003.

In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. This revision carries forward the disclosures previously required by SFAS No. 132, and requires additional disclosure of the measurement date used for the majority of the plans, the accumulated benefit obligation, and information about the plans assets and cash flows. It also requires that cost and contribution information be presented in interim period reports. The new disclosure requirements are generally effective for annual financial statements for fiscal years ending after December 15, 2003 or interim periods beginning after December 15, 2003. The required disclosures are provided in Benefit Plans footnote.

Effective January 1, 2002, the Company adopted SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, any unamortized negative goodwill related to an excess of fair value over cost arising from business combinations completed before July 1, 2001 must be written off and recognized as a cumulative effect of a change in accounting principle upon the adoption of SFAS No. 142. Accordingly, the Company realized a $7.2 million gain for the remaining balance of negative goodwill in the first quarter of 2002, which was originally recorded in connection with the acquisition of PMI Ltd in 1999.

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NOTE 4.    INVESTMENTS

Fair Values and Gross Unrealized Gains and Losses on Investments—The cost or amortized cost, estimated fair value, and gross unrealized gains and losses on investments are shown in the table below:

	Cost or Amortized Cost		Gross Unrealized					Fair Value
			Gains		(Losses)
	(Dollars in thousands)
December 31, 2003
Fixed income securities:
Municipal bonds	$	1,488,780	$	116,983	$	(142	)	$	1,605,621
Foreign governments		466,730		2,673		(2,487	)		466,916
Corporate bonds		423,914		15,849		(1,420	)		438,343
U.S. government and agencies		20,245		2,210		(1	)		22,454
Mortgage-backed securities		19,787		1,063		—			20,850
Total fixed income securities		2,419,456		138,778		(4,050	)		2,554,184
Equity securities:
Common stocks		92,640		24,401		(313	)		116,728
Preferred stocks		105,795		5,292		(17	)		111,070
Total equity securities		198,435		29,693		(330	)		227,798
Short-term investments		20,603		3,200		—			23,803
Total	$	2,638,494	$	171,671	$	(4,380	)	$	2,805,785
	Cost or Amortized Cost		Gross Unrealized					Fair Value
			Gains		(Losses)
	(Dollars in thousands)
December 31, 2002
Fixed income securities:
Municipal bonds	$	1,320,423	$	120,503	$	(110	)	$	1,440,816
Corporate bonds		435,221		19,661		(113	)		454,769
Foreign governments		279,522		7,085		(40	)		286,567
Mortgage-backed securities		56,305		2,599		(3	)		58,901
U.S. government and agencies		20,585		2,620		—			23,205
Total fixed income securities		2,112,056		152,468		(266	)		2,264,258
Equity securities:
Common stocks		75,094		7,032		(2,579	)		79,547
Preferred stocks		88,475		2,186		(4,588	)		86,073
Total equity securities		163,569		9,218		(7,167	)		165,620
Short-term investments		31,986		3,427		(7	)		35,406
Total	$	2,307,611	$	165,113	$	(7,440	)	$	2,465,284

The Company determined that the decline in market value of certain equity securities in its investment portfolio met the definition of other-than-temporary impairment, and recognized realized losses of $0.3 million, $6.9 million and $3.2 million in 2003, 2002 and 2001, respectively.

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THE PMI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Scheduled Maturities—The following table sets forth the amortized cost and fair value of fixed income securities by contractual maturity at December 31, 2003:

	Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	209,713	$	213,573
Due after one year through five years		520,313		541,165
Due after five years through ten years		522,627		544,949
Due after ten years		1,147,016		1,233,647
Mortgage-backed securities		19,787		20,850
Total fixed income securities	$	2,419,456	$	2,554,184

Actual maturities may differ from those scheduled as a result of calls or prepayments by the issuers prior to maturity.

Net Investment Income—Net investment income consists of:

	2003			2002			2001
	(Dollars in thousands)
Fixed income securities	$	135,162		$	111,083		$	107,699
Equity securities		7,965			4,142			10,785
Short-term investments		7,920			7,235			12,720
Investment income before expenses		151,047			122,460			131,204
Investment expenses		(1,268	)		(1,879	)		(1,431	)
Net investment income	$	149,779		$	120,581		$	129,773

Realized Investment Gains and Losses—Realized gains and losses on investments are composed of:

	2003			2002			2001
	(Dollars in thousands)
Fixed income securities:
Gross gains	$	7,119		$	16,944		$	11,129
Gross losses		(6,560	)		(7,779	)		(1,722	)
Net gains		559			9,165			9,407
Equity securities:
Gross gains		7,274			7,986			12,503
Gross losses		(3,996	)		(15,881	)		(18,698	)
Net gains (losses)		3,278			(7,895	)		(6,195	)
Short-term investments:
Gross gains		—			59			—
Gross losses		(289	)		—			(3,201	)
Net gains (losses)		(289	)		59			(3,201	)
Investment in unconsolidated subsidiaries:
Gross gains		363			—			—
Gross losses		(3,827	)		—			—
Net losses		(3,464	)		—			—
Net realized gains before income taxes		84			1,329			11
Income taxes		(28	)		(465	)		(4	)
Total net realized gains after income taxes	$	56		$	864		$	7

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unrealized Investment Gains and Losses—The change in unrealized gains and losses net of deferred taxes consists of:

	2003			2002			2001
	(Dollars in thousands)
Fixed income securities	$	(9,138	)	$	52,785		$	(6,559	)
Equity securities		17,964			(10,671	)		(7,048	)
Investment in unconsolidated subsidiaries		3,516			259			2,377
Short-term investments		(5	)		2,625			(101	)
Discontinued operations—APTIC		1,105			212			—
Change in unrealized gains (losses), net of deferred taxes		13,442			45,210			(11,331	)
Realized gains, net of income taxes		56			864			7
Total	$	13,498		$	46,074		$	(11,324	)

The following table shows our investments gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2003.

	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
Fixed income securities:
Municipal bonds	$	10,032	$	(142	)	$	—	$	—		$	10,032	$	(142	)
Foreign governments		275,581		(2,487	)		—		—			275,581		(2,487	)
Corporate bonds		103,920		(1,420	)		—		—			103,920		(1,420	)
U.S. government and agencies		145		(1	)		—		—			145		(1	)
Total fixed income securities		389,678		(4,050	)		—		—			389,678		(4,050	)
Equity securities:
Common stocks		11,598		(262	)		1,510		(51	)		13,108		(313	)
Preferred stocks		2,948		(17	)		—		—			2,948		(17	)
Total equity securities		14,546		(279	)		1,510		(51	)		16,056		(330	)
Total	$	404,224	$	(4,329	)	$	1,510	$	(51	)	$	405,734	$	(4,380	)

The Company determined that there was no other than temporary impairment in its consolidated investment portfolio as of December 31, 2003. Unrealized losses in the fixed income portfolio are primarily due to interest rate fluctuations during the year and as such do not qualify for other than temporary impairment as the Company has the ability to hold until maturity. The remaining unrealized losses do not meet the criteria established in our policy and as such are not considered impaired.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Investment Concentrations and Other Items—The Company maintains a diversified portfolio of municipal bonds. The following states represent the largest concentrations in the municipal bond portfolio, expressed as a percentage of the carrying value of all municipal bond holdings. Holdings in states that exceed 5% of the municipal bond portfolio at December 31, for the respective years are presented below:

	2003		2002
Texas	18.6	%	16.1	%
New York	13.0		8.0
Illinois	11.5		14.9
Massachusetts	9.9		7.0
Washington	7.3		9.0
District of Columbia	6.6		5.5
Florida	4.0		5.6

At December 31, 2003, fixed income securities and short-term investments with a fair value of $15.3 million were on deposit with regulatory authorities as required by law. In addition, $15.4 million cash were held in a bank in Hong Kong for Statutory purposes.

NOTE 5.    RESTRICTED CASH

In 2002, the Company entered into an agreement with a customer to provide mortgage insurance coverage for a three-year period on a pool of loans; the Company received funds to cover future claim payments on these loans. The transaction does not transfer insurance risk. Accordingly, the contract is being accounted for under the guidelines of SOP No. 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Risk. As of December 31, 2003, $8.4 million of deposits received under this agreement were included in cash and cash equivalents, and can only be utilized to pay claims related to the agreement.

NOTE 6.    INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

Investments in unconsolidated subsidiaries consisted of the following as of December 31, 2003 and 2002.

	2003		Ownership Percentage		2002		Ownership Percentage
	(Dollars in thousands)
FGIC	$	625,154	42	%	$	—	—
Fairbanks		115,803	57	%		131,814	57	%
CMG		97,389	50	%		83,234	50	%
RAM Re		75,675	25	%		45,633	25	%
Truman		—	—			3,462	20	%
Other		23,825	various			25,652	various
Total	$	937,846			$	289,795

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Equity in earnings from unconsolidated subsidiaries consisted of the following for the years ended December 31, 2003, 2002 and 2001.

	2003			Ownership Percentage		2002			Ownership Percentage		2001			Ownership Percentage
	(Dollars in thousands)
FGIC	$	2,358		42	%	$	—		—		$	—		—
Fairbanks		(17,663	)	57	%		22,387		46%-57	%		4,082		23	%
CMG		13,575		50	%		12,433		50	%		10,695		50	%
RAM Re		4,228		25	%		4,235		25	%		3,622		25	%
Truman		4,513		20	%		6,034		20	%		(59	)	20	%
Other		(2,414	)	various			(864	)	various			448		various
Total	$	4,597				$	44,225				$	18,788

On December 18, 2003, the Company completed its investment in FGIC. The investment is accounted for using the equity method of accounting in accordance with APB Opinion No. 18. The Company is the strategic investor in a group of investors, and funded $611 million in cash of the $1.6 billion total purchase price for the investment in FGIC. Our investment in FGIC, as of December 31, 2003, was $621.9 million which included $611 million cash for the investment, capitalized acquisition costs related to the transaction, equity in earnings and the extraordinary gain.

Equity in earnings of FGIC for 2003, as presented in the above table, excludes the extraordinary gain of $5.4 million after-tax related to the Company’s share of negative goodwill recognized by FGIC resulting from the application of purchase accounting adjustments. In accordance with APB No. 18, we reflected our proportionate share of FGIC’s extraordinary gain as a separate line item in our consolidated statement of operations. FGIC’s net income for the period from December 18, 2003 through December 31, 2003 was $20.5 million, which included an extraordinary gain of $13.9 million. Income available to common shareholders excluded preferred stock dividends of $0.6 million.

In connection with the settlement reached between Fairbanks and the FTC and HUD, Fairbanks recognized aggregate charges of approximately $55 million pre-tax in September 2003 related to the costs of settlement, estimated costs of potential settlements of certain putative class actions pending against Fairbanks, and estimated costs relating to certain pending state regulatory actions. The Company’s proportionate share of such charges was $19.1 million pre-tax, which was recognized in equity in earnings from unconsolidated subsidiaries in September 2003.

As of December 31, 2003, the Company’s carrying value of Fairbanks, including cumulative equity earnings, was $115.8 million. In addition, the Company holds receivables of $26.0 million from Fairbanks which is included in related party receivables. Included in the investment in Fairbanks is a component of goodwill of approximately $36 million. The Company evaluated its total investment in Fairbanks, including related party receivables as of December 31, 2003, and determined that there was no other-than-temporary decline in the carrying value. Accordingly, the Company has not recognized an impairment charge with respect to its total investment in Fairbanks. The Company will continue to evaluate this investment for potential impairment.

In 2003, the Company invested $24.4 million of a total of $92 million of additional capital raised by RAM Re. The Company’s ownership percentage as a result of this capital investment did not change.

In 2003, the Company sold its ownership interest in Truman Capital Founders, LLC and Truman Capital Advisors, LLC, for $6.5 million resulting in a $3.6 million loss pre-tax, which was recognized in net realized investment gains and losses in the consolidated statements of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 7.    PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS

(UNAUDITED)

The unaudited pro forma condensed combined statements of operations of the Company give effect to the investment in FGIC Corporation and the issuance of securities from common stock and equity units offering. The unaudited pro forma condensed combined statements of operations for the years ended December 31, 2003 and 2002 were prepared assuming these transactions were completed as of the first day of the periods presented.

The pro forma adjustments are based on estimates which are derived from available information and contain assumptions. The pro forma financial statements do not purport to represent what the consolidated results of operations actually would have been if these transactions had occurred on the dates indicated or what such results will be for any future date or future periods. The pro forma consolidated statements of operations are based on historical consolidated financial statements of The PMI Group and FGIC Corporation, primarily giving effect to our debt and equity offering, reduction of interest income due to investment in FGIC and our 42% ownership share of FGIC Corporation’s historical income adjusted for the application of purchase accounting adjustments.

	For the Year Ended December 31, 2003						For the Year Ended December 31, 2002
	As Reported		Adjustments		Pro Forma		As Reported		Adjustments		Pro Forma
Total revenues	$	891,721	$	68,427	$	960,148	$	882,118	$	80,567	$	962,685
Total losses and expenses	$	498,599	$	12,077	$	510,676	$	431,957	$	12,788	$	444,745
Net income	$	299,433	$	56,065	$	355,498	$	346,217	$	72,459	$	418,676
Weighted average shares basic		89,915		5,750		95,665		89,843		5,750		95,593
Weighted average shares diluted		91,045		5,750		96,795		91,380		5,750		97,130
Per Share Data
Basic net income	$	3.33			$	3.72	$	3.85			$	4.38
Diluted net income	$	3.29			$	3.67	$	3.79			$	4.31

NOTE 8.    DEFERRED POLICY ACQUISITION COSTS

The following table summarizes deferred policy acquisition cost activity as of and for the years ended December 31, 2003, 2002 and 2001:

	2003			2002			2001
	(Dollars in thousands)
Beginning balance	$	85,210		$	77,903		$	67,009
Policy acquisition costs incurred and deferred		106,191			90,723			92,676
Amortization of deferred policy acquisition costs		(89,327	)		(83,416	)		(81,782	)
Ending balance	$	102,074		$	85,210		$	77,903

Deferred policy acquisition costs are affected by qualifying costs that are deferred in the period, and amortization of previously deferred costs in such period. In periods where there is growth in new business, the asset will generally increase because the amount of acquisition costs being deferred exceeds amortization expenses. Included in 2001 policy acquisition costs incurred and deferred was $4.5 million of deferred costs from the acquisition of PMI Indemnity Limited.

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THE PMI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 9.    PROPERTY, EQUIPMENT AND SOFTWARE

The following table sets forth the cost basis and accumulated depreciation of property and equipment as of December 31, 2003 and December 31, 2002:

	2003			2002
	(Dollars in thousands)
Furniture and equipment	$	49,789		$	46,612
Building and leasehold improvements		96,819			94,703
Software		113,538			90,849
Land		5,000			5,000
Property and equipment, at cost		265,146			237,164
Less accumulated depreciation and amortization		(92,928	)		(72,479	)
Property and equipment, net of accumulated depreciation	$	172,218		$	164,685

Depreciation and amortization expense related to property and equipment totaled $22.7 million in 2003, $17.8 million in 2002 and $10.6 million in 2001. Capitalized costs associated with software developed for internal use was $22.5 million in 2003, $25.2 million in 2002 and $16.1 million in 2001.

In connection with relocating its corporate headquarters, the Company performed an evaluation of the estimated costs with respect to the relocation and recognized a $12.2 million pre-tax charge related to lease abandonment and relocation costs in 2002. The charge consists of $8.3 million for the estimated loss on the abandonment of the lease obligations for the previous home office space, $1.7 million for the write-off of abandoned fixed assets, and $2.2 million for other relocation and employee retention expenses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 10.    LOSSES AND LOSS ADJUSTMENT EXPENSES RESERVES

The Company establishes reserves for losses and loss adjustment expenses (“LAE”) to recognize the estimated liability for potential losses and related loss expenses in connection with borrower default on their mortgage payments. The establishment of loss reserves is subject to inherent uncertainly and requires significant judgment by management. The following table provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for each of the three years:

	2003			2002			2001
	(Dollars in millions)
Balance at January 1,	$	333,569		$	303,816		$	287,088
Reinsurance recoverable		(3,846	)		(6,068	)		(9,211	)
Net balance at January 1,		329,723			297,748			277,877
Losses and LAE incurred (principally with respect to defaults occurring in)
Current year		228,143			246,173			251,988
Prior years		(19,055	)		(88,598	)		(143,158	)
Total incurred		209,088			157,575			108,830
Losses and LAE payments (principally with respect to defaults occurring in)
Current year		(10,741	)		(9,591	)		(10,301	)
Prior years		(197,099	)		(117,825	)		(82,851	)
Total payments		(207,840	)		(127,416	)		(93,152	)
Foreign currency translations		4,818			1,816			(680	)
Acquisition of portfolio and wholly-owned subsidiaries		7,875			—			4,873
Net balance at December 31,		343,664			329,723			297,748
Reinsurance recoverable		3,275			3,846			6,068
Balance at December 31,	$	346,939		$	333,569		$	303,816

The increase in loss reserves in 2003 over 2002 was due primarily to increases in the reserve balances in U.S. mortgage operations and in PMI Europe offset by a decrease in the reserve balance in PMI Australia. The reserve increase in U.S. operations were the result of expected higher proportions of delinquencies developing into claims as well as higher mortgage insurance coverage levels on pending delinquencies. This has led to higher average claim amounts. U.S. Operations primary insurance default inventory was 37,445 at December 31, 2003, 36,537 at December 31, 2002 and 25,228 at December 31, 2001. The default rate was 4.53% at year-end 2003, 4.18% at year-end 2002 and 2.86% at year-end 2001. Generally, it takes approximately 12 to 36 months from the receipt of a default notice to result in a claim payment. Accordingly, most losses paid relate to default notices received in prior years.

The $19.1 million, $88.6 million and $143.2 million reductions in total incurred related to prior years were due to re-estimations of ultimate loss rates from those established at the original notice of default, updated through the period presented. These re-estimations of ultimate loss rates are the result of management’s periodic review of estimated claim amounts in light of actual claim amounts, loss development data or ultimate claim rates. The $19.1 million reduction in prior years’ reserves during 2003 was due primarily to (i) a reduction in PMI Australia’s loss reserves; and (ii) favorable PMI pool portfolio loss development trends. The $88.6 million and $143.2 million total reductions in prior years’ reserves during 2002 and 2001, respectively, were due primarily to more favorable loss trends than expected compared to PMI’s historic loss experience, evidenced by lower claim amounts, a robust real estate market and strong home price appreciation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

PMI Europe increased its loss reserves primarily due to a $7.9 million loss reserve established for Royal & Sun Alliance (“R&SA”) transaction, discussed below, and additional risk written by PMI Europe during 2003. PMI Australia reduced its loss reserves primarily due to a decrease in the proportion of reported defaults developing into claims and declining default rates attributable to strong economic conditions in Australia.

NOTE 11.    LONG-TERM DEBT AND LINES OF CREDIT

Equity Units—In November 2003 and in connection with the Company’s investment in FGIC, the Company sold 13.8 million 5.785% equity units and raised $345.0 million of gross proceeds. Each unit has two components: a senior note component and a purchase contract component. The senior note has a $25 principal amount with a 3.0% annual interest rate paid quarterly and maturing on November 11, 2008. The purchase contract component pays a 2.875% annual contract payment quarterly and obligates the holders to purchase $345 million of newly issued shares of the Company’s common stock, no later than November 15, 2006. Further details are provided in Dividends and Shareholders’ Equity footnote. In addition, the senior notes have a remarketing feature and will be remarketed in August 2006.

Senior Convertible Debentures—In July 2001, the Company issued $360 million of 2.50% Senior Convertible Debentures (“the Debentures”) in a private offering to qualified institutional buyers, and subsequently filed a shelf registration statement for the resale of the Debentures and the common stock of The PMI Group issuable upon conversion of the Debentures. The Company used a portion of the net proceeds for the repayment or retirement of existing indebtedness and the remainder for general corporate purposes. The Debentures are due on July 15, 2021 and bear interest at a rate of 2.50% per annum, payable semiannually. The Debentures are convertible at the registered holders’ option, prior to stated maturity, into shares of the Company’s common stock at an initial conversion price of $44.16 per share if specified requirements are met, subject to adjustments in specified circumstances. The most significant requirement for such conversion is that the trading price of the Company’s common stock must exceed 120% of the initial conversion price for 20 consecutive trading days within a 30-day trading period. The Company may redeem some or all of the Debentures on or after July 15, 2006 for a price equal to the principal amount of the Debentures plus any accrued and unpaid interest. The holders may put the Debentures to the Company on July 15, 2004, 2006, 2008, 2111 and 2116. Upon a change of control of the Company, holders may also require the Company, subject to certain conditions, to repurchase all or a portion of the Debentures. The Company may repurchase the Debentures with cash, common stock, or a combination of cash and shares of common stock. If the Company elects to pay all or a portion of the purchase price in common stock, the shares of common stock will be valued at 97.5% of the average sale price for twenty trading days ending on the third day prior to the repurchase date.

Mandatorily Redeemable Preferred Capital Securities and Junior Subordinated Deferrable Interest Debenture—In February 1997, The PMI Group, through a wholly-owned trust, privately issued $100.0 million of 8.309% preferred Capital Securities, Series A (the “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 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 issued by The PMI Group to the Issuer Trust. The subordinated debenture bears interest at the rate of 8.309% per annum and matures on February 1, 2027. In 2001, the Company repurchased $51.5 million of the Capital Securities. The early extinguishment of a portion of this debt resulted in an extraordinary loss of $2.9 million, net of tax in 2002.

Upon the adoption of FIN No. 46 as of December 31, 2003, the Company deconsolidated the trust subsidiary that issued the mandatorily redeemable preferred securities. The underlying securities of $48.5 million issued by the trust are backed by junior subordinated debentures issued by the Company to the trust in the amount of $51.5 million. As the subordinated debentures issued by the Company to the trust were previously

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THE PMI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

eliminated in consolidation, the amount of $51.5 million was not previously reflected in the Company’s consolidated financial statements. Upon deconsolidation of the trust, the subordinated debentures due to the trust are no longer eliminated and have been classified as long-term debt.

Senior Notes—In November 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. In 2001, the Company repurchased $37.1 million of the Notes, resulting in an extraordinary loss of $1.9 million, net of tax.

Revolving Credit Facility—The Company’s credit line in the amount of $25 million with Bank of America was determined by management to be no longer required and was allowed to expire on December 29, 2003. The credit facility contained certain financial covenants and restrictions, the most restrictive being risk-to-capital ratios and minimum capital and dividend restrictions. The Company was in compliance with all debt covenants for the year ended December 31, 2003.

NOTE 12.    FAIR VALUE OF FINANCIAL INSTRUMENTS

In the normal course of business, the Company invests in various financial assets and incurs various financial liabilities. The estimated fair value of the financial instruments indicated in the table below has been determined by available market information and appropriate valuation methodology. The carrying values of cash and cash equivalents and accrued investment income approximate the fair values primarily due to their liquidity and short-term nature. The estimated fair value of the outstanding debt has been determined by quoted market price.

	As of December 31, 2003				As of December 31, 2002
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(Dollars in thousands)
Assets
Fixed income securities	$	2,554,184	$	2,554,184	$	2,112,056	$	2,264,258
Equity securities		227,798		227,798		165,620		165,620
Short-term investments		23,803		23,803		35,406		35,406
Cash and cash equivalents		397,096		397,096		203,470		203,470
Accrued investment income		39,187		39,187		35,090		35,090
Liabilities
Equity Units, 5.875%	$	345,000	$	355,212	$	—	$	—
Senior Convertible Debentures, 2.50%		360,000		388,800		360,000		384,149
Senior Notes, 6.75%		62,950		69,503		62,950		71,078
Junior Subordinated Debentures, 8.309%		51,593		60,810		—		—
Mandatorily Redeemable Preferred Securities, 8.309%		—		—		48,500		54,449

Considerable judgment is required in interpreting market data to develop the estimates of fair value and, therefore, changes in the assumptions may have a material effect on the fair valuation estimates. A number of the Company’s significant assets and liabilities, including deferred policy acquisition costs, real estate owned, property and equipment, loss reserves, unearned premiums and deferred income taxes are not considered financial instruments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 13.    REINSURANCE

The effects of reinsurance on premiums written, premiums earned and losses and loss adjustment expenses of the Company’s operations for the years ended December 31, 2003, 2002 and 2001 are as follows:

	2003			2002			2001
	(Dollars in thousands)
Premiums written
Direct	$	1,011,842		$	789,328		$	657,067
Assumed		9,831			8,223			8,749
Ceded		(145,672	)		(105,944	)		(65,528	)
Net premiums written	$	876,001		$	691,607		$	600,288
Premiums earned
Direct	$	834,725		$	776,867		$	658,583
Assumed		12,364			1,724			6,421
Ceded		(150,161	)		(101,734	)		(67,783	)
Net premiums earned	$	696,928		$	676,857		$	597,221
Losses and loss adjustment expenses
Direct	$	222,045		$	156,224		$	109,843
Assumed		320			705			757
Ceded		(13,277	)		646			(1,770	)
Net losses and loss adjustment expenses	$	209,088		$	157,575		$	108,830

The majority of the Company’s existing reinsurance contracts are captive reinsurance agreements in U.S. Mortgage Insurance Operations. Under captive reinsurance agreements, a portion of the risk insured by PMI is reinsured with the mortgage originator or investor through a reinsurer that is affiliated with the mortgage originator or investor. Ceded premiums for U.S. captive reinsurance accounted for 82% of total ceded premiums written in 2003 compared to 77% in 2002 and 80% in 2001. Reinsurance recoverable on losses incurred was $3.3 million at December 31, 2003, $3.8 million at December 31, 2002 and $6.1 million at December 31, 2001.

In October 2003, PMI Europe entered into a definitive agreement to acquire the U.K. lenders’ mortgage insurance portfolio from R&SA. The portfolio encompasses primary mortgage insurance written since January 1, 1993. R&SA transferred all loss reserves, unearned premium reserves and central provisions associated with the portfolio to PMI Europe totaling approximately $55 million. The acquisition is subject to U.K. and Irish regulatory approval, followed by U.K. court approval, which is anticipated to take approximately six to nine months, and other customary closing conditions. In connection with this transaction, PMI Europe, has agreed to reinsure the R&SA portfolio to be acquired on a 100% quota share basis during the period from July 1, 2003 until regulatory and court approval.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 14.    INCOME TAXES

The components of income tax expenses are as follows:

	2003		2002		2001
	(Dollars in thousands)
Current	$	40,403	$	12,890	$	38,825
Deferred		78,411		111,655		90,830
Total income tax expense from continuing operations	$	118,814	$	124,545	$	129,655

Section 832(e) of the Internal Revenue Code permits mortgage guaranty insurers to deduct, within certain limitations, additions to statutory contingency reserves. This provision allows 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 reserves. The Company purchased tax and loss bonds of $67.8 million in 2003, $106.1 million in 2002 and $99.0 million in 2001. The purchase and redemption of tax and loss bonds are included as a deferred component of income tax expense.

The components of the income tax expense for 2003 included a foreign provision for current tax expense of approximately $27 million and a deferred tax expense of approximately $5 million primarily related to PMI Australia and PMI Europe.

A reconciliation of the statutory federal income tax rate to the effective tax rate reported on income before income taxes is shown in the following table:

	2003		2002		2001
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
Tax-exempt interest	(6.4	)	(5.2	)	(5.3	)
States taxes, net	0.3		0.3		0.3
Foreign taxes, net	(0.5	)	(0.3	)	(0.8	)
Other	1.8		(2.1	)	0.8
Effective income tax rate for continuing operations	30.2	%	27.7	%	30.0	%

PMI has provided for U.S. federal income tax on the undistributed earnings of its foreign subsidiaries and foreign corporate joint ventures, except to the extent that such earnings are reinvested indefinitely. It is not practicable to determine the amount of U.S. tax that would result if such earnings were not reinvested indefinitely.

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The components of the deferred income tax assets and liabilities as of December 31, 2003 and 2002 are as follows:

	2003		2002
	(Dollars in thousands)
Deferred tax assets
Discount on loss reserves	$	6,703	$	8,324
Unearned premium reserves		12,667		6,330
Other loss reserves		2,536		4,028
Lease costs		602		3,072
Settlements		522		6,681
Pension costs and deferred compensation		9,520		7,543
Other assets		12,858		8,944
Total deferred tax assets		45,408		44,922
Deferred tax liabilities
Deferred policy acquisition costs		25,763		23,669
Unrealized net gains on investments		57,273		52,527
Software development costs		19,719		16,786
Equity earnings of unconsolidated subsidiaries		25,423		19,620
Other liabilities		11,309		13,140
Total deferred tax liabilities		139,487		125,742
Net deferred tax liability	$	94,079	$	80,820

NOTE 15.    COMMITMENTS AND CONTINGENCIES

Leases—The Company leases certain office space and office equipment. Minimum rental payments under non-cancelable operating leases in the aggregate and the obligation recorded under capital leases for the five years subsequent to 2003 are as follows:

	Capital Leases		Operating Leases
	(Dollars in thousands)
Year ending December 31,
2004	$	1,332	$	10,019
2005		222		4,726
2006		—		3,406
2007		—		2,890
2008		—		1,985
Thereafter		—		5,134
Total minimum lease payments	$	1,554	$	28,160
Less: Amount representing interest		56
Present value of net lease payments under capital lease	$	1,498

Rent expense for all leases was $7.8 million for 2003, $11.2 million for 2002 and $12.8 million for 2001.

Income Taxes—In the fourth quarter of 2002 and the second quarter of 2003, the Company received notices of assessment from the California Franchise Tax Board (“FTB”) for 1997 through 2000 in amounts totaling of

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THE PMI GROUP, INC. AND SUBSIDIARIES

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$13.9 million. Such amounts do not include the federal tax benefits from the payment of such assessment or interest that might be included on amounts, if any, ultimately paid to the FTB. The assessments are the result of a memorandum issued by the FTB in April 2002. The memorandum, which is based partly on the California Court of Appeals decision in Ceridian v. Franchise Tax Board, provides for the disallowance of the deduction for dividends received by holding companies from their insurance company subsidiary, in determining California taxable income of the holding company for tax years ending on or after December 1, 1997. As of December 31, 2003, the Company has reserved $4.7 million related to this contingency. While the Company is protesting this assessment, there can be no assurance as to the ultimate outcome of these protests.

Guarantees to Related Party—In the fourth quarter of 2003, Fairbanks reached a settlement of civil charges with the FTC and the HUD. The terms of the settlement require changes in Fairbanks’ operations and the creation of a $40 million fund for the benefit of consumers allegedly harmed by Fairbanks. The Company has guaranteed approximately two-thirds of the funds that may become due to Fairbanks’ lenders under a $30.7 million letter of credit, which may be drawn upon by the FTC as security for a portion of a $40 million redress fund as part of the settlement. In addition, the Company guaranteed approximately $7 million of obligations owed by Fairbanks to its principal lenders in connection with the refinancing of amounts owed to another creditor.

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 consolidated financial condition, results of operations or cash flows of the Company. The Company determined that the liability related to the fair value of the guarantees provided to a related party, in accordance with FIN No. 45, was not material.

NOTE 16.    DIVIDENDS AND SHAREHOLDERS’ EQUITY

Common Stock—In November 2003 and in connection with the Company’s investment in FGIC, the Company issued 5.75 million shares of common stock and raised $219.7 million of gross proceeds in addition to Equity Units, disclosed in long-term debt footnote. Each Equity Units consist of a senior note and a purchase contract. The purchase contract will obligate the holders to purchase, no later than November 15, 2006, shares of the Company’s common stock subject to anti-dilution adjustments. The number of shares of common stock which will be purchased depends upon the 20-trading day average closing price at the date of purchase. If the average closing price is greater than $38.20 per share but less than $47.37 per share, the settlement rate per unit is equal to $25 divided by the applicable market price of the Company common stock. If the market price of our common stock is greater than or equal to $47.37, the settlement rate will be .5278 shares of common stock. If the market price of the Company common stock is less than or equal to $38.20 per share, the settlement rate will be .6545 shares of common stock.

Dividends—Under Arizona insurance law, PMI may pay during any twelve-month period, without prior approval of the Arizona Director of Insurance (the “Director”), an amount not to exceed the lesser of (i) 10% of policyholders’ surplus as of the preceding year-end, and (ii) the previous calendar year’s investment income. Dividends that exceed this amount are extraordinary dividends and require the prior approval of the Director. While Arizona permits dividends, whether ordinary or extraordinary, to be paid out of any capital and surplus account (other than paid-in capital), other state insurance laws require the payment of dividends to be made from the unassigned funds surplus account only. In 2003, following approval from the Director, PMI declared and paid an extraordinary dividend of $100.0 million to The PMI Group holding company. In addition, Residential Guaranty Co., one of our Arizona domiciled insurance subsidiaries, paid dividends to TPG in the amount of $8.4 million, which it was able to pay in dividends without prior permission from the Arizona Department of Insurance. In 2002, following receipt of approval from the Director, PMI declared and paid an extraordinary

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THE PMI GROUP, INC. AND SUBSIDIARIES

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dividend of $100 million to the PMI Group holding company. The dividend was paid in cash of $66 million and stock of Fairbanks, as well as its limited partnership interest in Truman. The combined value of the stock of Fairbanks and Truman at time of dividend was approximately $34 million.

Preferred Stock—The PMI Group’s restated certificate of incorporation authorizes the Board of Directors to issue up to 5,000,000 shares of preferred stock of The PMI Group in classes or series and to set 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 that has voting, dividend or liquidation rights superior to the common stock, which may adversely affect the rights of holders of common stock.

Pursuant to the support agreement described in the Capital Support Agreements footnote, the Company has agreed that, in the event that Allstate, the Company’s former parent, makes a payment contemplated by the Allstate Support Agreements or the runoff support agreement, Allstate will have the right to receive preferred stock of The PMI Group 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.

NOTE 17.    BENEFIT PLANS

Effective January 1, 2003, all full-time and part-time employees of the Company are eligible to participate in The PMI Group, Inc. Retirement Plan (the “Plan”), a noncontributory defined benefit plan. Prior to January 1, 2003, one year of service was required for eligibility. The Plan has been funded by the Company to the fullest extent permitted by federal income tax rules and regulations. In addition, certain employees whose annual earnings exceed $200,000 participate in The PMI Group, Inc. Supplemental Employee Retirement Plan, a noncontributory defined benefit plan. Benefits under both pension plans are based upon the employees’ 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 under another post-employment benefit plan (the “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 ten or more years prior to retirement. The Company shares the cost of the retiree medical benefits with retirees based on years of service. The Company has the right to modify or terminate these plans. The Company has not included any estimates of the Medical Prescription Drug, Improvement and Modernization Act of 2003 in the following table.

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The following table presents certain information with respect to the Company’s benefit plans as of and for the years ended December 31, 2003, 2002 and 2001:

	Pension Benefits									Other Post-Employment Benefits
	2003			2002			2001			2003			2002			2001
	(Dollars in thousands, except percentages)
Change in benefit obligation
Benefit obligation at January 1	$	68,021		$	43,984		$	34,624		$	9,065		$	5,395		$	4,814
Service cost		9,694			8,229			6,130			1,535			797			529
Interest cost		5,144			4,359			3,098			966			552			373
Plan amendments		1,283			—			—			(9,049	)		—			—
Actuarial (gain) loss		(1,168	)		11,854			935			5,407			2,385			(266	)
Benefits paid		(7,335	)		(405	)		(803	)		(125	)		(65	)		(55	)
Benefit obligation at December 31		75,639			68,021			43,984			7,799			9,064			5,395
Assumptions to determine benefit obligation
Discount rate		6.25	%		6.75	%		N/A			6.25	%		6.75	%		N/A
Rate of compensation increase		5.00	%		5.50	%		N/A			N/A			N/A			N/A
Change in plan assets
Fair value of plan assets at January 1		38,661			19,703			17,136			—			—			—
Actual return (loss) on plan assets		8,067			(2,272	)		(2,494	)		—			—			—
Company contribution		12,584			21,635			5,864			125			65			55
Benefits paid		(7,335	)		(405	)		(803	)		(125	)		(65	)		(55	)
Fair value of plan assets at December 31		51,977			38,661			19,703			—			—			—
Funded status
Funded (under funded) status of plan at December 31		(23,662	)		(29,360	)		(24,281	)		(7,799	)		(9,064	)		(5,395	)
Unrecognized actuarial loss (gain)		16,682			24,170			9,129			5,893			677			(1,708	)
Unrecognized prior service cost		1,179			—			—			(8,883	)		185			204
Accrued and recognized benefit cost	$	(5,801	)	$	(5,190	)	$	(15,152	)	$	(10,789	)	$	(8,202	)	$	(6,899	)
Components of net periodic benefit cost
Service cost	$	9,694		$	8,229		$	6,130		$	1,535		$	797		$	529
Interest cost		5,144			4,359			3,098			966			552			373
Expected return on assets		(3,190	)		(1,900	)		(1,495	)		—			—			—
Prior service cost amortization		103			—			—			20			—			—
Actuarial loss recognized		1,372			985			205			192			20			19
Additional cost		72			—			305			—			—			(90	)
Net periodic benefit cost	$	13,195		$	11,673		$	8,243		$	2,713		$	1,369		$	831
Projected benefit obligation in excess of plan assets
Projected benefit obligation	$	75,639		$	68,021			N/A			N/A			N/A			N/A
Accumulated benefit obligation	$	43,549		$	37,134			N/A			N/A			N/A			N/A
Fair value of plan assets	$	51,977		$	38,661			N/A			N/A			N/A			N/A
Accumulated benefit obligation in excess of plan assets
Projected benefit obligation	$	8,532		$	7,229			N/A			N/A			N/A			N/A
Accumulated benefit obligation	$	3,729		$	2,813			N/A			N/A			N/A			N/A
Fair value of plan assets	$	—		$	—			—			N/A			N/A			N/A
Assumptions to determine net periodic benefit cost
Discount rate		6.75	%		7.50	%		7.75	%		6.75	%		7.50	%		7.75	%
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			11.00	%		13.00	%		6.00	%

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The Company’s accumulated benefit obligation for its pension plans at December 31, 2003 was $39.8 million and $3.7 million. Health care cost trend on covered charges for other postretirement benefits was 11% in 2003, which will be reduced by 2% per year to 5% in 2006. The Company has funded $10 million anticipated contributions in 2004.

	Target Allocation	Percentage of Plan Assets at December 31,
		2003	2002
Asset allocation
U.S. stocks	40%-60%	40%	43%
International stocks	0%-30%	12%	14%
U.S. fixed income securities	20%-50%	29%	29%
U.S. cash and cash equivalents	0%-10%	19%	14%
Total		100%	100%

The primary objective of the Plan is to provide retirement income for Plan participants and their beneficiaries in accordance with the terms of the Plan. As such, the key objective in the Plan’s financial management is to promote stability and, to the extent appropriate, growth in funded status. A secondary financial objective is to reduce reliance on contributions as a source of benefit payments. As such, Plan assets are invested to maximize the Plan’s funded ratios over the long-term while managing the downside risk. The strategic asset allocation ranges represent a long-term perspective. Rapid unanticipated market shifts or changes in economic conditions may cause the asset mix to fall outside the policy range. These divergences should be of a relatively short-term nature, unless the circumstances warrant a longer term divergence from the permissible ranges. The Company evaluates and rebalances asset allocations as appropriate and reviews the Plan to make sure that the Plan remains properly funded to protect the benefit security of the participants. As of December 31, 2003, cash and cash equivalents were higher than the target range due to the timing of the contribution and fund allocation at year-end 2003, and to the expected payout in the following year at December 31, 2002.

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 Point Increase		One Percentage Point Decrease
	(In thousands)
Effect on total of service and interest cost components	$	623	$	(475	)
Effect on accumulated post-retirement benefit obligation	$	291	$	(212	)

Savings and Profit Sharing Plans—All full-time, part-time and certain temporary employees of the Company are eligible to participate in The PMI Group, Inc. Savings and Profit-Sharing Plan (“401(k) Plan”). Eligible employees who participate in the 401(k) Plan may receive, within certain limits, matching Company contributions. The Company contributions recognized as expense were $1.3 million for 2003, $3.3 million for 2002 and $2.7 million for 2001. Contract underwriters are covered under The PMI Group, Inc. Alternate 401(k) Plan, under which there are no matching Company contributions. In addition to the 401(k) Plan, the Company has an officers’ deferred compensation plan available to certain employees. The obligation related to the deferred compensation plan is $13.3 million as of December 31, 2003 and is included in other liabilities and accrued expenses.

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NOTE 18.    INCENTIVE PLANS

Equity Incentive Plan—The PMI Group, Inc. 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 grant date and have a three-year vesting period.

The following is a summary of the stock option activity in the Equity Incentive Plan during 2003, 2002 and 2001:

	2003				2002				2001
	Shares Under Option		Weighted Average Exercise Price		Under Option		Weighted Average Exercise Price		Under Option		Weighted Average Exercise Price
Outstanding at beginning of year	5,267,379		$	25.00	5,297,716		$	21.67	4,156,225		$	18.15
Granted	1,322,006			28.47	951,701			35.66	1,545,440			30.35
Exercised	(648,791	)		19.16	(937,890	)		16.62	(318,956	)		16.77
Forfeited	(68,613	)		30.87	(44,148	)		32.05	(84,993	)		25.98
Outstanding at end of year	5,871,981			26.36	5,267,379			25.00	5,297,716			21.67
Exercisable at year-end	3,706,576		$	24.02	2,844,206		$	20.95	2,282,552		$	17.47
Weighted-average fair market value of options granted during the year			$	28.47	—		$	35.65	—		$	30.35
Reserved for future grants	6,713,604				8,040,008			—	8,955,659			—

Employee Stock Purchase Plan—The PMI Group, Inc. Employee Stock Purchase Plan (“ESPP”) allows eligible employees to purchase shares of the Company’s stock at a 15% discount to fair market value as determined by the plan. Under the ESPP, the Company sold 70,493 treasury shares in 2003, 66,635 treasury shares in 2002 and 53,386 treasury shares in 2001. The Company applies APB No. 25 in accounting for the ESPP.

NOTE 19.    DISCONTINUED OPERATIONS

In October 2003, the Company announced that it had reached a definitive agreement to sell APTIC for $115.0 million in cash subject to post-closing adjustments. The transaction is subject to regulatory approvals and other customary closing conditions and is expected to close in the first half of 2004. In accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, the results of operations for APTIC are classified as discontinued operations for the fourth quarter of 2003 with prior periods adjusted for comparability. The Company expects to realize a gain on the transaction in the first or second quarter of 2004, upon receiving regulatory approval.

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THE PMI GROUP, INC. AND SUBSIDIARIES

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The results of operations of APTIC for the years ended December 31 are as follows:

	2003		2002		2001
	(Dollars in thousands)
Total revenues	$	304,231	$	239,993	$	162,528
Losses and loss adjustment expenses		19,943		11,325		5,905
Other underwriting and operating expenses		257,395		208,040		141,929
Income before income taxes from discontinued operations		26,893		20,628		14,694
Income taxes		7,186		7,199		5,294
Income from discontinued operations	$	19,707	$	13,429	$	9,400

The assets and liabilities of APTIC as of December 31 are as follows:

	2003		2002
	(Dollars in thousands)
Assets
Cash and investments	$	101,577	$	68,728
Accounts receivables and other assets		16,285		16,328
Total assets	$	117,862	$	85,056
Liabilities
Reserves for losses and loss adjustment expenses	$	29,145	$	17,271
Accounts payables and other liabilities		15,072		14,951
Total liabilities	$	44,217	$	32,222

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THE PMI GROUP, INC. AND SUBSIDIARIES

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NOTE 20.    BUSINESS SEGMENTS

During the fourth quarter of 2003, the Company changed its reportable segments to reflect current business activities, and the prior years’ information has been reclassified to conform to the change in reportable segments. Transactions between segments are not significant. The following tables present information for reported segment income or loss and segment assets as of and for the periods indicated:

	Year Ended December 31, 2003
	U.S. Mortgage Insurance			International Operations			Financial Guaranty			Other			Consolidated Total
	(Dollars in thousands)
Total revenues	$	711,297		$	135,740		$	6,587		$	38,097		$	891,721
Losses and loss adjustment expenses		(214,684	)		5,596			—			—			(209,088	)
Amortization of deferred policy acquisition costs		(78,877	)		(10,450	)		—			—			(89,327	)
Other underwriting and operating expenses		(72,173	)		(20,322	)		—			(83,198	)		(175,693	)
Interest expense and distribution on preferred securities		(167	)		(5	)		—			(24,319	)		(24,491	)
Income (loss) continuing operations before income taxes		345,396			110,559			6,587			(69,420	)		393,122
Income tax (expense) benefit from continuing operations		(99,903	)		(31,912	)		(1,645	)		14,646			(118,814	)
Income (loss) from continuing operations		245,493			78,647			4,942			(54,774	)		274,308
Income from discontinued operations before income taxes		—			—			—			26,893			26,893
Income taxes from discontinued operations		—			—			—			(7,186	)		(7,186	)
Income from discontinued operations		—			—			—			19,707			19,707
Income (loss) before extraordinary item		245,493			78,647			4,942			(35,067	)		294,015
Extraordinary gain on write off of negative goodwill, net of income taxes of $183		—			—			5,418			—			5,418
Net income (loss)	$	245,493		$	78,647		$	10,360		$	(35,067	)	$	299,433
Total assets	$	2,467,732		$	905,805		$	700,828		$	719,924		$	4,794,289

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THE PMI GROUP, INC. AND SUBSIDIARIES

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	Year Ended December 31, 2002
	U.S. Mortgage Insurance			International Operations			Financial Guaranty			Other			Consolidated Total
	(Dollars in thousands)
Total revenues	$	707,829		$	84,823		$	4,235		$	85,231		$	882,118
Losses and loss adjustment expenses		(149,856	)		(7,586	)					(133	)		(157,575	)
Amortization of deferred policy acquisition costs		(76,525	)		(6,891	)		—			—			(83,416	)
Other underwriting and operating expenses		(56,087	)		(13,169	)		—			(75,621	)		(144,877	)
Lease abandonment and other relocation costs		(9,280	)		—			—			(2,903	)		(12,183	)
Litigation settlement charge		(12,222	)		—			—			—			(12,222	)
Interest expense and distribution on preferred securities		(162	)		(6	)		—			(21,516	)		(21,684	)
Income (loss) from continuing operations before income taxes		403,697			57,171			4,235			(14,942	)		450,161
Income tax (expense) benefit from continuing operations		(122,896	)		(15,974	)		(1,482	)		15,807			(124,545	)
Income from continuing operations		280,801			41,197			2,753			865			325,616
Income from discontinued operations before income taxes		—			—			—			20,628			20,628
Income taxes from discontinued operations		—			—			—			(7,199	)		(7,199	)
Income from discontinued operations		—			—			—			13,429			13,429
Income before cumulative effect of a change in accounting principle		280,801			41,197			2,753			14,294			339,045
Cumulative effect of a change in accounting principle		—			7,172			—			—			7,172
Net income	$	280,801		$	48,369		$	2,753		$	14,294		$	346,217
Total assets	$	2,202,354		$	540,385		$	45,633		$	728,677		$	3,517,049

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Year Ended December 31, 2001
	U.S. Mortgage Insurance			International Operations			Financial Guaranty			Other			Consolidated Total
	(Dollars in thousands)
Total revenues	$	647,901		$	76,361		$	3,622		$	46,551		$	774,435
Losses and loss adjustment expenses		(99,543	)		(9,287	)		—			—			(108,830	)
Amortization of deferred policy acquisition costs		(76,586	)		(5,196	)		—			—			(81,782	)
Other underwriting and operating expenses		(60,605	)		(6,320	)		—			(61,805	)		(128,730	)
Interest expense and distributions on preferred securities		(46	)		(1,533	)		—			(21,242	)		(22,821	)
Income (loss) from continuing operations before income taxes		411,121			54,025			3,622			(36,496	)		432,272
Income tax benefit (expense) from continuing operations		(127,418	)		(13,798	)		(1,268	)		12,829			(129,655	)
Income (loss) from operations		283,703			40,227			2,354			(23,667	)		302,617
Income from discontinued operations before income taxes		—			—			—			14,694			14,694
Income taxes from discontinued operations		—			—			—			(5,294	)		(5,294	)
Income from discontinued operations		—			—			—			9,400			9,400
Income (loss) before extraordinary item		283,703			40,227			2,354			(14,267	)		312,017
Extraordinary loss on extinguishment of debt, net of income tax benefit of $2,588		—			—			—			(4,805	)		(4,805	)
Net income (loss)	$	283,703		$	40,227			2,354			(19,072	)		307,212
Total assets	$	1,997,873		$	415,518		$	42,290		$	534,271		$	2,989,952

Included in the results of International Operations are the results of the Australian, European, and Hong Kong operations. The Company commenced operations in Europe in February 2001. The Company began to report its foreign subsidiaries on the same calendar month as U.S. Operations in 2001, therefore the Australian operating results for 2001 reflected thirteen months of activity. The Australian results for 2001 also include four months of PMI Indemnity Limited’s operations.

NOTE 21.    STATUTORY ACCOUNTING

The Company’s domestic insurance subsidiaries prepare statutory-basis 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.

The National Association of Insurance Commissioners (“NAIC”) revised the NAIC Accounting Practices and Procedures Manual in a process referred to as codification. The revised manual was adopted by the respective states effective January 1, 2001. The Company prepares its statutory financial statements in conformity with accounting practices prescribed or permitted by the State of Arizona. Effective January 1, 2001, the state of Arizona required that state domiciled insurance companies prepare their statutory basis financial statements in accordance with the NAIC Accounting Practices and Procedures Manual—Version effective January 1, 2001 subject to any deviations prescribed or permitted by the Director.

125

THE PMI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accounting changes adopted to conform to the provisions of the NAIC Accounting Practices and Procedures Manual are reported as changes in accounting principles. The cumulative effect of changes in accounting principles is reported as an adjustment to unassigned funds, or surplus, at the end of the period in which the change in accounting principle occurs. The cumulative effect is the difference between the amount of capital and surplus at the beginning of the period and the amount of capital and surplus that would have been reported at that date if the new accounting principles had been applied retroactively for all prior periods. As a result of these changes, the Company reported an increase in statutory-basis unassigned funds of $6.2 million in January 2001.

The statutory net income, statutory surplus and the contingency reserve liability of PMI as of and for the years ended December 31 are as follows:

	2003		2002		2001
	(Dollars in thousands)
Statutory net income	$	248,467	$	353,695	$	318,989
Statutory surplus		519,430		277,559		190,813
Contingency reserve liability		2,042,335		1,915,153		1,709,896

Under the insurance laws of the State of Arizona and several other states, mortgage insurers are required to establish a special contingency reserve from unassigned funds, with annual additions equal to 50% of premiums earned for that year. This reserve is required to be maintained for a period of 120 months to protect against the effects of adverse economic cycles. After 120 months, the reserve is released to unassigned funds. During 2003, $132 million was released to unassigned funds. In the event an insurer’s loss ratio in any calendar year exceeds 35%, however, the insurer may withdraw from its contingency reserves an amount equal to the excess portion of such losses.

The differences between the statutory-basis net income and equity presented above and the consolidated net income and equity presented on a GAAP basis primarily reflects the differences between GAAP and statutory accounting principles.

NOTE 22.    CAPITAL SUPPORT AGREEMENTS

PMI’s claims-paying ratings from certain national rating agencies have been based 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 The PMI Group. In the event any amounts are paid or contributed, which possibility management believes is remote; Allstate would receive subordinated debt or preferred stock of PMI or The PMI Group 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

126

THE PMI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

PMI, or to The PMI Group 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.

In 2001, PMI executed a capital support agreement whereby it agreed to contribute funds, under specified conditions, to maintain CMG’s risk-to-capital at or below 18.0 to 1. PMI’s obligation under the agreement is limited to an aggregate amount of $37.7 million, exclusive of capital contributions made prior to April 10, 2001. A 1999 CMG capital support agreement was superceded by execution of the new agreement. On December 31, 2003, CMG’s risk-to capital ratio was 13.4 to 1.

PMI has entered into capital support agreements with its European and Australian subsidiaries that could require PMI to make additional capital contributions to those subsidiaries in order to maintain their credit ratings. With respect to the European and Australian subsidiaries, the Company guarantees the performance of PMI’s capital support agreements.

As of December 31, 2003, the Company was in compliance with all covenants included in its capital support agreements.

NOTE 23. CONDENSED FINANCIAL STATEMENTS OF SIGNIFICANT UNCONSOLIDATED SUBSIDIARIES

The following condensed financial statement information represents the Company’s proportionate share and has been presented on a combined basis for all equity investee and unconsolidated majority owned subsidiary accounted for under the equity method as of and for the years ended December 31, 2003 and 2002.

	Equity Investees				Unconsolidated Majority Owned Subsidiary
	As of December 31,				As of December 31,
	2003		2002		2003		2002
	(Dollars in thousands)
Condensed Combined Balance Sheet
Assets:
Cash and cash equivalents	$	37,008	$	2,203	$	24,806	$	28,481
Investments and real estate investments		1,398,834		188,468		—		5,733
Accrued investment income		15,914		1,679		—		—
Deferred policy acquisition costs		17,251		11,521		—		—
Servicing assets		—		—		69,538		76,828
Accounts receivable and other assets		73,687		17,844		213,276		171,391
Total assets	$	1,542,694	$	221,715	$	307,620	$	282,433
Liabilities:
Reserves for losses and loss adjustment expenses	$	23,726	$	4,732	$	—		—
Unearned premiums		422,454		21,701		—		—
Notes payable		144,148		30,438		159,199		150,904
Accounts payable and other liabilities		29,929		9,770		68,154		34,301
Total liabilities		620,257		66,641		227,353		185,205
Shareholders’ equity		922,437		155,074		80,267		97,228
Total liabilities and shareholders’ equity	$	1,542,694	$	221,715	$	307,620	$	282,433

127

THE PMI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Year Ended December 31,				Year Ended December 31,
	2003		2002		2003			2002
	(Dollars in thousands)
Condensed Combined Statement of Operations
Gross revenues	$	48,525	$	40,808	$	160,040		$	132,263
Total expenses		19,493		13,373		188,967			95,026
Income (loss) before income taxes and extraordinary item		29,032		27,435		(28,927	)		37,237
Income tax expense (benefit)		6,509		5,596		(11,264	)		14,851
Income (loss) before extraordinary item		22,523		21,839		(17,663	)		22,386
Extraordinary gain on write off of negative goodwill, net of income taxes		5,418		—		—			—
Net income (loss)		27,941		21,839	$	(17,663	)	$	22,386
Preferred stock dividend		264		—		—			—
Net income available to common shareholders	$	27,677	$	21,839	$	(17,663	)	$	22,386

As of December 31, 2003, included in the Company’s retained earnings were approximately $51 million of undistributed equity earnings of existing equity investees with ownership interests of 50% or less.

128

THE PMI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 24.    QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

A summary of selected quarterly results follows:

2003	First		Second		Third		Fourth		Year
	(Dollars in thousands, expect per share data)
Continuing operations:
Revenues	$	229,847	$	224,443	$	204,682	$	232,749	$	891,721
Net income		86,616		66,333		55,422		71,356		279,727
Basic EPS		0.97		0.75		0.62		0.74		3.11
Diluted EPS		0.96		0.74		0.61		0.73		3.07
Discontinued operations:
Revenues	$	63,576	$	74,077	$	83,111	$	80,127	$	300,891
Net income		2,992		3,124		4,710		8,881		19,707
Basic EPS		0.03		0.04		0.05		0.10		0.22
Diluted EPS		0.04		0.03		0.06		0.09		0.22
Total operations:
Net income	$	89,608	$	69,457	$	60,131	$	80,237	$	299,433
Basic EPS		1.01		0.78		0.68		0.86		3.33
Diluted EPS		1.00		0.77		0.67		0.85		3.29
2002	First		Second		Third		Fourth		Year
	(Dollars in thousands, expect per share data)
Continuing operations:
Revenues	$	212,697	$	218,462	$	222,282	$	228,676	$	882,117
Net income		88,985		77,982		85,219		80,602		332,788
Basic EPS		1.00		0.87		0.94		0.89		3.70
Diluted EPS		0.98		0.85		0.92		0.89		3.64
Discontinued operations:
Revenues	$	50,182	$	57,133	$	65,876	$	64,322	$	237,513
Net income		2,506		3,071		4,120		3,731		13,429
Basic EPS		0.03		0.03		0.05		0.04		0.15
Diluted EPS		0.02		0.03		0.05		0.03		0.15
Total operations:
Net income	$	91,492	$	81,053	$	89,340	$	84,332	$	346,217
Basic EPS		1.02		0.90		0.99		0.93		3.85
Diluted EPS		1.00		0.88		0.97		0.92		3.79

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.

129

Report of Independent Auditors

Shareholders and Board of Directors

The PMI Group, Inc.

We have audited the accompanying consolidated balance sheets of The PMI Group, Inc. and subsidiaries (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits 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 audits provide a reasonable basis for our opinion.

In our opinion, the 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, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

As of December 31, 2003, the Company adopted FASB Interpretation Number (FIN) No. 46, Consolidation of Variable Interest Entities, as revised, which required the deconsolidation of its trust subsidiary that issued mandatorily redeemable preferred securities. Also, during the year ended December 31, 2002 the Company changed its method of accounting for goodwill and intangible assets. These matters are further described in Note 3 to the consolidated financial statements.

/s/    Ernst & Young LLP

January 26, 2004

Los Angeles, California

130

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

(a) Evaluation of disclosure controls and procedures.    Based on the evaluation of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) required by Securities Exchange Act Rules 13a-15(b) or 15d-15(b), our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

(b) Changes in internal controls.    There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

131

PART III

Item 10. Directors and Executive Officers of the Registrant

The information concerning The PMI Group’s directors, including audit committee financial experts, as required by this Item is incorporated by reference from The PMI Group’s Proxy Statement for its 2004 Annual Meeting of Stockholders under the captions “Nominees For Director of The PMI Group,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Further Information Concerning the Board of Directors.” Information regarding Executive Officers of The PMI Group is included in a separate item captioned “Executive Officers of Registrant” in Part I of this report.

The PMI Group has adopted a code of ethics that applies to The PMI Group’s principal executive officer, principal financial officer, and principal accounting officer and controller. The code of ethics is available on The PMI Group’s website address at http://www.pmigroup.com. The PMI Group intends to disclose any amendment to, or waiver from, a provision of the code of ethics by posting such information on its website.

Certain other documents relating to The PMI Group’s corporate governance, including the Code of Business and Ethics, which is applicable to The PMI Group’s directors, officers and employees, the Board’s Guidelines on Significant Corporate Governance Issues, and the charters of the Audit Committee, Compensation Committee and Governance and Nominating Committee of The PMI Group Board of Directors, are available on The PMI Group’s website address at http://www.pmigroup.com.

Item 11. Executive Compensation

The information required by this Item is incorporated by reference from The PMI Group’s Proxy Statement for its 2004 Annual Meeting of Stockholders 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 and Related Stockholder Matters

The information required by this Item is incorporated by reference from The PMI Group’s Proxy Statement for its 2004 Annual Meeting of Stockholders under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

Item 13. Certain Relationships and Related Transactions

The information required by this Item is incorporated by reference from The PMI Group’s Proxy Statement for its 2004 Annual Meeting of Stockholders under the caption “Certain Relationships and Related Transactions.”

Item 14. Principal Accountant Fees and Services

The information required by this Item is incorporated by reference from The PMI Group’s Proxy Statement for its 2004 Annual Meeting of Stockholders under the caption “Item 2: Ratification of Appointment of Independent Auditors.”

132

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)	1.	Financial Statements:    The following financial statements are included in Item 8.
		Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001
		Consolidated Balance Sheets as of December 31, 2003 and 2002
		Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2003, 2002 and 2001
		Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001
		Notes to Consolidated Financial Statements
		Report of Independent Auditors
	2.	Financial Statement Schedules:    The financial statement schedules listed below immediately precede the Index to Exhibits and are filed as part of this 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.
		Schedule II – Condensed financial information of registrant
		Schedule III – Supplementary insurance information
		Schedule IV – Reinsurance
	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:

(i)  On January 20, 2004, we filed with the SEC a report on Form 8-K relating to the completion of our investor group’s acquisition of Financial Guaranty Insurance Company and FGIC Corporation.

(ii)  On January 27, 2004, we furnished the SEC a report on Form 8-K relating to our consolidated financial results for the year ended 2003.

(iii)  On January 28, 2004, we furnished the SEC, pursuant to Regulation FD, a report on Form 8-K relating to our revised guidance for 2004.

133

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 Walnut Creek, State of California, on the 12th day of March, 2004.

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
/S/    W. ROGER HAUGHTON       W. Roger Haughton	Chairman of the Board and Chief Executive Officer	March 12, 2004
/S/    DONALD P. LOFE, JR.         Donald P. Lofe, Jr.	Executive Vice President, Chief Financial Officer and Assistant Secretary (Principal Financial Officer)	March 12, 2004
/S/    BRIAN P. SHEA       Brian P. Shea	Vice President, Controller and Assistant Secretary (Controller and Principal Accounting Officer)	March 12, 2004
/S/    L. STEPHEN SMITH         L. Stephen Smith	Director, President and Chief Operating Officer	March 12, 2004
/S/    MARIANN BYERWALTER         Mariann Byerwalter	Director	March 12, 2004
/S/    JAMES C. CASTLE         James C. Castle	Director	March 12, 2004
/S/    CARMINE GUERRO         Carmine Guerro	Director	March 12, 2004
/S/    WAYNE E. HEDIEN       Wayne E. Hedien	Director	March 12, 2004
/S/    LOUIS G. LOWER II       Louis G. Lower II	Director	March 12, 2004
/S/    RAYMOND L. OCAMPO JR.         Raymond L. Ocampo Jr.	Director	March 12, 2004

134

Name	Title
/S/    JOHN D. ROACH         John D. Roach	Director	March 12, 2004
/S/    KENNETH T. ROSEN         Dr. Kenneth T. Rosen	Director	March 12, 2004
/S/    STEVEN L. SCHEID         Steven L. Scheid	Director	March 12, 2004
/S/    RICHARD L. THOMAS         Richard L. Thomas	Director	March 12, 2004
/S/    MARY LEE WIDENER         Mary Lee Widener	Director	March 12, 2004
/S/    RONALD H. ZECH         Ronald H. Zech	Director	March 12, 2004

135

THE PMI GROUP, INC.

SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED BALANCE SHEET

PARENT COMPANY ONLY

December 31, 2003 and 2002

	2003			2002
	(Dollars in thousands)
Assets
Investments—available-for-sale, at fair value:
Fixed income securities	$	211,234		$	287,828
Equity securities		—			46
Cash and cash equivalents		96,683			68,607
Investment in subsidiaries and unconsolidated subsidiaries at equity in net assets		3,304,680			2,319,256
Other assets		65,939			21,852
Total Assets	$	3,678,536		$	2,697,589
Liabilities
Long-term debt	$	819,543		$	474,543
Other liabilities		74,964			29,213
Total liabilities		894,507			503,756
Shareholders’ equity
Common stock—$.01 par value; 250,000,000 shares authorized, 111,336,954 and 105,587,554 shares issued; 96,161,721 and 89,943,406 shares outstanding		1,114			1,056
Additional paid-in capital		441,508			267,234
Treasury stock, at cost (16,175,233 and 15,644,148 shares)		(344,195	)		(342,093	)
Retained earnings		2,437,576			2,149,877
Accumulated other comprehensive income, net of deferred taxes		248,026			117,759
Total shareholders’ equity		2,784,029			2,193,833
Total liabilities and shareholders’ equity	$	3,678,536		$	2,697,589

See accompanying supplementary notes to Parent company condensed financial statements.

S-1

THE PMI GROUP, INC.

SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF OPERATIONS

PARENT COMPANY ONLY

Years Ended December 31, 2003, 2002 and 2001

	2003			2002		2001
	(Dollars in thousands)
Revenues
Equity in undistributed net income of subsidiaries	$	216,895		$	261,165	$	277,611
Subsidiary dividends		108,400			102,500		52,500
Investment income		14,127			19,671		14,328
Net realized investment gains (losses)		(1,757	)		12		(141	)
Total revenues		337,665			383,348		344,298
Expenses
Underwriting and operating expenses		26,126			21,516		18,037
Lease abandonment and relocation costs		—			2,903		—
Interest expenses		24,576			21,772		21,500
Total expenses		50,702			46,191		39,537
Income before income taxes and extraordinary items		286,963			337,157		304,761
Income tax benefit		7,052			9,060		7,256
Income before extraordinary items		294,015			346,217		312,017
Extraordinary gain on write off of negative goodwill,
net of income taxes of $408		5,418			—		—
Extraordinary loss on early extinguishment of debt,
net of income tax benefit of $2,588		—			—		(4,805	)
Net income	$	299,433		$	346,217	$	307,212

See accompanying supplementary notes to Parent company condensed financial statements

S-2

THE PMI GROUP, INC.

SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

PARENT COMPANY ONLY

Years Ended December 31, 2003, 2002 and 2001

	2003		2002			2001
	(Dollars in thousands)
Net income	$	299,433	$	346,217		$	307,212
Other comprehensive income (loss), net of tax:
Change in unrealized holding gains (losses) on
investments, net of deferred taxes		12,300		45,218			(11,423	)
Reclassification of realized (gains) losses
included in net income, net of tax		1,142		(8	)		92
Change in currency translation gain (loss)		116,825		31,758			(10,379	)
Other comprehensive income (loss), net of tax		130,267		76,968			(21,710	)
Comprehensive income	$	429,700	$	423,185		$	285,502

See accompanying supplementary notes to Parent company condensed financial statements.

S-3

THE PMI GROUP, INC.

SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF CASH FLOWS

PARENT COMPANY ONLY

Years Ended December 31, 2003, 2002 and 2001

	2003			2002			2001
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	299,433		$	346,217		$	307,212
Extraordinary gain from write off of negative goodwill		(5,418	)		—			—
Extraordinary charge from early extinguishment of debt		—			—			4,805
Income before extraordinary items		294,015			346,217			312,017
Adjustments to reconcile net income to net cash used in operating activities:
Net realized investment (gains) and losses		1,757			(12	)		141
Equity in earnings of affiliates		(324,608	)		(363,665	)		(330,111	)
Amortization		3,045			1,068			1,410
Payable to affiliates		5,655			(3,593	)		9,725
Other		(26,278	)		15,643			(6,649	)
Net cash used in operating activities		(46,414	)		(4,342	)		(13,467	)
Cash flows from investing activities:
Proceeds from sales of fixed income securities		208,508			212,624			44,205
Proceeds from sales of equity securities		29			—			4,819
Proceeds from sale of investments in affiliates		6,500			—			—
Investment purchases:
Fixed income securities		(134,570	)		(158,721	)		(309,667	)
Investments in unconsolidated subsidiaries		(643,109	)		(72,326	)		(78,445	)
Dividends from subsidiaries (Note B)		108,400			102,500			52,500
Net cash (used in) provided by continuing operations		(454,242	)		84,077			(286,588	)
Cash flows from financing activities:
Net proceeds from issuance of long-term debt		334,650			—			—
Net proceeds from issuance of senior convertible debentures		—			—			351,900
Net proceeds from issuance of common stock		207,918			—			—
Proceeds from issuance of treasury stock		17,617			18,946			9,099
Purchases of treasury stock		(19,719	)		(26,807	)		—
Dividends paid to shareholders		(11,734	)		(8,179	)		(7,124	)
Extinguishment of debt and redeemable securities		—			—			(95,943	)
Net cash provided by (used in) financing activities		528,732			(16,040	)		257,932
Net increase (decrease) in cash		28,076			63,695			(42,123	)
Cash at beginning of year		68,607			4,912			47,035
Cash at end of year	$	96,683		$	68,607		$	4,912

See accompanying supplementary notes to Parent company condensed financial statements.

S-4

THE PMI GROUP, INC.

SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT

PARENT COMPANY ONLY

SUPPLEMENTARY NOTES

Note A

The accompanying Parent Company (“The PMI Group”) financial statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements contained in Item 8.

Note B

During 2003, 2002 and 2001, The PMI Group received $108.4 million, $102.5 million and $52.5 million, respectively, of ordinary and extraordinary dividends.

Note C

Certain prior year amounts have been reclassified to conform to the current year presentation.

S-5

THE PMI GROUP, INC. AND SUBSIDIARIES

SCHEDULE III – SUPPLEMENTARY INSURANCE INFORMATION

As of and for the Years Ended December 31, 2003, 2002 and 2001

Segment	Deferred Acquisition Costs		Reserve for Losses and Loss Adjustment Expenses		Unearned Premiums		Net Premiums Written		Premiums Earned		Investment Income and Equity Earnings			Losses and Loss Adjustment Expenses			Amortization Of Deferred Acquisition Costs		Other Operating Expenses
							(Dollars in thousands)
2003
MI(1)	$	69,656	$	325,262	$	181,854	$	685,053	$	592,814	$	116,658		$	214,684		$	78,877	$	72,173
International(2)		32,418		21,674		287,099		190,869		104,028		31,314			(5,596	)		10,450		20,322
Financial Guaranty		—		—		—		—		—		6,587			—			—		—
Other(3)		—		3		48		79		86		(183	)		—			—		83,198
Total	$	102,074	$	346,939	$	469,001	$	876,001	$	696,928	$	154,376		$	209,088		$	89,327	$	175,693
2002
MI(1)	$	64,380	$	315,718	$	87,064	$	608,992	$	611,112	$	98,958		$	149,856		$	76,525	$	56,087
International(2)		20,830		17,848		145,759		82,524		65,650		14,994			7,586			6,891		13,169
Financial Guaranty		—		—		—		—		—		4,235			—			—		—
Other(3)		—		3		54		91		95		46,619			133			—		75,621
Total	$	85,210	$	333,569	$	232,877	$	691,607	$	676,857	$	164,806		$	157,575		$	83,416	$	144,877
2001
MI(1)	$	64,345	$	289,430	$	87,053	$	536,995	$	550,898	$	100,986		$	99,543		$	76,586	$	60,605
International(2)		13,558		14,383		121,468		63,241		46,284		25,102			9,287			5,196		6,320
Financial Guaranty		—		—		—		—		—		3,622			—			—		—
Other(3)		0		3		59		51		37		18,852			—			—		61,805
Total	$	77,903	$	303,816	$	208,580	$	600,287	$	597,219	$	148,562		$	108,830		$	81,782	$	128,730

(1) Represents U.S. Mortgage Insurance Operations.

(2) Represents International Mortgage Insurance Operations.

(3) Represents ancillary services and parent company investment income.

S-6

THE PMI GROUP, INC. AND SUBSIDIARIES

SCHEDULE IV – REINSURANCE

Years Ended December 31, 2003, 2002 and 2001

Premiums Written	Gross Amount		Assumed From Other Companies		Ceded To Other Companies		Net Amount		Percentage of Amount Assumed to Net
	(Dollars in thousands, except percentages)
2003
Mortgage Guaranty	$	834,725	$	12,364	$	150,161	$	696,928	1.8	%
2002
Mortgage Guaranty	$	776,867	$	1,724	$	101,734	$	676,857	0.3	%
2001
Mortgage Guaranty	$	658,583	$	6,421	$	67,783	$	597,221	1.1	%

S-7

INDEX TO EXHIBITS

Exhibit Number	Description of Exhibits
3.1(b)	Restated Certificate of Incorporation.
3.1a(l)	Certificate of Amendment of Certificate of Incorporation.
3.2(o)	Amended and Restated Bylaws.
4.1(b)	Specimen common stock certificate.
4.2(c)	Indenture, dated as of November 19, 1996, between The PMI Group, Inc. and The Bank of New York, as Trustee, in connection with the sale of $100,000,000 aggregate principal amount of 6 3/4% Notes due November 15, 2006.
4.3(d)	Junior Subordinated Indenture, dated as of February 4, 1997, between The PMI Group, Inc. and The Bank of New York, Inc., as Trustee.
4.4(e)	Rights Agreement (including form of rights certificate) dated as of January 26, 1998, between The PMI Group, Inc. and ChaseMellon Shareholder Services L.L.C.
4.6(g)	Credit Agreement, dated as of February 13, 1996, between The PMI Group, Inc., and Bank of America National Trust and Savings Association.
4.6a(o)	First Amendment to Credit Agreement, dated as of December 16, 1996, between The PMI Group, Inc. and Bank of America National Trust and Savings Association.
4.6b(o)	Second Amendment to Credit Agreement, dated as of April 7, 1998, between The PMI Group, Inc. and Bank of America National Trust and Savings Association.
4.6c(o)	Third Amendment to Credit Agreement, dated as of December 17, 1999, between The PMI Group, Inc. and Bank of America National Trust and Savings Association.
4.6d(o)	Third Amendment to Credit Agreement, dated as of February 12, 2001, between The PMI Group, Inc. and Bank of America, N.A. (formerly known as Bank of America National Trust and Savings Association).
4.6e(o)	Fourth Amendment to Credit Agreement, dated as of March 14, 2001, between The PMI Group, Inc. and Bank of America, N.A. (formerly known as Bank of America National Trust and Savings Association).
4.6f(o)	Fifth Amendment to Credit Agreement, dated as of December 31, 2001, between The PMI Group, Inc. and Bank of America, N.A. (formerly known as Bank of America National Trust and Savings Association).
4.6g(o)	Sixth Amendment to Credit Agreement, dated as of December 30, 2002, between The PMI Group, Inc. and Bank of America, N.A.
4.7(k)	Indenture dated as of July 16, 2001 between The PMI Group, Inc. and The Bank of New York, as Trustee.
4.8(k)	Resale Registration Rights Agreement, dated as of July 16, 2001, among The PMI Group, Inc., Bank of America Securities LLC and Lehman Brothers Inc.
10.1(f)*	The PMI Group, Inc. Bonus Incentive Plan, effective as of February 18, 1999.
10.2(l)*	The PMI Group, Inc. Amended and Restated Equity Incentive Plan, effective as of June 1, 2000.
10.2a(l)*	Amendment No. 1 to The PMI Group, Inc. Amended and Restated Equity Incentive Plan.
10.2b(o)*	Amendment No. 2 to The PMI Group, Inc. Amended and Restated Equity Incentive Plan.
10.2c(n)*	Amendment No. 3 to The PMI Group, Inc. Amended and Restated Equity Incentive Plan.
10.3(i)*	The PMI Group, Inc. Stock Plan for Non-Employee Directors (amended and restated as of August 16, 1999).
10.3a(j)*	Amendment No. 1 to The PMI Group, Inc. Stock Plan for Non-Employee Directors.

Exhibit Number	Description of Exhibits
10.3b(m)*	Amendment No. 2 to The PMI Group, Inc. Stock Plan for Non-Employee Directors.
10.4(o)*	The PMI Group, Inc. Retirement Plan (July 30, 2002 Restatement).
10.5(h)	The PMI Group, Inc. Directors’ Deferred Compensation Plan (amended and restated as of July 21, 1999).
10.6(a)	Form of 1984 Master Policy of PMI Mortgage Insurance Co.
10.7(a)	Form of 1994 Master Policy of PMI Mortgage Insurance Co.
10.8	Amended CMG Shareholders Agreement, dated as of June 1, 2003, between CUNA Mutual Investment Corporation and PMI Mortgage Insurance Co.
10.9(b)	Runoff Support Agreement, dated October 28, 1994, between Allstate Insurance Company, The PMI Group, Inc. and PMI Mortgage Insurance Co.
10.10(b)	Form of Tax Sharing Agreement among The PMI Group, Inc., The PMI Group, Inc.’s subsidiaries, The Allstate Corporation, Allstate Insurance Company and Sears, Roebuck and Co.
10.11(a)	Mortgage Insurance Variable Quota Share Reinsurance Treaty effective January 1, 1991 issued to PMI Mortgage Insurance Co. by Hannover Ruckversicherungs-Aktiengesellschaft (“Hannover”).
10.12a(a)	First Amendment to Mortgage Insurance Variable Quota Share Reinsurance Treaty made as of January 1, 1992 between Hannover and PMI Mortgage Insurance Co.
10.13(g)	The PMI Group, Inc. Supplemental Employee Retirement Plan (amended and restated as of May 20, 1999).
10.14(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.
10.15(q)	Form of Indemnification Agreement between The PMI Group, Inc. and certain of its officers and directors.
10.16(a)	Per Mortgage Excess of Loss Reinsurance Treaty effective January 1, 1994 issued to PMI Mortgage Insurance Co. by Hannover.
10.17(g)	The PMI Group, Inc. Additional Benefit Plan, effective February 18, 1999.
10.18(e)	The Guarantee Agreement, dated February 4, 1997, between The PMI Group, Inc. (as Guarantor) and The Bank of New York (as Trustee).
10.19(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.
10.20(o)	Form of Change of Control Employment Agreement.
10.21(h)	The PMI Group, Inc. Officer Deferred Compensation Plan (amended and restated as of September 16, 1999).
10.22(p)	Master Repurchase Agreement dated as of April 24, 2003 between Banc of America Securities LLC and The PMI Group, Inc.
10.23(q)	First Supplemental Indenture dated as of May 28, 2003, to the Indenture, dated as of July 16, 2001, between The PMI Group, Inc. and The Bank of New York, as trustee.
10.24(q)*	Form of Stock Option Agreement for Employees.
10.25(q)*	Form of Stock Option Agreement for Directors.
10.26(q)*	Form of Restricted Stock Agreement.

Exhibit Number	Description of Exhibits
10.27(r)	Stockholders’ Agreement, dated as of August 3, 2003, among Falcons Acquisition Corp., The PMI Group, Inc., Blackstone Capital Partners IV L.P., Blackstone Capital Partners IV-A L.P. and Blackstone Family Investment Partnership IV-A L.P., Cypress Merchant Banking Partners II L.P., Cypress Merchant Banking II C.V., Cypress Side-by-Side LLC, 55th Street Partners II L.P., CIVC/FGIC Investment Company LLC, CIVC Partners Fund III, L.P., CIVC Partners Fund IIIA, L.P., and the management investors listed therein and any other management investors who subsequently become a party to the agreement.
10.28(r)	Equity Commitment Letter, dated as of August 3, 2003, signed by The PMI Group, Inc, Falcons Acquisition Corp., FGIC Holdings, Inc. and General Electric Capital Corporation.
10.29	Purchase Contract Agreement, dated as of November 3, 2004, between The PMI Group, Inc. and The Bank of New York, as purchase contract agent.
10.30	Indenture, dated as of November 3, 2004, between The PMI Group, Inc. and The Bank of New York, as trustee.
10.31	Supplemental Indenture No. 1, dated as of November 3, 2004, between The PMI Group, Inc. and The Bank of New York, as trustee.
10.32	Pledge Agreement, dated as of November 3, 2004, among The PMI Group, Inc., The Bank of New York, as collateral agent, custodial agent and securities intermediary, and The Bank of New York, as purchase contract agent and attorney-in-fact.
10.33	Remarketing Agreement, dated as of November 3, 2003, among The PMI Group, Inc., Banc of America Securities LLC and The Bank of New York, as purchase contract agent and attorney-in-fact.
10.34(s)	Form of Corporate Unit.
10.35(s)	Form of Treasury Unit.
10.36(t)	Form of Note.
10.37*	Form of Performance Share Agreement.
11.1	Statement re: computation of net income per share.
12.1	Statement re: computation of ratio of profit to fixed charges.
21.1	Subsidiaries of the Registrant.
23.1	Independent Auditors’ Consent (Ernst & Young LLP).
31.1	Certification of Chief Executive Officer.
31.2	Certification of Chief Financial Officer.
32.1	Certification of Chief Executive Officer.
32.2	Certification of Chief Financial Officer.

(a) Incorporated by reference to the registrant’s Registration Statement on Form S-1 (No. 33-88542), as amended.

(b) Incorporated by reference to Amendment No. 1 to Form S-1, filed with the SEC on March 2, 1995.

(c) Incorporated by reference to the registrant’s current report on Form 8-K, filed with the SEC on November 27, 1996 (File No. 001-13664).

(d) Incorporated by reference to the registrant’s annual report on Form 10-K for the year ended December 31, 1996 (File No. 001-13664).

(e) Incorporated by reference to the registrant’s Form 8-A12B, filed with the SEC on February 2, 1998 (File No. 001-13664).

(f) Incorporated by reference to the registrant’s annual report on Form 10-K for the year ended December 31, 1998 (File No. 001-13664).

(g) Incorporated by reference to the registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 1999 (File No. 001-13664).

(h) Incorporated by reference to the registrant’s Form S-8 Registration Statement (No. 333-32190), filed with the SEC on March 10, 2000.

(i) Incorporated by reference to the registrant’s annual report on Form 10-K for the year ended December 31, 1999 (File No. 001-13664).

(j) Incorporated by reference to the registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2000 (File No. 001-13664).

(k) Incorporated by reference to the registrant’s current report on Form 8-K, filed with the SEC on July 18, 2001 (File No. 001-13664).

(l) Incorporated by reference to the registrant’s Registration Statement on Form S-8 (No. 333-63122), as amended.

(m) Incorporated by reference to the registrant’s Post-Effective Amendment No. 1 to Registration Statement on Form S-8 (No. 33-99378).

(n) Incorporated by reference to the registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2002 (File No. 001-13664).

(o) Incorporated by reference to the registrant’s annual report on Form 10-K for the year ended December 31, 2002 (File No. 001-13664).

(p) Incorporated by reference to the registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2003 (File No. 001-13664).

(q) Incorporated by reference to the registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2003 (File No. 001-13664).

(r) Incorporated by reference to the registrant’s current report on Form 8-K, filed with the SEC on August 6, 2003 (File No. 001-13664).

(s) Included in Exhibit 10.29.

(t) Included in Exhibit 10.31.

* Compensatory or benefit plan in which certain executive officers or directors of The PMI Group, Inc. or its subsidiaries are eligible to participate.

EX-10.8

EXHIBIT 10.8

RESTATED CMG SHAREHOLDERS AGREEMENT

BY

CUNA MUTUAL

INVESTMENT CORPORATION

AND

PMI MORTGAGE INSURANCE CO.

TABLE OF CONTENTS

ARTICLE I.	General Provisions	1
1.1	Purpose	1
1.2	Performance of Functions	2
1.3	Compliance with Regulations	2
ARTICLE II.	Definitions and Construction	2
2.1	Definitions	2
2.2	Construction	3
ARTICLE III.	Term	3
3.1	Term	3
ARTICLE IV.	Strategic Alliance	3
4.1	Strategic Alliance	3
4.2	Corporate Matters	3
4.3	Premium Rates	6
4.4	Business Plans	6
4.5	Exclusivity	6
4.6	Restated CMIC Services Agreement	8
4.7	Restated PMI Services Agreement	8
4.8	Name Change	8
4.9	Technology	8
4.10	Restriction on Sale	14
4.11	Use of Names	14
4.12	Access to Records	15
4.13	Trademarks and Advertising	15
ARTICLE V.	Put and Call Options	15
5.1	Put and Call Options	15
5.2	Exercise of Options	16
5.3	Performance Standards	17
5.4	Breach; Fraud	17
5.5	Additional Exercise Rights of CMIC	18
5.6	Additional Exercise Rights of PMI	18
5.7	Price	19

ARTICLE VI.	Confidentiality	21
6.1	Confidentiality	21
ARTICLE VII.	Dispute Resolution	23
7.1	Dispute Resolution	23
ARTICLE VIII.	Miscellaneous	23
8.1	Delays and Waivers	23
8.2	Notices	24
8.3	Entire Agreement	24
8.4	Parties Bound	24
8.5	Governing Law	25
8.6	Covenant to Further Assurances	25
8.7	Headings; References	25
8.8	Severability	25
8.9	Attorneys Fees	25
8.10	Remedies	25
8.11	No Violation of Contract	25
8.12	No Authority to Bind	25
8.13	Compliance with Law	25
8.14	Consent	26
8.15	Legends	26

EXHIBIT A RESTATED CMIC SERVICES AGREEMENT	A-1
EXHIBIT B RESTATED PMI SERVICES AGREEMENT	B-1
EXHIBIT C RESTATED TRADE NAME LICENSE AGREEMENT	C-1
EXHIBIT D LIST OF PMI TECHNOLOGY	D-1
EXHIBIT E TECHNOLOGY ESCROW AGREEMENT	E-1
EXHIBIT F RESTATED SOFTWARE LICENSE AGREEMENTS	F-1
EXHIBIT G FORM OF NOTE	G-1

EXHIBIT H FORM OF STOCK PLEDGE AGREEMENT	H-1
EXHIBIT I PERFORMANCE STANDARDS	I-1

RESTATED CMG SHAREHOLDERS AGREEMENT

THIS AGREEMENT is made effective as of the 1^st day of June, 2003 (the “Effective Date”), by and between CUNA Mutual Investment Corporation (“CMIC”) and PMI Mortgage Insurance Co. (“PMI”).

The parties acknowledge that this Agreement is based on the following:

A. CMIC is a Wisconsin corporation and is a wholly-owned subsidiary of CUNA Mutual Insurance Society (“CUNA Mutual”), a Wisconsin mutual insurance company.

B. CUNA Mutual and its affiliates provide insurance and financial products and services to credit unions, credit union service organizations, other credit union entities and credit union members in all fifty states and elsewhere throughout the world.

C. PMI is an Arizona stock insurance company and it is licensed to engage in mortgage guaranty insurance business in all fifty states, and Puerto Rico.

D. CMIC owns 50% and PMI owns 50% of the issued and outstanding shares of stock of CMG Mortgage Insurance Company (“CMG”).

E. CUNA Mutual and PMI originally entered into a strategic alliance using CMG to make mortgage guaranty insurance available to credit unions (the “Mortgage Insurance Program”) in the manner specified in the CMG Shareholders Agreement dated September 8, 1994 (the “Original Agreement”).

F. In order to accomplish the offering of the Mortgage Insurance Program to credit unions and their members, CMIC and PMI entered into an exclusive relationship on the terms and conditions set forth in the Original Agreement. The parties now wish to restate the Original Agreement as set forth in this Agreement in order to reflect the current operations of CMG.

NOW, THEREFORE, for good and valuable consideration, including the mutual covenants contained in this Agreement, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows:

ARTICLE I. General Provisions

1.1 Purpose.

(a) General. The principal purpose of this Agreement is to set forth the arrangement under which CMIC and PMI will operate CMG and make mortgage guaranty insurance available to credit unions for first mortgage loans to their members.

1

(b) Commitments by Parties. By entering into this Agreement, each party commits itself to providing the financial and human resources, investment, operational activities, and facilities needed to develop and implement the Mortgage Insurance Program in accordance with this Agreement.

1.2 Performance of Functions. Each party may have another entity within its respective Group of Companies perform some or all of the obligations imposed upon it by this Agreement. Provided, however, that any such entity shall agree to be bound by the terms of Sections 4.5(b) and (c) (restrictions on activities), 4.11 (use of names), 4.12 (access to records), 4.13 (trademarks and advertising) and 6.1 (confidentiality), and each party to this Agreement shall continue to be obligated with respect to any obligation performed by another member of its Group of Companies.

1.3 Compliance with Regulations. CMIC and PMI each recognizes that an insurance company is subject to regulation by each state in which it does business and that nothing in this Agreement will be interpreted, construed or enforced in a manner that would result in a violation of the rules and regulations that apply to CMG or members of the CUNA Mutual or PMI Groups of Companies. CMIC and PMI further agree that they shall take all necessary action to ensure that CMG is in compliance and remains in compliance with all applicable law. Nothing set forth in this Section shall affect the rights and obligations of CMIC and PMI with respect to each other as set forth in this Agreement or any other agreements, including without limitation, any agreements with CMG.

ARTICLE II. Definitions and Construction

2.1 Definitions. In addition to the terms defined in the Recitals to this Agreement, the following definitions apply unless the context clearly indicates otherwise:

Business Plans shall mean the Business Plans referred to in Section 4.4.

Credit Union Organization shall mean any credit union or its credit union service organization or other affiliate, any credit union trade association or league (national, state or otherwise) or its service corporations or other affiliate, or any other credit union entity.

CUNA Mutual Group of Companies shall mean any entity that directly or indirectly controls, is under common control with, or is controlled by CUNA Mutual.

2

Management Committee shall mean the Management Committee of CMG, as described in Section 4.2(b).

Mortgage Insurance Program or Program shall mean the jointly managed plan embodied in the Business Plan for the offering of mortgage guaranty insurance through CMG to credit unions for their members.

Original Agreement shall mean the CMG Shareholders Agreement dated September 8, 1994 between CMIC and PMI.

PMI Group of Companies shall mean any entity that directly or indirectly controls, is under common control with, or is controlled by PMI.

2.2 Construction. Unless the context plainly requires otherwise, the plural of words defined in the singular shall mean one or more of the same, the singular of words defined in the plural shall mean one of the same, and all words used in any gender shall extend to and include both genders.

ARTICLE III. Term

3.1 Term. The term of this Agreement shall commence as of the date hereof and shall continue indefinitely until terminated in accordance with the terms of this Agreement.

ARTICLE IV. Strategic Alliance

4.1 Strategic Alliance. This Agreement shall constitute the terms under which the operation of CMG shall be governed and under which the strategic alliance between CMIC and PMI for the operation of the Mortgage Insurance Program shall be conducted.

4.2 Corporate Matters.

(a) Board of Directors; President. The Board of Directors of CMG shall consist often (10) members or such different number as may be agreed upon from time to time by vote of the shareholders. So long as CMIC and PMI each own 50% of CMG’s issued and outstanding stock: (i) each shall have the right to designate the same number of directors and PMI and CMIC shall vote their shares in order to elect the persons so designated, (ii) the chairmanship of the Board of Directors of CMG will rotate annually between CMIC and PMI designees, and (iii) the President shall be a person designated by CMIC. If PMI and CMIC no longer each own 50% of CMG’s issued and outstanding stock, the election of directors and officers shall be by majority vote, except that so long as PMI or CMIC owns at least 26% but less than 50% of CMG’s issued and outstanding stock, the minority shareholder shall have the right to designate one-third of the total number of directors and PMI and CMIC agree to vote their shares in order to elect the persons so designated. If one-third of the total number of directors is not a whole number, the number shall be rounded off to the nearest whole number.

3

(b) Management Committee. Subject to the overriding authority of the Board of Directors, management of the operations of CMG will be by a Management Committee acting in the manner specified in the Bylaws.

(c) Redomestication. If CMIC and PMI agree that CMG should be redomesticated to another state, PMI and CMIC will take all steps necessary to have CMG redomesticated, and all costs thereof shall be borne by CMG.

(d) Additional Capital Contributions. No party shall be entitled to make an additional capital contribution to CMG except in accordance with the terms of this subsection.

The Board of Directors may from time to time by unanimous vote issue a capital call. In addition, a capital call shall be deemed to have been issued when (i) at any time CMG has insufficient assets to pay when due any claim for policy benefits made in the ordinary course of business or any expenditure called for by an annual Business Plan or approved by the Management Committee, and CMG has not been able to remedy the shortfall through short term borrowing, adjustments in the Business Plan or other appropriate means; or (ii) additional capital is required as a condition to the continued purchase of loans insured by CMG by the Federal Home Loan Mortgage Corporation (“Freddie Mac”), the Federal National Mortgage Association (“Fannie Mae”), their successors, or any other entity that in the future is a substantial and significant purchaser of such loans comparable to Freddie Mac or Fannie Mae. All capital calls shall be in the same proportion as the ownership of the stock in CMG.

CMIC and PMI shall be obligated to make a capital contribution in response to any capital call under this subsection, and the contribution shall be made on or before the deadline set by the Board of Directors. In the event of a deemed capital call under subparagraph (i) in the preceding paragraph and in the absence of a different deadline established by the Board of Directors, the capital contribution shall be made within sixty (60) days after any member of the Management Committee gives notice to both parties, unless circumstances require an earlier payment. In the event of a deemed capital call under subparagraph (ii) in the preceding paragraph and in the absence of an earlier deadline established by the Board of Directors, the capital contribution shall be made in a timely manner so that continued purchase of loans insured by CMG is not adversely affected.

Notwithstanding anything to the contrary in this Agreement, neither CMIC nor PMI shall be obligated to make additional capital contributions without its consent, if that contribution, when aggregated with all other contributions made on or after April 10, 2001, exceeds Thirty-Seven Million Six Hundred Fifty Thousand Dollars ($37,650,000), with respect to CMIC or Thirty-Seven Million Six Hundred Fifty Thousand Dollars ($37,650,000) with respect to PMI.

CMIC and PMI may agree between themselves to lend funds to CMG instead of making additional capital contributions in response to a capital call, but in the absence of such an agreement, additional funds shall be advanced in the form of additional capital contributions.

4

Neither party shall be allowed to make a capital contribution in an amount less than the full amount of the capital call, and partial capital contributions shall not be accepted by CMG. If either party fails to make a capital contribution in response to a capital call when due, the non-defaulting party shall be entitled to: (i) pay the capital contribution and receive an appropriate number of shares of stock in CMG; or (ii) if the parties had agreed to respond to the capital call by lending money to CMG, make the loan and receive the appropriate evidence of indebtedness. In addition, the non-defaulting party shall have the right for sixty (60) days after the default to exercise the put or call option that would be available to it under Section 5.4 in the event of a material default, and for this purpose the cure provisions of that Section shall not apply. The non-defaulting party may exercise this right in lieu of or in addition to making the defaulted capital contribution. The remedies granted the non-defaulting party under this paragraph are in lieu of any other remedies it may have under this Agreement or at law or equity.

Any change in ownership as a result of the issuance of shares of stock in CMG to one party and not the other under this subsection shall not affect the terms of this Agreement relating to appointment of members to the Board of Directors or the Management Committee, unless and until either (i) the percentage owned by CMIC equals or exceeds 56%, or (ii) the percentage owned by PMI equals or exceeds 56%. At that time (i) the parties shall take all steps necessary to change the Articles and Bylaws of CMG to remove any provision that requires greater than a majority vote of the shareholders, the Board of Directors, the Management Committee, or any other committee; and (ii) representation on the Board, the Management Committee, and any successor or substitute committees with similar authority shall thereafter be proportionate to ownership of shares of common stock. For this purpose, proportionate representation shall be calculated by multiplying the number of members of the subject group by a percentage equal to the percentage owned by the party owning the highest percentage and rounding the result up to the nearest whole number. The resulting number shall be the number of members of that group appointed by the party owning the highest percentage and the remainder of the members of that group shall be appointed by the other party. If any group has only two members, the number of members shall be increased to three and the same procedure followed.

(e) Capital Contributions Resulting From Guarantee. If a capital or surplus guarantee provided to a state regulatory body (a “Guarantee”) by a party requires the party to make a capital contribution to CMG, a capital call shall be deemed to have been made under Section 4.2(d) for the amount required to be contributed, and the remaining provisions of Section 4.2(d) shall apply. Any such deemed capital call shall be deemed to be due on the date required by the Guarantee. In the event that the one party is required to contribute the full amount of the capital call because of the Guarantee, the other party shall reimburse the first party for its share of the capital call within fifteen (15) days. If the other party fails to timely reimburse the contributing party, then the provisions of Section 4.2(d) shall apply, and the other party will be treated as failing to make a capital contribution in response to a capital call.

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4.3 Premium Rates. Subject to applicable regulatory requirements, CMG shall at all times endeavor to provide the best possible risk-based rates to its customers consistent with the high quality service provided by CMG to its customers. The Management Committee will give consideration to lowering the overall cost for originators of high quality loans. Any such reduction will be subject to any necessary rate filings or other regulatory approvals and will be undertaken only if in compliance with all applicable laws.

4.4 Business Plans. CMIC and PMI shall jointly develop annual long range Business Plans for the operation of the Mortgage Insurance Program, and each Business Plan shall be submitted to the Board of Directors for approval. These Business Plans shall contain the budget and operational plan for CMG and the Mortgage Insurance Program, and they shall establish the objectives of the Program, as measured by service levels, products, as well as long and short term goals, that each party shall endeavor to achieve during the succeeding twelve (12) months. The establishment of the percentage of “new insurance written” to be targeted shall be established in the Business Plans. Upon the approval of the annual Business Plan by the Board of Directors, CMG shall be operated in accordance with such Business Plan except for changes or deviations approved in accordance with this Agreement.

4.5 Exclusivity.

(a) Exclusive Arrangement. Except as provided in subsection (d), CMIC agrees that during the term of this Agreement neither it nor any member of the CUNA Mutual Group of Companies shall offer, sell or write mortgage guaranty insurance covering first mortgages to credit unions or other Credit Union Organizations other than through CMG. However, nothing in this paragraph shall be construed as requiring CUNA Mutual Mortgage Corporation to place insurance issued by CMG on the loans it purchases or originates.

PMI agrees that during the term of this Agreement neither it nor any member of the PMI Group of Companies shall solicit mortgage guaranty insurance covering mortgages to credit unions or other Credit Union Organizations other than through CMG or CMG Mortgage Assurance Company unless approval has been granted by the CMG Management Committee.

(b) Restrictions on Activities of PMI. During the term of this Agreement and for a period of five (5) years after termination (unless the termination is as a result of the material fraud of CMIC or the material breach of this Agreement or the Restated CMIC Services Agreement by CMIC), neither PMI nor any member of the PMI Group of Companies shall, directly or indirectly, seek any relationship with any Credit Union Organization for the purpose of developing, preparing or participating in any manner in offering to provide or providing mortgage guaranty insurance or any insurance or financial product or service marketed to or directed towards Credit Union Organizations or credit union members, or engage in any business, marketing plan, arrangement or program that emphasizes, targets or focuses on efforts to solicit, develop or write any such business for such Credit Union Organizations or credit union members, as such.

It is understood that, in the ordinary course of its business of marketing its products to the general public, PMI is likely to contact a certain number of businesses and members

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of the general public who happen to be Credit Union Organizations or members of credit unions, without emphasizing, targeting or focusing upon them as such, and this Section does not prohibit these contacts or business resulting from these contacts so long as neither results from or is the product of activity otherwise prohibited by this Section.

(c) Restrictions on Activities of CMIC. During the term of this Agreement and for a period of five (5) years after termination (unless the termination is as a result of the material fraud of PMI or the material breach of this Agreement or the Restated PMI Services Agreement by PMI), and except as provided in subsection (d), neither CMIC nor any member of the CUNA Mutual Group of Companies will offer, sell or write mortgage guaranty insurance policies in a manner that is not related to the credit union system. Provided, however, that if CMIC purchases PMI’s shares of stock in CMG pursuant to Article V or otherwise, CMG shall be allowed to continue to pursue the same scope of business in which it is engaged at the time of purchase.

If during the term of this Agreement CMIC or any member of the CUNA Mutual Group of Companies elects to participate in any of the following services within the credit union system, CMIC will notify PMI and the parties will attempt to negotiate a mutually beneficial manner in which to pursue that business: title insurance; credit enhancement and evaluation services for the secondary market; or contract underwriting. This procedure does not apply to any activities of CUNA Mutual Mortgage Corporation.

(d) International Activities. If during the term of this Agreement CMIC or any member of the CUNA Mutual Group of Companies desires to offer, sell or write mortgage guaranty insurance outside of the United States in a manner related to the credit union system, it shall first offer the opportunity to do so to CMG. If the PMI directors act to decline the opportunity, CMIC or the member presenting the proposal shall be entitled to proceed with its program. Any such program shall be restricted to the credit union system except to the extent that it is reasonably necessary for the viability of the program that it be established as an integrated program including financial institutions outside the credit union system.

(e) Application; Survival and Enforcement. The restrictions contained in this Section apply to any of the stated activities, whether performed by the restricted party through any type of ownership (other than ownership of less than 5% of the securities of a publicly held entity), or as a principal, agent, employer, adviser, consultant, partner, or in any individual or representative capacity whatsoever, either for its own benefit or for the benefit of others.

In the event this Agreement is terminated for any reason, the covenants and agreements contained in this Section shall survive for the five (5) year period stated above in the prior subparagraphs in this Section. Each party agrees that a violation on its part of any covenant contained in this Section will cause irreparable damage to the other party, and for that reason each party further agrees that the other party shall be entitled as a matter of right to an injunction from any court of competent jurisdiction, restraining any further violation of such covenants. This right to an injunction shall be cumulative and in addition to whatever other remedies a party may be entitled to, including, specifically, recovery of liquidated, incidental, special or consequential damages.

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Each party expressly acknowledges and agrees that the covenants and agreements applicable to it under this Section shall be construed in such a manner as to be enforceable under applicable laws if a more limited scope is determined by a court of competent jurisdiction to be required.

4.6 Restated CMIC Services Agreement. Subject to any necessary regulatory approvals, CMG will enter into an agreement with CMIC for the performance of certain sales and other services. This agreement shall be in substantially the form attached as Exhibit A (the “Restated CMIC Services Agreement”), and CMIC will be compensated for these services in the manner specified in that agreement.

CMIC will plan, support and direct sales activities for CMG’s products in the credit union system. Access to the credit union market will be controlled by CMIC, and CMIC will perform all sales functions and be responsible for all sales decisions in accordance with the approved Business Plans.

The parties recognize the importance and value to the CUNA Mutual Group of Companies of the credit union market that CMIC is bringing to the Mortgage Insurance Program. In recognition of this, PMI agrees that all contact with credit unions, Credit Union Organizations or their members relating to the Mortgage Insurance Program shall be made by members of the CUNA Mutual Group of Companies or with the prior approval of CMIC.

4.7 Restated PMI Services Agreement. Subject to any necessary regulatory approvals, CMG will enter into an agreement with PMI for the performance of certain services. This agreement shall be in substantially the form attached as Exhibit B (the “Restated PMI Services Agreement”), and PMI will be compensated for these services in the manner specified in that agreement.

4.8 Name Change. The name of CMG has been chosen by CMIC to fit into the structure of the CUNA Mutual Group of Companies and to promote the Group in the marketplace. The use of the name shall be subject to the terms of a Restated Trade Name License Agreement from CUNA Mutual in substantially the form attached as Exhibit C, and all right to use the name shall terminate if CMIC is no longer a shareholder of CMG. The name CMG may not be changed without the prior written consent of PMI.

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4.9 Technology.

(a) PMI Technology.

(1) General. PMI agrees to make the technology of the PMI Group of Companies available to CMG as follows:

(A) Terms and conditions when services performed by PMI.

(i) Underwriting services. In performing underwriting services for CMG pursuant to the PMI Services Agreement under Section 4.7, PMI (or other members of the PMI Group of Companies, as appropriate) will use all technology, software, data bases, documentation and systems (collectively referred to in this Section as the “Underwriting Technology”), and all enhancements to them and replacements for them, that are developed or otherwise obtained by them and used in performing the same or similar functions for themselves or others. This includes, but is not limited to, the pmiAura^sm, pmiTerra^sm, and Quest^sm systems and their mid-range, mainframe or other host system equivalents.

No separate charge shall be made to CMG for the use of the Underwriting Technology while PMI is performing the underwriting services for CMG, and the actual cost incurred in connection therewith shall be included in the charges for the underwriting services themselves in accordance with the Restated PMI Services Agreement.

(ii) All other services. In connection with its performance of all other services for CMG pursuant to the Restated PMI Services Agreement under Section 4.7, PMI (or other members of the PMI Group of Companies, as appropriate) will copy or otherwise make available for its use on behalf of CMG those portions of its existing technology, software, data bases, documentation and systems (collectively referred to in this Section as the “Other Technology”), and all enhancements to them, that are necessary for PMI to meet the performance standards applicable to it under Section 5.3. This includes any such item that is needed in connection with the following functions as described in the Restated PMI Services Agreement: claims processing; actuarial; reinsurance; customer service; and accounting. CMG will pay all of the additional costs (including additional third party license fees) incurred in connection with copying and otherwise making the Other Technology available to be used on behalf of CMG. CMG shall not have any rights in any of this Other Technology except as provided in subsections (a)(l)(B) and (a)(l)(C).

Except as provided in subsection (c), no charge whatsoever shall be made to CMG for the use of any of the Other Technology unless and until this Agreement is terminated and subsection (a)(l)(C) applies.

A complete list of the Other Technology currently used by PMI to perform these services is attached as Exhibit D. Exhibit D shall be reviewed and revised, if necessary by PMI at least once every two (2) years. Except for any required third party approvals listed on Exhibit D, PMI warrants and represents that it currently has the right to use all of the Other Technology in the manner specified in this subsection.

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(B) Terms and conditions when other services performed by CMG during the term of this Agreement.

If at any time during the term of this Agreement CMG, rather than PMI, performs any of the other services referred to in subsection (a)(1)(A)(ii), PMI (or other members of the PMI Group of Companies, as appropriate) will license and make available to CMG all of the then current Other Technology referred to in subsection (a)(1)(A)(ii) that was immediately prior thereto being used by PMI in connection with the performance of such services. To the extent that any Other Technology is at that time resident on a PMI hardware system, PMI shall permit CMG to interface with such system to the extent necessary for CMG to utilize that Other Technology as provided herein. The license agreement will provide that CMG will have the right to receive from PMI all corrections, updates and modifications used by or made available to PMI; provided that CMG shall be responsible for all costs of implementing any such corrections, updates or modifications, including costs incurred in making necessary program changes. Nothing in this Agreement or any license agreement shall be construed to require PMI to continue to use any of the Other Technology or to keep it resident upon its system; provided that if any item of Other Technology PMI wishes to discontinue is at the time of discontinuance resident on a PMI hardware system and accessed by CMG on that system, PMI may not remove that item without first giving CMG a reasonable opportunity to transfer it at CMG’s cost to a system accessible to CMG. Any license under this paragraph shall be granted according to terms and conditions that will enable CMG to use the licensed materials in all manners that (i) PMI had been using them to provide services to CMG, and (ii) they would have been available to be used by PMI if PMI had continued to provide such services to CMG in connection with the Mortgage Insurance Program.

Except as provided in subsection (c), no charge whatsoever shall be made to CMG for the use of the Other Technology unless and until this Agreement is terminated and subsection (a)(1)(C) applies.

Nothing in this subsection (a)(1)(B) shall affect in any manner the right of the CMG Board of Directors to determine in its sole discretion whether to have someone other than PMI perform any of the other services referred to in subsection (a)(1)(A)(ii).

(C) Terms and conditions after termination of this Agreement.

(i) Application. This subsection (a)(1)(C) shall apply if either the put or call option referred to in Article V is exercised or if this Agreement terminates for any reason. In that event, commencing as of the “license effective date,” PMI (or other members of the PMI Group of Companies, as appropriate) will license and make the Underwriting and Other Technology available to CMG in accordance with the terms of this subsection (a)(1)(C). For purposes of this subsection, the “license effective date” shall be the date of sale or, if CMIC has exercised its call option in response to a breach or fraud by PMI under Section 5.4 or the failure of PMI to meet its performance standards under Section 5.3, the date notice of exercise is given. The license agreement shall terminate in the event that CMIC defaults in its purchase obligations under Article V or under any promissory note delivered in connection therewith.

(ii) Underwriting and Other technology. Effective as of the license effective date, PMI (or other members of the PMI Group of Companies, as

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appropriate) will license and make available to CMG all of the Underwriting Technology and Other Technology used by CMG or a member of the PMI Group of Companies in providing underwriting or other services, respectively, for CMG immediately prior to the license effective date. All such Technology shall be subject to one or more license agreements as provided in this subsection and such license agreement shall supersede any prior license under subsection (a)(1)(B).

The fees for any such licenses shall be the fair value of the Underwriting Technology, Other Technology and services being provided. The license agreements shall provide that CMG will receive all corrections, updates, modifications and enhancements used by or made available to PMI in connection with the Underwriting Technology. With respect to the Other Technology, the license agreements shall provide that CMG will have the right to receive all corrections, updates and modifications used by or made available to PMI; provided that CMG shall be responsible for all costs of implementing such corrections, updates or modifications, including costs incurred in making necessary program changes. The licenses shall be granted according to terms and conditions that will enable CMG to use the licensed materials in all manners that (i) had been used to provide services to CMG prior to the license effective date, and (ii) they would have been available to be used by PMI if PMI had continued to provide such services to CMG in connection with the Mortgage Insurance Program.

Each item of Underwriting Technology and Other Technology shall be licensed under a separate license agreement for such period of time up to three (3) years as may be designated by CMIC and may be continued thereafter upon the mutual agreement of the parties. If at any time during the initial three-year period PMI ceases to use any item of Underwriting Technology or Other Technology in connection with its own business, it may terminate the license agreement as to that item. Provided, however, that upon any termination of a license agreement, whether before or after the initial three-year period, PMI shall, at no cost other than reasonable charges for copying and transmittal, deliver to CMG the source code for the underlying software, all documentation, and a royalty free perpetual license to use such item in connection with any mortgage guaranty insurance program it pursues as a successor to the Mortgage Insurance Program operated under this Agreement.

If as of the license effective date CMG is using the Underwriting Technology on a PC based system, the license agreement shall in addition provide that PMI will fully support and maintain that system at the fair value of such service so long as it is providing such support and maintenance to others.

(D) Escrow Agreement. PMI has placed the source code and other documentation for the Underwriting Technology and Other Technology referred to in subsections (A)(i) and (ii) in escrow with a third party pursuant to the terms of a mutually agreed upon escrow agreement. The escrowed items shall be updated on a semi-annual basis and immediately after a major modification to the escrowed materials. CMG shall pay all of the costs and fees of the escrow agent. The escrow agreement shall be in substantially the form attached as Exhibit E.

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(2) Mortgage Origination and Related Technology. In addition to the rights granted under subsection (a)(1), CMG will have the right to license present or future technology, software, data bases, documentation and systems (collectively referred to in this Section as the “Mortgage Origination Technology”) owned or used by PMI or other members of the PMI Group of Companies in mortgage origination or related functions. This right is subject to commercially reasonable efforts by PMI to obtain any necessary third party consents. This right shall only apply to the extent that PMI has the right to grant such a license and only to the extent that it is at that time licensing such Mortgage Origination Technology to other third parties. The rights granted by this subsection shall only apply to Mortgage Origination Technology that is owned or used by PMI during the term of this Agreement and shall only apply if the license is granted during the term of this Agreement.

(3) Licenses to Credit Unions. If the Management Committee decides to license any Underwriting Technology, Other Technology, or Mortgage Origination Technology referred to in subsections (a)(1) or (a)(2) to Credit Union Organizations, it shall be accomplished through a license from the appropriate member of the PMI Group of Companies to a member of the CUNA Mutual Group of Companies designated by CMIC, which in turn will enter into sublicenses to the Credit Union Organizations. This right as to Mortgage Origination Technology referred to in subsection (a)(2) is subject to commercially reasonable efforts by PMI to obtain any necessary third party consents. The terms of the license and sublicense agreements shall be mutually agreed upon by CMIC and PMI.

(b) CUNA Mutual Technology.

(1) General. CMIC agrees to make the technology of the CUNA Mutual Group of Companies available to CMG as follows:

(A) In performing services for CMG pursuant to the Restated CMIC Services Agreement under Section 4.6, CMIC (or other members of the CUNA Mutual Group of Companies, as appropriate) will use all technology, software, data bases, documentation and systems (collectively referred to in this Section as the “CMIC Technology”), and all enhancements and replacements developed or otherwise obtained by them and used in performing the same or similar functions for any member of the CUNA Mutual Group of Companies or others.

(c) CMG Technology. It is anticipated that CMG may either develop or pay a third party to develop technology, software, data bases, documentation and systems (collectively referred to in this Section as the “CMG Technology”) to be used to perform the other services referred to in subsection (a)(1)(A)(ii). The parties understand that many issues, such as itemization of desired functions, design specifications, vendor selection, cost factors and timetables will have to be addressed and resolved by management of CMG to determine whether to authorize the development of the CMG Technology.

CMG Technology developed under this subsection shall be designed so that it will be able to interface with the systems used by CMIC, if feasible.

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If the CMG Technology necessary to perform all of the other services under subsection (a)(1)(A)(ii) is not developed, and all or part of the system provided by PMI under that subsection continues to be used in whole or in part, either by PMI or CMG, PMI shall be compensated for the fair value of such use.

PMI and CMIC will cause CMG to make any CMG Technology (including the source code) and all enhancements developed during the term of this Agreement available to both PMI and CMIC through license agreements for no fee during the term of this Agreement, and thereafter will continue such licenses, if requested, for no fee with respect to those items that PMI and CMIC, respectively, were entitled to use on the date of termination of this Agreement. The license agreement will provide that during the term of this Agreement, PMI will have the right to receive all corrections, updates and modifications used by or made available to CMG with respect to the CMG Technology; provided that PMI shall be responsible for all costs of implementing such corrections, updates or modifications, including costs incurred in making necessary program changes. After the term of this Agreement, CMG shall have no obligation to provide PMI with any corrections, updates or modifications or any maintenance or support whatsoever with respect to the CMG Technology.

(d) Terms and Conditions. Except as otherwise expressly specified above, the terms and conditions of the licenses and arrangements referred to in this Section shall be set forth on the form of agreement attached as Exhibit F, and the charges therefor shall be at the fair value for such items. All licenses from PMI will provide that PMI may cancel the license if (i) CMG makes the licensed technology available to a competitor of PMI; or (ii) a competitor of PMI through a joint venture or service arrangement with CMG is in a position to gain financially from the use by CMG of the technology or otherwise gain access to the technology; or (iii) if CMG uses the technology other than in connection with the Mortgage Insurance Program or any mortgage guaranty insurance program it pursues as a successor to the Mortgage Insurance Program operated under this Agreement.

For purposes of this Agreement, “fair value” shall mean the amount then charged to third parties for the services provided or the right to use such technology. If there are no third party arrangements and the parties are not able to agree upon fair value, the matter shall be resolved by commercial arbitration in accordance with the rules of the American Arbitration Association. Any such arbitration shall be final and binding, with each party bearing its own costs and the costs of the arbitrators being borne equally.

Each party warrants and represents that subject to obtaining any third party consents identified above, it has and will continue to have the right to use its currently existing technology in the manner specified above and to grant the licenses and otherwise enter into the agreements called for by this Section with respect to that technology.

(e) Survival. The warranties, representations, covenants and agreements contained in this Section shall survive any termination of this Agreement.

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4.10 Restriction on Sale. Neither party may sell, transfer or otherwise dispose of any of its shares of stock in CMG or any interest therein without the prior written consent of the other party. Neither party may pledge or assign its stock in CMG as collateral for a loan or otherwise without the prior written consent of the other party. Any such purported action shall be void. Upon seeking the consent to a transaction subject to this Section, the party seeking consent shall provide such information regarding the proposed transferee, the terms of the transaction and such other matters as may reasonably be requested by the other party. The granting of any such consent may be conditioned upon the transferee expressly agreeing to be bound by the terms of this Agreement. This Section shall not apply to an assignment by a party to a member of its respective Group of Companies.

4.11 Use of Names. All lists of Credit Union Organizations and credit union members (including the identity of any person listed thereon) used by CMIC or CMG in the solicitation of customers and potential customers (collectively “Customer Information”) for CMG shall remain the exclusive property of CMIC, and neither CMG nor PMI shall have any right to use those lists except as permitted in writing by CMIC.

All lists of individuals inquiring about coverage, policyholders and certificate holders obtained by CMG (which lists and personal information contained therein shall also be considered Customer Information for purposes of the remainder of this Section 4.11 only) shall be the property of CMG. Subject to any regulatory restrictions and the terms of Section 4.5(a) and (c), CMIC and other members of the CUNA Mutual Group may use those lists and the identities of the individuals contained thereon for such other purposes as it deems advisable.

PMI may not use or disclose Customer Information, in any form or medium, to any affiliated or nonaffiliated person, firm or corporation except as necessary to carry out the terms of the Restated PMI Services Agreement under Section 4.7 or as may be required by law. To the extent that PMI or CMIC contracts with a third party that obtains Customer Information in order to provide services under the Restated PMI or Restated CMIC Services Agreement, PMI and CMIC agree to obtain contractual confidentiality protections to require the third party to hold Customer Information in strict confidence and not disclose it to any person unless required by law. PMI and CMIC agree to comply with applicable privacy laws and regulations, including, but not limited to, the Gramm-Leach-Bliley Act, Public Law 106-102 (1999) as set forth in 15 U.S.C.A. §6801, as amended and to comply with applicable changes in such laws and regulations as these occur and become effective.

PMI and CMIC agree to implement and maintain reasonable and customary security measures to safeguard Customer Information. Such measures shall include, but not be limited to, requiring employees who will have access to such information to agree to the confidentiality requirements of this Section.

The confidentiality and privacy obligations of PMI and CMIC set forth in this Section shall survive the termination of this Agreement.

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4.12 Access to Records. Each party shall have the right to reasonable access for itself or its agents during business hours to records maintained by the other party and developed and maintained for the purpose of supporting business coming within the scope of this Agreement and complying with any applicable regulatory requirements. In addition, each party shall have the further right to similar access to all records and information used by the other party in determining the amount of any expense or other amount having an impact on the financial arrangements between the parties, including but not limited to the derivation of any internal expenses allocated by any party to the Mortgage Insurance Program. The access granted pursuant to this Section shall be for the limited purpose of determining the compliance by that party with this Agreement and its contractual arrangements with CMG. All information provided shall be subject to the terms of Article VI (confidentiality).

4.13 Trademarks and Advertising. Neither party may use the name, trademark, service mark, logo or identification of the other party without that party’s prior written consent. CMG shall be entitled to use the name, trademark, service mark, logo and identification (the “Marks”) of either party to this Agreement in a manner that accurately describes that party’s relationship to CMG and in any other manner approved by that party. All such usage shall be in approved formats only and shall require prior written consent as to manner and context. No confusingly similar Marks or terms may be used. No property rights are granted in any Mark beyond the right to use the Mark in accordance with this paragraph. The rights granted to CMG by this paragraph shall terminate upon the termination of this Agreement or upon the failure of CMG after reasonable notice to comply with the terms of this paragraph.

CMG may use all trade names, trademarks and service marks (collectively, “marks”) adopted from a product marketed by one of the parties on a royalty free basis so long as that party continues to be a shareholder in CMG. Thereafter, CMG will only have such rights as may be agreed upon by that party. All marks developed by CMG or by either party specifically for the Mortgage Insurance Program shall be the exclusive property of CMG.

The use in connection with the Mortgage Insurance Program of any portion of any advertising or promotional material developed by either party independently of the Program shall not affect that party’s rights in that portion of the material. Any advertising or promotional material or portion thereof developed by either party specifically for use in connection with the Program, and all copyrights and other rights therein, shall be owned by CMIC.

ARTICLE V. Put and Call Options.

5.1 Put and Call Options. Subject to the terms of this Article, PMI shall have the option to require CMIC to purchase all but not less than all of PMFs shares of stock in CMG (the “put option”), and CMIC shall have the right to require PMI to sell all but not less than all of PMI’s shares of stock in CMG to CMIC (the “call option”).

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5.2 Exercise of Options.

(a) General. Except as provided in Sections 5.3 (performance standards), 5.4 (breach; fraud), 5.5 (additional exercise rights of CMIC), and 5.6 (additional exercise rights of PMI), neither the put option nor the call option may be exercised for a period of twenty-one (21) years from the date of the Original Agreement (i.e., September 8, 2015). After the end of that period, the put and call options may be exercised at any time.

(b) Manner of Exercise. Options under this Article may only be exercised by written notice to the other party and notice may only be given after the right to exercise the option becomes effective.

(c) Closing; Payment Terms. Except as provided in Sections 5.5 and 5.6, the closing of any purchase shall take place six (6) months after notice of exercise is given and CMIC shall pay the full purchase price in cash. If despite its best efforts CMIC has not arranged financial terms for the purchase to its satisfaction by the expiration of that period, CMIC may delay the closing for up to an additional six (6) months. If despite its continued best efforts CMIC has still not arranged such financial terms by the end of this additional six-month period, the purchase price shall be paid as follows:

(i) if the purchase price is less than twenty-five million dollars ($25,000,000), the entire purchase price shall be paid in cash.

(ii) if the purchase price is more than twenty-five million dollars ($25,000,000) and less than seventy million dollars ($70,000,000), twenty-five million dollars ($25,000,000) shall be paid in cash and the balance shall be paid in the form of a two year balloon payment note from CMIC at an interest rate of two points over the prime rate charged by CMG’s principal financial institution, provided, that the interest rate shall not exceed the maximum allowed by applicable law. Interest shall be payable semi-annually. CMIC shall be allowed to prepay the note without penalty. The note shall be secured by a stock pledge of shares of CMG stock equal to 110% of the amount of the note, with the value of the shares based upon the purchase price. The note shall be in substantially the form attached as Exhibit G and the stock pledge agreement shall be in substantially the form attached as Exhibit H.

(iii) if the purchase price is seventy million dollars ($70,000,000) or more, the lesser of fifty million dollars ($50,000,000) or 50% of the purchase price shall be paid in cash and the balance shall be paid in the form of a note as described in (ii).

PMI agrees that CMIC may, as its method of payment, utilize an initial public offering that includes PMI’s shares of CMG stock. If CMIC pursues this method, PMI agrees to cooperate with reasonable requests of CMIC in any manner that may be necessary or helpful in consummating the offering. The use of an initial public offering as the method of payment shall not affect the purchase price, which shall in all events be determined pursuant to Section 5.7.

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(d) Regulatory Approvals. The closing of any purchase shall be conditioned upon the receipt of any required regulatory approvals. Immediately after an option is exercised, the parties shall proceed to obtain input from the appropriate regulators regarding the approval process and any conditions that may apply. The parties shall use their best efforts to obtain all necessary approvals. If a required regulatory approval is not obtained due to the use of a note in partial payment of the purchase price, and if the approval will be granted if cash is paid instead of using a note, CMIC agrees to pay cash. If approval can be obtained for a purchase of part but not all of the shares, the parties shall at the option of PMI close on the partial purchase in accordance with this Section. Until such time as the parties can obtain regulatory approval for and consummate the purchase of the remaining shares, (i) the parties shall continue to use their best efforts to obtain all necessary approvals for the purchase of the remaining shares; and (ii) PMI shall continue to have all of its rights as a shareholder under this Agreement. If approval can be obtained if PMI agrees to provide services to CMG for a reasonable period of time on reasonable terms, PMI agrees to do so. If despite any of the above actions any required approval is still not obtained, the parties shall use their best efforts to agree upon a manner in which to sell CMG or the shares of CMG owned by PMI, including, without limitation, by means of an initial public offering. Any sale of CMG or the use of an initial public offering shall not affect the amount to be paid to PMI, which in all events shall be the purchase price determined pursuant to Section 5.7. If the parties are not able to come to an agreement on how to proceed, either party may invoke the mediation provisions of Section 7.1 if it believes that it may be helpful.

5.3 Performance Standards. Attached as Exhibit I are performance standards for each party. These performance standards will be reviewed and revised if necessary by PMI and CMIC at least once every two (2) years. These performance standards shall be subject to change at any time by unanimous action of the Management Committee.

If the performance standards applicable to PMI for a particular period are not met, CMIC will have the right for a period of six (6) months after the end of that period to give written notice to PMI of the failure, and if the failure is not remedied within six (6) months after notice is given, CMIC will then have the right to exercise its call option. If the performance standards applicable to CMIC for a particular period are not met, PMI will have the right for a period of six (6) months after the end of that period to give written notice to CMIC of the failure, and if the failure is not remedied within twelve (12) months after notice is given, PMI will then have the right to exercise its put option.

The performance standards applicable to each party shall be reviewed at the time each time that a new Business Plan is prepared.

5.4 Breach; Fraud. Either party will have the immediate right to exercise its option upon written notice if the other party either: (i) materially breaches this Agreement or any license agreement or service agreement between it and the other party or CMG; or (ii) engages in a material fraud in its dealings with CMG or the other party.

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With respect to a material breach, this right shall not be exercisable until after the non-breaching party has given written notice of the breach to the breaching party and the breach has not been cured within sixty (60) days after the notice is given. A party shall be deemed to have cured the breach if the breach cannot be cured within the cure period and the breaching party commences the remedy and continues to pursue such remedy diligently until the breach is cured.

With respect to a material fraud, this right shall be exercisable at any time after the fraud is discovered by the other party.

A failure to meet the performance standards set forth pursuant to Section 5.3 shall not in and of itself be considered to be a breach of this Agreement or constitute fraud.

5.5 Additional Exercise Rights of CMIC. CMIC will have the immediate right to exercise its call option upon written notice to PMI if any Competitor of the CUNA Mutual Group of Companies owns or controls more than 15% of the outstanding shares of stock in PMI and continues to own such shares ninety (90) days after CMIC has given written notice to PMI of its objection thereto and such change in ownership is materially adverse to CMIC’s interests. For purposes of this subsection, a Competitor of the CUNA Mutual Group of Companies shall mean any person or entity that is or controls one of the ten leading producers of an insurance, mortgage banking or financial product for Credit Union Organizations or credit union members. In addition, CMIC shall have the immediate right to exercise its call option if any person or entity (or any group of persons or entities acting in concert) directly or indirectly owns or controls more than 50% of the outstanding shares of stock in PMI.

PMI shall notify CMIC in writing in the event that a change in ownership as described above occurs. CMIC shall then have a period of sixty (60) days in which to give PMI written notice that it is exercising its call option or CMIC’s option shall be deemed waived as to that matter. If PMI shall fail to notify CMIC of such matter, the option period shall continue until sixty (60) days after PMI does in fact notify CMIC. Closing shall take place within the time period specified in Section 5.2(c).

If the parties are not in agreement as to whether the change in ownership involving a Competitor is materially adverse to CMIC’s interests, the matter shall be resolved in final and binding arbitration in accordance with the commercial arbitration rules of the American Arbitration Association. In any arbitration, it shall be presumed that the matter is materially adverse to CMIC’s interests and PMI shall have the burden of establishing by a preponderance of the evidence that it is not.

5.6 Additional Exercise Rights of PMI. PMI will have the immediate right to exercise its put option upon written notice to CMIC if CUNA Mutual demutualizes and any Competitor of the PMI Group of Companies owns or controls more than 15% of the outstanding shares of stock in CMIC or CUNA Mutual and continues to own such shares ninety (90) days after PMI has given written notice to CMIC of its objection thereto and such change in ownership is materially adverse to PMI’s interests. For purposes of this Section, a Competitor of the PMI Group of Companies shall mean any person or entity that is or controls one of the seven leading producers of (i)

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mortgage guaranty insurance coverage or (ii) competitive credit enhancement arrangements that are substantially similar in purpose and effect to mortgage guaranty insurance. In addition, PMI shall have the immediate right to exercise its put option upon written notice to CMIC if CUNA Mutual demutualizes and any person or entity (or any group of persons or entities acting in concert) owns or controls more than 50% of the outstanding shares of stock in CMIC or CUNA Mutual, other than an entity within the CUNA Mutual Group of Companies.

CMIC shall notify PMI in writing in the event that a change in ownership as described above occurs. PMI shall then have a period of sixty (60) days in which to give CMIC written notice that it is exercising its call option or PMI’s option shall be deemed waived as to that matter. If CMIC shall fail to notify PMI of such matter, the option period shall continue until sixty (60) days after CMIC does in fact notify PMI. Closing shall take place within the time period specified in Section 5.2(c).

If the parties are not in agreement as to whether the change in ownership involving a Competitor is materially adverse to PMI’s interests, the matter shall be resolved in final and binding arbitration in accordance with the commercial arbitration rules of the American Arbitration Association. In any arbitration, it shall be presumed that the matter is materially adverse to PMI’s interests and CMIC shall have the burden of establishing by a preponderance of the evidence that it is not.

5.7 Price.

(a) General. The price to be paid under this Article shall be the selling shareholder’s proportionate share of the fair market value of all of the shares of stock. A shareholder’s proportionate share shall be determined by multiplying the fair market value of a share of stock by the total number of shares owned by the selling shareholder. The fair market value of a share of stock shall be determined by dividing the fair market value of CMG, as of the date of the event triggering the exercise right of a party, by the total number of outstanding shares of stock of CMG as of that date. If CMIC and PMI are unable to mutually agree upon the fair market value of CMG within thirty (30) days after the expiration of any option period, the parties shall follow the procedure set forth in subsection (c).

(b) Closing. At the closing, CMIC shall: (i) cause CMG to repay in full all loans, indebtedness or other obligations of any nature owing by CMG to PMI or any of its Group of Companies; (ii) use its best efforts to cause PMI and its Group of Companies to be released from any guarantees, obligations or liabilities of any nature then existing in connection with CMG or its business to the extent that they may apply to activities engaged in by CMG after the closing; (iii) agree in writing to indemnify, defend and hold harmless PMI and its Group of Companies and their respective directors, officers, employees, agents, successors and assigns from all actions, suits, claims, demands, costs or liability of any nature arising in connection with CMG or its business with respect to activities engaged in by CMG after the closing; (iv) agree in writing to indemnify, defend and hold harmless PMI and its Group of Companies and their respective directors, officers, employees, agents, successors and assigns from all actions, suits, claims, demands, costs or liability

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of any nature arising in connection with CMG or its business with respect to activities engaged in by CMG before the closing except for those matters that arise out of the gross negligence, fraud or willful misconduct of PMI or a member of its Group of Companies where CMIC was not aware that the activities constituted gross negligence, fraud or misconduct; and (v) provide evidence satisfactory to PMI that CMIC has obtained all regulatory approvals necessary for such purchase. All documentation regarding the foregoing shall be in form and substance satisfactory to PMI in its reasonable discretion.

At the closing, PMI shall agree in writing to indemnify, defend and hold harmless CMG, CMIC, its Group of Companies and their respective directors, officers, employees, agents, successors and assigns from all actions, suits, claims, demands, costs or liability of any nature arising in connection with CMG or its business with respect to activities engaged in by CMG before the closing but solely with respect to those matters that arise out of the gross negligence, fraud or willful misconduct of PMI or a member of the PMI Group of Companies where CMIC was not aware that the activities constituted gross negligence, fraud or misconduct.

(c) Appraisal.

(1) If the parties are unable to agree upon the fair market value of CMG as of the Option Date (“Fair Value”), a binding determination of Fair Value shall be made by appraisal in the manner set forth in this subsection. The term “Option Date” shall mean the date of the notice exercising the option. A party desiring to effect a determination of Fair Value shall give written notice to the other and each party shall appoint a nationally recognized investment banking firm to act as appraiser within thirty (30) days after the date such notice is delivered. A party shall have selected an appraiser by giving written notice to the other party. The two appraisers who are selected by the parties shall select a nationally recognized investment-banking firm to act as a third appraiser within fifteen (15) days after selection of the second appraiser. In the event of the failure of a party to appoint an appraiser, or the failure of the two appraisers to appoint a third appraiser within such periods of time, the appraiser(s) who have not been selected shall be selected upon petition by either party by the then presiding Judge of the San Francisco Superior Court, pursuant to the provisions of California Code of Civil procedure Section 1280 et seq. Each nationally recognized investment banking firm appointed by a party, by the other investment banking firms or by the Court pursuant to the terms of this subsection shall be experienced in the valuation of securities.

(2) If the two appraisers selected by the parties cannot reach agreement on Fair Value, the Fair Value shall be established by the three appraisers in accordance with the following procedures. The appraiser selected by each of the parties shall state in writing its determination of Fair Value. The appraisers shall arrange for a simultaneous delivery of such determinations to the third appraiser. The role of the third appraiser shall be to select which of the two proposed determinations most closely approximates its determination of Fair Value. The third appraiser shall have no right to propose a middle ground or any modification of either of the two proposed determinations. The determination it chooses as most closely approximating its determination shall constitute the decision of the appraisers and be final and binding upon the parties.

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(3) In determining Fair Value as of the Option Date, an appraiser shall: (i) value CMG as though all of the shares of CMG were publicly held on a fully distributed basis on the Option Date; (ii) assume that CMIC and other members of the CUNA Mutual Group of Companies performing services to CMG as of the Option Date will continue to perform services to CMG, and make available customer lists, trademarks, service marks and other intellectual property to CMG, in the same manner and on the same terms provided in this Agreement and the other agreements between CMG and such persons so that there is no discount or premium in Fair Value as a result of such special arrangements; (iii) assume that the services provided as of the Option Date to CMG by PMI and other members of the PMI Group of Companies will be provided after such date in the same manner and other same terms provided in this Agreement and the other agreements between CMG and such persons either by CMG, PMI or another member of the PMI Group of Companies or a qualified third party so that there is no discount in Fair Value as a result of such persons no longer being affiliated with or performing services for CMG; and (iv) take into account such factors as it deems appropriate, such as price-to-earning ratios and multiples on adjusted book value. Provided, however, that if PMI’s stock is being purchased as a result of (A) the exercise by CMIC of its call option under Section 5.3 as a result of the failure of PMI to meet its performance standards; or (B) the exercise by CMIC of its call option under Section 5.4 as a result of the fraud or material breach by PMI, then, in any such event, the appraisers shall not make the assumptions set forth in subsection (iii) and instead the appraiser shall take into account the actual manner and the actual terms under which CMG will be obtaining those services.

(4) PMI and CMIC shall each have the right to submit such written and oral comments, observations, information and opinions to the appraisers as they may deem advisable.

(5) PMI and CMIC shall each bear the cost of its own appraiser and one-half of the cost of any third appraiser. PMI’s cooperation with CMIC in connection with an initial public offering that includes PMI’s shares of CMG stock shall not affect the price to be paid for such shares by CMIC in accordance with this Section 5.7.

ARTICLE VI. Confidentiality

6.1 Confidentiality.

(a) General. The parties each agree that all confidential or proprietary information, whether or not marked as such, of a party or any of its respective Group of Companies communicated to and by each other relating to this Agreement shall be deemed to be confidential business information and shall be maintained in strict confidence to be used only during the term of this Agreement and only for the purposes contemplated by this Agreement. In addition, if such information must be communicated, it shall be communicated within the recipient party’s organization or to any third party agent, representative or consultant employed by recipient organization only on a “need-to-know” basis for the purpose of accomplishing the purposes of this

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Agreement and only upon compliance with subsection (d). No such information shall be disclosed to any other third party by the recipient party without the prior written consent of the other party unless clearly required by applicable law or regulation, or by court order or the ruling, order or formal determination of a state or federal regulating body. This Article shall apply to all such information, whether communicated before or after the date of this Agreement. This Article shall apply to any information received under the Mortgage Insurance Program by PMI relating to a credit union or any other Credit Union Organization or their members and to information regarding each party’s operational, marketing and other business practices and procedures.

(b) Prevention of Disclosure. Each party agrees to establish and communicate written directives and take all reasonable precautions to prevent the disclosure to outside parties of information covered by this Agreement, except as may be necessary by reason of applicable federal or state regulatory requirements.

(c) Application to Records. All data contained in or on master records, customer or complaint files and ledgers, all lists including inquiries, clients and referrals, and other lists and data generated with respect to activities performed pursuant to this Agreement shall be subject, wherever applicable, at all times to the terms of this Agreement with respect to use, access, ownership and disposition. Neither party shall disclose, or permit to be disclosed, to third parties in any manner or for any reason, any information from ledgers, lists, files or other records developed, derived, furnished or required by either party, nor shall any of them make any use of such information other than as permitted in this Agreement unless mutually agreed by CMIC and PMI (and then only in compliance with applicable laws).

(d) Disclosure to Third Parties. The parties agree that except as may be required to comply with a request by a governmental authority or as may be necessary to comply with applicable law, no information covered by this Agreement shall be released to any third party agent, representative or consultant without obtaining from the third party written representations in form and content satisfactory to the other party guaranteeing the confidentiality of such information.

(e) Exceptions; Survival and Enforcement. The restrictions contained in this Article do not apply to any information that the receiving party can demonstrate is: (i) generally available to the public; (ii) known to the recipient at the time of disclosure and not acquired directly or indirectly from the other party; or (iii) disclosed to the recipient by a party having a right to make such disclosure.

Information provided by one party to the other shall remain the exclusive property of the party providing the information unless the parties otherwise agree in writing. Nothing contained in this Agreement shall be construed as granting any right to the receiving party, by license or otherwise, to any of the disclosing party’s confidential information except as expressly provided in writing.

In the event this Agreement is terminated for any reason, the covenants and agreements contained in this Article shall survive indefinitely thereafter. Each party agrees that a

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violation on its part of any covenant contained in this Article will cause such damage to the other party as will be irreparable and for that reason each party further agrees that the other party shall be entitled as a matter of right to an injunction from any court of competent jurisdiction, restraining any further violation of such covenants. This right to an injunction shall be cumulative and in addition to whatever other remedies a party may be entitled to, including, specifically, recovery of liquidated, incidental, special or consequential damages.

Each party expressly acknowledges and agrees that the covenants and agreements applicable to it under this Article shall be construed in such a manner as to be enforceable under applicable laws if a more limited scope is determined by a court of competent jurisdiction to be required.

ARTICLE VII. Dispute Resolution

7.1 Dispute Resolution. In the event of any controversy or dispute relating to this Agreement, either party may refer the matter to the respective senior management of the parties for resolution by delivery of a written notice to the other party (the “Notice of Dispute”). If the senior management is not able to resolve the matter after a period of thirty (30) days, the parties shall submit the dispute to non-binding mediation through the offices of Judicial Arbitration Mediation Services (“JAMS”) or its successor in San Francisco, California. The parties shall select a mutually agreeable mediator from the list of available mediators provided by JAMS; provided, however, that the parties shall select a mediator whose schedule permits a mediation within thirty (30) days after contacting JAMS, unless the parties mutually agree to an extension of time to have the matter mediated at a later date. If the parties are unable to agree upon an available mediator from the list provided by JAMS whose time schedule permits a mediation within said thirty (30) days, and there is no agreement to extend such time, the parties shall accept an assignment of a mediator from JAMS who may be disqualified only for bias. The parties shall inform JAMS of the nature of the dispute so that it may recommend a mediator most qualified to help the parties to resolve the dispute. Notwithstanding anything contained in the foregoing, in the event that a written settlement of the dispute is not made within 120 days following the date of the Notice of Dispute, and the parties have not agreed upon an extension of such time, then either party may initiate litigation. All costs of the mediation and the mediator charged by JAMS shall be shared equally by the parties. Each party shall bear its own attorneys fees and other costs in connection with the mediation. The mediation shall not preclude any party from seeking injunctive or other provisional or equitable relief in order to preserve the status quo between the parties pending resolution of the dispute, nor shall the filing of an action seeking injunctive or other provisional relief be construed as a failure by that party to comply with the mediation requirements of this Agreement.

ARTICLE VIII. Miscellaneous

8.1 Delays and Waivers. The failure of any party to insist in any one or more instances upon the performance of any of the terms, covenants or conditions of this Agreement shall not be construed as a waiver or relinquishment of the future performance of any other term, covenant or

23

condition, but the defaulting party’s obligation with respect to future performance of any other terms shall continue in full force and effect. The failure of any party to take any action permitted by this Agreement to be taken by it shall not be construed as a waiver or relinquishment of its right thereafter to take such action.

8.2 Notices. Any notice required or permitted under this Agreement shall be in writing and shall be given by personal delivery or certified mail, return receipt requested, addressed as follows:

If to PMI:	PMI Mortgage Insurance Co.
	Attn: General Counsel
	3003 Oak Road
	Walnut Creek, CA 94597-2098
	and
	PMI Mortgage Insurance Co.
	Attn: Senior Vice President
	3003 Oak Road
	Walnut Creek, CA 94597-2098
If to CMIC:	CUNA Mutual Investment Corporation
	Attn: President and Chief Executive Officer
	5910 Mineral Point Road
	Madison, WI 53705
	and
	CUNA Mutual Investment Corporation
	Attn: General Counsel
	5910 Mineral Point Road
	Madison, WI 53705

Except as may be specifically provided otherwise, all notices shall be effective in the case of personal delivery upon receipt and in case in mailing upon deposit in the United States mail.

8.3 Entire Agreement. This Agreement supersedes any and all agreements previously made between the parties relating to the subject matter of this Agreement, and there are no understandings or agreements other than those incorporated in this Agreement. This Agreement may not be modified except by an instrument in writing duly executed by both parties.

8.4 Parties Bound. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Provided, however, that neither

24

party may assign any rights or obligations hereunder without the prior written consent of the other party, except that either party may assign this Agreement and its rights and obligations hereunder to a member of its respective Group of Companies. The assignment of this Agreement shall not release the assignor from any of its duties or obligations under this Agreement.

8.5 Governing Law. This Agreement shall be governed by, and construed and interpreted in accordance with, the internal law of the state of domicile of CMG, as it may be changed from time to time.

8.6 Covenant to Further Assurances. Each party forthwith upon reasonable request from the other parties shall execute and deliver such documents and take such action as may be reasonably necessary in order to carry out fully the intended purpose of this Agreement.

8.7 Headings; References. The headings used in this Agreement are for convenience only and shall not constitute a part of this Agreement. Unless the context clearly requires otherwise, all references to “Sections” and other subdivisions are to the sections and subdivisions of this Agreement.

8.8 Severability. If any provision of this Agreement shall under any circumstances be deemed invalid or inoperative, this Agreement shall be construed with the invalid or inoperative provision deleted and the rights and obligations construed and enforced accordingly.

8.9 Attorneys Fees. In the event that legal or equitable action is instituted to enforce any of the provisions of this Agreement, the prevailing party in such action shall be entitled to recover all costs of such action, including reasonable attorneys fees.

8.10 Remedies. Except as otherwise stated, the rights and remedies specified in this Agreement are cumulative and not exclusive of any rights other rights or remedies that either party may have and may be exercised concurrently therewith.

8.11 No Violation of Contract. Each party warrants that it has the right and authority to enter into this Agreement and that this Agreement will not constitute the violation of any contract or agreement to which it may be a party.

8.12 No Authority to Bind. Except as may be expressly permitted in writing by the other, no party shall have any right, power or authority to bind the other party, transact any business in the name of the other party or on its behalf, or make any promises or representations on behalf of the other party.

8.13 Compliance with Law. Each party warrants and represents that the activities to be performed by it pursuant to this Agreement will be in material compliance with all applicable law, and that any lack of compliance will not have a material effect on CMG’s operations or its ability to continue business.

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8.14 Consent. In the event the consent or approval of a party is required to any action, such party shall not unreasonably withhold such consent or approval.

8.15 Legends. The stock certificates representing the shares of CMG stock owned by CMIC and PMI shall at all times bear the following legend:

The shares represented by this certificate are subject to certain agreements regarding the management of the corporation and restrictions on transfer under the terms of an agreement entered into by the shareholders of this corporation.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the above date.

CUNA Mutual Investment Corporation		PMI Mortgage Insurance Co.
By:	/s/    Michael Kitchen	By:	/s/    L. Stephen Smith

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EX-10.29

Exhibit 10.29

THE PMI GROUP, INC.

and

THE BANK OF NEW YORK,

as Purchase Contract Agent

PURCHASE CONTRACT AGREEMENT

Dated as of November 3, 2003

TABLE OF CONTENTS

ARTICLE 1
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01.	Definitions	1
Section 1.02.	Compliance Certificates and Opinions	15
Section 1.03.	Form of Documents Delivered to Purchase Contract Agent.	16
Section 1.04.	Acts of Holders; Record Dates.	17
Section 1.05.	Notices.	18
Section 1.06.	Notice to Holders; Waiver.	19
Section 1.07.	Effect of Headings and Table of Contents.	20
Section 1.08.	Successors and Assigns.	20
Section 1.09.	Separability Clause.	20
Section 1.10.	Benefits Of Agreement.	20
Section 1.11.	Governing Law.	20
Section 1.12.	Legal Holidays.	20
Section 1.13.	Counterparts.	21
Section 1.14.	Inspection of Agreement.	21
Section 1.15.	Appointment of Financial Institution as Agent for the Company.	21
Section 1.16.	No Waiver.	21
ARTICLE 2
CERTIFICATE FORMS
Section 2.01.	Forms of Certificates Generally.	22
Section 2.02.	Form of Purchase Contract Agent’s Certificate of Authentication.	23
ARTICLE 3
THE UNITS
Section 3.01.	Amount; Form and Denominations.	23
Section 3.02.	Rights and Obligations Evidenced by the Certificates.	23
Section 3.03.	Execution, Authentication, Delivery and Dating.	24
Section 3.04.	Temporary Certificates.	25
Section 3.05.	Registration; Registration of Transfer and Exchange.	26
Section 3.06.	Book-Entry Interests.	27
Section 3.07.	Notices to Holders.	28
Section 3.08.	Appointment of Successor Depositary.	29
Section 3.09.	Definitive Certificates.	29
Section 3.10.	Mutilated, Destroyed, Lost and Stolen Certificates.	29
Section 3.11.	Persons Deemed Owners.	31

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Section 3.12.	Cancellation.	32
Section 3.13.	Creation of Treasury Units by Substitution of Treasury Securities.	32
Section 3.14.	Recreation of Corporate Units.	34
Section 3.15.	Transfer of Collateral upon Occurrence of Termination Event.	36
Section 3.16.	No Consent to Assumption.	37
ARTICLE 4
THE SENIOR NOTES AND APPLICABLE OWNERSHIP INTERESTS IN THE TREASURY PORTFOLIO
Section 4.01.	Interest Payments; Rights to Interest Payments Preserved.	37
Section 4.02.	Notice and Voting.	39
Section 4.03.	Special Event Redemption.	39
ARTICLE 5
THE PURCHASE CONTRACTS
Section 5.01.	Purchase of Shares of Common Stock.	41
Section 5.02.	Remarketing; Payment of Purchase Price.	44
Section 5.03.	Issuance of Shares of Common Stock.	52
Section 5.04.	Certain Adjustments.	53
Section 5.05.	Notice of Adjustments and Certain Other Events.	63
Section 5.06.	Termination Event; Notice.	64
Section 5.07.	Early Settlement.	64
Section 5.08.	Intentionally Omitted.	67
Section 5.09.	No Fractional Shares.	67
Section 5.10.	Charges and Taxes.	68
Section 5.11.	Contract Adjustment Payments.	68
ARTICLE 6
REMEDIES
Section 6.01.	Unconditional Right of Holders to Receive Contract Adjustment Payments and to Purchase Shares of Common Stock.	74
Section 6.02.	Restoration of Rights and Remedies.	74
Section 6.03.	Rights and Remedies Cumulative.	74
Section 6.04.	Delay or Omission Not Waiver.	75
Section 6.05.	Undertaking for Costs.	75
Section 6.06.	Waiver of Stay or Extension Laws.	75
ARTICLE 7
THE PURCHASE CONTRACT AGENT
Section 7.01.	Certain Duties and Responsibilities.	76

ii

Section 7.02.	Notice of Default.	77
Section 7.03.	Certain Rights of Purchase Contract Agent.	77
Section 7.04.	Not Responsible for Recitals or Issuance of Units.	79
Section 7.05.	May Hold Units.	79
Section 7.06.	Money Held in Custody.	79
Section 7.07.	Compensation and Reimbursement.	80
Section 7.08.	Corporate Purchase Contract Agent Required, Eligibility.	80
Section 7.09.	Resignation and Removal; Appointment of Successor.	81
Section 7.10.	Acceptance Of Appointment By Successor.	83
Section 7.11.	Merger, Conversion, Consolidation Or Succession To Business.	83
Section 7.12.	Preservation of Information; Communications to Holders.	83
Section 7.13.	No Obligations of Purchase Contract Agent.	84
Section 7.14.	Tax Compliance.	84
ARTICLE 8
SUPPLEMENTAL AGREEMENTS
Section 8.01.	Supplemental Agreements Without Consent of Holders.	85
Section 8.02.	Supplemental Agreements with Consent of Holders.	86
Section 8.03.	Execution of Supplemental Agreements.	87
Section 8.04.	Effect of Supplemental Agreements.	87
Section 8.05.	Reference to Supplemental Agreements.	87
ARTICLE 9
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
Section 9.01.	Covenant Not to Consolidate, Merge, Convey, Transfer or Lease Property Except under Certain Conditions.	88
Section 9.02.	Rights and Duties of Successor Corporation.	88
Section 9.03.	Officers’ Certificate and Opinion of Counsel Given to Purchase Contract Agent.	89
ARTICLE 10
COVENANTS
Section 10.01.	Performance Under Purchase Contracts.	89
Section 10.02.	Maintenance of Office or Agency.	89
Section 10.03.	Company to Reserve Common Stock.	90
Section 10.04.	Covenants as to Common Stock.	90
Section 10.05.	Statements of Officers of the Company as to Default.	91
Section 10.06.	ERISA.	91
Section 10.07.	Tax Treatment	91

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EXHIBITS

Exhibit A – Form of Corporate Units Certificate

Exhibit B – Form of Treasury Units Certificate

Exhibit C – Instruction to Purchase Contract Agent

Exhibit D – Notice from Purchase Contract Agent to Holders

Exhibit E – Notice to Settle by Separate Cash

Exhibit F – Notice from Purchase Contract Agent to Collateral Agent

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PURCHASE CONTRACT AGREEMENT, dated as of November 3, 2003, between THE PMI GROUP, INC., a Delaware corporation (the “Company”), and The Bank of New York, a New York banking corporation, acting as purchase contract agent for the Holders of Units (as defined herein) from time to time (the “Purchase Contract Agent”).

RECITALS

The Company has duly authorized the execution and delivery of this Agreement and the Certificates evidencing the Units.

All things necessary to make the Purchase Contracts (as defined herein), when the Certificates (as defined herein) are executed by the Company and authenticated, executed on behalf of the Holders and delivered by the Purchase Contract Agent, as provided in this Agreement, the valid obligations of the Company, and to constitute these presents a valid agreement of the Company, in accordance with its terms, have been done. For and in consideration of the premises and the purchase of the Units by the Holders thereof, it is mutually agreed as follows:

ARTICLE 1

DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION

Section 1.01. Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires:

(a) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular, and nouns and pronouns of the masculine gender include the feminine and neuter genders;

(b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles in the United States;

(c) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section, Exhibit or other subdivision; and

(d) the following terms have the meanings given to them in this Section 1.01(d):

“Accounting Event” has the meaning set forth in the Supplemental Indenture.

“Act” has the meaning, with respect to any Holder, set forth in Section 1.04(a).

“Adjusted Applicable Market Value” has the meaning set forth in Section 5.01(a).

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Agreement” means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more agreements supplemental hereto entered into pursuant to the applicable provisions hereof.

“Applicable Market Value” has the meaning set forth in Section 5.01(a).

“Applicable Ownership Interest” shall mean, with respect to a Corporate Unit and the Treasury Portfolio contained in a Corporate Unit, (i) a 2.5% undivided beneficial ownership interest in $1,000 face amount of U.S. treasury securities (or principal or interest strips thereof) included in such Treasury Portfolio that mature on or prior to November 15, 2006 and (ii) (x) for the scheduled Payment Date on the Senior Notes that occurs on the Purchase Contract Settlement Date, in the case of a Successful Remarketing prior to the Final Remarketing Date, or (y) for each scheduled Payment Date on the Senior Notes that occurs after the Special Event Redemption Date to and including the Purchase Contract Settlement Date, in the case of a Special Event Redemption, a 0.01875% undivided beneficial ownership interest in $1,000 face amount of U.S. treasury securities (or principal or interest strips thereof) included in such Treasury Portfolio that mature on or prior to the business day immediately preceding such scheduled Payment Date.

“Applicable Principal Amount” means the aggregate principal amount of the Senior Notes that are components of Corporate Units.

“Applicants” has the meaning set forth in Section 7.12(b).

“Bankruptcy Code” means Title 11 of the United States Code, or any other law of the United States that from time to time provides a uniform system of bankruptcy laws.

“Beneficial Owner” means, with respect to a Book-Entry Interest, a Person who is the beneficial owner of such Book-Entry Interest as reflected on the books of the Depositary or on the books of a Person maintaining an account with such Depositary (directly as a Depositary Participant or as an indirect participant, in each case in accordance with the rules of such Depositary).

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“Board of Directors” means the board of directors of the Company or a duly authorized committee of that board.

“Board Resolution” means one or more resolutions of the Board of Directors, a copy of which has been certified by the Secretary or an Assistant Secretary of the Company, to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Purchase Contract Agent.

“Book-Entry Interest” means a beneficial interest in a Global Certificate, registered in the name of a Depositary or a nominee thereof, ownership and transfers of which shall be maintained and made through book entries by such Depositary as described in Section 3.06.

“Business Day” or “business day” means any day other than a Saturday or Sunday or any other day on which banking institutions and trust companies in New York City, New York are permitted or required by applicable law to remain closed or a day on which the Indenture Trustee or the Collateral Agent is closed for business; provided that for purposes of the second paragraph of Section 1.12 only, the term “Business Day” shall also be deemed to exclude any day on which DTC is closed.

“Cash Merger” has the meaning set forth in Section 5.04(b)(ii).

“Cash Merger Early Settlement” has the meaning set forth in Section 5.04(b)(ii).

“Cash Merger Early Settlement Date” has the meaning set forth in Section 5.04(b)(ii).

“Cash Settlement” has the meaning set forth in Section 5.02(b)(i).

“Certificate” means a Corporate Units Certificate or a Treasury Units Certificate.

“Closing Price” has the meaning set forth in Section 5.01(a).

“Code” means the Internal Revenue Code of 1986, as amended.

“Collateral” has the meaning set forth in Section 1.01(d) of the Pledge Agreement.

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“Collateral Account” has the meaning set forth in Section 1.01(d) of the Pledge Agreement.

“Collateral Agent” means The Bank of New York, as Collateral Agent under the Pledge Agreement until a successor Collateral Agent shall have become such pursuant to the applicable provisions of the Pledge Agreement, and thereafter “Collateral Agent” shall mean the Person who is then the Collateral Agent thereunder.

“Collateral Substitution” means (i) with respect to a Corporate Unit, (x) the substitution for the Pledged Senior Note included in such Corporate Unit by Treasury Securities or portions thereof in an aggregate principal amount at maturity equal to the aggregate principal amount of such Pledged Senior Note, or (y) the substitution for the Pledged Applicable Ownership Interest in the Treasury Portfolio included in such Corporate Unit by Treasury Securities or portions thereof in an amount equal to such Pledged Applicable Ownership Interest in the Treasury Portfolio, or (ii) with respect to a Treasury Unit, (x) the substitution for the Pledged Treasury Securities included in such Treasury Unit (if the Applicable Ownership Interest in the Treasury Portfolio has not replaced the Senior Note as a component of the Corporate Unit) by Senior Notes in an aggregate principal amount equal to the aggregate principal amount at stated maturity of the Pledged Treasury Securities, or (y) the substitution for the Pledged Treasury Securities included in such Treasury Unit (if the Applicable Ownership Interest in the Treasury Portfolio has replaced the Senior Note as a component of the Corporate Unit) by the appropriate Applicable Ownership Interest in the Treasury Portfolio.

“Common Stock” means the common stock, par value $0.01 per share, of the Company.

“Company” means the Person named as the “Company” in the first paragraph of this instrument until a successor shall have become such pursuant to the applicable provision of this Agreement, and thereafter “Company” shall mean such successor.

“Constituent Person” has the meaning set forth in Section 5.04(b)(i).

“Contract Adjustment Payments” means the payments payable by the Company on the Payment Dates in respect of each Purchase Contract, at a rate per year of 2.875% of the Stated Amount per Purchase Contract.

“Corporate Trust Office” means the office of the Purchase Contract Agent at which, at any particular time, its corporate trust business shall be principally administered, which office at the date hereof is located at 101 Barclay Street, Floor 8W, New York, NY 10286.

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“Corporate Unit” means the collective rights and obligations of a Holder of a Corporate Units Certificate in respect of the Senior Notes or an appropriate Applicable Ownership Interest in the Treasury Portfolio, as the case may be, subject in each case (except for the appropriate Applicable Ownership Interest specified in clause (ii) of the definition of such term) to the Pledge thereof, and the related Purchase Contract.

“Corporate Units Certificate” means a certificate evidencing the rights and obligations of a Holder in respect of the number of Corporate Units specified on such certificate.

“Coupon Rate” means the percentage rate per annum at which each Senior Note will bear interest initially.

“Current Market Price” has the meaning set forth in Section 5.04(a)(viii).

“Custodial Agent” means The Bank of New York, as Custodial Agent under the Pledge Agreement until a successor Custodial Agent shall have become such pursuant to the applicable provisions of the Pledge Agreement, and thereafter “Custodial Agent” shall mean the Person who is then the Custodial Agent thereunder.

“Depositary” means a clearing agency registered under Section 17A of the Exchange Act that is designated to act as Depositary for the Units as contemplated by Sections 3.06 and 3.08.

“Depositary Participant” means a broker, dealer, bank, other financial institution or other Person for whom from time to time the Depositary effects book-entry transfers and pledges of securities deposited with the Depositary.

“Dividend Threshold Amount” has the meaning set forth in Section 5.04(a).

“DTC” means The Depository Trust Company.

“Early Settlement” has the meaning set forth in Section 5.07(a).

“Early Settlement Amount” has the meaning set forth in Section 5.07(b).

“Early Settlement Date” has the meaning set forth in Section 5.07(b).

“Early Settlement Rate” has the meaning set forth in Section 5.07(c).

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

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“Exchange Act” means the Securities Exchange Act of 1934 and any statute successor thereto, in each case as amended from time to time, and the rules and regulations promulgated thereunder.

“Expiration Date” has the meaning set forth in Section 1.04(e).

“Expiration Time” has the meaning set forth in Section 5.04(a)(vi).

“Failed Final Remarketing” has the meaning set forth in Section 5.02(c)(iii).

“Failed Initial Remarketing” has the meaning set forth in Section 5.02(a)(i).

“Failed Remarketing” shall mean a Failed Initial Remarketing or a Failed Final Remarketing.

“Final Remarketing” has the meaning set forth in Section 5.02(c)(i).

“Final Remarketing Date” means the third Business Day immediately preceding the Purchase Contract Settlement Date.

“Final Remarketing Fee” has the meaning set forth in Section 5.02(c)(ii).

“Fixed Settlement Rate” means each of the Maximum Share Number and the Minimum Share Number.

“Global Certificate” means a Certificate that evidences all or part of the Units and is registered in the name of the Depositary or a nominee thereof.

“Holder” means, with respect to a Unit, the Person in whose name the Unit evidenced by a Certificate is registered in the Security Register; provided, however, that solely for the purpose of determining whether the Holders of the requisite number of Units have voted on any matter (and not for any other purpose hereunder), if the Unit remains in the form of one or more Global Certificates and if the Depositary that is the registered holder of such Global Certificate has sent an omnibus proxy assigning voting rights to the Depositary Participants to whose accounts the Units are credited on the record date, the term “Holder” shall mean such Depositary Participant acting at the direction of the Beneficial Owners.

“Indenture” means the Indenture, dated as of November 3, 2003, between the Company and the Indenture Trustee (including any provisions of the TIA that are deemed incorporated therein), as supplemented by the Supplemental Indenture pursuant to which the Senior Notes will be issued.

“Indemnitees” has the meaning set forth in Section 7.07(c).

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“Indenture Trustee” means The Bank of New York, as trustee under the Indenture, or any successor thereto.

“Initial Remarketing” has the meaning set forth in Section 5.02(a)(i).

“Initial Remarketing Date” means the third Business Day immediately preceding August 15, 2006.

“Issuer Order” or “Issuer Request” means a written order or request signed in the name of the Company by (i) either its Chief Executive Officer, its President or one of its Vice Presidents, and (ii) either its Corporate Secretary or one of its Assistant Corporate Secretaries or its Treasurer or one of its Assistant Treasurers, and delivered to the Purchase Contract Agent.

“Maximum Share Number” has the meaning set forth in Section 5.01(a)(i).

“Minimum Share Number” has the meaning set forth in Section 5.01(a)(iii).

“non-electing share” has the meaning set forth in Section 5.04(b)(i).

“NYSE” has the meaning set forth in Section 5.01(a).

“Officers’ Certificate” means a certificate signed by (i) either the Company’s Chief Executive Officer, its President or one of its Vice Presidents, and (ii) either the Company’s Corporate Secretary or one of its Assistant Corporate Secretaries or its Treasurer or one of its Assistant Treasurers, and delivered to the Purchase Contract Agent.

“Opinion of Counsel” means a written opinion of counsel, who may be counsel to the Company (and who may be an employee of the Company), and who shall be reasonably acceptable to the Purchase Contract Agent. An Opinion of Counsel may rely on certificates as to matters of fact.

“Outstanding Units” means, with respect to any Unit and as of the date of determination, all Units evidenced by Certificates theretofore authenticated, executed and delivered under this Agreement, except:

(i) if a Termination Event has occurred, (x) Corporate Units for which the underlying Senior Notes or Applicable Ownership Interests in the Treasury Portfolio have been theretofore deposited with the Purchase Contract Agent in trust for the Holders of such Corporate Units and (y) Treasury Units;

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(ii) Units evidenced by Certificates theretofore cancelled by the Purchase Contract Agent or delivered to the Purchase Contract Agent for cancellation or deemed cancelled pursuant to the provisions of this Agreement; and

(iii) Units evidenced by Certificates in exchange for or in lieu of which other Certificates have been authenticated, executed on behalf of the Holder and delivered pursuant to this Agreement, other than any such Certificate in respect of which there shall have been presented to the Purchase Contract Agent proof satisfactory to it that such Certificate is held by a protected purchaser in whose hands the Units evidenced by such Certificate are valid obligations of the Company;

provided, however, that in determining whether the Holders of the requisite number of the Units have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Units owned by the Company or any Affiliate of the Company shall be disregarded and deemed not to be Outstanding Units, except that, in determining whether the Purchase Contract Agent shall be authorized and protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Units that a Responsible Officer of the Purchase Contract Agent actually knows to be so owned shall be so disregarded. Units so owned that have been pledged in good faith may be regarded as Outstanding Units if the pledgee establishes to the satisfaction of the Purchase Contract Agent the pledgee’s right so to act with respect to such Units and that the pledgee is not the Company or any Affiliate of the Company.

“Payment Date” means each February 15, May 15, August 15 and November 15 of each year, commencing February 15, 2004.

“Permitted Investments” has the meaning set forth in Section 1.01(d) of the Pledge Agreement.

“Person” means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof or any other entity of whatever nature.

“Plan” means an employee benefit plan that is subject to ERISA, a plan or individual retirement account that is subject to Section 4975 of the Code or any entity whose assets are considered assets of any such plan.

“Pledge” means the pledge under the Pledge Agreement of the Senior Notes, the Treasury Securities or the appropriate Applicable Ownership Interest (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, as the case may be, in each case constituting a part of the Units (it being

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understood that the appropriate Applicable Ownership Interest (as specified in clause (ii) of the definition of such term) in the Treasury Portfolio shall not be subject to the Pledge).

“Pledge Agreement” means the Pledge Agreement, dated as of November 3, 2003, among the Company, the Collateral Agent, the Custodial Agent, the Securities Intermediary and the Purchase Contract Agent, on its own behalf and as attorney-in-fact for the Holders from time to time of the Units, as amended from time to time.

“Pledged Applicable Ownership Interests” has the meaning set forth in Section 1.01(d) of the Pledge Agreement.

“Pledged Senior Notes” has the meaning set forth in Section 1.01(d) of the Pledge Agreement.

“Pledged Treasury Securities” has the meaning set forth in Section 1.01(d) of the Pledge Agreement.

“Predecessor Certificate” means a Predecessor Corporate Units Certificate or a Predecessor Treasury Units Certificate.

“Predecessor Corporate Units Certificate” of any particular Corporate Units Certificate means every previous Corporate Units Certificate evidencing all or a portion of the rights and obligations of the Company and the Holder under the Corporate Units evidenced thereby; and, for the purposes of this definition, any Corporate Units Certificate authenticated and delivered under Section 3.10 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Corporate Units Certificate shall be deemed to evidence the same rights and obligations of the Company and the Holder as the mutilated, destroyed, lost or stolen Corporate Units Certificate.

“Predecessor Treasury Units Certificate” of any particular Treasury Units Certificate means every previous Treasury Units Certificate evidencing all or a portion of the rights and obligations of the Company and the Holder under the Treasury Units evidenced thereby; and, for the purposes of this definition, any Treasury Units Certificate authenticated and delivered under Section 3.10 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Treasury Units Certificate shall be deemed to evidence the same rights and obligations of the Company and the Holder as the mutilated, destroyed, lost or stolen Treasury Units Certificate.

“Primary Treasury Dealer” shall mean a primary U.S. government securities dealer.

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“Proceeds” has the meaning set forth in Section 1.01(d) of the Pledge Agreement.

“Prospectus” means the prospectus relating to the delivery of shares or any securities in connection with an Early Settlement pursuant to Section 5.07 or a Cash Merger Early Settlement of Purchase Contracts pursuant to Section 5.04(b)(ii), in the form in which first filed, or transmitted for filing, with the Securities and Exchange Commission after the effective date of the Registration Statement pursuant to Rule 424(b) under the Securities Act, including the documents incorporated by reference therein as of the date of such Prospectus.

“Purchase Contract” means, with respect to any Unit, the contract forming a part of such Unit and obligating the Company to (i) sell, and the Holder of such Unit to purchase, shares of Common Stock and (ii) pay the Holder thereof Contract Adjustment Payments, in each case on the terms and subject to the conditions set forth in Article 5 hereof.

“Purchase Contract Agent” means the Person named as the “Purchase Contract Agent” in the first paragraph of this Agreement until a successor Purchase Contract Agent shall have become such pursuant to the applicable provisions of this Agreement, and thereafter “Purchase Contract Agent” shall mean such Person or any subsequent successor who is appointed pursuant to this Agreement.

“Purchase Contract Settlement Date” means November 15, 2006.

“Purchase Contract Settlement Fund” has the meaning set forth in Section 5.03.

“Purchase Price” has the meaning set forth in Section 5.01(a).

“Purchased Shares” has the meaning set forth in Section 5.04(a)(vi).

“Put Right” has the meaning set forth in Section 8.05 of the Supplemental Indenture.

“Quotation Agent” means any Primary Treasury Dealer selected by the Company.

“Record Date” for any distribution and Contract Adjustment Payment payable on any Payment Date means, as to any Global Certificate or any other Certificate, the first business day of the calendar month in which the relevant Payment Date falls; provided that the Company may, at its option, select any other day as the Record Date for any Payment Date so long as such Record Date selected is more than one Business Day but less than sixty Business Days prior to such Payment Date.

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“Redemption Amount” has the meaning set forth in Section 1.02(e) of the Supplemental Indenture.

“Redemption Price” has the meaning set forth in Section 1.02(e) of the Supplemental Indenture.

“Reference Dealer” means a dealer engaged in trading of convertible securities.

“Reference Price” has the meaning set forth in Section 5.01(a)(ii).

“Registration Statement” means a registration statement under the Securities Act prepared by the Company covering, inter alia, the delivery by the Company of any securities in connection with an Early Settlement on the Early Settlement Date or a Cash Merger Early Settlement of Purchase Contracts on the Cash Merger Early Settlement Date under Section 5.04(b)(ii), including all exhibits thereto and the documents incorporated by reference in the prospectus contained in such registration statement, and any post-effective amendments thereto.

“Remarketing” means the remarketing of the Senior Notes by the Remarketing Agent pursuant to the Remarketing Agreement.

“Remarketing Agent” has the meaning set forth in the Remarketing Agreement.

“Remarketing Agreement” means the Remarketing Agreement, dated as of November 3, 2003 among the Company, Banc of America Securities LLC and the Purchase Contract Agent, as amended from time to time.

“Remarketing Date” means the Initial Remarketing Date or the Final Remarketing Date.

“Remarketing Fee” has the meaning set forth in Section 5.02(a)(i).

“Remarketing Per Senior Note Price” means the Treasury Portfolio Purchase Price divided by the number of Senior Notes held as components of Corporate Units.

“Reorganization Event” has the meaning set forth in Section 5.04(b)(i).

“Reset Rate” has the meaning set forth in Section 1.02(e) of the Supplemental Indenture.

“Responsible Officer” shall mean, when used with respect to the Purchase Contact Agent, any officer within the corporate trust department of the

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Purchase Contract Agent, including any vice president, assistant vice president, assistant secretary, assistant treasurer, trust officer or any other officer of the Purchase Contract Agent who customarily performs functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such person’s knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Purchase Contract Agreement.

“Securities Act” means the Securities Act of 1933 and any statute successor thereto, in each case as amended from time to time, and the rules and regulations promulgated thereunder.

“Securities Intermediary” means The Bank of New York, as Securities Intermediary under the Pledge Agreement until a successor Securities Intermediary shall have become such pursuant to the applicable provisions of the Pledge Agreement, and thereafter “Securities Intermediary” shall mean such successor or any subsequent successor who is appointed pursuant to the Pledge Agreement.

“Security Register” and “Security Registrar” have the respective meanings set forth in Section 3.05.

“Senior Indebtedness” means indebtedness of any kind of the Company unless the instrument under which such indebtedness is incurred expressly provides that it is on a parity in right of payment with or subordinate in right of payment to the Contract Adjustment Payments.

“Senior Notes” means the series of notes designated the senior notes due November 15, 2008 to be issued by the Company under the Indenture.

“Separate Senior Notes” means Senior Notes that are no longer a component of Corporate Units.

“Separate Senior Notes Purchase Price” means the amount in cash equal to the product of the Remarketing Per Senior Note Price multiplied by the number of Separate Senior Notes remarketed in the Initial Remarketing.

“Settlement Rate” has the meaning set forth in Section 5.01(a).

“Special Event” has the meaning set forth in Section 1.02(e) of the Supplemental Indenture.

“Special Event Redemption” means the redemption of the Senior Notes pursuant to the Indenture following the occurrence of a Special Event.

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“Special Event Redemption Date” means the date upon which a Special Event Redemption is scheduled to occur pursuant to the Indenture.

“Stated Amount” means $25.00.

“Successful Final Remarketing” has the meaning set forth in Section 5.02(c)(ii).

“Successful Initial Remarketing” has the meaning set forth in Section 5.02(a)(i).

“Successful Remarketing” means a Successful Initial Remarketing or a Successful Final Remarketing.

“Supplemental Indenture” means the Supplemental Indenture No. 1 dated as of the date hereof between the Company and the Indenture Trustee.

“Tax Event” has the meaning set forth in Section 1.02(e) of the Supplemental Indenture.

“Termination Date” means the date, if any, on which a Termination Event occurs.

“Termination Event” means the occurrence of any of the following events:

(i) at any time on or prior to the Purchase Contract Settlement Date, a judgment, decree or court order shall have been entered granting relief under the Bankruptcy Code, adjudicating the Company to be insolvent, or approving as properly filed a petition seeking reorganization or liquidation of the Company or any other similar applicable Federal or state law and if such judgment, decree or order shall have been entered more than 60 days prior to the Purchase Contract Settlement Date, such decree or order shall have continued undischarged and unstayed for a period of 60 days;

(ii) at any time on or prior to the Purchase Contract Settlement Date, a judgment, decree or court order for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of the Company or of its property, or for the termination or liquidation of its affairs, shall have been entered and if such judgment, decree or order shall have been entered more than 60 days prior to the Purchase Contract Settlement Date, such judgment, decree or order shall have continued undischarged and unstayed for a period of 60 days; or

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(iii) at any time on or prior to the Purchase Contract Settlement Date, the Company shall file a petition for relief under the Bankruptcy Code, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization or liquidation under the Bankruptcy Code or any other similar applicable Federal or State law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or of its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due.

“Threshold Appreciation Price” has the meaning set forth in Section 5.01(a).

“TIA” means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation.

“Trading Day” has the meaning set forth in Section 5.01(a).

“Treasury Portfolio” means a portfolio of (1) U.S. treasury securities (or principal or interest strips thereof) that mature on or prior to November 15, 2006 in an aggregate amount at maturity equal to the Applicable Principal Amount, and (2) (x) in the case of a Successful Remarketing prior to the Final Remarketing Date, for the scheduled Payment Date on the Senior Notes that occurs on the Purchase Contract Settlement Date, U.S. treasury securities (or principal or interest strips thereof) that mature on or prior to November 15, 2006 in an aggregate amount at maturity equal to the aggregate interest payment (assuming no reset of the interest rate) that would have been due on the Purchase Contract Settlement Date on the Applicable Principal Amount, and (y) in the case of a Special Event Redemption, for each scheduled Payment Date that occurs after the Special Event Redemption Date to and including the Purchase Contract Settlement Date, U.S. treasury securities (or principal or interest strips thereof) that mature on or prior to the Business Day immediately preceding such scheduled Payment Date in an aggregate amount at maturity equal to the aggregate interest payment (assuming no reset of the interest rate) that would have been due on such scheduled Payment Date on the Applicable Principal Amount.

“Treasury Portfolio Purchase Price” means the lowest aggregate ask-side price quoted by a Primary Treasury Dealer to the Quotation Agent between 9:00 a.m. and 11:00 a.m. (New York City time) (i) in the case of a Special Event Redemption, on the third Business Day immediately preceding the Special Event Redemption Date for the purchase of the applicable Treasury Portfolio for settlement on the Special Event Redemption Date, and (ii) in the case of any Successful Remarketing prior to the Final Remarketing Date, on the date of such Successful Remarketing for the purchase of the applicable Treasury Portfolio for settlement on the third Business Day immediately following the date of such Successful Remarketing.

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“Treasury Securities” means zero-coupon U.S. treasury securities that mature on November 15, 2006 (CUSIP No. 912820GQ4).

“Treasury Unit” means, following the substitution of Treasury Securities for Pledged Senior Notes or the Pledged Applicable Ownership Interest in the Treasury Portfolio as collateral to secure a Holder’s obligations under the Purchase Contract, the collective rights and obligations of a Holder of a Treasury Units Certificate in respect of such Treasury Securities, subject to the Pledge thereof, and the related Purchase Contract.

“Treasury Units Certificate” means a certificate evidencing the rights and obligations of a Holder in respect of the number of Treasury Units specified on such certificate.

“Underwriters” means the underwriters identified in Schedule A to the Underwriting Agreement.

“Underwriting Agreement” means the Underwriting Agreement, dated October 28, 2003, among the Company and the Underwriters, relating to the issuance of Corporate Units by the Company.

“Unit” means a Corporate Unit or a Treasury Unit, as the case may be.

“Vice President” means any vice president, whether or not designated by a number or a word or words added before or after the title “Vice President.”

Section 1.02. Compliance Certificates and Opinions. Except as otherwise expressly provided by this Agreement, upon any application or request by the Company to the Purchase Contract Agent to take any action in accordance with any provision of this Agreement, the Company shall furnish to the Purchase Contract Agent an Officers’ Certificate stating that all conditions precedent, if any, provided for in this Agreement relating to the proposed action have been complied with and, if reasonably requested by the Purchase Contract Agent, an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Agreement relating to such particular application or request, no additional certificate or opinion need be furnished.

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Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Agreement (other than the Officers’ Certificate provided for in Section 10.05) shall include:

(i) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto;

(ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;

(iii) a statement that, in the opinion of each such individual, he or she has made such examination or investigation as is necessary to enable such individual to express an informed opinion as to whether or not such covenant or condition has been complied with; and

(iv) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with.

Section 1.03. Form of Documents Delivered to Purchase Contract Agent.

In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which its certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous.

Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Agreement, they may, but need not, be consolidated and form one instrument.

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Section 1.04. Acts of Holders; Record Dates.

(a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Purchase Contract Agent and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the “Act” of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Agreement and (subject to Section 7.01) conclusive in favor of the Purchase Contract Agent and the Company, if made in the manner provided in this Section.

(b) The fact and date of the execution by any Person of any such instrument or writing may be proved in any manner that the Purchase Contract Agent deems sufficient.

(c) The ownership of Units shall be proved by the Security Register.

(d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Unit shall bind every future Holder of the same Unit and the Holder of every Certificate evidencing such Unit issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Purchase Contract Agent or the Company in reliance thereon, whether or not notation of such action is made upon such Certificate.

(e) The Company may set any date as a record date for the purpose of determining the Holders of Outstanding Units entitled to give, make or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Agreement to be given, made or taken by Holders of Units. If any record date is set pursuant to this paragraph, the Holders of the Outstanding Corporate Units and the Outstanding Treasury Units, as the case may be, on such record date, and no other Holders, shall be entitled to take the relevant action with respect to the Corporate Units or the Treasury Units, as the case may be, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken prior to or on the applicable Expiration Date by Holders of the requisite number of Outstanding Units on such record date. Nothing contained in this paragraph shall be construed to prevent the Company from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and be of no effect), and nothing contained in this paragraph shall be

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construed to render ineffective any action taken by Holders of the requisite number of Outstanding Units on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Company, at its own expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Purchase Contract Agent in writing and to each Holder of Units in the manner set forth in Section 1.06.

With respect to any record date set pursuant to this Section 1.04(e), the Company may designate any date as the “Expiration Date” and from time to time may change the Expiration Date to any earlier or later day; provided that no such change shall be effective unless notice of the proposed new Expiration Date is given to the Purchase Contract Agent in writing, and to each Holder of Units in the manner set forth in Section 1.06, prior to or on the existing Expiration Date. If an Expiration Date is not designated with respect to any record date set pursuant to this Section, the Company shall be deemed to have initially designated the 180th day after such record date as the Expiration Date with respect thereto, subject to its right to change the Expiration Date as provided in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be later than the 180th day after the applicable record date.

Section 1.05. Notices.

Any notice or communication is duly given if in writing and delivered in Person or mailed by first-class mail (registered or certified, return receipt requested), telecopier (with receipt confirmed) or overnight air courier guaranteeing next day delivery, to the others’ address; provided that notice shall be deemed given to the Purchase Contract Agent only upon receipt thereof:

If to the Purchase Contract Agent:

The Bank of New York

101 Barclay Street, Floor 8W

New York, NY 10286

Attention: Corporate Trust Administration

Fax: 212-815-5707

If to the Company:

The PMI Group, Inc.

3003 Oak Road

Walnut Creek, California 94597

Telecopier No.: 925-658-6175

Attention: General Counsel

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If to the Collateral Agent:

The Bank of New York

101 Barclay Street, Floor 8W

New York, NY 10286

Attention: Corporate Trust Administration

Fax: 212-815-5707

If to the Indenture Trustee:

The Bank of New York

101 Barclay Street, Floor 8W

New York, NY 10286

Attention: Corporate Trust Administration

Fax: 212-815-5707

The Purchase Contract Agent shall send to the Indenture Trustee at the telecopier number set forth above a copy of any notices in the form of Exhibits C, D, E or F it sends or receives.

Section 1.06. Notice to Holders; Waiver.

Where this Agreement provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at its address as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed to any particular Holder, shall affect the sufficiency of such notice with respect to other Holders. Where this Agreement provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Purchase Contract Agent, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.

In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Purchase Contract Agent shall constitute a sufficient notification for every purpose hereunder.

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Section 1.07. Effect of Headings and Table of Contents.

The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.

Section 1.08. Successors and Assigns.

All covenants and agreements in this Agreement by the Company and the Purchase Contract Agent shall bind their respective successors and assigns, whether so expressed or not.

Section 1.09. Separability Clause.

In case any provision in this Agreement or in the Units shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof and thereof shall not in any way be affected or impaired thereby.

Section 1.10. Benefits Of Agreement.

Nothing contained in this Agreement or in the Units, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and, to the extent provided hereby, the Holders, any benefits or any legal or equitable right, remedy or claim under this Agreement. The Holders from time to time shall be beneficiaries of this Agreement and shall be bound by all of the terms and conditions hereof and of the Units evidenced by their Certificates by their acceptance of delivery of such Certificates.

Section 1.11. Governing Law.

This Agreement and the Units shall be governed by, and construed in accordance with, the laws of the State of New York.

Section 1.12. Legal Holidays.

In any case where any Payment Date shall not be a Business Day (notwithstanding any other provision of this Agreement or the Units), Contract Adjustment Payments or other distributions shall not be paid on such date, but Contract Adjustment Payments or such other distributions shall be paid on the next succeeding Business Day with the same force and effect as if made on such Payment Date, provided that if such Business Day is in the next succeeding calendar year, then payment of the Contract Adjustment Payments or other distributions will be made on the Business Day immediately preceding such Business Day. No interest shall accrue or be payable by the Company or to any Holder for the period from and after any such Payment Date.

In any case where the Purchase Contract Settlement Date or any Early Settlement Date or Cash Merger Early Settlement Date shall not be a Business

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Day (notwithstanding any other provision of this Agreement or the Units), Purchase Contracts shall not be performed and Early Settlement and Cash Merger Early Settlement shall not be effected on such date, but Purchase Contracts shall be performed or Early Settlement or Cash Merger Early Settlement shall be effected, as applicable, on the next succeeding Business Day with the same force and effect as if made on such Purchase Contract Settlement Date, Early Settlement Date or Cash Merger Early Settlement Date, as applicable.

Section 1.13. Counterparts.

This Agreement may be executed in any number of counterparts by the parties hereto on separate counterparts, each of which, when so executed and delivered, shall be deemed an original, but all such counterparts shall together constitute one and the same instrument.

Section 1.14. Inspection of Agreement.

A copy of this Agreement shall be available at all reasonable times during normal business hours at the Corporate Trust Office for inspection by any Holder or Beneficial Owner.

Section 1.15. Appointment of Financial Institution as Agent for the Company.

The Company may appoint a financial institution (which may be the Collateral Agent) to act as its agent in performing its obligations and in accepting and enforcing performance of the obligations of the Purchase Contract Agent and the Holders, under this Agreement and the Purchase Contracts, by giving notice of such appointment in the manner provided in Section 1.05 hereof. Any such appointment shall not relieve the Company in any way from its obligations hereunder.

Section 1.16. No Waiver.

No failure on the part of the Company, the Purchase Contract Agent, the Collateral Agent, the Securities Intermediary or any of their respective agents to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Company, the Collateral Agent, the Securities Intermediary or any of their respective agents of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein are cumulative and are not exclusive of any remedies provided by law.

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ARTICLE 2

CERTIFICATE FORMS

Section 2.01. Forms Of Certificates Generally.

The Certificates (including the form of Purchase Contract forming part of each Unit evidenced thereby) shall be in substantially the form set forth in Exhibit A hereto (in the case of Certificates evidencing Corporate Units) or Exhibit B hereto (in the case of Certificates evidencing Treasury Units), with such letters, numbers or other marks of identification or designation and such legends or endorsements printed, lithographed or engraved thereon as may be required by the rules of any securities exchange on which the Units are listed or any depositary therefor, or as may, consistently herewith, be determined by the officers of the Company executing such Certificates, as evidenced by their execution of the Certificates.

The definitive Certificates shall be produced in any manner as determined by the officers of the Company executing the Units evidenced by such Certificates, consistent with the provisions of this Agreement, as evidenced by their execution thereof.

Every Global Certificate authenticated, executed on behalf of the Holders and delivered hereunder shall bear a legend in substantially the following form:

THIS CERTIFICATE IS A GLOBAL CERTIFICATE WITHIN THE MEANING OF THE PURCHASE CONTRACT AGREEMENT HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF CEDE & CO., AS NOMINEE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (THE “DEPOSITARY”), THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY. THIS CERTIFICATE IS EXCHANGEABLE FOR CERTIFICATES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE PURCHASE CONTRACT AGREEMENT AND NO TRANSFER OF THIS CERTIFICATE (OTHER THAN A TRANSFER OF THIS CERTIFICATE AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES.

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY

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CERTIFICATE ISSUED IS REQUESTED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

Section 2.02. Form of Purchase Contract Agent’s Certificate of Authentication.

The form of the Purchase Contract Agent’s certificate of authentication of the Units shall be in substantially the form set forth on the form of the applicable Certificates.

ARTICLE 3

THE UNITS

Section 3.01. Amount; Form and Denominations.

The aggregate number of Units evidenced by Certificates authenticated, executed on behalf of the Holders and delivered hereunder is limited to 12,000,000 (or 13,800,000 if the over-allotment option granted to the Underwriters pursuant to the Underwriting Agreement is exercised in full), except for Certificates authenticated, executed and delivered upon registration of transfer of, in exchange for, or in lieu of, other Certificates pursuant to Section 3.04, Section 3.05, Section 3.10, Section 3.13, Section 3.14 or Section 8.05.

The Certificates shall be issuable only in registered form and only in denominations of a single Corporate Unit or Treasury Unit and any integral multiple thereof.

Section 3.02. Rights and Obligations Evidenced by the Certificates.

Each Corporate Units Certificate shall evidence the number of Corporate Units specified therein, with each such Corporate Unit representing (1) the ownership by the Holder thereof of a beneficial interest in a Senior Note or the Applicable Ownership Interest in the Treasury Portfolio, as the case may be, subject to the Pledge of such Senior Note or the Applicable Ownership Interest (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, as the case may be, by such Holder pursuant to the Pledge Agreement, and (2) the rights and obligations of the Holder thereof and the Company under one Purchase

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Contract. The Purchase Contract Agent is hereby authorized, as attorney-in-fact for, and on behalf of, the Holder of each Corporate Unit, to pledge, pursuant to the Pledge Agreement, the Senior Note and the Applicable Ownership Interest (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, if any, forming a part of such Corporate Unit, to the Collateral Agent for the benefit of the Company, and to grant to the Collateral Agent, for the benefit of the Company, a security interest in the right, title and interest of such Holder in such Senior Note and the Applicable Ownership Interest (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, if any, to secure the obligation of the Holder under each Purchase Contract to purchase shares of Common Stock.

Upon the formation of a Treasury Unit pursuant to Section 3.13, each Treasury Unit Certificate shall evidence the number of Treasury Units specified therein, with each such Treasury Unit representing (1) the ownership by the Holder thereof of a 1/40 undivided beneficial interest in a Treasury Security with a principal amount at maturity equal to $1,000, subject to the Pledge of such interest by such Holder pursuant to the Pledge Agreement, and (2) the rights and obligations of the Holder thereof and the Company under one Purchase Contract. The Purchase Contract Agent is hereby authorized, as attorney-in-fact for, and on behalf of, the Holder of each Treasury Unit, to pledge, pursuant to the Pledge Agreement, such Holder’s interest in the Treasury Security forming a part of such Treasury Unit to the Collateral Agent, for the benefit of the Company, and to grant to the Collateral Agent, for the benefit of the Company, a security interest in the right, title and interest of such Holder in such Treasury Security to secure the obligation of the Holder under each Purchase Contract to purchase shares of Common Stock.

Prior to the purchase of shares of Common Stock under each Purchase Contract, such Purchase Contract shall not entitle the Holder of a Unit to any of the rights of a holder of shares of Common Stock, including, without limitation, the right to vote or receive any dividends or other payments or to consent or to receive notice as a shareholder in respect of the meetings of shareholders or for the election of directors of the Company or for any other matter, or any other rights whatsoever as a shareholder of the Company.

Section 3.03. Execution, Authentication, Delivery and Dating.

Subject to the provisions of Section 3.13 and Section 3.14 hereof, upon the execution and delivery of this Agreement, and at any time and from time to time thereafter, the Company may deliver Certificates executed by the Company to the Purchase Contract Agent for authentication, execution on behalf of the Holders and delivery, together with its Issuer Order for authentication of such Certificates, and the Purchase Contract Agent in accordance with such Issuer Order shall authenticate, execute on behalf of the Holders and deliver such Certificates.

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The Certificates shall be executed on behalf of the Company by its Chairman of the Board of Directors, its Chief Executive Officer, its President, its Treasurer or one of its Vice Presidents. The signature of any of these officers on the Certificates may be manual or facsimile.

Certificates bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Certificates or did not hold such offices at the date of such Certificates.

No Purchase Contract evidenced by a Certificate shall be valid until such Certificate has been executed on behalf of the Holder by the manual signature of an authorized officer of the Purchase Contract Agent, as such Holder’s attorney-in-fact. Such signature by an authorized officer of the Purchase Contract Agent shall be conclusive evidence that the Holder of such Certificate has entered into the Purchase Contracts evidenced by such Certificate.

Each Certificate shall be dated the date of its authentication.

No Certificate shall be entitled to any benefit under this Agreement or be valid or obligatory for any purpose unless there appears on such Certificate a certificate of authentication substantially in the form provided for herein executed by an authorized officer of the Purchase Contract Agent by manual signature, and such certificate upon any Certificate shall be conclusive evidence, and the only evidence, that such Certificate has been duly authenticated and delivered hereunder.

Section 3.04. Temporary Certificates.

Pending the preparation of definitive Certificates, the Company shall execute and deliver to the Purchase Contract Agent, and the Purchase Contract Agent shall authenticate, execute on behalf of the Holders, and deliver, in lieu of such definitive Certificates, temporary Certificates that are in substantially the form set forth in Exhibit A or Exhibit B hereto, as the case may be, with such letters, numbers or other marks of identification or designation and such legends or endorsements printed, lithographed or engraved thereon as may be required by the rules of any securities exchange on which the Corporate Units or Treasury Units, as the case may be, are listed, or as may, consistently herewith, be determined by the officers of the Company executing such Certificates, as evidenced by their execution of the Certificates.

If temporary Certificates are issued, the Company will cause definitive Certificates to be prepared without unreasonable delay. After the preparation of definitive Certificates, the temporary Certificates shall be exchangeable for

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definitive Certificates upon surrender of the temporary Certificates at the Corporate Trust Office, at the expense of the Company and without charge to the Holder. Upon surrender for cancellation of any one or more temporary Certificates, the Company shall execute and deliver to the Purchase Contract Agent, and the Purchase Contract Agent shall authenticate, execute on behalf of the Holder, and deliver in exchange therefor, one or more definitive Certificates of like tenor and denominations and evidencing a like number of Units as the temporary Certificate or Certificates so surrendered. Until so exchanged, the temporary Certificates shall in all respects evidence the same benefits and the same obligations with respect to the Units evidenced thereby as definitive Certificates.

Section 3.05. Registration; Registration of Transfer and Exchange.

The Purchase Contract Agent shall keep at the Corporate Trust Office a register (the “Security Register”) in which, subject to such reasonable regulations as it may prescribe, the Purchase Contract Agent shall provide for the registration of Certificates and of transfers of Certificates (the Purchase Contract Agent, in such capacity, the “Security Registrar”). The Security Registrar shall record separately the registration and transfer of the Certificates evidencing Corporate Units and Treasury Units.

Upon surrender for registration of transfer of any Certificate at the Corporate Trust Office, the Company shall execute and deliver to the Purchase Contract Agent, and the Purchase Contract Agent shall authenticate, execute on behalf of the designated transferee or transferees, and deliver, in the name of the designated transferee or transferees, one or more new Certificates of any authorized denominations, like tenor, and evidencing a like number of Corporate Units or Treasury Units, as the case may be.

At the option of the Holder, Certificates may be exchanged for other Certificates, of any authorized denominations and evidencing a like number of Corporate Units or Treasury Units, as the case may be, upon surrender of the Certificates to be exchanged at the Corporate Trust Office. Whenever any Certificates are so surrendered for exchange, the Company shall execute and deliver to the Purchase Contract Agent, and the Purchase Contract Agent shall authenticate, execute on behalf of the Holder, and deliver the Certificates that the Holder making the exchange is entitled to receive.

All Certificates issued upon any registration of transfer or exchange of a Certificate shall evidence the ownership of the same number of Corporate Units or Treasury Units, as the case may be, and be entitled to the same benefits and subject to the same obligations under this Agreement as the Corporate Units or Treasury Units, as the case may be, evidenced by the Certificate surrendered upon such registration of transfer or exchange.

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Every Certificate presented or surrendered for registration of transfer or exchange shall (if so required by the Purchase Contract Agent) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Purchase Contract Agent duly executed, by the Holder thereof or its attorney duly authorized in writing.

No service charge shall be made for any registration of transfer or exchange of a Certificate, but the Company and the Purchase Contract Agent may require payment from the Holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Certificates, other than any exchanges pursuant to Section 3.04, Section 3.06 and Section 8.05 not involving any transfer.

Notwithstanding the foregoing, the Company shall not be obligated to execute and deliver to the Purchase Contract Agent, and the Purchase Contract Agent shall not be obligated to authenticate, execute on behalf of the Holder and deliver any Certificate in exchange for any other Certificate presented or surrendered for registration of transfer or for exchange on or after the Business Day immediately preceding the earliest to occur of any Early Settlement Date with respect to such Certificate, any Cash Merger Early Settlement Date with respect to such Certificate, the Purchase Contract Settlement Date or the Termination Date. In lieu of delivery of a new Certificate, upon satisfaction of the applicable conditions specified above in this Section and receipt of appropriate registration or transfer instructions from such Holder, the Purchase Contract Agent shall:

(i) if the Purchase Contract Settlement Date (including upon any Cash Settlement) or an Early Settlement Date or a Cash Merger Early Settlement Date with respect to such other Certificate has occurred, deliver the shares of Common Stock issuable in respect of the Purchase Contracts forming a part of the Units evidenced by such other Certificate; or

(ii) if a Termination Event shall have occurred prior to the Purchase Contract Settlement Date, transfer the Senior Notes, the Treasury Securities, or the appropriate Applicable Ownership Interest in the Treasury Portfolio, as the case may be, evidenced thereby, in each case subject to the applicable conditions and in accordance with the applicable provisions of Section 3.15 and Article 5 hereof.

Section 3.06. Book-Entry Interests.

The Certificates, on original issuance, will be issued in the form of one or more fully registered Global Certificates, to be delivered to the Depositary or its custodian by, or on behalf of, the Company. The Company hereby designates

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DTC as the initial Depositary. Such Global Certificates shall initially be registered on the books and records of the Company in the name of Cede & Co., the nominee of the Depositary, and no Beneficial Owner will receive a definitive Certificate representing such Beneficial Owner’s interest in such Global Certificate, except as provided in Section 3.09. The Purchase Contract Agent shall enter into an agreement with the Depositary if so requested by the Company. Unless and until definitive, fully registered Certificates have been issued to Beneficial Owners pursuant to Section 3.09:

(i) the provisions of this Section 3.06 shall be in full force and effect;

(ii) the Company shall be entitled to deal with the Depositary for all purposes of this Agreement (including, without limitation, making Contract Adjustment Payments and receiving approvals, votes or consents hereunder) as the Holder of the Units and the sole holder of the Global Certificates and shall have no obligation to the Beneficial Owners; provided that any Beneficial Owner may directly enforce against the Company, without the involvement of the Depositary or any other Person, its right to receive definitive Certificates pursuant to Section 3.09;

(iii) to the extent that the provisions of this Section 3.06 conflict with any other provisions of this Agreement, the provisions of this Section 3.06 shall control; and

(iv) the rights of the Beneficial Owners shall be exercised only through the Depositary and shall be limited to those established by law and agreements between such Beneficial Owners and the Depositary or the Depositary Participants; provided that any Beneficial Owner may directly enforce against the Company, without the involvement of the Depositary or any other Person, its right to receive definitive Certificates pursuant to Section 3.09.

Transfers of securities evidenced by Global Certificates shall be made through the facilities of the Depositary, and any cancellation of, or increase or decrease in the number of, such securities (including the creation of Treasury Units and the recreation of Corporate Units pursuant to Section 3.13 and Section 3.14 respectively) shall be accomplished by making appropriate annotations on the Schedule of Increases and Decreases for such Global Certificate.

Section 3.07. Notices to Holders.

Whenever a notice or other communication to the Holders is required to be given under this Agreement, the Company or the Company’s agent shall give such notices and communications to the Holders and, with respect to any Units

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registered in the name of the Depositary or the nominee of the Depositary, the Company or the Company’s agent shall, except as set forth herein, have no obligations to the Beneficial Owners.

Section 3.08. Appointment of Successor Depositary.

If the Depositary elects to discontinue its services as securities depositary with respect to the Units, the Company may, in its sole discretion, appoint a successor Depositary with respect to the Units.

Section 3.09. Definitive Certificates.

If:

(i) the Depositary notifies the Company that it is unwilling or unable to continue its services as securities depositary with respect to the Units and no successor Depositary has been appointed pursuant to Section 3.08 within 90 days after such notice; or

(ii) the Depositary ceases to be a “clearing agency” registered under Section 17A of the Exchange Act when the Depositary is required to be so registered to act as the Depositary and so notifies the Company, and no successor Depositary has been appointed pursuant to Section 3.08 within 90 days after such notice;

(iii) any event of default has occurred and is continuing under the Notes or the Purchase Contract Agreement; or

(iv) the Company determines in its discretion that the Global Certificates shall be exchangeable for definitive Certificates,

then (x) definitive Certificates shall be prepared by the Company with respect to such Units and delivered to the Purchase Contract Agent and (y) upon surrender of the Global Certificates representing the Units by the Depositary, accompanied by registration instructions, the Company shall cause definitive Certificates to be delivered to Beneficial Owners in accordance with the instructions of the Depositary. The Company and the Purchase Contract Agent shall not be liable for any delay in delivery of such instructions and may conclusively rely on and shall be authorized and protected in relying on, such instructions. Each definitive Certificate so delivered shall evidence Units of the same kind and tenor as the Global Certificate so surrendered in respect thereof.

Section 3.10. Mutilated, Destroyed, Lost and Stolen Certificates.

If any mutilated Certificate is surrendered to the Purchase Contract Agent, the Company shall execute and deliver to the Purchase Contract Agent, and the

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Purchase Contract Agent shall authenticate, execute on behalf of the Holder, and deliver in exchange therefor, a new Certificate, evidencing the same number of Corporate Units or Treasury Units, as the case may be, and bearing a Certificate number not contemporaneously outstanding.

If there shall be delivered to the Company and the Purchase Contract Agent (i) evidence to their satisfaction of the destruction, loss or theft of any Certificate, and (ii) such security or indemnity as may be required by them to hold each of them and any agent of any of them harmless, then, in the absence of notice to the Company or the Purchase Contract Agent that such Certificate has been acquired by a protected purchaser, the Company shall execute and deliver to the Purchase Contract Agent, and the Purchase Contract Agent shall authenticate, execute on behalf of the Holder, and deliver to the Holder, in lieu of any such destroyed, lost or stolen Certificate, a new Certificate, evidencing the same number of Corporate Units or Treasury Units, as the case may be, and bearing a Certificate number not contemporaneously outstanding.

Notwithstanding the foregoing, the Company shall not be obligated to execute and deliver to the Purchase Contract Agent, and the Purchase Contract Agent shall not be obligated to authenticate, execute on behalf of the Holder, and deliver to the Holder, a Certificate on or after the Business Day immediately preceding the earliest of any Early Settlement Date with respect to such lost or mutilated Certificate, any Cash Merger Early Settlement Date with respect to such lost or mutilated Certificate, the Purchase Contract Settlement Date or the Termination Date. In lieu of delivery of a new Certificate, upon satisfaction of the applicable conditions specified above in this Section and receipt of appropriate registration or transfer instructions from such Holder, the Purchase Contract Agent shall:

(i) if the Purchase Contract Settlement Date or Early Settlement Date or Cash Merger Early Settlement Date with respect to such lost, stolen, destroyed or mutilated Certificate has occurred, deliver the shares of Common Stock issuable in respect of the Purchase Contracts forming a part of the Units evidenced by such Certificate; or

(ii) if a Cash Settlement with respect to such lost or mutilated Certificate or if a Termination Event shall have occurred prior to the Purchase Contract Settlement Date, transfer the Senior Notes, the Treasury Securities or the appropriate Applicable Ownership Interest (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, as the case may be, evidenced thereby, in each case subject to the applicable conditions and in accordance with the applicable provisions of Section 3.15 and Article 5 hereof.

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Upon the issuance of any new Certificate under this Section, the Company and the Purchase Contract Agent may require the payment by the Holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other fees and expenses (including, without limitation, the fees and expenses of the Purchase Contract Agent) connected therewith.

Every new Certificate issued pursuant to this Section in lieu of any destroyed, lost or stolen Certificate shall constitute an original additional contractual obligation of the Company and of the Holder in respect of the Units evidenced thereby, whether or not the destroyed, lost or stolen Certificate (and the Units evidenced thereby) shall be at any time enforceable by anyone, and shall be entitled to all the benefits and be subject to all the obligations of this Agreement equally and proportionately with any and all other Certificates delivered hereunder.

The provisions of this Section are exclusive and shall preclude, to the extent lawful, all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Certificates.

Section 3.11. Persons Deemed Owners.

Prior to due presentment of a Certificate for registration of transfer, the Company and the Purchase Contract Agent, and any agent of the Company or the Purchase Contract Agent, may treat the Person in whose name such Certificate is registered as the owner of the Units evidenced thereby for purposes of (subject to any applicable record date) any payment or distribution on the Senior Notes or on the Applicable Ownership Interests (as specified in clause (ii) of the definition of such term) in the Treasury Portfolio (if any), as applicable, payment of Contract Adjustment Payments and performance of the Purchase Contracts and for all other purposes whatsoever in connection with such Units, whether or not such payment, distribution, or performance shall be overdue and notwithstanding any notice to the contrary, and neither the Company nor the Purchase Contract Agent, nor any agent of the Company or the Purchase Contract Agent, shall be affected by notice to the contrary.

Notwithstanding the foregoing, with respect to any Global Certificate, nothing contained herein shall prevent the Company, the Purchase Contract Agent or any agent of the Company or the Purchase Contract Agent from giving effect to any written certification, proxy or other authorization furnished by the Depositary (or its nominee), as a Holder, with respect to such Global Certificate, or impair, as between such Depositary and the related Beneficial Owner, the operation of customary practices governing the exercise of rights of the Depositary (or its nominee) as Holder of such Global Certificate. None of the Company, the Purchase Contract Agent or any agent of the Company or the Purchase Contract Agent will have any responsibility or liability for any aspect of the records

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relating to or payments made on account of beneficial ownership interests of a Global Certificate or maintaining, supervising or reviewing any records relating to such beneficial ownership interests.

Section 3.12. Cancellation.

All Certificates surrendered for delivery of shares of Common Stock on or after the Purchase Contract Settlement Date or upon the transfer of Senior Notes, or for delivery of Senior Notes, the appropriate Applicable Ownership Interest in the Treasury Portfolio or Treasury Securities, as the case may be, after the occurrence of a Termination Event or pursuant to a Cash Settlement, an Early Settlement or a Cash Merger Early Settlement, or upon the registration of transfer or exchange of a Unit, or a Collateral Substitution or the recreation of Corporate Units shall, if surrendered to any Person other than the Purchase Contract Agent, be delivered to the Purchase Contract Agent along with appropriate written instructions regarding the cancellation thereof and, if not already cancelled, shall be promptly cancelled by it. The Company may at any time deliver to the Purchase Contract Agent for cancellation any Certificates previously authenticated, executed and delivered hereunder that the Company may have acquired in any manner whatsoever, and all Certificates so delivered shall, upon an Issuer Order, be promptly cancelled by the Purchase Contract Agent. No Certificates shall be authenticated, executed on behalf of the Holder and delivered in lieu of or in exchange for any Certificates cancelled as provided in this Section, except as expressly permitted by this Agreement. All cancelled Certificates held by the Purchase Contract Agent shall be disposed of in accordance with its customary practices.

If the Company or any Affiliate of the Company shall acquire any Certificate, such acquisition shall not operate as a cancellation of such Certificate unless and until such Certificate is delivered to the Purchase Contract Agent cancelled or for cancellation.

Section 3.13. Creation of Treasury Units by Substitution of Treasury Securities.

Unless the Treasury Portfolio has replaced the Senior Notes as a component of the Corporate Units, and subject to the conditions set forth in this Agreement, a Holder may, at any time from and after the date of this Agreement and on or prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the Purchase Contract Settlement Date, effect a Collateral Substitution and separate the Pledged Senior Notes from the related Purchase Contracts in respect of all or a portion of such Holder’s Corporate Units by substituting for such Pledged Senior Notes, Treasury Securities or portions thereof in an aggregate principal amount at maturity equal to the aggregate principal amount of such Pledged Senior Notes; provided that Holders may make Collateral Substitutions only in integral multiples of 40 Corporate Units. To effect such substitution, the Holder must:

(1) deposit with the Securities Intermediary Treasury Securities having an aggregate principal amount at maturity equal to the aggregate principal amount of the Senior Notes comprising part of all such Corporate Units; and

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(2) transfer the related Corporate Units to the Purchase Contract Agent accompanied by a notice to the Purchase Contract Agent, substantially in the form of Exhibit C hereto, (i) stating that the Holder has deposited the relevant amount of Treasury Securities with the Securities Intermediary for credit to the Collateral Account and (ii) instructing the Purchase Contract Agent to instruct the Collateral Agent to release the Pledged Senior Notes underlying such Corporate Units, whereupon the Purchase Contract Agent shall promptly provide an instruction to such effect to the Collateral Agent, substantially in the form of Exhibit A to the Pledge Agreement.

Upon receipt of the Treasury Securities described in clause (1) above and the instruction described in clause (2) above, in accordance with the terms of the Pledge Agreement, the Collateral Agent will cause the Securities Intermediary to effect the release of such Pledged Senior Notes from the Pledge and the transfer of such Senior Notes to the Purchase Contract Agent on behalf of the Holder free and clear of the Company’s security interest therein. Upon receipt of such Senior Notes, the Purchase Contract Agent shall promptly:

(i) cancel the related Corporate Units;

(ii) transfer the Senior Notes to the Holder (such Senior Notes shall be tradeable as a separate security, independent of the resulting Treasury Units); and

(iii) authenticate, execute on behalf of such Holder and deliver Treasury Units in book-entry form, or if applicable, in the form of a Treasury Units Certificate executed by the Company in accordance with Section 3.03 evidencing the same number of Purchase Contracts as were evidenced by the cancelled Corporate Units.

Holders who elect to separate the Senior Notes from the related Purchase Contracts and to substitute Treasury Securities for such Senior Notes shall be responsible for any fees or expenses (including, without limitation, fees and expenses payable to the Collateral Agent for its services as Collateral Agent) in respect of the substitution, and neither the Company nor the Purchase Contract Agent shall be responsible for any such fees or expenses.

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If the Treasury Portfolio has replaced the Senior Notes as a component of the Corporate Units and subject to the conditions set forth in this Agreement, a Holder may, at any time on or prior to the second Business Day immediately preceding the Purchase Contract Settlement Date, substitute Treasury Securities for the Applicable Ownership Interests in the Treasury Portfolio included in such Corporate Units, but only in integral multiples of 16,000 Corporate Units. In such an event, the Holder shall transfer Treasury Securities to the Securities Intermediary, and the Purchase Contract Agent shall instruct the Collateral Agent to release the Pledge of and transfer to the Holder the appropriate Applicable Ownership Interests in the Treasury Portfolio in the manner set forth above.

In the event a Holder making a Collateral Substitution pursuant to this Section 3.13 fails to effect a book-entry transfer of the Corporate Units or fails to deliver Corporate Units Certificates to the Purchase Contract Agent after depositing Treasury Securities with the Securities Intermediary, any distributions on the Senior Notes or Applicable Ownership Interest in the Treasury Portfolio constituting a part of such Corporate Units shall be held in the name of the Purchase Contract Agent or its nominee in trust for the benefit of such Holder, until such Corporate Units are so transferred or the Corporate Units Certificate is so delivered, as the case may be, or, such Holder provides evidence satisfactory to the Company and the Purchase Contract Agent that such Corporate Units Certificate has been destroyed, lost or stolen, together with any indemnity that may be required by the Purchase Contract Agent and the Company.

Except as described in Section 5.02 or in this Section 3.13 or in connection with a Cash Settlement, an Early Settlement, a Cash Merger Early Settlement or a Termination Event, for so long as the Purchase Contract underlying a Corporate Unit remains in effect, such Corporate Units shall not be separable into its constituent parts, and the rights and obligations of the Holder in respect of the Senior Notes or Applicable Ownership Interests in the Treasury Portfolio, as the case may be, and the Purchase Contract comprising such Corporate Units may be acquired, and may be transferred and exchanged, only as a Corporate Unit.

Section 3.14. Recreation of Corporate Units.

Unless the Treasury Portfolio has replaced the Senior Notes as a component of the Corporate Units, and subject to the conditions set forth in this Agreement, a Holder of Treasury Units may recreate Corporate Units at any time on or prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the Purchase Contract Settlement Date; provided that Holders of Treasury Units may only recreate Corporate Units in integral multiples of 40 Treasury Units. To recreate Corporate Units, the Holder must:

(1) transfer to the Securities Intermediary Senior Notes having an aggregate principal amount equal to the aggregate principal amount at stated maturity of the Pledged Treasury Securities comprising part of the Treasury Units; and

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(2) transfer the related Treasury Units to the Purchase Contract Agent accompanied by a notice to the Purchase Contract Agent, substantially in the form of Exhibit C hereto, (i) stating that the Holder has transferred the relevant amount of Senior Notes to the Securities Intermediary for deposit in the Collateral Account and (ii) instructing the Purchase Contract Agent to instruct the Collateral Agent to release the Pledged Treasury Securities underlying such Treasury Units, whereupon the Purchase Contract Agent shall promptly provide an instruction to such effect to the Collateral Agent, substantially in the form of Exhibit C to the Pledge Agreement.

Upon receipt of the Senior Notes described in clause (1) above and the instruction described in clause (2) above, in accordance with the terms of the Pledge Agreement, the Collateral Agent will cause the Securities Intermediary to effect the release of the Pledged Treasury Securities having a corresponding aggregate principal amount at maturity from the Pledge and the transfer thereof to the Purchase Contract Agent on behalf of the Holder free and clear of the Company’s security interest therein. Upon receipt of such Treasury Securities, the Purchase Contract Agent shall promptly:

(i) cancel the related Treasury Units;

(ii) transfer the Treasury Securities to the Holder; and

(iii) authenticate, execute on behalf of such Holder and deliver Corporate Units in book-entry form or, if applicable, in the form of a Corporate Units Certificate executed by the Company in accordance with Section 3.03 evidencing the same number of Purchase Contracts as were evidenced by the cancelled Treasury Units.

Holders who elect to recreate Corporate Units shall be responsible for any fees or expenses (including, without limitation, fees and expenses payable to the Collateral Agent for its services as Collateral Agent) in respect of the recreation, and neither the Company nor the Purchase Contract Agent shall be responsible for any such fees or expenses.

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If the Treasury Portfolio has replaced the Senior Notes as a component of the Corporate Units, a Holder of Treasury Units may at any time on or prior to the second Business Day immediately preceding the Purchase Contract Settlement Date substitute the Applicable Ownership Interests in the Treasury Portfolio for Treasury Securities, but only in multiples of 16,000 Treasury Units. In such an event, the Holder shall transfer the appropriate Applicable Ownership Interests in the Treasury Portfolio to the Collateral Agent, and the Purchase Contract Agent shall instruct the Collateral Agent to release the Pledge of and transfer to the Holder Treasury Securities in the manner set forth above.

Except as provided in Section 5.02 or in this Section 3.14 or in connection with a Cash Settlement, an Early Settlement, a Cash Merger Early Settlement or a Termination Event, for so long as the Purchase Contract underlying a Treasury Unit remains in effect, such Treasury Unit shall not be separable into its constituent parts and the rights and obligations of the Holder of such Treasury Unit in respect of the 1/40 of a Treasury Security and the Purchase Contract comprising such Treasury Unit may be acquired, and may be transferred and exchanged, only as a Treasury Unit.

Section 3.15. Transfer of Collateral upon Occurrence of Termination Event.

Upon the occurrence of a Termination Event and the transfer to the Purchase Contract Agent of the Senior Notes, the appropriate Applicable Ownership Interests in the Treasury Portfolio or the Treasury Securities, as the case may be, underlying the Corporate Units and the Treasury Units, as the case may be, pursuant to the terms of the Pledge Agreement, the Purchase Contract Agent shall request transfer instructions with respect to such Senior Notes, the appropriate Applicable Ownership Interests in the Treasury Portfolio or Treasury Securities, as the case may be, from each Holder by written request, substantially in the form of Exhibit D hereto, mailed to such Holder at its address as it appears in the Security Register.

Upon book-entry transfer of the Corporate Units or the Treasury Units or delivery of a Corporate Units Certificate or Treasury Units Certificate to the Purchase Contract Agent with such transfer instructions, the Purchase Contract Agent shall transfer the Senior Notes, the appropriate Applicable Ownership Interests in the Treasury Portfolio or Treasury Securities, as the case may be, underlying such Corporate Units or Treasury Units, as the case may be, to such Holder by book-entry transfer, or other appropriate procedures, in accordance with such instructions. In the event a Holder of Corporate Units or Treasury Units fails to effect such transfer or delivery, the Senior Notes, the appropriate Applicable Ownership Interests in the Treasury Portfolio or Treasury Securities, as the case may be, underlying such Corporate Units or Treasury Units, as the case may be, and any distributions thereon, shall be held in the name of the Purchase Contract Agent or its nominee in trust for the benefit of such Holder, until the earlier to occur of:

(i) the transfer of such Corporate Units or Treasury Units or surrender of the Corporate Units Certificate or Treasury Units Certificate or the receipt by the Company and the Purchase Contract Agent from such Holder of satisfactory evidence that such Corporate Units Certificate or Treasury Units Certificate has been destroyed, lost or stolen, together with any indemnity that may be required by the Purchase Contract Agent and the Company; and

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(ii) the expiration of the time period specified in the abandoned property laws of the relevant State in which the Purchase Contract Agent holds such property.

Section 3.16. No Consent to Assumption.

Each Holder of a Unit, by acceptance thereof, shall be deemed expressly to have withheld any consent to the assumption under Section 365 of the Bankruptcy Code or otherwise, of the Purchase Contract by the Company or its trustee, receiver, liquidator or a person or entity performing similar functions in the event that the Company becomes the debtor under the Bankruptcy Code or subject to other similar state or Federal law providing for reorganization or liquidation.

ARTICLE 4

THE SENIOR NOTES AND APPLICABLE OWNERSHIP INTERESTS IN THE TREASURY

PORTFOLIO

Section 4.01. Interest Payments; Rights to Interest Payments Preserved.

Any payment on any Senior Note or on the appropriate Applicable Ownership Interests (as specified in clause (ii) of the definition of such term) in the Treasury Portfolio, as the case may be, which is paid on any Payment Date shall, subject to receipt thereof by the Purchase Contract Agent from the Company (in the case of a Senior Note that is held in the name of the Purchase Contract Agent) or from the Collateral Agent as provided by the terms of the Pledge Agreement (in the case of Applicable Ownership Interests or a Senior Note that is held in the name of the Collateral Agent), be paid by the Purchase Contract Agent to the Person in whose name the Corporate Units Certificate (or one or more Predecessor Corporate Units Certificates) of which such Senior Note or the appropriate Applicable Ownership Interests in the Treasury Portfolio, as the case may be, forms a part is registered at the close of business on the Record Date for such Payment Date.

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Each Corporate Units Certificate evidencing Senior Notes or the appropriate Applicable Ownership Interests in the Treasury Portfolio delivered under this Agreement upon registration of transfer of or in exchange for or in lieu of any other Corporate Units Certificate shall carry the right to accrued and unpaid interest or distributions, and to accrue interest or distributions, which were carried by the Senior Notes or the appropriate Applicable Ownership Interests in the Treasury Portfolio underlying such other Corporate Units Certificate.

In the case of any Corporate Unit with respect to which (A) Cash Settlement of the underlying Purchase Contract is properly effected pursuant to Section 5.02(b) or Section 5.02(e) hereof, (B) Early Settlement of the underlying Purchase Contract is properly effected pursuant to Section 5.07 hereof, (C) Cash Merger Early Settlement of the underlying Purchase Contract is properly effected pursuant to Section 5.04(b)(ii) hereof, (D) a Collateral Substitution is properly effected pursuant to Section 3.13, or (E) a Successful Initial Remarketing occurs with respect to the Senior Note that is part of such Corporate Unit, in each case on a date that is after any Record Date and prior to or on the next succeeding Payment Date, interest on the Senior Notes or distributions on the appropriate Applicable Ownership Interests in the Treasury Portfolio, as the case may be, underlying such Corporate Unit otherwise payable on such Payment Date shall be payable on such Payment Date notwithstanding such Cash Settlement, Early Settlement, Cash Merger Early Settlement, Collateral Substitution or Initial Remarketing, and such payment or distributions shall, subject to receipt thereof by the Purchase Contract Agent, be payable to the Person in whose name the Corporate Units Certificate (or one or more Predecessor Corporate Units Certificates) was registered at the close of business on the Record Date.

Except as otherwise expressly provided in the immediately preceding paragraph, in the case of any Corporate Units with respect to which Cash Settlement, Early Settlement or Cash Merger Early Settlement of the underlying Purchase Contract is properly effected, or with respect to which a Collateral Substitution has been effected, payments on the related Senior Notes or distributions on the appropriate Applicable Ownership Interests in the Treasury Portfolio, as the case may be, that would otherwise be payable or made after the Purchase Contract Settlement Date, Early Settlement Date, Cash Merger Early Settlement Date or the date of the Collateral Substitution, as the case may be, shall not be payable hereunder to the Holder of such Corporate Units; provided, however, that to the extent that such Holder continues to hold Separate Senior Notes or Applicable Ownership Interest in the Treasury Portfolio that formerly comprised a part of such Holder’s Corporate Units, such Holder shall be entitled to receive interest on such Separate Senior Notes or distributions on the Applicable Ownership Interests in the Treasury Portfolio.

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Section 4.02. Notice and Voting.

Under the terms of the Pledge Agreement, the Purchase Contract Agent will be entitled to exercise the voting and any other consensual rights pertaining to the Pledged Senior Notes, but only to the extent instructed in writing by the Holders as described below. Upon receipt of notice of any meeting at which holders of Senior Notes are entitled to vote or upon any solicitation of consents, waivers or proxies of holders of Senior Notes, the Purchase Contract Agent shall, as soon as practicable thereafter, mail, first class, postage pre-paid, to the Holders of Corporate Units a notice:

(i) containing such information as is contained in the notice or solicitation;

(ii) stating that each Holder on the record date set by the Purchase Contract Agent therefor (which, to the extent possible, shall be the same date as the record date for determining the holders of Senior Notes, as the case may be, entitled to vote) shall be entitled to instruct the Purchase Contract Agent as to the exercise of the voting rights pertaining to such Senior Notes underlying their Corporate Units; and

(iii) stating the manner in which such instructions may be given.

Upon the written request of the Holders of Corporate Units on such record date received by the Purchase Contract Agent at least six days prior to such meeting, the Purchase Contract Agent shall endeavor insofar as practicable to vote or cause to be voted, in accordance with the instructions set forth in such requests, the maximum number of Senior Notes, as the case may be, as to which any particular voting instructions are received. In the absence of specific instructions from the Holder of a Corporate Unit, the Purchase Contract Agent shall abstain from voting the Senior Notes underlying such Corporate Unit. The Company hereby agrees, if applicable, to solicit Holders of Corporate Units to timely instruct the Purchase Contract Agent in order to enable the Purchase Contract Agent to vote such Senior Notes.

The Holders of Corporate Units and Treasury Units shall have no voting or other rights in respect of Common Stock.

Section 4.03. Special Event Redemption.

(a) If the Company elects to redeem the Senior Notes on any Payment Date following the occurrence of a Special Event as permitted by the Indenture, it shall notify the Collateral Agent in writing that a Special Event has occurred and that it intends to redeem the Senior Notes on the Special Event Redemption Date. On the Special Event Redemption Date, the Collateral Agent shall surrender the Pledged Senior Notes to the Indenture Trustee against delivery of an amount equal to the aggregate Redemption Price for such Pledged Senior Notes.

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Thereafter, pursuant to the terms of the Pledge Agreement, the Collateral Agent shall cause the Securities Intermediary to apply an amount equal to the aggregate Redemption Amount of such funds to purchase on behalf of the Holders of Corporate Units the Treasury Portfolio and promptly remit the remaining portion of such funds to the Purchase Contract Agent for payment to the Holders of such Corporate Units.

(b) Upon the occurrence of a Special Event Redemption, (i) the Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio will be substituted as Collateral for the Pledged Senior Notes and will be held by the Collateral Agent in accordance with the terms of the Pledge Agreement to secure the obligation of each Holder of a Corporate Unit to purchase Common Stock of the Company under the Purchase Contract constituting a part of such Corporate Unit, (ii) the Applicable Ownership Interests (as specified in clause (ii) of the definition of such term) in the Treasury Portfolio will be transferred to the Purchase Contract Agent for the benefit of the Holders of such Corporate Units, (iii) the Holders of Corporate Units and the Collateral Agent shall have such security interest rights and obligations with respect to such Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio as the Holders of Corporate Units and the Collateral Agent had in respect of the Senior Notes, as the case may be, subject to the Pledge thereof as provided in the Pledge Agreement, (iv) any reference herein or in the Certificates to the Senior Notes shall be deemed to be a reference to such Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio and (v) any reference herein or in the Certificates to interest on the Senior Notes shall be deemed to be a reference to corresponding distributions on such Applicable Ownership Interests (as specified in clause (ii) of the definition of such term) in the Treasury Portfolio. The Company may cause to be made in any Corporate Units Certificates thereafter to be issued such change in phraseology and form (but not in substance) as may be appropriate to reflect the substitution of the Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio for Senior Notes as Collateral.

(c) The Holders of Separate Senior Notes shall directly receive the Redemption Price for the Separate Senior Notes in accordance with the terms of the Indenture.

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ARTICLE 5

THE PURCHASE CONTRACTS

Section 5.01. Purchase of Shares of Common Stock.

(a) Each Purchase Contract shall obligate the Holder of the related Units to purchase, and the Company to sell, on the Purchase Contract Settlement Date at a price equal to the Stated Amount (the “Purchase Price”), a number of newly issued shares of Common Stock (subject to Section 5.09) equal to the Settlement Rate (as defined below) unless an Early Settlement, a Cash Merger Early Settlement or a Termination Event with respect to the Unit of which such Purchase Contract is a part shall have occurred. The “Settlement Rate” is equal to:

(i) if the Adjusted Applicable Market Value (as defined below) is greater than or equal to $47.37 (the “Threshold Appreciation Price”), 0.5278 shares of Common Stock per Purchase Contract (such number of shares as adjusted from time to time, the “Minimum Share Number”);

(ii) if the Adjusted Applicable Market Value is less than the Threshold Appreciation Price but greater than $38.20 (the “Reference Price”), the number of shares of Common Stock per Purchase Contract having a value equal to the Stated Amount divided by the Applicable Market Value; and

(iii) if the Adjusted Applicable Market Value is less than or equal to the Reference Price, 0.6545 shares of Common Stock per Purchase Contract (such number of shares as adjusted from time to time, the “Maximum Share Number”).

in each case rounded upward or downward to the nearest 1/10,000th of a share.

The “Adjusted Applicable Market Value” means (i) prior to any adjustment of the Fixed Settlement Rate pursuant to paragraph (i), (ii), (iii), (iv), (v), (vi), (vii) or (x) of Section 5.04(a), the Applicable Market Value, and (ii) at the time of and after any adjustment of the Fixed Settlement Rate pursuant to paragraph (i), (ii), (iii), (iv), (v), (vi), (vii) or (x) of Section 5.04(a), the Applicable Market Value multiplied by a fraction of which the numerator shall be the Fixed Settlement Rate immediately after such adjustment pursuant to paragraph (i), (ii), (iii), (iv), (v), (vi), (vii) or (x) of Section 5.04(a) and the denominator shall be the Fixed Settlement Rate immediately prior to such adjustment; provided, however, that if such adjustment to the Fixed Settlement Rate is required to be made pursuant to the occurrence of any of the events contemplated by paragraph (i), (ii), (iii), (iv), (v), (vi), (vii) or (x) of Section 5.04(a) during the period taken into consideration for determining the Applicable Market Value, appropriate and customary adjustments shall be made to the Fixed Settlement Rate.

The “Applicable Market Value” means the average of the Closing Price per share of Common Stock on each of the 20 consecutive Trading Days ending on the third Trading Day immediately preceding the Purchase Contract Settlement Date.

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The “Closing Price” per share of Common Stock on any date of determination means:

(i) the closing sale price as of the close of the principal trading session (or, if no closing price is reported, the last reported sale price) per share on the New York Stock Exchange, Inc. (the “NYSE”) on such date;

(ii) if the Common Stock is not listed for trading on the NYSE on any such date, the closing sale price (or, if no closing price is reported, the last reported sale price) per share as reported in the composite transactions for the principal United States national or regional securities exchange on which the Common Stock is so listed;

(iii) if the Common Stock is not so listed on a United States national or regional securities exchange, the last reported sale price per share as reported by the Nasdaq National Market, Inc.;

(iv) if the Common Stock is not so reported by the Nasdaq National Market, Inc., the last quoted bid price for the Common Stock in the over-the-counter market as reported by the National Quotation Bureau or similar organization; or

(v) if the bid price referred to in clause (iv) is not available, the market value of Common Stock on such date as determined by a nationally recognized independent investment banking firm retained by the Company for purposes of determining the Closing Price.

A “Trading Day” means a day on which the Common Stock (1) is not suspended from trading on any national or regional securities exchange or association or over-the-counter market at the close of business and (2) has traded at least once on the national or regional securities exchange or association or over-the-counter market that is the primary market for the trading of the Common Stock.

(b) Each Holder of a Corporate Unit or a Treasury Unit, by its acceptance of such Unit:

(i) irrevocably authorizes the Purchase Contract Agent to enter into and perform the related Purchase Contract on its behalf as its attorney-in-fact (including, without limitation, the execution of Certificates on behalf of such Holder);

(ii) agrees to be bound by the terms and provisions thereof;

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(iii) covenants and agrees to perform its obligations under such Purchase Contract for so long as such Holder remains a Holder of a Corporate Unit or a Treasury Unit;

(iv) consents to the provisions hereof;

(v) irrevocably authorizes the Purchase Contract Agent to enter into and perform this Agreement and the Pledge Agreement on its behalf and in its name as its attorney-in-fact;

(vi) consents to, and agrees to be bound by, the Pledge of such Holder’s right, title and interest in and to the Collateral Account, including the Senior Notes and the Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio or the Treasury Securities pursuant to the Pledge Agreement; and

(vii) for United States federal, state and local income and franchise tax purposes, agrees to (A) treat an acquisition of the Corporate Units as an acquisition of the Senior Notes and Purchase Contracts constituting the Corporate Units and (B) treat itself as the owner of the applicable interest in the Collateral Account, including the Senior Notes and the Applicable Ownership Interests in the Treasury Portfolio (as specified in clause (i) of the definition of such term) or the Treasury Securities,

provided that upon a Termination Event, the rights of the Holder of such Units under the Purchase Contract may be enforced without regard to any other rights or obligations.

(c) Each Holder of a Corporate Unit or a Treasury Unit, by its acceptance thereof, further covenants and agrees that to the extent and in the manner provided in Section 5.02 hereof and the provisions of the Pledge Agreement, but subject to the terms thereof, Proceeds of the Senior Notes, the Treasury Securities or the Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, as applicable, on the Purchase Contract Settlement Date, shall be paid by the Collateral Agent to the Company in satisfaction of such Holder’s obligations under such Purchase Contract and such Holder shall acquire no right, title or interest in such Proceeds.

(d) Upon registration of transfer of a Certificate, the transferee shall be bound (without the necessity of any other action on the part of such transferee) by the terms of this Agreement, the Purchase Contracts underlying such Certificate and the Pledge Agreement and the transferor shall be released from the obligations under this Agreement, the Purchase Contracts underlying the Certificate so transferred and the Pledge Agreement. The Company covenants and agrees, and each Holder of a Certificate, by its acceptance thereof, likewise covenants and agrees, to be bound by the provisions of this paragraph.

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Section 5.02. Remarketing; Payment of Purchase Price.

(a) (i) Unless a Special Event Redemption has occurred prior to the Initial Remarketing Date, the Company shall engage the Remarketing Agent pursuant to the Remarketing Agreement for Remarketing the Senior Notes. By 11:00 a.m. (New York City time) on the Business Day immediately preceding the Initial Remarketing Date, the Collateral Agent shall notify the Remarketing Agent of the aggregate principal amount of Pledged Senior Notes, and the Custodial Agent shall notify the Remarketing Agent of the aggregate principal amount of Separate Senior Notes (if any) that are to be remarketed pursuant to clause (ii) below. Concurrently, the Custodial Agent will present for remarketing the Separate Senior Notes to the Remarketing Agent. Upon receipt of such notice from the Collateral Agent and Custodial Agent, and the Separate Senior Notes for remarketing from the Custodial Agent, the Remarketing Agent will, on the Initial Remarketing Date, use commercially reasonable efforts to remarket (based on the Reset Rate) (the “Initial Remarketing”) such Pledged Senior Notes and Separate Senior Notes on such date at a price of equal to approximately 100.25% of the sum of the Treasury Portfolio Purchase Price plus the Separate Senior Notes Purchase Price, as provided in the Remarketing Agreement. If the Remarketing Agent is able to remarket the Pledged Senior Notes and Separate Senior Notes at a price equal to or greater than 100% of the Treasury Portfolio Purchase Price plus the Separate Senior Notes Purchase Price (a “Successful Initial Remarketing”), the Collateral Agent shall, in accordance with the Pledge Agreement, cause the Securities Intermediary to transfer the Pledged Senior Notes upon confirmation of deposit by the Remarketing Agent of the proceeds of such Successful Remarketing in the Collateral Account, and the portion of the proceeds from such Successful Initial Remarketing equal to the Treasury Portfolio Purchase Price will be applied to purchase the Treasury Portfolio. The Remarketing Agent may deduct as a remarketing fee an amount not exceeding 25 basis points (.25%) of the sum of the Treasury Portfolio Purchase Price plus the Separate Senior Notes Purchase Price from any proceeds of the Successful Remarketing in excess of the Treasury Portfolio Price plus the Separate Senior Notes Purchase Price. To the extent that such excess proceeds are less than 25 basis points of the Treasury Portfolio Purchase Price plus the Separate Senior Notes Purchase Price, the Company shall pay an amount, as an additional remarketing fee, to the Remarketing Agent equal to such shortfall (such amount, together with the amount in the previous sentence, the “Remarketing Fee”). With respect to Pledged Senior Notes upon a Successful Initial Remarketing, any proceeds of the Initial Remarketing in excess of the sum of the Treasury Portfolio Purchase Price plus the portion of Remarketing Fee attributable to such Pledged Senior Notes will be remitted to the Purchase Contract Agent for payment to the Holders of the related Corporate Units. The Treasury Portfolio will be substituted for the

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Pledged Senior Notes and the appropriate Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio will be pledged to the Collateral Agent to secure the obligation of the Holders of Corporate Units to pay the Purchase Price for the Common Stock under the related Purchase Contracts on the Purchase Contract Settlement Date. With respect to Separate Senior Notes upon a Successful Initial Remarketing, any proceeds of the Initial Remarketing in excess of the portion of the Remarketing Fee attributable to the Separate Senior Notes will be remitted to the Custodial Agent for payment to the holders of Separate Senior Notes. None of the Company, the Purchase Contract Agent, or any Holders of Corporate Units or holders of Separate Senior Notes whose Senior Notes or Separate Senior Notes are so remarketed will otherwise be responsible for the payment of any Remarketing Fee in connection therewith.

Following the occurrence of a Successful Initial Remarketing, the Holders of Corporate Units and the Collateral Agent shall have such security interests, rights and obligations with respect to the Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio as the Holders of Corporate Units and the Collateral Agent had in respect of the Senior Notes, subject to the Pledge thereof as provided in the Pledge Agreement, and any reference herein or in the Certificates to the Senior Notes shall be deemed to be a reference to such Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio and any reference herein or in the Certificates to interest on the Senior Notes shall be deemed to be a reference to corresponding distributions on such Applicable Ownership Interests in the Treasury Portfolio. The Company may cause to be made in any Corporate Units Certificates thereafter to be issued such change in phraseology and form (but not in substance) as may be appropriate to reflect the substitution of such Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio for Senior Notes as Collateral.

If, in spite of using commercially reasonable efforts, the Remarketing Agent cannot remarket the Pledged Senior Notes and the Separate Senior Notes (if any) in the Initial Remarketing (other than to the Company) at a price not less than 100% of the sum of the Treasury Portfolio Purchase Price plus the Separate Senior Notes Purchase Price or a condition precedent set forth in the Remarketing Agreement is not fulfilled, the Initial Remarketing will be deemed to have failed (a “Failed Initial Remarketing”). Upon a Failed Initial Remarketing, the Remarketing Agent shall return the Separate Senior Notes (if any) subject to such Remarketing to the Custodial Agent.

(ii) Prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the applicable Remarketing Date, but no earlier than the Payment Date immediately preceding such date, Holders of Separate Senior Notes may elect to have their Separate Senior

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Notes remarketed under the Remarketing Agreement by delivering their Separate Senior Notes, along with a notice of such election, substantially in the form of Exhibit F to the Pledge Agreement, to the Custodial Agent. The Custodial Agent shall hold Separate Senior Notes in an account separate from the Collateral Account in which the Pledged Senior Notes (as defined in the Pledge Agreement) shall be held. Holders of Separate Senior Notes electing to have their Separate Senior Notes remarketed will also have the right to withdraw that election by written notice to the Custodial Agent, substantially in the form of Exhibit G to the Pledge Agreement, on or prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the applicable Remarketing Date, upon which notice the Custodial Agent shall return such Separate Senior Notes to such Holder. Promptly after 11:00 a.m. on the Business Day immediately preceding the applicable Remarketing Date, the Custodial Agent shall notify the Remarketing Agent of the aggregate principal amount of the Separate Senior Notes to be remarketed. After such time, such election shall become an irrevocable election to have such Separate Senior Notes remarketed in such Remarketing.

(iii) Not later than seven calendar days nor more than 15 calendar days prior to the applicable Remarketing Date, the Company shall request the Depositary or its nominee to notify Depositary Participants holding Units and Separate Senior Notes of the procedures to be followed in such Remarketing, including in the case of a Failed Final Remarketing the procedures to be followed to exercise Put Rights.

(iv) The Company agrees to use commercially reasonable efforts (A) to ensure that, if required by applicable law, a registration statement with regard to the full amount of the Senior Notes to be remarketed in the Initial Remarketing or the Final Remarketing, as the case may be, shall be effective with the Securities and Exchange Commission in a form that will enable the Remarketing Agent to rely on it in connection with such Remarketing and (B) to provide a Prospectus in connection therewith.

(v) The Company shall cause a notice of a Failed Remarketing to be published (with a copy of such notice to be provided to the Purchase Contract Agent) on the Business Day immediately following the applicable Remarketing Date, in a daily newspaper in the English language of general circulation in the City of New York, which is expected to be The Wall Street Journal.

(b) (i) Unless a Special Event Redemption, an Early Settlement or a Cash Merger Early Settlement has occurred prior to the Final Remarketing Date, if no Successful Remarketing has occurred prior to the Final Remarketing Date,

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each Holder of Corporate Units shall have the right to satisfy such Holder’s obligations under the Purchase Contract on the Purchase Contract Settlement Date in cash by notifying the Purchase Contract Agent by use of a notice in substantially the form of Exhibit E hereto of its intention to pay in cash (“Cash Settlement”) on or prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the Purchase Contract Settlement Date. Promptly following 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the Purchase Contract Settlement Date, the Purchase Contract Agent shall notify the Collateral Agent and the Indenture Trustee of the receipt of such notices from Holders intending to make a Cash Settlement.

(ii) A Holder of a Corporate Unit who has so notified the Purchase Contract Agent of its intention to effect a Cash Settlement shall pay the Purchase Price to the Collateral Agent for deposit in the Collateral Account on or prior to 5:00 p.m. (New York City time) on the fourth Business Day immediately preceding the Purchase Contract Settlement Date, in lawful money of the United States by certified or cashiers’ check or wire transfer of immediately available funds payable to or upon the order of the Securities Intermediary. Any cash so received shall be invested promptly by the Securities Intermediary in Permitted Investments and paid to the Company on the Purchase Contract Settlement Date in settlement of the Purchase Contracts in accordance with the terms of this Agreement and the Pledge Agreement. Any funds received by the Securities Intermediary in respect of the investment earnings from such Permitted Investments in excess of the Purchase Price for the shares of Common Stock to be purchased by such Holder shall be distributed to the Purchase Contract Agent when received for payment to the Holder.

(iii) If a Holder of a Corporate Unit does not notify the Purchase Contract Agent of its intention to make a Cash Settlement in accordance with Section 5.02(b)(ii) above, or does notify the Purchase Contract Agent in accordance with Section 5.02(b)(i) above but fails to make such payment as required by Section 5.02(b)(ii) above, such Holder shall be deemed to have consented to the disposition of the Pledged Senior Notes pursuant to the Final Remarketing as described in paragraph Section 5.02(c) below.

(iv) As soon as practicable after 5:00 p.m. (New York City time) on the fourth Business Day preceding the Purchase Contract Settlement Date, the Collateral Agent, based on cash payments received by the Collateral Agent pursuant to Section 5.02(b)(ii) hereof, shall promptly notify the Purchase Contract Agent and the Indenture Trustee of the aggregate principal amount of Senior Notes to be tendered for purchase in the Remarketing in a notice pursuant to the terms of the Pledge Agreement.

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(c) (i) Unless a Special Event Redemption, an Early Settlement or a Cash Merger Early Settlement has occurred prior to the Final Remarketing Date, if a Failed Initial Remarketing has occurred, the Senior Notes of such Holders of Corporate Units who have not notified the Purchase Contract Agent of their intention to effect a Cash Settlement as provided in Section 5.02(b)(i) above, or who have so notified the Purchase Contract Agent in accordance with Section 5.02(b)(i) above but have failed to make such payment as required by Section 5.02(b)(ii) above, and the Separate Senior Notes of any holder who has elected for its Separate Senior Notes to be remarketed pursuant to Section 5.02(a)(ii) will be remarketed by the Remarketing Agent (the “Final Remarketing”) on the third Business Day immediately preceding the Purchase Contract Settlement Date (the “Final Remarketing Date”). In order to facilitate the Final Remarketing, the Purchase Contract Agent, based on the notices specified in Section 5.02(b)(iv), and the Collateral Agent, based on the notices specified in Section 5.02(a)(ii), shall notify the Remarketing Agent, by 11:00 a.m. (New York City time) on the Business Day immediately preceding the Final Remarketing Date, of the aggregate principal amount of Pledged Senior Notes or aggregate principal amount of Separate Senior Notes that are to be remarketed pursuant to Section 5.02(a)(ii), as the case may be, to be remarketed. Concurrently, the Custodial Agent will present for remarketing the Separate Senior Notes to the Remarketing Agent.

(ii) Upon receipt of such notice from the Purchase Contract Agent and the Collateral Agent and the Separate Senior Notes (if any) from the Custodial Agent, as set forth in clause (i) above, the Remarketing Agent shall, on the Final Remarketing Date, use commercially reasonable efforts to remarket (based on the Reset Rate) such Pledged Senior Notes and Separate Senior Notes on such date at a price equal to approximately 100.25% of the aggregate principal amount of such Senior Notes and Separate Senior Notes being remarketed, as provided in the Remarketing Agreement. If the Remarketing Agent is able to remarket the Pledged Senior Notes and Separate Senior Notes at a price equal to or greater than 100% of the aggregate principal amount of the Pledged Senior Notes and Separate Senior Notes (if any) (a “Successful Final Remarketing”), the Collateral Agent shall, in accordance with the Pledge Agreement, cause the Securities Intermediary to transfer the Pledged Senior Notes upon confirmation of deposit by the Remarketing Agent of the proceeds of such Successful Remarketing in the Collateral Account. The Remarketing Agent may deduct as the remarketing fee an amount not exceeding 25 basis points (.25%) of the aggregate principal amount of the remarketed Pledged Senior Notes and Separate Senior Notes (if any) from any proceeds of the Successful Final Remarketing in excess of the aggregate principal amount of the remarketed Pledged Senior Notes and Separate Senior Notes. To the extent that such excess proceeds are less than 25

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basis points of the aggregate principal amount of the remarketed Pledged Senior Notes and Separate Senior Notes, the Company shall pay an amount, as an additional remarketing fee, equal to such shortfall (such amount, together with the amount in the previous sentence, the “Final Remarketing Fee”). The proceeds from the Remarketing remitted to the Collateral Agent shall be invested by the Collateral Agent in Permitted Investments, in accordance with the Pledge Agreement, and then applied to satisfy in full the obligations of such Holders of Corporate Units to pay the Purchase Price for the shares of Common Stock under the related Purchase Contracts on the Purchase Contract Settlement Date. Any proceeds in excess of those required to pay the Purchase Price and the portion of the Final Remarketing Fee attributable to the Senior Notes will be remitted to the Purchase Contract Agent for payment to the Holders of the related Corporate Units. With respect to Separate Senior Notes upon a Successful Final Remarketing, any proceeds of the Final Remarketing in excess of the portion of the Final Remarketing Fee attributable to the Separate Senior Notes will be remitted to the Custodial Agent for payment to the holders of Separate Senior Notes.

(iii) If, in spite of using commercially reasonable efforts, the Remarketing Agent cannot remarket the Pledged Senior Notes and Separate Senior Notes (if any) in the Final Remarketing at a price not less than 100% of the aggregate principal amount of the Pledged Senior Notes and Separate Senior Notes to be remarketed in the Final Remarketing (other than to the Company) or a condition precedent set forth in the Remarketing Agreement is not fulfilled, the Final Remarketing will be deemed to have failed (a “Failed Final Remarketing”). Following a Failed Final Remarketing, as of the Purchase Contract Settlement Date, each Holder of any Pledged Senior Notes unless such Holder has elected Cash Settlement and delivered cash in accordance with Section 5.02(e)(ii) shall be deemed to have exercised such Holder’s Put Right with respect to such Senior Notes and to have elected to have a portion of the Proceeds of the Put Right set-off against such Holder’s obligation to pay the aggregate Purchase Price for the shares of Common Stock to be issued under the related Purchase Contracts in full satisfaction of such Holders’ obligations under such Purchase Contracts. Following such set-off, each such Holder’s obligations to pay the Purchase Price for the shares of Common Stock will be deemed to be satisfied in full, and the Collateral Agent shall cause the Securities Intermediary to release the Pledged Senior Notes from the Collateral Account and shall promptly transfer the Pledged Senior Notes to the Company. Thereafter, the Collateral Agent shall promptly remit the remaining portion of the Proceeds of the Holder’s exercise of the Put Right in excess of the aggregate Purchase Price for the shares of Common Stock to be issued under such Purchase Contracts to the Purchase Contract Agent for payment to the Holder of the Corporate Units to which such Senior Notes relate.

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(d) As soon as practicable after 5:00 p.m. (New York City time) on the fourth Business Day preceding the Purchase Contract Settlement Date, the Collateral Agent, based on cash payments received by the Collateral Agent pursuant to Section 5.02(b)(ii) hereof, shall promptly notify the Purchase Contract Agent and the Indenture Trustee of the aggregate principal amount of Senior Notes to be tendered for purchase in the Final Remarketing in a notice pursuant to the terms of the Pledge Agreement.

(e) (i) Each Holder of a Corporate Unit who intends to effect a Cash Settlement of the underlying Purchase Contract following a Failed Final Remarketing shall so notify the Purchase Contract Agent by use of a notice in substantially the form of Exhibit E hereto prior to 11:00 a.m. (New York City time) on the second Business Day immediately preceding the Purchase Contract Settlement Date. Promptly following 11:00 a.m. (New York City time) on the second Business Day immediately preceding the Purchase Contract Settlement Date, the Purchase Contract Agent shall notify the Collateral Agent and the Indenture Trustee of the receipt of such notices from Holders intending to make a Cash Settlement.

(ii) A Holder of a Corporate Unit who has so notified the Purchase Contract Agent of its intention to effect a Cash Settlement shall pay the Purchase Price to the Collateral Agent for deposit in the Collateral Account prior to 5:00 p.m. (New York City time) on the Business Day immediately preceding the Purchase Contract Settlement Date, in lawful money of the United States by certified or cashiers’ check or wire transfer, in each case in immediately available funds payable to or upon the order of the Securities Intermediary. Any cash so received shall be invested promptly by the Securities Intermediary in Permitted Investments and paid to the Company on the Purchase Contract Settlement Date in settlement of the Purchase Contracts in accordance with the terms of this Agreement and the Pledge Agreement. Any funds received by the Securities Intermediary in respect of the investment earnings from such Permitted Investments in excess of the Purchase Price for the shares of Common Stock to be purchased by such Holder shall be distributed to the Purchase Contract Agent when received for payment to the Holder.

(iii) In the event of a Failed Final Remarketing, if a Holder of a Corporate Unit does not notify the Purchase Contract Agent of its intention to make a Cash Settlement in accordance with Section 5.02(a)(i) above, or does notify the Purchase Contract Agent in accordance with Section 5.02(a)(i) above but fails to make such payment as required by Section 5.02(a)(ii) above, such Holder shall be deemed to have automatically exercised such Holder’s Put Right following a Failed Final Remarketing as described in paragraph Section 5.02(c)(iii) above.

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(f) As soon as practicable after 5:00 p.m. (New York city time) on the Business Day preceding the Purchase Contract Settlement Date, the Collateral Agent, based on cash payment received by the Collateral Agent pursuant to Section 5.02(e)(ii) hereof, shall promptly notify the Purchase Contract Agent and the Indenture Trustee of the aggregate principal amount of Senior Notes pursuant to which a Put Right has been automatically exercised pursuant to Section 5.02(c)(iii) hereof.

(g) Any distribution to Holders of any payments described above shall be payable at the office of the Purchase Contract Agent in New York City maintained for that purpose or, at the option of the Holder, by check mailed to the address of the Person entitled thereto at such address as it appears on the Security Register.

(h) Upon Cash Settlement of any Purchase Contract:

(i) the Collateral Agent will in accordance with the terms of the Pledge Agreement cause the Pledged Senior Notes or the appropriate Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, as the case may be, underlying the relevant Units to be released from the Pledge, free and clear of any security interest of the Company, and transferred to the Purchase Contract Agent for delivery to the Holder thereof or its designee as soon as reasonably practicable; and

(ii) subject to the receipt thereof, the Purchase Contract Agent shall, by book-entry transfer or other appropriate procedures, in accordance with written instructions provided by the Holder thereof, transfer such Senior Notes or the appropriate Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, as the case may be (or, if no such instructions are given to the Purchase Contract Agent by the Holder, the Purchase Contract Agent shall hold such Senior Notes or the appropriate Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, as the case may be, and any interest payment thereon, in the name of the Purchase Contract Agent or its nominee in trust for the benefit of such Holder until the expiration of the time period specified in the abandoned property laws of the relevant state where such property is held).

(i) The obligations of the Holders to pay the Purchase Price are non-recourse obligations and, except to the extent satisfied by Early Settlement, Cash

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Merger Early Settlement or Cash Settlement, are payable solely out of the proceeds of any Collateral pledged to secure the obligations of the Holders, and in no event will Holders be liable for any deficiency between the Proceeds of the disposition of Collateral and the Purchase Price.

(j) The Company shall not be obligated to issue any shares of Common Stock in respect of a Purchase Contract or deliver any certificates thereof to the Holder of the related Units unless the Company shall have received payment for the Common Stock to be purchased thereunder in the manner herein set forth.

Section 5.03. Issuance of Shares of Common Stock.

Unless a Termination Event, an Early Settlement or a Cash Merger Early Settlement shall have occurred, subject to Section 5.04(b)(ii), on the Purchase Contract Settlement Date upon receipt of the aggregate Purchase Price payable on all Outstanding Units, the Company shall issue and deposit with the Purchase Contract Agent, for the benefit of the Holders of the Outstanding Units, one or more certificates representing newly issued shares of Common Stock registered in the name of the Purchase Contract Agent (or its nominee) as custodian for the Holders (such certificates for shares of Common Stock, together with any dividends or distributions for which a record date and payment date for such dividend or distribution has occurred after the Purchase Contract Settlement Date, being hereinafter referred to as the “Purchase Contract Settlement Fund”) to which the Holders are entitled hereunder.

Subject to the foregoing, upon surrender of a Certificate to the Purchase Contract Agent on or after the Purchase Contract Settlement Date, Early Settlement Date or Cash Merger Early Settlement Date, as the case may be, together with settlement instructions thereon duly completed and executed, the Holder of such Certificate shall be entitled to receive forthwith in exchange therefor a certificate representing that number of newly issued whole shares of Common Stock which such Holder is entitled to receive pursuant to the provisions of this Article 5 (after taking into account all Units then held by such Holder), together with cash in lieu of fractional shares as provided in Section 5.09 and any dividends or distributions with respect to such shares constituting part of the Purchase Contract Settlement Fund, but without any interest thereon, and the Certificate so surrendered shall forthwith be cancelled. Such shares shall be registered in the name of the Holder or the Holder’s designee as specified in the settlement instructions provided by the Holder to the Purchase Contract Agent. If any shares of Common Stock issued in respect of a Purchase Contract are to be registered to a Person other than the Person in whose name the Certificate evidencing such Purchase Contract is registered (but excluding any Depositary or nominee thereof), no such registration shall be made unless the Person requesting such registration has paid any transfer and other taxes required by reason of such registration in a name other than that of the registered Holder of the Certificate evidencing such Purchase Contract or has established to the satisfaction of the Company that such tax either has been paid or is not payable.

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Section 5.04. Certain Adjustments.

(a) Adjustments for Dividends, Distributions, Stock Splits, Etc.

(i) In case the Company shall pay or make a dividend or other distribution on Common Stock in Common Stock, each Fixed Settlement Rate in effect at the close of business on the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be increased by dividing such Fixed Settlement Rate by a fraction of which:

(A) the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination; and

(B) the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution,

such increase to become effective immediately at the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (i), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include any shares issuable in respect of any scrip certificates issued in lieu of fractions of shares of Common Stock. The Company agrees that it shall not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company.

(ii) In case the Company shall issue rights, warrants or options, other than pursuant to any dividend reinvestment plans or share purchase plans, to all holders of its Common Stock (not being available on an equivalent basis to Holders of the Units upon settlement of the Purchase Contracts underlying such Units) entitling them, for a period expiring within 45 days after the record date for the determination of shareholders entitled to receive such rights, warrants or options, to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price per share of Common Stock on the date of announcement of such issuance, each Fixed Settlement Rate in effect at the close of business on the date of such announcement shall be increased by dividing such Fixed Settlement Rate by a fraction of which:

(A) the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date of such announcement plus the number of shares of Common Stock that the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such Current Market Price; and

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(B) the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date of such announcement plus the number of shares of Common Stock so offered for subscription or purchase,

such increase to become effective immediately after the opening of business on the Business Day following the date of such announcement. The Company agrees that it shall notify the Purchase Contract Agent if any issuance of such rights, warrants or options is cancelled or not completed following the announcement thereof and each Fixed Settlement Rate shall thereupon be readjusted to the Fixed Settlement Rate in effect immediately prior to the date of such announcement. For the purposes of this paragraph (ii), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include any shares issuable in respect of any scrip certificates issued in lieu of fractions of shares of Common Stock. The Company agrees that it shall not issue any such rights, warrants or options in respect of shares of Common Stock held in the treasury of the Company.

(iii) In case outstanding shares of Common Stock shall be subdivided or split into a greater number of shares of Common Stock, each Fixed Settlement Rate in effect at the close of business on the day preceding the day upon which such subdivision or split becomes effective shall be proportionately increased, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, such Settlement Rate in effect at the close of business on the day preceding the day upon which such combination becomes effective shall be proportionately reduced, such increase or reduction, as the case may be, to become effective immediately at the opening of business on the day following the day upon which such subdivision, split or combination becomes effective.

(iv) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences of its indebtedness or assets (including shares of capital stock, securities, cash and property but excluding any rights, warrants or options referred to in paragraph (ii) of this Section 5.04(a), any dividend or distribution paid exclusively in cash and any dividend or distribution referred to in paragraph (i) of this

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Section 5.04(a)), each Fixed Settlement Rate in effect at the close of business on the date fixed for the determination of shareholders entitled to receive such distribution shall be adjusted by dividing such rate by a fraction of which:

(A) the numerator shall be the Current Market Price per share of Common Stock on the date fixed for such determination less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive and the basis for which shall be generally described in a Board Resolution) of the portion of the assets or evidences of indebtedness so distributed applicable to one share of Common Stock; and

(B) the denominator shall be such Current Market Price per share of Common Stock,

such adjustment to become effective at the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such distribution. In any case in which this paragraph (iv) is applicable, paragraph (ii) of this Section 5.04(a) shall not be applicable. In the event that such dividend or distribution is not so paid or made, each Fixed Settlement Rate shall again be adjusted to be the Fixed Settlement Rate that would then be in effect if such dividend or distribution had not been declared.

(v) In case the Company or any of its subsidiaries shall, by dividend or otherwise, make distributions consisting exclusively of cash to all holders of its Common Stock, excluding any cash dividend or distribution on the Common Stock to the extent that the aggregate cash dividend or distribution per share of Common Stock in any quarter does not exceed $0.0375 (the “Dividend Threshold Amount”) (the Dividend Threshold Amount is subject to adjustment whenever the Fixed Settlement Rate is adjusted, which adjustment shall be the inverse of the adjustment made to the Fixed Settlement Rate, provided that no adjustment shall be made to the Dividend Threshold Amount for any adjustment made pursuant to this Section 5.04(a)(v)) then, in such case, each Fixed Settlement Rate in effect at the close of business on the date fixed for the determination of shareholders entitled to receive such distribution dividend or distribution shall be adjusted by dividing such rate by a fraction of which:

(A) the numerator shall be the Current Market Price on such date less the amount of cash so distributed applicable to one share of Common Stock in excess of the Dividend Threshold Amount; and

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(B) the denominator shall be the Current Market Price on such date,

such adjustment to be effective at the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such dividend or distribution; provided that if the portion of the cash so distributed applicable to one share of Common Stock in excess of the Dividend Threshold Amount is equal to or greater than the Current Market Price on such date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of a Unit shall have the right to receive upon settlement of the Units such excess amount. In the event that such dividend or distribution is not so paid or made, each Fixed Settlement Rate shall again be adjusted to be the Fixed Settlement Rate that would then be in effect if such dividend or distribution had not been declared.

(vi) In case a tender or exchange offer made by the Company or any subsidiary of the Company for all or any portion of the Common Stock shall expire and such tender or exchange offer (as amended upon the expiration thereof) shall require the payment to stockholders of consideration per share of Common Stock having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) that as of the last time (the “Expiration Time”) tenders or exchanges may be made pursuant to such tender or exchange offer (as it may be amended) exceeds the Closing Price of a share of Common Stock on the Trading Day next succeeding the Expiration Time, each Fixed Settlement Rate shall be increased so that the same shall equal the rate determined by dividing such Fixed Settlement Rate in effect immediately prior to the Expiration Time by a fraction,

(A) the numerator of which shall be equal to (A) the product of (I) the Current Market Price of a share of Common Stock as of the Expiration Time and (II) the number of shares of Common Stock outstanding (including any shares accepted in terms of the tender or exchange offer, such shares being referred to as the “Purchased Shares”) at the Expiration Time less (B) the fair market value (determined by the Board of Directors as aforesaid) of the aggregate consideration payable to stockholders for all Purchased Shares, and

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(B) the denominator of which shall be the product of the (x) number of shares of Common Stock outstanding at the Expiration Time less any Purchased Shares and (y) the Current Market Price of a share of Common Stock at the Expiration Time,

such adjustment to become effective immediately prior to the opening of business on the day following the Expiration Time. If the Company is obligated to purchase shares pursuant to any such tender or exchange offer, but the Company is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, each Fixed Settlement Rate shall again be adjusted to be the Fixed Settlement Rate that would then be in effect if such tender or exchange offer had not been made.

(vii) The reclassification of Common Stock into securities including securities other than Common Stock (other than any reclassification upon a Reorganization Event to which Section 5.04(b) applies) shall be deemed to involve:

(A) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be “the date fixed for the determination of shareholders entitled to receive such distribution” and the “date fixed for such determination” within the meaning of paragraph (iv) of this Section); and

(B) a subdivision, split or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be “the day upon which such subdivision or split becomes effective” or “the day upon which such combination becomes effective”, as the case may be, and “the day upon which such subdivision, split or combination becomes effective” within the meaning of paragraph (iii) of this Section).

(viii) The “Current Market Price” per share of Common Stock on any date of determination means the average of the daily Closing Prices for the ten Trading Days ending on the earlier of such date of determination and the day before the “ex date” with respect to the issuance or distribution requiring such computation. For purposes of this paragraph, the term “ex date,” when used with respect to any issuance or distribution, shall mean the first date on which Common Stock trades regular way on such exchange or in such market without the right to receive such issuance or distribution.

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(ix) All adjustments to the Fixed Settlement Rate shall be calculated to the nearest 1/10,000th of a share of Common Stock (or if there is not a nearest 1/10,000th of a share, to the next lower 1/10,000th of a share).

(x) The Company may, but shall not be required to, make such increases in the Fixed Settlement Rate, in addition to those required by this Section, as the Board of Directors considers to be advisable in order to avoid or diminish any income tax to any holders of shares of Common Stock resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes or for any other reason. Any such adjustment to the Fixed Settlement Rate shall be proportionally made to both the Maximum Share Number and the Minimum Share Number.

(xi) If the Company has any stockholder rights plan in effect upon settlement of the Purchase Contracts, a Holder shall be entitled to receive upon settlement of its Purchase Contracts, in addition to the shares of Common Stock issuable upon settlement of such Purchase Contract, the related rights for the Common Stock, unless such rights under the stockholder rights plan have separated from the Common Stock at the time of settlement, in which case each Fixed Settlement Rate shall be adjusted as provided in this Section 5.04 on the date such rights separate from the Common Stock.

(b) Adjustment for Consolidation, Merger or Other Reorganization Event.

(i) In the event of:

(A) any consolidation or merger of the Company with or into another Person (other than a merger or consolidation in which the Company is the continuing corporation and in which the shares of Common Stock outstanding immediately prior to the merger or consolidation are not exchanged for cash, securities or other property of the Company or another corporation);

(B) any sale, transfer, lease or conveyance to another Person of the property of the Company as an entirety or substantially as an entirety;

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(C) any statutory share exchange of the Company with another Person (other than in connection with a merger or acquisition); or

(D) any liquidation, dissolution or termination of the Company other than as a result of or after the occurrence of a Termination Event (any event described in clauses (A), (B), (C) and (D), a “Reorganization Event”),

the Settlement Rate will be adjusted to provide that each Holder of Units will receive on the Purchase Contract Settlement Date with respect to each Purchase Contract forming a part thereof, the kind and amount of securities, cash and other property receivable upon such Reorganization Event (without any interest thereon, and without any right to dividends or distribution thereon which have a record date that is prior to the Purchase Contract Settlement Date) by a Holder of the one share of Common Stock (the “Exchange Property”). The kind and amount of Exchange Property will be determined assuming such Holder of Common Stock is not a Person with which the Company consolidated or into which the Company merged or which merged into the Company or to which such sale or transfer was made, as the case may be (any such Person, a “Constituent Person”), or an Affiliate of a Constituent Person to the extent such Reorganization Event provides for different treatment of Common Stock held by Affiliates of the Company and non-affiliates and such Holder failed to exercise its rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such Reorganization Event (provided that if the kind or amount of securities, cash and other property receivable upon such Reorganization Event is not the same for each share of Common Stock held immediately prior to such Reorganization Event by other than a Constituent Person or an Affiliate thereof and in respect of which such rights of election shall not have been exercised (“non-electing share”), then for the purpose of this Section 5.04(b)(i) the kind and amount of securities, cash and other property receivable upon such Reorganization Event by each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares).

The actual amount of Exchange Property receivable upon settlement of each Purchase Contract shall be (1) in the case of settlement on the Purchase Contract Settlement Date or pursuant to Section 5.04(b)(ii), a variable amount based upon the applicable Settlement Rate and the Applicable Market Value of the Exchange Property at such time and (2) in the case of any Early Settlement, determined in accordance with the procedures described under Section 5.07 using the Settlement Rate that results in the minimum amount of Exchange Property being delivered under such Purchase Contract.

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For purposes of this Section 5.04(b)(i) and Section 5.04(b)(ii), the term “Applicable Market Value” shall be deemed to refer to the “Applicable Market Value” of the Exchange Property, and such value shall be determined (A) with respect to any publicly traded securities that compose all or part of the Exchange Property, based on the Closing Price of such securities, (B) in the case of any cash that composes all or part of the Exchange Property, based on the amount of such cash and (C) in the case of any other property that composes all or part of the Exchange Property, based on the value of such property, as determined by a nationally recognized independent investment banking firm retained by the Company for this purpose; provided that prior to the separation of the Rights or any similar stockholder rights from the Common Stock, such Rights or similar stockholder rights shall be deemed to have no value. The term “Closing Price” shall be deemed to refer to the closing sale price, last quoted bid price or mid-point of the last bid and ask prices, as the case may be, of any publicly traded securities that comprise all or part of the Exchange Property. The term “Trading Day” shall be deemed to refer to any publicly traded securities that comprise all or part of the Exchange Property.

In the event of such a Reorganization Event, the Person formed by such consolidation, merger or exchange or the Person which acquires the assets of the Company or, in the event of a liquidation, dissolution or termination of the Company, the Company or a liquidating trust created in connection therewith, shall execute and deliver to the Purchase Contract Agent an agreement supplemental hereto providing that each Holder of an Outstanding Unit shall have the rights provided by this Section 5.04(b)(i). Such supplemental agreement shall provide for adjustments which, for events subsequent to the effective date of such supplemental agreement, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 5.04. The above provisions of this Section 5.04 shall similarly apply to successive Reorganization Events.

(ii) In the event of a consolidation or merger of the Company with or into another Person (other than a consolidation or merger that does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock), in each case in which 30% or more of the total consideration paid to the Company’s shareholders consists of cash or cash equivalents (a “Cash Merger”), then a Holder of a Unit may settle (“Cash Merger Early Settlement”) its Purchase Contract, upon the conditions set forth below, at the Settlement Rate in effect immediately prior to the closing of the Cash Merger; provided that (A) the Cash Merger Early Settlement Date (as defined below) is no later than the fifth Business Day immediately preceding the Purchase Contract Settlement Date and (B) no Cash Merger Early Settlement will be permitted pursuant to this Section 5.04(b)(ii) unless, at the time such Cash Merger Early Settlement is effected, there is an effective Registration Statement with respect to any securities to be issued and delivered in connection with such Cash Merger

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Early Settlement, if such a Registration Statement is required (in the view of counsel, which need not be in the form of a written opinion, for the Company) under the Securities Act. If such a Registration Statement is so required, the Company covenants and agrees to use commercially reasonable efforts to (x) have in effect a Registration Statement covering any securities to be delivered in respect of the Purchase Contracts being settled and (y) provide a Prospectus in connection therewith, in each case in a form that may be used in connection with such Cash Merger Early Settlement.

Within five Business Days of the completion of a Cash Merger, the Company shall provide written notice to Holders of Units of such completion of a Cash Merger, which shall specify the deadline for submitting the notice to settle early in cash pursuant to this Section 5.04(b)(ii), the date on which such Cash Merger Early Settlement shall occur (which date shall be 10 days after the date of such written notice by the Company, but which shall in no event be later than the fifth Business Day immediately preceding the Purchase Contract Settlement Date) (the “Cash Merger Early Settlement Date”), the applicable Settlement Rate and the amount (per share of Common Stock) of cash, securities and other consideration receivable by the Holder upon settlement. In addition, if a Holder effects a Cash Merger Early Settlement of some or all of its Purchase Contracts, such Holder shall be entitled to receive, on the Cash Merger Early Settlement Date, the aggregate amount of any accrued and unpaid Contract Adjustment Payments since the immediately preceding Payment Date with respect to such Purchase Contracts. The Company shall pay such amount as a credit against the amount otherwise payable by the Holders to effect such Cash Merger Early Settlement.

Corporate Units Holders and Treasury Units Holders may only effect Cash Merger Early Settlement pursuant to this Section 5.04(b)(ii) in integral multiples of 40 Corporate Units or Treasury Units, as the case may be. If the Treasury Portfolio has replaced the Senior Notes as a component of the Corporate Units, Corporate Units Holders may only effect Cash Merger Early Settlement pursuant to this Section 5.04(b)(ii) in multiples of 16,000 Corporate Units. Other than the provisions relating to timing of notice and settlement, which shall be as set forth above, the provisions of Section 5.01(a) shall apply with respect to a Cash Merger Early Settlement pursuant to this Section 5.04(b)(ii).

In order to exercise the right to effect Cash Merger Early Settlement with respect to any Purchase Contracts, the Holder of the Certificate evidencing Units shall deliver, no later than 5:00 p.m. (New York City time) on the third Business Day immediately preceding the Cash Merger Early Settlement Date, such Certificate to the Purchase

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Contract Agent at the Corporate Trust Office duly endorsed for transfer to the Company or in blank with the form of Election to Settle Early on the reverse thereof duly completed and accompanied by payment (payable to the Company in immediately available funds) in an amount equal to the product of (A) the Stated Amount times (B) the number of Purchase Contracts with respect to which the Holder has elected to effect Cash Merger Early Settlement, less any credit in respect of Contract Adjustment Payments as set forth above.

If a Holder properly effects an effective Cash Merger Early Settlement in accordance with the provisions of this Section 5.04(b)(ii), the Company will deliver (or will cause the Collateral Agent to deliver) to the Holder on the Cash Merger Early Settlement Date:

(A) the kind and amount of securities, cash and other property receivable upon such Cash Merger by a Holder of the number of shares of Common Stock issuable on account of each Purchase Contract if the Purchase Contract Settlement Date had occurred immediately prior to such Cash Merger (based on the Settlement Rate in effect at such time), assuming such Holder of Common Stock is not a Constituent Person or an Affiliate of a Constituent Person to the extent such Cash Merger provides for different treatment of Common Stock held by Affiliates of the Company and non-affiliates and such Holder failed to exercise its rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such Cash Merger (provided that if the kind or amount of securities, cash and other property receivable upon such Cash Merger is not the same for each non-electing share, then for the purpose of this Section 5.04(b)(ii), the kind and amount of securities, cash and other property receivable upon such Cash Merger by each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). For the avoidance of doubt, for the purposes of determining the Adjusted Applicable Market Value (in connection with determining the appropriate Settlement Rate to be applied in the foregoing sentence), the date of the closing of the Cash Merger shall be deemed to be the Purchase Contract Settlement Date;

(B) the Senior Notes, the Applicable Ownership Interests in the Treasury Portfolio or Treasury Securities, as the case may be, related to the Purchase Contracts with respect to which the Holder is effecting a Cash Merger Early Settlement; and

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(C) if so required under the Securities Act, a Prospectus as contemplated by this Section 5.04(b)(ii).

(c) All calculations and determinations pursuant to this Section 5.04 shall be made by the Company or its agent and the Purchase Contract Agent shall have no responsibility with respect thereto.

(d) The Corporate Units or the Treasury Units of the Holders who do not elect Cash Merger Early Settlement in accordance with the foregoing will continue to remain outstanding and be subject to settlement on the Purchase Contract Settlement Date in accordance with the terms hereof.

Section 5.05. Notice of Adjustments and Certain Other Events.

(a) Whenever the Fixed Settlement Rate is adjusted as provided under Section 5.04(a), or the Settlement Rate is adjusted under Section 5.04(b), the Company shall within 10 Business Days following the occurrence of an event that requires such adjustment (or if the Company is not aware of such occurrence, as soon as reasonably practicable after becoming so aware):

(i) compute the adjusted Fixed Settlement Rate or Settlement Rate, as the case may be, in accordance with Section 5.04 and prepare and transmit to the Purchase Contract Agent an Officers’ Certificate setting forth the Fixed Settlement Rate or Settlement Rate, as the case may be, the method of calculation thereof in reasonable detail, and the facts requiring such adjustment and upon which such adjustment is based; and

(ii) provide a written notice to the Holders of the Units of the occurrence of such event and a statement in reasonable detail setting forth the method by which the adjustment to the Fixed Settlement Rate or Settlement Rate, as the case may be, was determined and setting forth the adjusted Fixed Settlement Rate or Settlement Rate, as the case may be.

(b) The Purchase Contract Agent shall not at any time be under any duty or responsibility to any Holder of Units to determine whether any facts exist which may require any adjustment of the Fixed Settlement Rate or Settlement Rate, as the case may be, or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed in making the same. The Purchase Contract Agent shall be fully authorized and protected in relying on any Officers’ Certificate delivered pursuant to Section 5.05(a)(i) and any adjustment contained therein and the Purchase Contract Agent shall not be deemed to have knowledge of any adjustment unless and until it has received such certificate. The Purchase Contract Agent shall not be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property, which may at the time be issued

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or delivered with respect to any Purchase Contract; and the Purchase Contract Agent makes no representation with respect thereto. The Purchase Contract Agent shall not be responsible for any failure of the Company to issue, transfer or deliver any shares of Common Stock pursuant to a Purchase Contract or to comply with any of the duties, responsibilities or covenants of the Company contained in this Article.

Section 5.06. Termination Event; Notice.

The Purchase Contracts and all obligations and rights of the Company and the Holders thereunder, including, without limitation, the rights of the Holders to receive and the obligation of the Company to pay any Contract Adjustment Payments (including any accrued and unpaid Contract Adjustment Payments), if the Company shall have such obligation, and the rights and obligations of Holders to purchase Common Stock, shall immediately and automatically terminate, without the necessity of any notice or action by any Holder, the Purchase Contract Agent or the Company, if, prior to or on the Purchase Contract Settlement Date, a Termination Event shall have occurred.

Upon and after the occurrence of a Termination Event, the Units shall thereafter represent the right to receive the Senior Notes, the Treasury Securities or the appropriate Applicable Ownership Interests in the Treasury Portfolio, as the case may be, forming part of such Units, in accordance with the provisions of Section 5.04 of the Pledge Agreement. Upon the occurrence of a Termination Event, the Company shall promptly but in no event later than two Business Days thereafter give written notice to the Purchase Contract Agent, the Collateral Agent and the Holders, at their addresses as they appear in the Security Register.

Section 5.07. Early Settlement.

(a) Subject to and upon compliance with the provisions of this Section 5.07, at the option of the Holder thereof, Purchase Contracts underlying Units may be settled early (“Early Settlement”) at any time on or prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the Purchase Contract Settlement Date; provided that no Early Settlement will be permitted pursuant to this Section 5.07 unless, at the time such Early Settlement is effected, there is an effective Registration Statement with respect to any securities to be issued and delivered in connection with such Early Settlement, if such a Registration Statement is required (in the view of counsel, which need not be in the form of a written opinion, for the Company) under the Securities Act. If such a Registration Statement is so required, the Company covenants and agrees to use commercially reasonable efforts to (i) have in effect a Registration Statement covering any securities to be delivered in respect of the Purchase Contracts being settled and (ii) provide a Prospectus in connection therewith, in each case in a form that may be used in connection with such Early Settlement.

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(b) In order to exercise the right to effect Early Settlement with respect to any Purchase Contracts, the Holder of the Certificate evidencing Units shall deliver, at any time prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the Purchase Contract Settlement Date, such Certificate to the Purchase Contract Agent at the Corporate Trust Office duly endorsed for transfer to the Company or in blank with the form of Election to Settle Early on the reverse thereof duly completed and accompanied by payment (payable to the Company in immediately available funds) in an amount (the “Early Settlement Amount”) equal to the sum of:

(i) the product of (A) the Stated Amount times (B) the number of Purchase Contracts with respect to which the Holder has elected to effect Early Settlement, plus

(ii) if such delivery is made with respect to any Purchase Contracts during the period from the close of business on any Record Date next preceding any Payment Date to the opening of business on such Payment Date, an amount equal to the Contract Adjustment Payments payable on such Payment Date with respect to such Purchase Contracts.

Except as provided in the immediately preceding sentence, no payment shall be made upon Early Settlement of any Purchase Contract on account of any Contract Adjustment Payments accrued on such Purchase Contract or on account of any dividends on the Common Stock issued upon such Early Settlement. If the foregoing requirements are first satisfied with respect to Purchase Contracts underlying any Units on or prior to 5:00 p.m. (New York City time) on a Business Day, such day shall be the “Early Settlement Date” with respect to such Units and if such requirements are first satisfied after 5:00 p.m. (New York City time) on a Business Day or on a day that is not a Business Day, the “Early Settlement Date” with respect to such Units shall be the next succeeding Business Day.

Upon the receipt of such Certificate and Early Settlement Amount from the Holder, the Purchase Contract Agent shall pay to the Company such Early Settlement Amount, the receipt of which payment the Company shall confirm in writing. The Purchase Contract Agent shall then, in accordance with Section 5.06 of the Pledge Agreement, notify the Collateral Agent that (A) such Holder has elected to effect an Early Settlement, which notice shall set forth the number of such Purchase Contracts as to which such Holder has elected to effect Early Settlement, (B) the Purchase Contract Agent has received from such Holder, and paid to the Company as confirmed in writing by the Company, the related Early Settlement Amount and (C) all conditions to such Early Settlement have been satisfied.

Holders of Treasury Units may only effect Early Settlement pursuant to this Section 5.07 in integral multiples of 40 Treasury Units. If the Treasury

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Portfolio has replaced the Senior Notes as a component of the Corporate Units, Corporate Units Holders may only effect Early Settlement pursuant to this Section 5.07 in integral multiples of 16,000 Corporate Units.

Upon Early Settlement of the Purchase Contracts, the rights of the Holders to receive and the obligation of the Company to pay any Contract Adjustment Payments (including any accrued and unpaid Contract Adjustment Payments) with respect to such Purchase Contracts shall immediately and automatically terminate.

(c) Upon Early Settlement of Purchase Contracts by a Holder of the related Units, the Company shall issue, and the Holder shall be entitled to receive, newly issued shares of Common Stock equal to the Minimum Share Number, as adjusted from time to time pursuant to Section 5.04 on account of each Purchase Contract as to which Early Settlement is effected (the “Early Settlement Rate”).

(d) No later than the third Business Day after the applicable Early Settlement Date, the Company shall cause:

(i) the shares of Common Stock issuable upon Early Settlement of Purchase Contracts to be issued and delivered, together with payment in lieu of any fraction of a share, as provided in Section 5.09; and

(ii) the related Pledged Senior Notes or the Applicable Ownership Interests in the Treasury Portfolio (as specified in clause (i) of the definition of such term), as applicable, in the case of Corporate Units, or the related Pledged Treasury Securities, in the case of Treasury Units, to be released from the Pledge by the Collateral Agent, free and clear of the Company’s security interest therein, and transferred, in each case, to the Purchase Contract Agent for delivery to the Holder thereof or its designee.

(e) Upon Early Settlement of any Purchase Contracts, and subject to receipt of shares of Common Stock from the Company and the Senior Notes, the Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio or Treasury Securities, as the case may be, from the Securities Intermediary, as applicable, the Purchase Contract Agent shall, in accordance with the instructions provided by the Holder thereof on the applicable form of Election to Settle Early on the reverse of the Certificate evidencing the related Units:

(i) transfer to the Holder the Senior Notes, the Applicable Ownership Interests (as specified in clause (i) of the Definition of such term) in the Treasury Portfolio or Treasury Securities, as the case may be, forming a part of such Units,

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(ii) deliver to the Holder a certificate or certificates for the full number of shares of Common Stock issuable upon such Early Settlement, together with payment in lieu of any fraction of a share, as provided in Section 5.09, and

(iii) if so required under the Securities Act, deliver a Prospectus for the shares of Common Stock issuable upon such Early Settlement as contemplated by (a).

(f) In the event that Early Settlement is effected with respect to Purchase Contracts underlying less than all the Units evidenced by a Certificate, upon such Early Settlement the Company shall execute and the Purchase Contract Agent shall execute on behalf of the Holder, authenticate and deliver to the Holder thereof, at the expense of the Company, a Certificate evidencing the Units as to which Early Settlement was not effected.

(g) A Holder of a Unit who effects Early Settlement may elect to have the Senior Notes no longer a part of a Corporate Unit remarketed in accordance with the provisions of Section 5.02.

Section 5.08. Intentionally Omitted.

Section 5.09. No Fractional Shares.

No fractional shares or scrip representing fractional shares of Common Stock shall be issued or delivered upon settlement on the Purchase Contract Settlement Date, or upon Early Settlement or Cash Merger Early Settlement of any Purchase Contracts. If Certificates evidencing more than one Purchase Contract shall be surrendered for settlement at one time by the same Holder, the number of full shares of Common Stock that shall be delivered upon settlement shall be computed on the basis of the aggregate number of Purchase Contracts evidenced by the Certificates so surrendered. Instead of any fractional share of Common Stock that would otherwise be deliverable upon settlement of any Purchase Contracts on the Purchase Contract Settlement Date, or upon Early Settlement or Cash Merger Early Settlement, the Company, through the Purchase Contract Agent, shall make a cash payment in respect of such fractional interest in an amount equal to the percentage of such fractional share times the Applicable Market Value calculated as if the date of such settlement were the Purchase Contract Settlement Date. The Company shall provide the Purchase Contract Agent from time to time with sufficient funds to permit the Purchase Contract Agent to make all cash payments required by this Section 5.09 in a timely manner.

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Section 5.10. Charges and Taxes.

The Company will pay all stock transfer and similar taxes attributable to the initial issuance and delivery of the shares of Common Stock pursuant to the Purchase Contracts; provided, however, that the Company shall not be required to pay any such tax or taxes which may be payable in respect of any exchange of or substitution for a Certificate evidencing a Unit or any issuance of a share of Common Stock in a name other than that of the registered Holder of a Certificate surrendered in respect of the Units evidenced thereby, other than in the name of the Purchase Contract Agent, as custodian for such Holder, and the Company shall not be required to issue or deliver such share certificates or Certificates unless or until the Person or Persons requesting the transfer or issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

Section 5.11. Contract Adjustment Payments.

(a) Subject to Section 5.11(d), the Company shall pay, on each Payment Date, the Contract Adjustment Payments payable in respect of each Purchase Contract to the Person in whose name a Certificate is registered at the close of business on the Record Date relating to such Payment Date. The Contract Adjustment Payments will be payable at the office of the Purchase Contract Agent in the Borough of Manhattan, New York City maintained for that purpose. If the book-entry system for the Units has been terminated, the Contract Adjustment Payments will be payable, at the option of the Company, by check mailed to the address of the Person entitled thereto at such Person’s address as it appears on the Security Register, or by wire transfer to the account designated by such Person by a prior written notice to the Purchase Contract Agent. Contract Adjustment Payments payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. The Contract Adjustment Payments will accrue from November 3, 2003.

(b) Upon the occurrence of a Termination Event, the Company’s obligation to pay future Contract Adjustment Payments (including any accrued Contract Adjustment Payments) shall cease.

(c) Each Certificate delivered under this Agreement upon registration of transfer of or in exchange for or in lieu of (including as a result of a Collateral Substitution or the recreation of Corporate Units) any other Certificate shall carry the right to accrued and unpaid Contract Adjustment Payments, which right was carried by the Purchase Contracts underlying such other Certificates.

(d) In the case of any Unit with respect to which Early Settlement or Cash Merger Early Settlement of the underlying Purchase Contract is effected on a date that is after any Record Date and prior to or on the next succeeding

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Payment Date, Contract Adjustment Payments otherwise payable on such Payment Date shall be payable on such Payment Date notwithstanding such Early Settlement or Cash Merger Early Settlement, and such Contract Adjustment Payments shall be paid to the Person in whose name the Certificate evidencing such Unit is registered at the close of business on such Record Date. Except as otherwise expressly provided in the immediately preceding sentence, and the right to receive accrued and unpaid Contract Adjustment Payments as set forth in Section 5.04(b)(ii), in the case of any Unit with respect to which Early Settlement or Cash Merger Early Settlement of the underlying Purchase Contract is effected, Contract Adjustment Payments that would otherwise be payable after the Early Settlement or Cash Merger Early Settlement Date with respect to such Purchase Contract shall not be payable.

(e) The Company’s obligations with respect to Contract Adjustment Payments, if any, will be subordinated and junior in right of payment to the Company’s obligations under any Senior Indebtedness.

(f) In the event (x) of any payment by, or distribution of assets of, the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution, winding-up, liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, or (y) subject to the provisions of Section 5.11(h) below, that (i) a default shall have occurred and be continuing with respect to the payment of principal, interest or any other monetary amounts due and payable on any Senior Indebtedness and such default shall have continued beyond the period of grace, if any, specified in the instrument evidencing such Senior Indebtedness (and the Purchase Contract Agent shall have received written notice thereof from the Company or one or more holders of Senior Indebtedness or their representative or representatives or the trustee or trustees under any indenture pursuant to which any such Senior Indebtedness may have been issued), or (ii) the maturity of any Senior Indebtedness shall have been accelerated because of a default in respect of such Senior Indebtedness (and the Purchase Contract Agent shall have received written notice thereof from the Company or one or more holders of Senior Indebtedness or their representative or representatives or the trustee or trustees under any indenture pursuant to which any such Senior Indebtedness may have been issued), then:

(i) the holders of all Senior Indebtedness shall first be entitled to receive, in the case of clause (x) above, payment of all amounts due or to become due upon all Senior Indebtedness and, in the case of subclauses (i) and (ii) of clause (y) above, payment of all amounts due thereon, or provision shall be made for such payment in money or money’s worth, before the Holders of any of the Units are entitled to receive any Contract Adjustment Payments on the Purchase Contracts underlying the Units;

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(ii) any payment by, or distribution of assets of, the Company of any kind or character, whether in cash, property or securities, to which the Holders of any of the Units would be entitled except for the provisions of Section 5.11(e) through (q), including any such payment or distribution which may be payable or deliverable by reason of the payment of any other indebtedness of the Company being subordinated to the payment of such Contract Adjustment Payments on the Purchase Contracts underlying the Units, shall be paid or delivered by the Person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the representative or representatives of the holders of Senior Indebtedness or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, ratably according to the aggregate amounts remaining unpaid on account of such Senior Indebtedness held or represented by each, to the extent necessary to make payment in full of all Senior Indebtedness remaining unpaid after giving effect to any concurrent payment or distribution (or provision therefor) to the holders of such Senior Indebtedness, before any payment or distribution is made of such Contract Adjustment Payments to the Holders of such Units; and

(iii) in the event that, notwithstanding the foregoing, any payment by, or distribution of assets of, the Company of any kind or character, whether in cash, property or securities, including any such payment or distribution which may be payable or deliverable by reason of the payment of any other indebtedness of the Company being subordinated to the payment of Contract Adjustment Payments on the Purchase Contracts underlying the Units, shall be received by the Purchase Contract Agent or the Holders of any of the Units when such payment or distribution is prohibited pursuant to Section 5.11(e) through (q), such payment or distribution shall be paid over to the representative or representatives of the holders of Senior Indebtedness or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any such Senior Indebtedness may have been issued, ratably as aforesaid, for application to the payment of all Senior Indebtedness remaining unpaid until all such Senior Indebtedness shall have been paid in full, after giving effect to any concurrent payment or distribution (or provision therefor) to the holders of such Senior Indebtedness.

(g) For purposes of Section 5.11(e) through (q), the words “cash, property or securities” shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other Person provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in Section 5.11(e) through (q) with respect to such Contract Adjustment Payments on the Units to the payment of all Senior Indebtedness which may at the time be outstanding; provided that (i)

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the indebtedness or guarantee of indebtedness, as the case may be, that constitutes Senior Indebtedness is assumed by the Person, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of the Senior Indebtedness are not, without the consent of each such holder adversely affected thereby, altered by such reorganization or readjustment;

(h) Any failure by the Company to make any payment on or perform any other obligation under Senior Indebtedness, other than any indebtedness incurred by the Company or assumed or guaranteed, directly or indirectly, by the Company for money borrowed (or any deferral, renewal, extension or refunding thereof) or any indebtedness or obligation as to which the provisions of Section 5.11(e) through (q) shall have been waived by the Company in the instrument or instruments by which the Company incurred, assumed, guaranteed or otherwise created such indebtedness or obligation, shall not be deemed a default or event of default if (i) the Company shall be disputing its obligation to make such payment or perform such obligation and (ii) either (A) no final judgment relating to such dispute shall have been issued against the Company which is in full force and effect and is not subject to further review, including a judgment that has become final by reason of the expiration of the time within which a party may seek further appeal or review, and (B) in the event a judgment that is subject to further review or appeal has been issued, the Company shall in good faith be prosecuting an appeal or other proceeding for review and a stay of execution shall have been obtained pending such appeal or review.

(i) Subject to the irrevocable payment in full of all Senior Indebtedness, the Holders of the Units shall be subrogated (equally and ratably with the holders of all obligations of the Company which by their express terms are subordinated to Senior Indebtedness of the Company to the same extent as payment of the Contract Adjustment Payments in respect of the Purchase Contracts underlying the Units is subordinated and which are entitled to like rights of subrogation) to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Indebtedness until all such Contract Adjustment Payments owing on the Units shall be paid in full, and as between the Company, its creditors other than holders of such Senior Indebtedness and the Holders, no such payment or distribution made to the holders of Senior Indebtedness by virtue of Section 5.11(e) through (q) that otherwise would have been made to the Holders shall be deemed to be a payment by the Company on account of such Senior Indebtedness, it being understood that the provisions of Section 5.11(e) through (q) are and are intended solely for the purpose of defining the relative rights of the Holders, on the one hand, and the holders of Senior Indebtedness, on the other hand.

(j) Nothing contained in Section 5.11(e) through (q) or elsewhere in this Agreement or in the Units is intended to or shall impair, as among the Company, its creditors other than the holders of Senior Indebtedness and the

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Holders, the obligation of the Company, which is absolute and unconditional, to pay to the Holders such Contract Adjustment Payments on the Units as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders and creditors of the Company other than the holders of Senior Indebtedness, nor shall anything herein or therein prevent the Purchase Contract Agent or any Holder from exercising all remedies otherwise permitted by applicable law upon default under this Agreement, subject to the rights, if any, under Section 5.11(e) through (q), of the holders of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy.

(k) Upon payment or distribution of assets of the Company referred to in Section 5.11(e) through (q), the Purchase Contract Agent and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which any such dissolution, winding up, liquidation or reorganization proceeding affecting the affairs of the Company is pending or upon a certificate of the trustee in bankruptcy, receiver, assignee for the benefit of creditors, liquidating trustee or Purchase Contract Agent or other person making any payment or distribution, delivered to the Purchase Contract Agent or to the Holders, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section 5.11(e) through (q).

(l) The Purchase Contract Agent shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee or representative on behalf of such holder) to establish that such notice has been given by a holder of Senior Indebtedness or a trustee or representative on behalf of any such holder or holders. In the event that the Purchase Contract Agent determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to Section 5.11(e) through (q), the Purchase Contract Agent may request such Person to furnish evidence to the reasonable satisfaction of the Purchase Contract Agent as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under Section 5.11(e) through (q), and, if such evidence is not furnished, the Purchase Contract Agent may defer payment to such Person pending judicial determination as to the right of such Person to receive such payment.

(m) Nothing contained in Section 5.11(e) through (q) shall affect the obligations of the Company to make, or prevent the Company from making, payment of the Contract Adjustment Payments, except as otherwise provided in this Section 5.11(e) through (q).

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(n) Each Holder of Units, by its acceptance thereof, authorizes and directs the Purchase Contract Agent on its behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in Section 5.11(e) through (q) and appoints the Purchase Contract Agent its attorney-in-fact, as the case may be, for any and all such purposes.

(o) The Company shall give prompt written notice to the Purchase Contract Agent of any fact known to the Company that would prohibit the making of any payment of moneys to or by the Purchase Contract Agent in respect of the Units pursuant to the provisions of this Section. Notwithstanding the provisions of Section 5.11(e) through (q) or any other provisions of this Agreement, the Purchase Contract Agent shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of moneys to or by the Purchase Contract Agent, or the taking of any other action by the Purchase Contract Agent, unless and until the Purchase Contract Agent shall have received written notice thereof mailed or delivered to the Purchase Contract Agent at its Institutional Trust Services department from the Company, any Holder, or the holder or representative of any Senior Indebtedness; provided that if at least two Business Days prior to the date upon which by the terms hereof any such moneys may become payable for any purpose, the Purchase Contract Agent shall not have received with respect to such moneys the notice provided for in this Section, then, anything herein contained to the contrary notwithstanding, the Purchase Contract Agent shall have full power and authority to receive such moneys and to apply the same to the purpose for which they were received and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to or on or after such date.

(p) The Purchase Contract Agent in its individual capacity shall be entitled to all the rights set forth in this Section with respect to any Senior Indebtedness at the time held by it, to the same extent as any other holder of Senior Indebtedness and nothing in this Agreement shall deprive the Purchase Contract Agent of any of its rights as such holder.

(q) No right of any present or future holder of any Senior Indebtedness to enforce the subordination herein shall at any time or in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any noncompliance by the Company with the terms, provisions and covenants of this Agreement, regardless of any knowledge thereof which any such holder may have or be otherwise charged with.

(r) Nothing in this Section 5.11 shall apply to claims of, or payments to, the Purchase Contract Agent under or pursuant to Section 7.07.

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(s) With respect to the holders of Senior Indebtedness, (i) the duties and obligations of the Purchase Contract Agent shall be determined solely by the express provisions of this Agreement; (ii) the Purchase Contract Agent shall not be liable to any such holders if it shall, acting in good faith, mistakenly pay over or distribute to the Holders or to the Company or any other Person cash, property or securities to which any holders of Senior Indebtedness shall be entitled by virtue of this Section 5.11 or otherwise; (iii) no implied covenants or obligations shall be read into this Agreement against the Purchase Contract Agent; and (iv) the Purchase Contract Agent shall not be deemed to be a fiduciary as to such holders.

ARTICLE 6

REMEDIES

Section 6.01. Unconditional Right of Holders to Receive Contract Adjustment Payments and to Purchase Shares of Common Stock.

Each Holder of a Unit shall have the right, which is absolute and unconditional, (i) subject to Article 5, to receive each Contract Adjustment Payment with respect to the Purchase Contract comprising part of such Unit on the respective Payment Date for such Unit and (ii) except upon and following a Termination Event, to purchase shares of Common Stock pursuant to such Purchase Contract and, in each such case, to institute suit for the enforcement of any such right to receive Contract Adjustment Payments and the right to purchase shares of Common Stock, and such rights shall not be impaired without the consent of such Holder.

Section 6.02. Restoration of Rights and Remedies.

If any Holder has instituted any proceeding to enforce any right or remedy under this Agreement and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to such Holder, then and in every such case, subject to any determination in such proceeding, the Company and such Holder shall be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of such Holder shall continue as though no such proceeding had been instituted.

Section 6.03. Rights and Remedies Cumulative.

Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Certificates in the last paragraph of Section 3.10, no right or remedy herein conferred upon or reserved to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other

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right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.

Section 6.04. Delay or Omission Not Waiver.

No delay or omission of any Holder to exercise any right upon a default or remedy upon a default shall impair any such right or remedy or constitute a waiver of any such right. Every right and remedy given by this Article or by law to the Holders may be exercised from time to time, and as often as may be deemed expedient, by such Holders.

Section 6.05. Undertaking for Costs.

All parties to this Agreement agree, and each Holder of a Unit, by its acceptance of such Unit shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Agreement, or in any suit against the Purchase Contract Agent for any action taken, suffered or omitted by it as Purchase Contract Agent, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees and costs against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided that the provisions of this Section shall not apply to any suit instituted by the Purchase Contract Agent, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% of the Outstanding Units, or to any suit instituted by any Holder for the enforcement of interest on any Senior Notes or Contract Adjustment Payments on or after the respective Payment Date therefor in respect of any Unit held by such Holder, or for enforcement of the right to purchase shares of Common Stock under the Purchase Contracts constituting part of any Unit held by such Holder.

Section 6.06. Waiver of Stay or Extension Laws.

The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Agreement; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Purchase Contract Agent or the Holders, but will suffer and permit the execution of every such power as though no such law had been enacted.

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ARTICLE 7

THE PURCHASE CONTRACT AGENT

Section 7.01. Certain Duties and Responsibilities.

(a) The Purchase Contract Agent:

(i) undertakes to perform, with respect to the Units, such duties and only such duties as are specifically set forth in this Agreement, the Pledge Agreement and the Remarketing Agreement and no implied covenants or obligations shall be read into this Agreement, the Pledge Agreement or the Remarketing Agreement against the Purchase Contract Agent; and

(ii) in the absence of bad faith or gross negligence on its part, may, with respect to the Units, conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Purchase Contract Agent and conforming to the requirements of this Agreement or the Pledge Agreement or the Remarketing Agreement, as applicable, but in the case of any certificates or opinions which by any provision hereof are specifically required to be furnished to the Purchase Contract Agent, the Purchase Contract Agent shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Agreement, the Pledge Agreement or the Remarketing Agreement, as applicable (but need not confirm or investigate the accuracy of the mathematical calculations or other facts stated therein).

(b) No provision of this Agreement, the Pledge Agreement or the Remarketing Agreement shall be construed to relieve the Purchase Contract Agent from liability for its own grossly negligent action, its own grossly negligent failure to act, or its own willful misconduct, except that:

(i) this Subsection shall not be construed to limit the effect of subsection (a) of this Section;

(ii) the Purchase Contract Agent shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be conclusively determined by a court of competent jurisdiction that the Purchase Contract Agent was grossly negligent in ascertaining the pertinent facts; and

(iii) no provision of this Agreement or the Pledge Agreement or the Remarketing Agreement shall require the Purchase Contract Agent to expend or risk its own funds or otherwise incur any financial liability in

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the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.

(c) Whether or not therein expressly so provided, every provision of this Agreement, the Pledge Agreement and the Remarketing Agreement relating to the conduct or affecting the liability of or affording protection to the Purchase Contract Agent shall be subject to the provisions of this Section.

(d) The Purchase Contract Agent is authorized to execute and deliver the Pledge Agreement and the Remarketing Agreement in its capacity as Purchase Contract Agent.

Section 7.02. Notice of Default.

Within 30 days after the occurrence of any default by the Company hereunder of which a Responsible Officer of the Purchase Contract Agent has actual knowledge, the Purchase Contract Agent shall transmit by mail to the Company and the Holders of Units, as their names and addresses appear in the Security Register, notice of such default hereunder, unless such default shall have been cured or waived.

Section 7.03. Certain Rights of Purchase Contract Agent.

Subject to the provisions of Section 7.01:

(a) the Purchase Contract Agent may, in the absence of bad faith, conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, Senior Note, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;

(b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by an Officers’ Certificate, Issuer Order or Issuer Request, and any resolution of the Board of Directors of the Company may be sufficiently evidenced by a Board Resolution;

(c) whenever in the administration of this Agreement, the Pledge Agreement or the Remarketing Agreement the Purchase Contract Agent shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting to take any action hereunder, the Purchase Contract Agent (unless other evidence be herein specifically prescribed in this Agreement) may, in the absence of bad faith on its part, conclusively rely upon an Officers’ Certificate of the Company;

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(d) the Purchase Contract Agent may consult with counsel of its selection appointed with due care by it hereunder and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon;

(e) the Purchase Contract Agent shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Purchase Contract Agent, in its discretion, may make reasonable further inquiry or investigation into such facts or matters related to the execution, delivery and performance of the Purchase Contracts as it may see fit, and, if the Purchase Contract Agent shall determine to make such further inquiry or investigation, it shall be entitled to examine the relevant books, records and premises of the Company, personally or by agent or attorney;

(f) the Purchase Contract Agent may execute any of the powers hereunder or perform any duties hereunder either directly or by or through agents, attorneys, custodians or nominees or an Affiliate and the Purchase Contract Agent shall not be responsible for any misconduct or negligence on the part of any agent, attorney, custodian or nominee or an Affiliate appointed with due care by it hereunder;

(g) the Purchase Contract Agent shall be under no obligation to exercise any of the rights or powers vested in it by this Agreement at the request or direction of any of the Holders pursuant to this Agreement, unless such Holders shall have offered to the Purchase Contract Agent security or indemnity reasonably satisfactory to the Purchase Contract Agent against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction;

(h) the Purchase Contract Agent shall not be liable for any action taken, suffered, or omitted to be taken by it in the absence of bad faith or gross negligence by it;

(i) the Purchase Contract Agent shall not be deemed to have notice of any default hereunder unless a Responsible Officer of the Purchase Contract Agent has actual knowledge thereof or unless written notice of any event that is in fact such a default is received by the Purchase Contract Agent at the Corporate Trust Office of the Purchase Contract Agent, and such notice references the Units and this Agreement;

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(j) the Purchase Contract Agent may request that the Company deliver an Officers’ Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Agreement, which Officers’ Certificate may be signed by any person authorized to sign an Officers’ Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded;

(k) the rights, privileges, protections, immunities and benefits given to the Purchase Contract Agent, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Purchase Contract Agent in each of its capacities hereunder, and to each agent, custodian and other Person employed to act hereunder; and

(l) The Purchase Contract Agent shall not be required to initiate or conduct any litigation or collection proceedings hereunder and shall have no responsibilities with respect to any default hereunder except as expressly set forth herein.

Section 7.04. Not Responsible for Recitals or Issuance of Units.

The recitals contained herein, in the Pledge Agreement, the Remarketing Agreement and in the Certificates shall be taken as the statements of the Company, and the Purchase Contract Agent assumes no responsibility for their accuracy or validity. The Purchase Contract Agent makes no representations as to the validity or sufficiency of either this Agreement or of the Units, or of the Pledge Agreement or the Pledge or the Collateral and shall have no responsibility for perfecting or maintaining the perfection of any security interest in the Collateral. The Purchase Contract Agent shall not be accountable for the use or application by the Company of the proceeds in respect of the Purchase Contracts.

Section 7.05. May Hold Units.

Any Security Registrar or any other agent of the Company, or the Purchase Contract Agent and its Affiliates, in their individual or any other capacity, may become the owner or pledgee of Units and may otherwise deal with the Company, the Collateral Agent or any other Person with the same rights it would have if it were not Security Registrar or such other agent, or the Purchase Contract Agent. The Company may become the owner or pledgee of Units.

Section 7.06. Money Held in Custody.

Money held by the Purchase Contract Agent in custody hereunder need not be segregated from the Purchase Contract Agent’s other funds except to the extent required by law or provided herein. The Purchase Contract Agent shall be under no obligation to invest or pay interest on any money received by it hereunder except as otherwise provided hereunder or agreed in writing with the Company.

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Section 7.07. Compensation and Reimbursement.

The Company agrees:

(a) to pay to the Purchase Contract Agent compensation for all services rendered by it hereunder, under the Pledge Agreement and under the Remarketing Agreement as the Company and the Purchase Contract Agent shall from time to time agree in writing;

(b) except as otherwise expressly provided for herein, to reimburse the Purchase Contract Agent upon its request for all reasonable expenses, disbursements and advances incurred or made by the Purchase Contract Agent in accordance with any provision of this Agreement, the Pledge Agreement and the Remarketing Agreement (including the reasonable compensation and the expenses and disbursements of its agents and counsel) in connection with the negotiation, preparation, execution and delivery and performance of this Agreement, the Pledge Agreement and the Remarketing Agreement and any modification, supplement or waiver of any of the terms thereof, except any such expense, disbursement or advance as may be attributable to its gross negligence, willful misconduct or bad faith; and

(c) to indemnify the Purchase Contract Agent and any predecessor Purchase Contract Agent (and each of its directors, officers, agents and employees (collectively, the “Indemnitees”) for, and to hold it harmless against, any loss, claim, damage, fine, penalty, liability or expense (including reasonable fees and expenses of counsel) incurred without gross negligence, willful misconduct or bad faith on its part, arising out of or in connection with the acceptance or administration of its duties hereunder and under the Pledge Agreement and the Remarketing Agreement, including the Indemnitees’ reasonable costs and expenses of defending themselves against any claim (whether asserted by the Company, a Holder or any other person) or liability in connection with the exercise or performance of any of the Purchase Contract Agent’s powers or duties hereunder or thereunder.

The provisions of this Section shall survive the resignation and removal of the Purchase Contract Agent and the termination of this Agreement.

Section 7.08. Corporate Purchase Contract Agent Required, Eligibility.

There shall at all times be a Purchase Contract Agent hereunder which shall be a Person organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under

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such laws to exercise corporate trust powers, having (or being a member of a bank holding company having) a combined capital and surplus of at least $50,000,000, subject to supervision or examination by Federal or State authority and having a corporate trust office in the Borough of Manhattan, New York City, if there be such a Person in the Borough of Manhattan, New York City, qualified and eligible under this Article and willing to act on reasonable terms. If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Purchase Contract Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.

Section 7.09. Resignation and Removal; Appointment of Successor.

(a) No resignation or removal of the Purchase Contract Agent and no appointment of a successor Purchase Contract Agent pursuant to this Article shall become effective until the acceptance of appointment by the successor Purchase Contract Agent in accordance with the applicable requirements of Section 7.10.

(b) The Purchase Contract Agent may resign at any time by giving written notice thereof to the Company 60 days prior to the effective date of such resignation. If the instrument of acceptance by a successor Purchase Contract Agent required by Section 7.10 shall not have been delivered to the Purchase Contract Agent within 30 days after the giving of such notice of resignation, the resigning Purchase Contract Agent may petition, at the expense of the Company, any court of competent jurisdiction for the appointment of a successor Purchase Contract Agent.

(c) The Purchase Contract Agent may be removed at any time by Act of the Holders of a majority in number of the Outstanding Units delivered to the Purchase Contract Agent and the Company. If the instrument of acceptance by a successor Purchase Contract Agent required by Section 7.10 shall not have been delivered to the Purchase Contract Agent within 30 days after such Act, the Purchase Contract Agent being removed may petition any court of competent jurisdiction for the appointment at the expense of the Company of a successor Purchase Contract Agent.

(d) If at any time:

(i) the Purchase Contract Agent fails to comply with Section 310(b) of the TIA, as if the Purchase Contract Agent were an indenture trustee under an indenture qualified under the TIA, and shall fail to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Unit for at least six months;

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(ii) the Purchase Contract Agent shall cease to be eligible under Section 7.08 and shall fail to resign after written request therefor by the Company or by any such Holder; or

(iii) the Purchase Contract Agent shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Purchase Contract Agent or of its property shall be appointed or any public officer shall take charge or control of the Purchase Contract Agent or of its property or affairs for the purpose of rehabilitation, conservation or liquidation,

then, in any such case, (i) the Company by a Board Resolution may remove the Purchase Contract Agent, or (ii) any Holder who has been a bona fide Holder of a Unit for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Purchase Contract Agent and the appointment of a successor Purchase Contract Agent.

(e) If the Purchase Contract Agent shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Purchase Contract Agent for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Purchase Contract Agent and shall comply with the applicable requirements of Section 7.10. If no successor Purchase Contract Agent shall have been so appointed by the Company and accepted appointment in the manner required by Section 7.10, any Holder who has been a bona fide Holder of a Unit for at least six months, on behalf of itself and all others similarly situated, or the Purchase Contract Agent may petition at the expense of the Company any court of competent jurisdiction for the appointment of a successor Purchase Contract Agent.

(f) The Company shall give, or shall cause such successor Purchase Contract Agent to give, notice of each resignation and each removal of the Purchase Contract Agent and each appointment of a successor Purchase Contract Agent by mailing written notice of such event by first-class mail, postage prepaid, to all Holders as their names and addresses appear in the applicable Security Register. Each notice shall include the name of the successor Purchase Contract Agent and the address of its Corporate Trust Office.

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Section 7.10. Acceptance Of Appointment By Successor.

(a) In case of the appointment hereunder of a successor Purchase Contract Agent, every such successor Purchase Contract Agent so appointed shall execute, acknowledge and deliver to the Company and to the retiring Purchase Contract Agent an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Purchase Contract Agent shall become effective and such successor Purchase Contract Agent, without any further act, deed or conveyance, shall become vested with all the rights, powers, agencies and duties of the retiring Purchase Contract Agent; but, on the request of the Company or the successor Purchase Contract Agent, such retiring Purchase Contract Agent shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Purchase Contract Agent all the rights, powers and trusts of the retiring Purchase Contract Agent and duly assign, transfer and deliver to such successor Purchase Contract Agent all property and money held by such retiring Purchase Contract Agent hereunder.

(b) Upon request of any such successor Purchase Contract Agent, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Purchase Contract Agent all such rights, powers and agencies referred to in (a) of this Section.

(c) No successor Purchase Contract Agent shall accept its appointment unless at the time of such acceptance such successor Purchase Contract Agent shall be qualified and eligible under this Article.

Section 7.11. Merger, Conversion, Consolidation Or Succession To Business.

Any Person into which the Purchase Contract Agent may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Purchase Contract Agent shall be a party, or any Person succeeding to all or substantially all the corporate trust business of the Purchase Contract Agent, shall be the successor of the Purchase Contract Agent hereunder, provided that such Person shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Certificates shall have been authenticated and executed on behalf of the Holders, but not delivered, by the Purchase Contract Agent then in office, any successor by merger, conversion or consolidation to such Purchase Contract Agent may adopt such authentication and execution and deliver the Certificates so authenticated and executed with the same effect as if such successor Purchase Contract Agent had itself authenticated and executed such Units.

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Section 7.12. Preservation of Information; Communications to Holders.

(a) The Purchase Contract Agent shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders received by the Purchase Contract Agent in its capacity as Security Registrar.

(b) If three or more Holders (herein referred to as “Applicants”) apply in writing to the Purchase Contract Agent, and furnish to the Purchase Contract Agent reasonable proof that each such applicant has owned a Unit for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other Holders with respect to their rights under this Agreement or under the Units and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Purchase Contract Agent shall mail to all the Holders copies of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Purchase Contract Agent of the materials to be mailed and of payment, or provision for the payment, of the reasonable expenses of such mailing.

Section 7.13. No Obligations of Purchase Contract Agent.

Except to the extent otherwise expressly provided in this Agreement, the Purchase Contract Agent assumes no obligations and shall not be subject to any liability under this Agreement, the Pledge Agreement, the Remarketing Agreement or any Purchase Contract in respect of the obligations of the Holder of any Unit thereunder. The Company agrees, and each Holder of a Certificate, by its acceptance thereof, shall be deemed to have agreed, that the Purchase Contract Agent’s execution of the Certificates on behalf of the Holders shall be solely as agent and attorney-in-fact for the Holders, and that the Purchase Contract Agent shall have no obligation to perform such Purchase Contracts on behalf of the Holders, except to the extent expressly provided in Article Five hereof. Anything contained in this Agreement to the contrary notwithstanding, in no event shall the Purchase Contract Agent or its officers, directors, employees or agents be liable under this Agreement, the Pledge Agreement or the Remarketing Agreement to any third party for indirect, incidental, special, punitive, or consequential loss or damage of any kind whatsoever, including lost profits, whether or not the likelihood of such loss or damage was known to the Purchase Contract Agent and regardless of the form of action.

Section 7.14. Tax Compliance.

(a) The Purchase Contract Agent, on its own behalf and on behalf of the Company, will comply with all applicable certification, information reporting and withholding (including “backup” withholding) requirements imposed by applicable tax laws, regulations or administrative practice with respect to (i) any payments made with respect to the Units or (ii) the issuance, delivery, holding, transfer, redemption or exercise of rights under the Units. Such compliance shall

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include, without limitation, the preparation and timely filing of required returns and the timely payment of all amounts required to be withheld to the appropriate taxing authority or its designated agent.

(b) The Purchase Contract Agent shall comply in accordance with the terms hereof with any written direction received from the Company with respect to the execution or certification of any required documentation and the application of such requirements to particular payments or Holders or in other particular circumstances, and may for purposes of this Agreement conclusively rely on any such direction in accordance with the provisions of Section 7.01(a) hereof.

(c) The Purchase Contract Agent shall maintain all appropriate records documenting compliance with such requirements, and shall make such records available, on written request, to the Company or its authorized representative within a reasonable period of time after receipt of such request.

ARTICLE 8

SUPPLEMENTAL AGREEMENTS

Section 8.01. Supplemental Agreements Without Consent of Holders.

Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Purchase Contract Agent, at any time and from time to time, may enter into one or more agreements supplemental hereto, in form satisfactory to the Company and the Purchase Contract Agent, to:

(a) evidence the succession of another Person to the Company, and the assumption by any such successor of the covenants of the Company herein and in the Certificates;

(b) evidence and provide for the acceptance of appointment hereunder by a successor Purchase Contract Agent;

(c) add to the covenants of the Company for the benefit of the Holders, or surrender any right or power herein conferred upon the Company;

(d) make provision with respect to the rights of Holders pursuant to the requirements of Section 5.04(b);

(e) except as provided for in Section 5.04, cure any ambiguity (or formal defect), or correct or supplement any provisions herein which may be inconsistent with any other provisions herein; or

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(f) make any other provisions with respect to such matters or questions arising under this Agreement, provided that such action shall not adversely affect the interests of the Holders in any material respect.

Section 8.02. Supplemental Agreements with Consent of Holders.

With the consent of the Holders of not less than a majority of the Outstanding Units voting together as one class, including without limitation the consent of the Holders obtained in connection with a tender or an exchange offer, by Act of said Holders delivered to the Company and the Purchase Contract Agent, the Company, when duly authorized and the Purchase Contract Agent may enter into an agreement or agreements supplemental hereto for the purpose of modifying in any manner the terms of the Purchase Contracts, or the provisions of this Agreement or the rights of the Holders in respect of the Units; provided, however, that, except as contemplated herein, no such supplemental agreement shall, without the unanimous consent of the Holders of each outstanding Purchase Contract affected thereby,

(a) change any Payment Date;

(b) change the amount or the type of Collateral required to be Pledged to secure a Holder’s obligations under the Purchase Contract, unless such change is not adverse to the Holders, impair the right of the Holder of any Purchase Contract to receive distributions on the related Collateral or otherwise adversely affect the Holder’s rights in or to such Collateral or adversely alter the rights in or to such Collateral;

(c) impair the right to institute suit for the enforcement of any Purchase Contract or any Contract Adjustment Payments;

(d) reduce the number of shares of Common Stock or the amount of any other property to be purchased pursuant to any Purchase Contract, increase the price to purchase shares of Common Stock or any other property upon settlement of any Purchase Contract or change the Purchase Contract Settlement Date or the right to Early Settlement or Cash Merger Early Settlement or otherwise adversely affect the Holder’s rights under the Purchase Contract;

(e) reduce any Contract Adjustment Payments or change any place where, or the coin or currency in which, any Contract Adjustment Payment is payable; or

(f) reduce the percentage of the outstanding Purchase Contracts the consent of whose Holders is required for any modification or amendment to the provisions of this Agreement, the Purchase Contracts or the Pledge Agreement;

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provided that if any amendment or proposal referred to above would adversely affect only the Corporate Units or the Treasury Units, then only the affected class of Holders as of the record date for the Holders entitled to vote thereon will be entitled to vote on such amendment or proposal, and such amendment or proposal shall not be effective except with the consent of Holders of not less than a majority of such class; and provided, further, that the unanimous consent of the Holders of each outstanding Purchase Contract of such class affected thereby shall be required to approve any amendment or proposal specified in clauses (a) through (f) above.

It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental agreement, but it shall be sufficient if such Act shall approve the substance thereof.

Section 8.03. Execution of Supplemental Agreements.

In executing, or accepting the additional agencies created by, any supplemental agreement permitted by this Article or the modifications thereby of the agencies created by this Agreement, the Purchase Contract Agent shall be provided, and (subject to Section 7.01) shall be fully authorized and protected in relying upon, an Officers’ Certificate and an Opinion of Counsel stating that the execution of such supplemental agreement is authorized or permitted by this Agreement and that any and all conditions precedent to the execution and delivery of such supplemental agreement have been satisfied. The Purchase Contract Agent may, but shall not be obligated to, enter into any such supplemental agreement which affects the Purchase Contract Agent’s own rights, duties or immunities under this Agreement or otherwise.

Section 8.04. Effect of Supplemental Agreements.

Upon the execution of any supplemental agreement under this Article, this Agreement shall be modified in accordance therewith, and such supplemental agreement shall form a part of this Agreement for all purposes; and every Holder of Certificates theretofore or thereafter authenticated, executed on behalf of the Holders and delivered hereunder, shall be bound thereby.

Section 8.05. Reference to Supplemental Agreements.

Certificates authenticated, executed on behalf of the Holders and delivered after the execution of any supplemental agreement pursuant to this Article may, and shall if required by the Purchase Contract Agent, bear a notation in form approved by the Purchase Contract Agent as to any matter provided for in such supplemental agreement. If the Company shall so determine, new Certificates so modified as to conform, in the opinion of the Purchase Contract Agent and the Company, to any such supplemental agreement may be prepared and executed by the Company and authenticated, executed on behalf of the Holders and delivered by the Purchase Contract Agent in exchange for outstanding Certificates.

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ARTICLE 9

CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE

Section 9.01. Covenant Not to Consolidate, Merge, Convey, Transfer or Lease Property Except under Certain Conditions.

The Company covenants that it will not consolidate with, convert into, or merge with and into, any other corporation or sell, assign, transfer, lease or convey all or substantially all of its properties and assets to any Person, unless:

(a) either the Company shall be the continuing corporation, or the successor (if other than the Company) shall be a corporation organized and existing under the laws of the United States of America or a State thereof or the District of Columbia and such corporation shall expressly assume all the obligations of the Company under the Purchase Contracts, this Agreement, the Pledge Agreement, the Indenture (including any supplement thereto) and the Remarketing Agreement by one or more supplemental agreements in form reasonably satisfactory to the Purchase Contract Agent and the Collateral Agent, executed and delivered to the Purchase Contract Agent and the Collateral Agent by such corporation; and

(b) the Company or such successor corporation, as the case may be, shall not, immediately after such consolidation, conversion, merger, sale, assignment, transfer, lease or conveyance, be in default of payment obligations under the Purchase Contracts, this Agreement, the Pledge Agreement, the Indenture (including any supplement thereto) or the Remarketing Agreement or in material default in the performance of any other covenants under any of the foregoing agreements.

Section 9.02. Rights and Duties of Successor Corporation.

In case of any such merger, consolidation, share exchange, sale, assignment, transfer, lease or conveyance and upon any such assumption by a successor corporation in accordance with Section 9.01, such successor corporation shall succeed to and be substituted for the Company with the same effect as if it had been named herein as the Company. Such successor corporation thereupon may cause to be signed, and may issue either in its own name or in the name of The PMI Group, Inc., any or all of the Certificates evidencing Units issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Purchase Contract Agent; and, upon the order of such successor corporation, instead of the Company, and subject to all the terms,

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conditions and limitations in this Agreement prescribed, the Purchase Contract Agent shall authenticate and execute on behalf of the Holders and deliver any Certificates which previously shall have been signed and delivered by the officers of the Company to the Purchase Contract Agent for authentication and execution, and any Certificate evidencing Units which such successor corporation thereafter shall cause to be signed and delivered to the Purchase Contract Agent for that purpose. All the Certificates issued shall in all respects have the same legal rank and benefit under this Agreement as the Certificates theretofore or thereafter issued in accordance with the terms of this Agreement as though all of such Certificates had been issued at the date of the execution hereof.

In case of any such merger, consolidation, share exchange, sale, assignment, transfer, lease or conveyance, such change in phraseology and form (but not in substance) may be made in the Certificates evidencing Units thereafter to be issued as may be appropriate.

Section 9.03. Officers’ Certificate and Opinion of Counsel Given to Purchase Contract Agent.

The Purchase Contract Agent, subject to Section 7.01 and Section 7.03, shall receive an Officers’ Certificate and an Opinion of Counsel as conclusive evidence that any such merger, consolidation, share exchange, sale, assignment, transfer, lease or conveyance, and any such assumption, complies with the provisions of this Article and that all conditions precedent to the consummation of any such merger, consolidation, share exchange, sale, assignment, transfer, lease or conveyance have been met.

ARTICLE 10

Covenants

Section 10.01. Performance Under Purchase Contracts.

The Company covenants and agrees for the benefit of the Holders from time to time of the Units that it will duly and punctually perform its obligations under the Purchase Contracts in accordance with the terms of the Purchase Contracts and this Agreement.

Section 10.02. Maintenance of Office or Agency.

The Company will maintain in the Borough of Manhattan, New York City an office or agency where Certificates may be presented or surrendered for acquisition of shares of Common Stock upon settlement of the Purchase Contracts on the Purchase Contract Settlement Date or upon Early Settlement or Cash

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Merger Early Settlement and for transfer of Collateral upon occurrence of a Termination Event, where Certificates may be surrendered for registration of transfer or exchange, for a Collateral Substitution or recreation of Corporate Units and where notices and demands to or upon the Company in respect of the Units and this Agreement may be served. The Company will give prompt written notice to the Purchase Contract Agent of the location, and any change in the location, of such office or agency. The Company initially designates the Corporate Trust Office of the Purchase Contract Agent as such office of the Company. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Purchase Contract Agent with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office, and the Company hereby appoints the Purchase Contract Agent as its agent to receive all such presentations, surrenders, notices and demands.

The Company may also from time to time designate one or more other offices or agencies where Certificates may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, New York City for such purposes. The Company will give prompt written notice to the Purchase Contract Agent of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates as the place of payment for the Units the Corporate Trust Office and appoints the Purchase Contract Agent at its Corporate Trust Office as paying agent in such city.

Section 10.03. Company to Reserve Common Stock.

The Company shall at all times prior to the Purchase Contract Settlement Date reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock the full number of shares of Common Stock issuable against tender of payment in respect of all Purchase Contracts constituting a part of the Units evidenced by Outstanding Certificates.

Section 10.04. Covenants as to Common Stock.

The Company covenants that all shares of Common Stock which may be issued against tender of payment in respect of any Purchase Contract constituting a part of the Outstanding Units will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable.

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Section 10.05. Statements of Officers of the Company as to Default.

The Company will deliver to the Purchase Contract Agent, within 120 days after the end of each fiscal year of the Company (which as of the date hereof is December 31) ending after the date hereof, an Officers’ Certificate, one of the signers of which is the chief executive, chief financial or chief accounting officer, stating whether or not to the knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions hereof, and if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge.

Section 10.06. ERISA.

Each Holder from time to time of the Units that is a Plan or who used assets of a Plan to purchase Units hereby represents that either (i) no portion of the assets used by such Holder to acquire the Corporate Units constitutes assets of the Plan or (ii) the purchase or holding of the Corporate Units by such purchaser or transferee will not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or similar violation under any applicable laws.

Section 10.07. Tax Treatment. The Company covenants and agrees, for United States federal, state and local income and franchise tax purposes, to (i) treat a Holder’s acquisition of the Corporate Units as the acquisition of the Senior Note and Purchase Contract constituting the Corporate Units and (ii) treat each Holder as the owner of the applicable interest in the Collateral Account, including the Senior Notes and Applicable Ownership Interests in the Treasury Portfolio or the Treasury Securities.

SIGNATURES ON THE FOLLOWING PAGE

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written.

THE PMI GROUP, INC.
By:	/s/ Donald P. Lofe, Jr.
	Name:	Donald P. Lofe, Jr.
	Title:	Executive Vice President and Chief Financial Officer
THE BANK OF NEW YORK,     as Purchase Contract Agent
By:	/s/ Michael Pitfick
	Name:	Michael Pitfick
	Title:	Assistant Vice President

EXHIBIT A

(FORM OF FACE OF CORPORATE UNITS CERTIFICATE)

For inclusion in Global Certificates only – THIS CERTIFICATE IS A GLOBAL CERTIFICATE WITHIN THE MEANING OF THE PURCHASE CONTRACT AGREEMENT HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF CEDE & CO., AS THE NOMINEE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (THE “DEPOSITARY”), THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY. THIS CERTIFICATE IS EXCHANGEABLE FOR CERTIFICATES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE PURCHASE CONTRACT AGREEMENT AND NO TRANSFER OF THIS CERTIFICATE (OTHER THAN A TRANSFER OF THIS CERTIFICATE AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES.

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]

No.                  CUSIP No.                 

Number of Corporate Units:                         

THE PMI GROUP, INC.

Corporate Units

This Corporate Units Certificate certifies that [Cede & Co.] is the registered Holder of the number of Corporate Units set forth above [for inclusion in Global Certificates only – or such other number of Corporate Units reflected in the Schedule of Increases or Decreases in the Global Certificate attached hereto]. Each Corporate Unit consists of (i) either (a) the beneficial ownership by the

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Holder of $25 principal amount of Senior Notes due November 15, 2008 (the “Senior Notes”) of The PMI Group, Inc., a Delaware corporation (the “Company”), subject to the Pledge of such Senior Note by such Holder pursuant to the Pledge Agreement, or (b) upon the occurrence of a Special Event Redemption prior to the Purchase Contract Settlement Date or a Successful Remarketing of the Senior Notes prior to the Final Remarketing Date, the Applicable Ownership Interests, subject to the pledge of the appropriate Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio by such Holder pursuant to the Pledge Agreement, and (ii) the rights and obligations of the Holder under one Purchase Contract with the Company. All capitalized terms used herein which are defined in the Purchase Contract Agreement (as defined on the reverse hereof) have the meaning set forth therein.

Pursuant to the Pledge Agreement, the Senior Notes or the appropriate Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, as the case may be, constituting part of each Corporate Unit evidenced hereby have been pledged to the Collateral Agent, for the benefit of the Company, to secure the obligations of the Holder under the Purchase Contract comprising part of such Corporate Unit.

The Pledge Agreement provides that all payments of the principal amount with respect to any of the Pledged Senior Notes (as defined in the Pledge Agreement) or the appropriate Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, as the case may be, or interest or distributions on any Pledged Senior Notes or the appropriate Applicable Ownership Interests (as specified in clause (ii) of the definition of such term) in the Treasury Portfolio, as the case may be, constituting part of the Corporate Units received by the Securities Intermediary shall be paid by wire transfer in same day funds (i) in the case of (A) interest on Pledged Senior Notes or distributions with respect to the appropriate Applicable Ownership Interests (as specified in clause (ii) of the definition of such term) in the Treasury Portfolio, as the case may be, and (B) any payments of the principal amount of any Senior Notes or with respect to the appropriate Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, as the case may be, that have been released from the Pledge pursuant to the Pledge Agreement, to the Purchase Contract Agent to the account designated by the Purchase Contract Agent, no later than 2:00 p.m., New York City time, on the Business Day such payment is received by the Securities Intermediary (provided that in the event such payment is received by the Securities Intermediary on a day that is not a Business Day or after 12:30 p.m., New York City time, on a Business Day, then such payment shall be made no later than 10:30 a.m., New York City time, on the next succeeding Business Day) and (ii) in the case of payments with respect to the principal amount of the Pledged Senior Notes or with respect to the appropriate Applicable Ownership Interests (as specified in clause (i) of the

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definition of such term) in the Treasury Portfolio, to the Company on the Purchase Contract Settlement Date (as described herein) in accordance with the terms of the Pledge Agreement, in full satisfaction of the respective obligations of the Holders of the Corporate Units of which such Pledged Senior Notes or the Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, as the case may be, are a part under the Purchase Contracts forming a part of such Corporate Units. Interest on the Senior Notes and distributions on the appropriate Applicable Ownership Interests (as specified in clause (ii) of the definition of such term) in the Treasury Portfolio, as the case may be, forming part of a Corporate Units evidenced hereby, which are payable quarterly in arrears on February 15, May 15, August 15, and November 15 of each year, commencing February 15, 2004 (a “Payment Date”), shall, subject to receipt thereof by the Purchase Contract Agent from the Securities Intermediary, be paid to the Person in whose name this Corporate Units Certificate (or a Predecessor Corporate Units Certificate) is registered at the close of business on the Record Date for such Payment Date.

Each Purchase Contract evidenced hereby obligates the Holder of this Corporate Units Certificate to purchase, and the Company to sell, on November 15, 2006, (the “Purchase Contract Settlement Date”), at a price equal to $25 (the “Stated Amount”), a number of newly issued shares of common stock, par value $0.01 per share (“Common Stock”), of the Company, equal to the Settlement Rate, unless on or prior to the Purchase Contract Settlement Date there shall have occurred a Termination Event or an Early Settlement or Cash Merger Early Settlement with respect to such Purchase Contract, all as provided in the Purchase Contract Agreement and more fully described on the reverse hereof. The purchase price (the “Purchase Price”) for the shares of Common Stock purchased pursuant to each Purchase Contract evidenced hereby, if not paid earlier, shall be paid on the Purchase Contract Settlement Date by application of payment received in respect of the principal amount with respect to any Pledged Senior Notes pursuant to the Remarketing or the appropriate Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, as the case may be, pledged to secure the obligations under such Purchase Contract of the Holder of the Corporate Units of which such Purchase Contract is a part.

Each Purchase Contract evidenced hereby obligates the holder to agree, for United States federal, state and local income and franchise tax purposes, to (i) treat an acquisition of the Corporate Units as an acquisition of the Senior Notes and Purchase Contracts constituting the Corporate Units and (ii) treat itself as owner of the applicable interest in the Collateral Account, including the Senior Notes and the Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio.

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The Company shall pay, on each Payment Date, in respect of each Purchase Contract forming part of a Corporate Unit evidenced hereby, an amount (the “Contract Adjustment Payments”) equal to 2.875% per year of the Stated Amount. Such Contract Adjustment Payments shall be payable to the Person in whose name this Corporate Units Certificate is registered at the close of business on the Record Date for such Payment Date.

Interest on the Senior Notes and distributions on the Applicable Ownership Interests (as specified in clause (ii) of the definition of such term) and the Contract Adjustment Payments will be payable at the office of the Purchase Contract Agent in New York City. If the book-entry system for the Corporate Units has been terminated, the Contract Adjustment Payments will be payable, at the option of the Company, by check mailed to the address of the Person entitled thereto at such Person’s address as it appears on the Security Register, or by wire transfer to the account designated by such Person by a prior written notice to the Purchase Contract Agent.

Reference is hereby made to the further provisions set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

Unless the certificate of authentication hereon has been executed by the Purchase Contract Agent by manual signature, this Corporate Units Certificate shall not be entitled to any benefit under the Pledge Agreement or the Purchase Contract Agreement or be valid or obligatory for any purpose.

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IN WITNESS WHEREOF, the Company and the Holder specified above have caused this instrument to be duly executed.

THE PMI GROUP, INC.
By:
	Name:
	Title:
HOLDER SPECIFIED ABOVE (as to obligations of such Holder under the Purchase Contracts)
By:	THE BANK OF NEW YORK, not individually but solely as attorney-in-fact of such Holder
By:
	Name:
	Title:

Dated:

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CERTIFICATE OF AUTHENTICATION

OF PURCHASE CONTRACT AGENT

This is one of the Corporate Units Certificates referred to in the within mentioned Purchase Contract Agreement.

By:	THE BANK OF NEW YORK, as Purchase Contract Agent
By:
	Name:
	Title:

Dated:

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(FORM OF REVERSE OF CORPORATE UNITS CERTIFICATE)

Each Purchase Contract evidenced hereby is governed by a Purchase Contract Agreement, dated as of November 3, 2003 (as may be supplemented from time to time, the “Purchase Contract Agreement”), between the Company and The Bank of New York, as Purchase Contract Agent (including its successors hereunder, the “Purchase Contract Agent”), to which Purchase Contract Agreement and supplemental agreements thereto reference, is hereby made for a description of the respective rights, limitations of rights, obligations, duties and immunities thereunder of the Purchase Contract Agent, the Company, and the Holders and of the terms upon which the Corporate Units Certificates are, and are to be, executed and delivered.

Each Purchase Contract evidenced hereby obligates the Holder of this Corporate Units Certificate to purchase, and the Company to sell, on the Purchase Contract Settlement Date at a price equal to the Stated Amount (the “Purchase Price”), a number of shares of Common Stock equal to the Settlement Rate, unless an Early Settlement, a Cash Merger Early Settlement or a Termination Event with respect to the Units of which such Purchase Contract is a part shall have occurred. The “Settlement Rate” is equal to:

(1) if the Adjusted Applicable Market Value (as defined below) is greater than or equal to $47.37 (the “Threshold Appreciation Price”), 0.5278 shares of Common Stock per Purchase Contract (such number of shares, as adjusted from time to time, the “Minimum Share Number”);

(2) if the Adjusted Applicable Market Value is less than the Threshold Appreciation Price but greater than $38.20 (the “Reference Price”), the number of shares of Common Stock per Purchase Contract having a value equal to the Stated Amount divided by the Applicable Market Value; and

(3) if the Adjusted Applicable Market Value is less than or equal to the Reference Price, 0.6545 shares of Common Stock per Purchase Contract (such number of shares, as adjusted from time to time, the “Maximum Share Number”),

in each case subject to adjustment as provided in the Purchase Contract Agreement (and in each case rounded upward or downward to the nearest 1/10,000th of a share).

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No fractional shares of Common Stock will be issued upon settlement of Purchase Contracts, as provided in Section 5.09 of the Purchase Contract Agreement.

Each Purchase Contract evidenced hereby, which is settled through Early Settlement or Cash Merger Early Settlement, shall obligate the Holder of the related Corporate Units to purchase at the Purchase Price, and the Company to sell, a number of newly issued shares of Common Stock equal to the Early Settlement Rate (in the case of an Early Settlement) or applicable Settlement Rate (in the case of a Cash Merger Early Settlement).

The “Adjusted Applicable Market Value” means (i) prior to any adjustment of the Fixed Settlement Rate pursuant to paragraph (i), (ii), (iii), (iv), (v), (vi), (vii) or (x) of Section 5.04(a) of the Purchase Contract Agreement, the Applicable Market Value, and (ii) at the time of and after any adjustment of the Fixed Settlement Rate pursuant to paragraph (i), (ii), (iii), (iv), (v), (vi), (vii) or (x) of Section 5.04(a) of the Purchase Contract Agreement, the Applicable Market Value multiplied by a fraction, the numerator of which shall be the Fixed Settlement Rate immediately after such adjustment pursuant to paragraph (i), (ii), (iii), (iv), (v), (vi), (vii) or (x) of Section 5.04(a) of the Purchase Contract Agreement and the denominator of which shall be the Fixed Settlement Rate immediately prior to such adjustment; provided, however, that if such adjustment to the Fixed Settlement Rate is required to be made pursuant to the occurrence of any of the events contemplated by paragraph (i), (ii), (iii), (iv), (v), (vi), (vii) or (x) of Section 5.04(a) of the Purchase Contract Agreement during the period taken into consideration for determining the Applicable Market Value, appropriate and customary adjustments shall be made to the Fixed Settlement Rate.

The “Applicable Market Value” means the average of the Closing Price per share of Common Stock on each of the 20 consecutive Trading Days ending on the third Trading Day immediately preceding the Purchase Contract Settlement Date.

The “Closing Price” per share of Common Stock on any date of determination means:

(1) the closing sale price as of the close of the principal trading session (or, if no closing price is reported, the last reported sale price) per share on the New York Stock Exchange, Inc. (the “NYSE”) on such date;

(2) if Common Stock is not listed for trading on the NYSE on any such date, the closing sale price (or, if no closing price is reported, the last reported sale price) per share as reported in the composite transactions for the principal United States national or regional securities exchange on which Common Stock is so listed;

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(3) if Common Stock is not so listed on a United States national or regional securities exchange, the last closing sale price per share as reported by the Nasdaq National Market, Inc.;

(4) if Common Stock is not so reported by the Nasdaq National Market, Inc., the last quoted bid price for the Common Stock in the over-the-counter market as reported by the National Quotation Bureau or similar organization; or

(5) if the bid price referred to above is not available, the market value of Common Stock on such date as determined by a nationally recognized independent investment banking firm retained by the Company for purposes of determining the Closing Price.

A “Trading Day” means a day on which Common Stock (1) is not suspended from trading on any national or regional securities exchange or association or over-the-counter market at the close of business and (2) has traded at least once on the national or regional securities exchange or association or over-the-counter market that is the primary market for the trading of Common Stock.

In accordance with the terms of the Purchase Contract Agreement, the Holder of this Corporate Units Certificate may pay the Purchase Price for the shares of Common Stock purchased pursuant to each Purchase Contract evidenced hereby by effecting a Cash Settlement, an Early Settlement or, if applicable, a Cash Merger Early Settlement or from the proceeds of the Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio or a Remarketing of the related Pledged Senior Notes. Unless the Treasury Portfolio has replaced the Senior Notes as a component of Corporate Units, a Holder of Corporate Units who (1) does not, on or prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the Purchase Contract Settlement Date, notify the Purchase Contract Agent of its intention to effect a Cash Settlement, or who does so notify the Purchase Contract Agent but fails to make an effective Cash Settlement on or prior to 5:00 p.m. (New York City time) on the fourth Business Day immediately preceding the Purchase Contract Settlement Date, or (2) on or prior to 5:00 p.m. (New York City time) on the fifth Business Day prior to the Purchase Contract Settlement Date, does not make an effective Early Settlement, shall pay the Purchase Price for the shares of Common Stock to be delivered under the related Purchase Contract from the proceeds of the sale of the related Pledged Senior Notes held by the Collateral Agent in the Remarketing unless the Holder has previously made a Cash Merger Early Settlement. Unless the Treasury Portfolio has replaced the Senior Notes as a component of Corporate Units, such sale will be made by the Remarketing Agent pursuant to the terms of the Remarketing Agreement on the Final Remarketing Date. If the Treasury Portfolio has replaced

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the Senior Notes as a component of Corporate Units, a Holder of Corporate Units who does not notify the Purchase Contract Agent, on or prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the Purchase Contract Settlement Date of its intention to effect a Cash Settlement shall pay the Purchase Price for the shares of Common Stock to be delivered under the related Purchase Contract from the proceeds at maturity of the Applicable Ownership Interests (as defined in clause (i) of the definition of such term) in the Treasury Portfolio.

As provided in the Purchase Contract Agreement, upon the occurrence of a Failed Final Remarketing, unless a Holder of a Pledged Senior Note has notified the Purchase Contract Agent of his intent to effect a Cash Settlement of the Purchase Contract and delivered the Purchase Price to the Collateral Agent pursuant to Section 5.02(e)(ii) of the Purchase Contract Agreement, such Holder shall be deemed to have exercised such Holder’s Put Right and to have elected to pay the Purchase Price under the Purchase Contract out of a portion of the proceeds from the Put Right in full satisfaction of such Holder’s obligations under the Purchase Contract. In the event of the Company’s failure to pay the Put Price when due, the Company shall be deemed to have netted such Holder’s obligation to pay the Company the Purchase Price under the Purchase Contracts against the Company’s obligation to pay the Put Price, in full satisfaction of such Holder’s obligation under the Purchase Contracts.

The Company shall not be obligated to issue any shares of Common Stock in respect of a Purchase Contract or deliver any certificates therefor to the Holder unless it shall have received payment of the aggregate Purchase Price for the shares of Common Stock to be purchased thereunder in the manner set forth in the Purchase Contract Agreement.

Under the terms of the Pledge Agreement and the Purchase Contract Agreement, the Purchase Contract Agent will be entitled to exercise the voting and any other consensual rights pertaining to the Pledged Senior Notes, but only to the extent instructed in writing by the Holders. Upon receipt of notice of any meeting at which holders of Senior Notes are entitled to vote or upon any solicitation of consents, waivers or proxies of holders of Senior Notes, the Purchase Contract Agent shall, as soon as practicable thereafter, mail, first class, postage pre-paid, to the Corporate Units Holders a notice:

(1) containing such information as is contained in the notice or solicitation;

(2) stating that each Holder on the record date set by the Purchase Contract Agent therefor (which, to the extent possible, shall be the same date as the record date for determining the holders of Senior Notes, as the case may be, entitled to vote) shall be entitled to instruct the Purchase Contract Agent as to the exercise of the voting rights pertaining to the Senior Notes underlying such Holder’s Corporate Units; and

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(3) stating the manner in which such instructions may be given.

Upon the written request of the Corporate Units Holders on such record date received by the Purchase Contract Agent at least six days prior to such meeting, the Purchase Contract Agent shall endeavor insofar as practicable to vote or cause to be voted, in accordance with the instructions set forth in such requests, the maximum aggregate principal amount of Senior Notes, as the case may be, as to which any particular voting instructions are received. In the absence of specific instructions from the Holder of a Corporate Unit, the Purchase Contract Agent shall abstain from voting the Senior Note evidenced by such Corporate Unit. The Company hereby agrees, if applicable, to solicit Holders of Corporate Units to timely instruct the Purchase Contract Agent in order to enable the Purchase Contract Agent to vote the Senior Notes. The Holders of Corporate Units shall have no voting or other rights in respect of Common Stock.

Upon the occurrence of a Special Event Redemption, the Collateral Agent shall surrender the Pledged Senior Notes against delivery of an amount equal to the aggregate Redemption Price of the Pledged Senior Notes and shall deposit the funds in the Collateral Account in exchange for the Pledged Senior Notes. Thereafter, pursuant to the terms of the Pledge Agreement, the Collateral Agent shall cause the Securities Intermediary to apply an amount equal to the aggregate Redemption Amount of such funds to purchase on behalf of the Holders of Corporate Units the Treasury Portfolio and promptly (a) transfer the Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio to the Collateral Account to secure the obligations of each Holder of Corporate Units to purchase shares of Common Stock under the Purchase Contracts constituting a part of such Corporate Units, (b) transfer the Applicable Ownership Interests (as specified in clause (ii) of the definition of such term) in the Treasury Portfolio to the Purchase Contract Agent for the benefit of the Holders of such Corporate Units and (c) remit the remaining portion of such funds to the Purchase Contract Agent for payment to the Holders of such Corporate Units.

Upon the occurrence of a Successful Remarketing of Senior Notes prior to the Final Remarketing Date, pursuant to the terms of the Remarketing Agreement, the Remarketing Agent will apply an amount equal to the Treasury Portfolio Purchase Price to purchase on behalf of the Holders of Corporate Units, the Treasury Portfolio, and, after deducting all or a portion of the Remarketing Fee to the extent permitted under the terms of the Remarketing Agreement, promptly remit the remaining portion of such proceeds of such Successful Remarketing to the Purchase Contract Agent for payment to the Holders of such Corporate Units.

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Following the occurrence of (i) a Special Event Redemption prior to the Purchase Contract Settlement Date, or (ii) a Successful Remarketing of the Senior Notes prior to the Final Remarketing Date, the Holders of Corporate Units and the Collateral Agent shall have such security interest rights and obligations with respect to the Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio as the Holder of Corporate Units and the Collateral Agent had in respect of the Senior Notes, as the case may be, subject to the Pledge of the Applicable Ownership Interest (as specified in clause (i) of the definition of such term) as provided in the Pledge Agreement and any reference herein to the Senior Notes shall be deemed to be a reference to such Treasury Portfolio.

The Corporate Units Certificates are issuable only in registered form and only in denominations of a single Corporate Unit and any integral multiple thereof. The transfer of any Corporate Units Certificate will be registered and Corporate Units Certificates may be exchanged as provided in the Purchase Contract Agreement. The Security Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents permitted by the Purchase Contract Agreement. No service charge shall be required for any such registration of transfer or exchange, but the Company and the Purchase Contract Agent may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. A Holder who elects to substitute a Treasury Security for a Senior Note, thereby creating Treasury Units, shall be responsible for any fees or expenses payable in connection therewith. Except as provided in the Purchase Contract Agreement, for so long as the Purchase Contract underlying a Corporate Units remains in effect, such Corporate Units shall not be separable into its constituent parts, and the rights and obligations of the Holder of such Corporate Units in respect of the Senior Notes and Purchase Contract constituting such Corporate Units may be transferred and exchanged only as a Corporate Unit.

Unless the Treasury Portfolio has replaced the Senior Notes as a component of the Corporate Units, and subject to the conditions set forth in the Purchase Contract Agreement, the Holder of Corporate Units may substitute, at any time on or prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the Purchase Contract Settlement Date, for the Pledged Senior Notes securing such Holder’s obligations under the related Purchase Contracts, Treasury Securities in an aggregate principal amount at maturity equal to the aggregate principal amount of the Pledged Senior Notes in accordance with the terms of the Purchase Contract Agreement and the Pledge Agreement. From and after such Collateral Substitution, each Unit for which such Pledged Treasury Securities secures the Holder’s obligation under the Purchase Contract shall be referred to as a “Treasury Unit”. A Holder may make such Collateral Substitution only in integral multiples of 40 Corporate Units for 40 Treasury Units.

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If the Treasury Portfolio has replaced the Senior Notes as a component of the Corporate Units, a Holder may, at any time on or prior to the second Business Day immediately preceding the Purchase Contract Settlement Date, substitute Treasury Securities for the Applicable Ownership Interests in the Treasury Portfolio, but only in integral multiples of 16,000 Corporate Units. In such an event, the Holder shall transfer Treasury Securities to the Collateral Agent, and the Purchase Contract Agent shall instruct the Collateral Agent to release the Pledge and transfer to the Holder the appropriate Applicable Ownership Interests in the Treasury Portfolio.

The Company shall pay, on each Payment Date, the Contract Adjustment Payments payable in respect of each Purchase Contract to the Person in whose name the Corporate Units Certificate evidencing such Purchase Contract is registered at the close of business on the Record Date for such Payment Date. Contract Adjustment Payments will be payable at the office of the Purchase Contract Agent in New York City. If the book-entry system for the Corporate Units has been terminated, the Contract Adjustment Payments will be payable, at the option of the Company, by check mailed to the address of the Person entitled thereto at such Person’s address as it appears on the Security Register, or by wire transfer to the account designated by such Person by a prior written notice to the Purchase Contract Agent.

The Purchase Contracts and all obligations and rights of the Company and the Holders thereunder, including, without limitation, the rights of the Holders to receive and the obligation of the Company to pay any Contract Adjustment Payments, shall immediately and automatically terminate, without the necessity of any notice or action by any Holder, the Purchase Contract Agent or the Company, if, on or prior to the Purchase Contract Settlement Date, a Termination Event shall have occurred. Upon the occurrence of a Termination Event, the Company shall promptly but in no event later than two Business Days thereafter give written notice to the Purchase Contract Agent, the Collateral Agent and the Holders, at their addresses as they appear in the Security Register. Upon and after the occurrence of a Termination Event, the Collateral Agent shall release the Pledged Senior Notes or the appropriate Applicable Ownership Interests (as specified in clause (i) of the definition of such term) (as defined in the Pledge Agreement) in the Treasury Portfolio, as the case may be, in accordance with the provisions of the Pledge Agreement. A Corporate Unit shall thereafter represent the right to receive the Senior Note or the appropriate Applicable Ownership Interests in the Treasury Portfolio forming a part of such Corporate Unit in accordance with the terms of, and except as set forth in, the Purchase Contract Agreement and the Pledge Agreement.

Subject to and upon compliance with the provisions of the Purchase Contract Agreement, at the option of the Holder thereof, Purchase Contracts underlying Units may be settled early (“Early Settlement”) at any time on or

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prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the Purchase Contract Settlement Date as provided in the Purchase Contract Agreement. In order to exercise the right to effect Early Settlement with respect to any Purchase Contract evidenced by this Certificate, the Holder of this Corporate Units Certificate shall deliver to the Purchase Contract Agent at the Corporate Trust Office prior to the time specified in the Purchase Contract Agreement an Election to Settle Early form set forth below duly completed and accompanied by payment in the form of immediately available funds payable to the order of the Company in an amount (the “Early Settlement Amount”) equal to the sum of:

(i) the product of (A) the Stated Amount times (B) the number of Purchase Contracts with respect to which the Holder has elected to effect Early Settlement, plus

(ii) if such delivery is made with respect to any Purchase Contracts during the period from the close of business on any Record Date next preceding any Payment Date to the opening of business on such Payment Date, an amount equal to the Contract Adjustment Payments payable on such Payment Date with respect to such Purchase Contracts.

Upon Early Settlement of Purchase Contracts by a Holder of the related Units, the Pledged Senior Notes or Pledged Applicable Ownership Interests (as specified in clause (i) of the definition of such term) underlying such Units shall be released from the Pledge as provided in the Pledge Agreement and the Holder shall be entitled to receive a number of shares of Common Stock on account of each Purchase Contract forming part of a Corporate Unit as to which Early Settlement is effected equal to the Minimum Share Number (the “Early Settlement Rate”)as adjusted from time to time under Section 5.04 of the Purchase Contract Agreement.

Upon the occurrence of a Cash Merger, a Holder of Corporate Units may effect Cash Merger Early Settlement of the Purchase Contract underlying such Corporate Units pursuant to the terms of Section 5.04(b)(ii) of the Purchase Contract Agreement. Upon Cash Merger Early Settlement of Purchase Contracts by a Holder of the related Corporate Units, the Pledged Senior Notes or Pledged Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio underlying such Corporate Units shall be released from the Pledge as provided in the Pledge Agreement.

Upon registration of transfer of this Corporate Units Certificate, the transferee shall be bound (without the necessity of any other action on the part of such transferee, except as may be required by the Purchase Contract Agent pursuant to the Purchase Contract Agreement), under the terms of the Purchase Contract Agreement and the Purchase Contracts evidenced hereby and the

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transferor shall be released from the obligations under the Purchase Contracts evidenced by this Corporate Units Certificate. The Company covenants and agrees, and the Holder, by its acceptance hereof, likewise covenants and agrees, to be bound by the provisions of this paragraph.

The Holder of this Corporate Units Certificate, by its acceptance hereof, irrevocably authorizes the Purchase Contract Agent to enter into and perform the related Purchase Contracts forming part of the Corporate Units evidenced hereby on its behalf as its attorney-in-fact, expressly withholds any consent to the assumption (i.e., affirmance) of the Purchase Contracts by the Company or its trustee in the event that the Company becomes the subject of a case under the Bankruptcy Code, agrees to be bound by the terms and provisions thereof, covenants and agrees to perform its obligations under such Purchase Contracts, consents to the provisions of the Purchase Contract Agreement, irrevocably authorizes the Purchase Contract Agent to enter into and perform the Purchase Contract Agreement and the Pledge Agreement on its behalf as its attorney-in-fact, and consents to, and agrees to be bound by, the Pledge of such Holder’s right, title and interest in and to the Collateral Account, including the Senior Notes or the appropriate Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, as the case may be, underlying this Corporate Units Certificate pursuant to the Pledge Agreement. The Holder further covenants and agrees that, to the extent and in the manner provided in the Purchase Contract Agreement and the Pledge Agreement, but subject to the terms thereof, payments with respect to the aggregate principal amount of the Pledged Senior Notes or the appropriate Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, as the case may be, on the Purchase Contract Settlement Date shall be paid by the Collateral Agent to the Company in satisfaction of such Holder’s obligations under such Purchase Contract and such Holder shall acquire no right, title or interest in such payments.

Subject to certain exceptions, the provisions of the Purchase Contract Agreement may be amended with the consent of the Holders of a majority of the Purchase Contracts.

The Purchase Contracts shall be governed by, and construed in accordance with, the laws of the State of New York.

Prior to due presentment of this Certificate for registration of transfer, the Company, the Purchase Contract Agent and its Affiliates and any agent of the Company or the Purchase Contract Agent may treat the Person in whose name this Corporate Units Certificate is registered as the owner of the Corporate Units evidenced hereby for the purpose of receiving payments of interest payable on the Senior Notes, receiving payments of Contract Adjustment Payments (subject to any applicable record date), performance of the Purchase Contracts and for all

A-15

other purposes whatsoever, whether or not any payments in respect thereof be overdue and notwithstanding any notice to the contrary, and neither the Company, the Purchase Contract Agent nor any such agent shall be affected by notice to the contrary.

The Purchase Contracts shall not, prior to the settlement thereof, entitle the Holder to any of the rights of a holder of shares of Common Stock.

A copy of the Purchase Contract Agreement is available for inspection at the offices of the Purchase Contract Agent.

A-16

ABBREVIATIONS

The following abbreviations, when used in the inscription on the face of this instrument, shall be construed as though they were written out in full according to applicable laws or regulations:

TEN COM:	as tenants in common
UNIF GIFT MIN ACT:	Custodian
	(cust)                                     (minor)
	Under Uniform Gifts to Minors Act of
TENANT:	as tenants by the entireties
JT TEN:	as joint tenants with right of survivorship and not as tenants in common

Additional abbreviations may also be used though not in the above list.

FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto                                                      

(Please insert Social Security or Taxpayer I.D. or other Identifying Number of Assignee)

(Please print or type name and address including Postal Zip Code of Assignee)

the within Corporate Units Certificates and all rights thereunder, hereby irrevocably constituting and appointing attorney                                         , to transfer said Corporate Units Certificates on the books of The PMI Group, Inc., with full power of substitution in the premises.

Dated:	Signature
	NOTICE: The signature to this assignment must correspond with the name as it appears upon the face of the within Corporate Units Certificates in every particular, without alteration or enlargement or any change whatsoever.
Signature Guarantee:

A-17

SETTLEMENT INSTRUCTIONS

The undersigned Holder directs that a certificate for shares of Common Stock deliverable upon settlement on or after the Purchase Contract Settlement Date of the Purchase Contracts underlying the number of Corporate Units evidenced by this Corporate Units Certificate be registered in the name of, and delivered, together with a check in payment for any fractional share, to the undersigned at the address indicated below unless a different name and address have been indicated below. If shares are to be registered in the name of a Person other than the undersigned, the undersigned will pay any transfer tax payable incident thereto.

Dated:
	Signature
	Signature Guarantee:
	(if assigned to another person)
If shares are to be registered in the name of and delivered to a Person other than the Holder, please (i) print such Person’s name and address and (ii) provide a guarantee of your signature:	REGISTERED HOLDER Please print name and address of Registered Holder:
Name	Name
Address	Address
Social Security or other Taxpayer Identification Number, if any

A-18

ELECTION TO SETTLE EARLY/CASH MERGER EARLY SETTLEMENT

The undersigned Holder of this Corporate Units Certificate hereby irrevocably exercises the option to effect [Early Settlement] [Cash Merger Early Settlement following a Cash Merger] in accordance with the terms of the Purchase Contract Agreement with respect to the Purchase Contracts underlying the number of Corporate Units evidenced by this Corporate Units Certificate specified below. The undersigned Holder directs that a certificate for shares of Common Stock or other securities deliverable upon such [Early Settlement] [Cash Merger Early Settlement] be registered in the name of, and delivered, together with a check in payment for any fractional share and any Corporate Units Certificate representing any Corporate Units evidenced hereby as to which [Early Settlement] [Cash Merger Early Settlement] of the related Purchase Contracts is not effected, to the undersigned at the address indicated below unless a different name and address have been indicated below. Pledged Senior Notes or the appropriate Applicable Ownership Interests in the Treasury Portfolio, as the case may be, deliverable upon such [Early Settlement] [Cash Merger Early Settlement] will be transferred in accordance with the transfer instructions set forth below. If shares are to be registered in the name of a Person other than the undersigned, the undersigned will pay any transfer tax payable incident thereto.

Dated:	Signature
Signature Guarantee:

A-19

Number of Units evidenced hereby as to which [Early Settlement] [Cash Merger Early Settlement] of the related Purchase Contracts is being elected:

If shares of Common Stock or Corporate Units Certificates are to be registered in the name of and delivered to and Pledged Senior Notes or the Applicable Ownership Interests in the Treasury Portfolio, as the case may be, are to be transferred to a Person other than the Holder, please print such Person’s name and address:	REGISTERED HOLDER
	Please print name and address of Registered Holder:
Name	Name
Address	Address
Social Security or other Taxpayer Identification Number, if any

A-20

Transfer Instructions for Pledged Senior Notes or the Applicable Ownership Interests in the Treasury Portfolio, as the case may be, transferable upon [Early Settlement] [Cash Merger Early Settlement] or a Termination Event:

A-21

TO BE ATTACHED TO GLOBAL CERTIFICATES]

SCHEDULE OF INCREASES OR DECREASES IN GLOBAL CERTIFICATE

The following increases or decreases in this Global Certificate have been made:

Date Amount of increase in Number of Corporate Units evidenced by the Global Certificate Amount of decrease in Number of Corporate Units
evidenced by the Global Certificate Number of Corporate
Units evidenced by this Global
Certificate following
such decrease or
increase Signature of
authorized signatory
of Purchase Contract
Agent

A-22

EXHIBIT B

(FORM OF FACE OF TREASURY UNIT CERTIFICATE)

For inclusion in Global Certificate only – THIS CERTIFICATE IS A GLOBAL CERTIFICATE WITHIN THE MEANING OF THE PURCHASE CONTRACT AGREEMENT HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF CEDE & CO., AS NOMINEE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (THE “DEPOSITARY”), THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY. THIS CERTIFICATE IS EXCHANGEABLE FOR CERTIFICATES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE PURCHASE CONTRACT AGREEMENT AND NO TRANSFER OF THIS CERTIFICATE (OTHER THAN A TRANSFER OF THIS CERTIFICATE AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES.

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]

No.              CUSIP No.

Number of Treasury Units:                        

THE PMI GROUP, INC.

Treasury Units

This Treasury Units Certificate certifies that [Cede & Co.] is the registered Holder of the number of Treasury Units set forth above [for inclusion in Global Certificates only – or such other number of Treasury Units reflected in the Schedule of Increases or Decreases in the Global Certificate attached hereto]. Each Treasury Unit consists of (i) a 1/40 undivided beneficial ownership interest of a Treasury Security having a principal amount at maturity equal to $1,000, subject to the Pledge of such Treasury Security by such Holder pursuant to the

B-1

Pledge Agreement, and (ii) the rights and obligations of the Holder under one Purchase Contract with The PMI Group, Inc., a Delaware corporation (the “Company”). All capitalized terms used herein which are defined in the Purchase Contract Agreement (as defined on the reverse hereof) have the meaning set forth therein.

Pursuant to the Pledge Agreement, the Treasury Securities constituting part of each Treasury Unit evidenced hereby have been pledged to the Collateral Agent, for the benefit of the Company, to secure the obligations of the Holder under the Purchase Contract comprising part of such Treasury Unit.

Each Purchase Contract evidenced hereby obligates the Holder of this Treasury Units Certificate to purchase, and the Company, to sell, on November 15, 2006 (the “Purchase Contract Settlement Date”), at a price equal to $25 (the “Stated Amount”), a number of newly issued shares of common stock, par value $0.01 per share (“Common Stock”), of the Company, equal to the Settlement Rate, unless prior to or on the Purchase Contract Settlement Date there shall have occurred a Termination Event, an Early Settlement or a Cash Merger Early Settlement with respect to such Purchase Contract, all as provided in the Purchase Contract Agreement and more fully described on the reverse hereof. The purchase price (the “Purchase Price”) for the shares of Common Stock purchased pursuant to each Purchase Contract evidenced hereby, if not paid earlier, shall be paid on the Purchase Contract Settlement Date by application of the proceeds from the Treasury Securities at maturity pledged to secure the obligations of the Holder under such Purchase Contract of the Treasury Units of which such Purchase Contract is a part.

Each Purchase Contract evidenced hereby obligates the holder to agree, for United States federal, state and local income and franchise tax purposes, to (i) treat an acquisition of the Treasury Units as an acquisition of the Treasury Securities and Purchase Contracts constituting the Treasury Units and (ii) treat itself as owner of the applicable interest in the Collateral Account, including the Treasury Securities.

The Company shall pay, on each Payment Date, in respect of each Purchase Contract forming part of a Treasury Unit evidenced hereby, an amount (the “Contract Adjustment Payments”) equal to 2.875% per year of the Stated Amount. Such Contract Adjustment Payments shall be payable to the Person in whose name this Treasury Units Certificate is registered at the close of business on the Record Date for such Payment Date.

Contract Adjustment Payments will be payable at the office of the Purchase Contract Agent in New York City. If the book-entry system for the Treasury Units has been terminated, the Contract Adjustment Payments will be payable, at the option of the Company, by check mailed to the address of the

B-2

Person entitled thereto at such Person’s address as it appears on the Security Register, or by wire transfer to the account designated by such Person by a prior written notice to the Purchase Contract Agent.

Reference is hereby made to the further provisions set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

Unless the certificate of authentication hereon has been executed by the Purchase Contract Agent by manual signature, this Treasury Units Certificate shall not be entitled to any benefit under the Pledge Agreement or the Purchase Contract Agreement or be valid or obligatory for any purpose.

B-3

IN WITNESS WHEREOF, the Company and the Holder specified above have caused this instrument to be duly executed.

THE PMI GROUP, INC.
By:
	Name:
	Title:
HOLDER SPECIFIED ABOVE (as to obligations of such Holder under the Purchase Contracts)
By:	THE BANK OF NEW YORK, not individually but solely as attorney-in-fact or such Holder
By:
	Name:
	Title:

Dated:

B-4

CERTIFICATE OF AUTHENTICATION OF

PURCHASE CONTRACT AGENT

This is one of the Treasury Units referred to in the within-mentioned Purchase Contract Agreement.

THE BANK OF NEW YORK,     as Purchase Contract Agent
By:
	Name:
	Title:

Dated:

B-5

(REVERSE OF TREASURY UNIT CERTIFICATE)

Each Purchase Contract evidenced hereby is governed by a Purchase Contract Agreement, dated as of November 3, 2003 (as may be supplemented from time to time, the “Purchase Contract Agreement”) between the Company and The Bank of New York, as Purchase Contract Agent (including its successors thereunder, herein called the “Purchase Contract Agent”), to which the Purchase Contract Agreement and supplemental agreements thereto reference, is hereby made for a description of the respective rights, limitations of rights, obligations, duties and immunities thereunder of the Purchase Contract Agent, the Company and the Holders and of the terms upon which the Treasury Units Certificates are, and are to be, executed and delivered.

Each Purchase Contract evidenced hereby obligates the Holder of this Treasury Units Certificate to purchase, and the Company to sell, on the Purchase Contract Settlement Date at a price equal to the Stated Amount (the “Purchase Price”) a number of newly issued shares of Common Stock equal to the Settlement Rate, unless an Early Settlement, a Cash Merger Early Settlement or a Termination Event with respect to the Units of which such Purchase Contract is a part shall have occurred. The “Settlement Rate” is equal to:

(1) if the Adjusted Applicable Market Value (as defined below) is greater than or equal to $47.37 (the “Threshold Appreciation Price”), 0.5278 shares of Common Stock per Purchase Contract (such number of shares, as adjusted from time to time, the “Minimum Share Number”);

(2) if the Adjusted Applicable Market Value is less than the Threshold Appreciation Price but greater than $38.20 (the “Reference Price”), the number of shares of Common Stock per Purchase Contract having a value equal to the Stated Amount divided by the Applicable Market Value; and

(3) if the Adjusted Applicable Market Value is less than or equal to the Reference Price, 0.6545 shares of Common Stock per Purchase Contract (such number of shares, as adjusted from time to time, the “Maximum Share Number”),

in each case subject to adjustment as provided in the Purchase Contract Agreement (and in each case rounded upward or downward to the nearest 1/10,000th of a share).

No fractional shares of Common Stock will be issued upon settlement of Purchase Contracts, as provided in Section 5.09 of the Purchase Contract Agreement.

B-6

Each Purchase Contract evidenced hereby, which is settled through Early Settlement or Cash Merger Early Settlement shall obligate the Holder of the related Treasury Units to purchase at the Purchase Price, and the Company to sell, a number of newly issued shares of Common Stock equal to the Early Settlement Rate (in the case of an Early Settlement) or applicable Settlement Rate (in the case of a Cash Merger Early Settlement).

The “Adjusted Applicable Market Value” means (i) prior to any adjustment of the Fixed Settlement Rate pursuant to paragraph (i), (ii), (iii), (iv), (v), (vi), (vii) or (x) of Section 5.04(a) of the Purchase Contract Agreement, the Applicable Market Value, and (ii) at the time of and after any adjustment of the Fixed Settlement Rate pursuant to paragraph (i), (ii), (iii), (iv), (v), (vi), (vii) or (x) of Section 5.04(a) of the Purchase Contract Agreement, the Applicable Market Value multiplied by a fraction, the numerator of which shall be the Fixed Settlement Rate immediately after such adjustment pursuant to paragraph (i), (ii), (iii), (iv), (v), (vi), (vii) or (x) of Section 5.04(a) of the Purchase Contract Agreement and the denominator of which shall be the Fixed Settlement Rate immediately prior to such adjustment; provided, however, that if such adjustment to the Fixed Settlement Rate is required to be made pursuant to the occurrence of any of the events contemplated by paragraph (i), (ii), (iii), (iv), (v), (vi), (vii) or (x) of Section 5.04(a) of the Purchase Contract Agreement during the period taken into consideration for determining the Applicable Market Value, appropriate and customary adjustments shall be made to the Fixed Settlement Rate.

The “Applicable Market Value” means the average of the Closing Price per share of Common Stock on each of the 20 consecutive Trading Days ending on the third Trading Day immediately preceding the Purchase Contract Settlement Date.

The “Closing Price” per share of Common Stock on any date of determination means:

(1) the closing sale price as of the close of the principal trading session (or, if no closing price is reported, the last reported sale price) per share on the New York Stock Exchange, Inc. (the “NYSE”) on such date;

(2) if Common Stock is not listed for trading on the NYSE on any such date, the closing sale price (or, if no closing price is reported, the last reported sale price) per share as reported in the composite transactions for the principal United States national or regional securities exchange on which Common Stock is so listed;

(3) if Common Stock is not so listed on a United States national or regional securities exchange, the last closing sale price per share as reported by the Nasdaq National Market, Inc.;

B-7

(4) if Common Stock is not so reported by the Nasdaq National Market, Inc., the last quoted bid price for the Common Stock in the over-the-counter market as reported by the National Quotation Bureau or similar organization; or

(5) if the bid price referred to above is not available, the market value of Common Stock on such date as determined by a nationally recognized independent investment banking firm retained by the Company for purposes of determining the Closing Price.

A “Trading Day” means a day on which Common Stock (1) is not suspended from trading on any national or regional securities exchange or association or over-the-counter market at the close of business and (2) has traded at least once on the national or regional securities exchange or association or over-the-counter market that is the primary market for the trading of Common Stock.

In accordance with the terms of the Purchase Contract Agreement, the Holder of this Treasury Unit shall pay the Purchase Price for the shares of the Common Stock purchased pursuant to each Purchase Contract evidenced hereby either by effecting an Early Settlement or, if applicable, a Cash Merger Early Settlement of each such Purchase Contract or by applying a principal amount of the Pledged Treasury Securities underlying such Holder’s Treasury Unit equal to the Stated Amount of such Purchase Contract to the purchase of the Common Stock. A Holder of Treasury Units who (1) on or prior to 5:00 p.m. (New York City time) on the fifth Business Day prior to the Purchase Contract Settlement Date, does not make an effective Early Settlement or (2) on or prior to 5:00 p.m. (New York City time) on the fifth Business Day prior to the Purchase Contract Settlement Date, does not make an effective Cash Merger Early Settlement, shall pay the Purchase Price for the shares of Common Stock to be issued under the related Purchase Contract from the proceeds of the Pledged Treasury Securities.

The Company shall not be obligated to issue any shares of Common Stock in respect of a Purchase Contract or deliver any certificates therefor to the Holder unless it shall have received payment of the aggregate purchase price for the shares of Common Stock to be purchased thereunder in the manner set forth in the Purchase Contract Agreement.

The Treasury Units Certificates are issuable only in registered form and only in denominations of a single Treasury Unit and any integral multiple thereof. The transfer of any Treasury Units Certificate will be registered and Treasury Units Certificates may be exchanged as provided in the Purchase Contract Agreement. The Security Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents permitted by the Purchase Contract Agreement. No service charge shall be required for any such

B-8

registration of transfer or exchange, but the Company and the Purchase Contract Agent may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. A Holder who elects to substitute Senior Notes or Applicable Ownership Interests in the Treasury Portfolio, for Treasury Securities, thereby recreating Corporate Units, shall be responsible for any fees or expenses associated therewith. Except as provided in the Purchase Contract Agreement, for so long as the Purchase Contract underlying a Treasury Unit remains in effect, such Treasury Unit shall not be separable into its constituent parts, and the rights and obligations of the Holder of such Treasury Unit in respect of the Treasury Security and the Purchase Contract constituting such Treasury Unit may be transferred and exchanged only as a Treasury Unit.

Unless the Treasury Portfolio has replaced the Senior Notes as a component of the Corporate Units and subject to the conditions set forth in the Purchase Contract Agreement, a Holder of Treasury Units may recreate, at any time on or prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the Purchase Contract Settlement Date, Corporate Units by delivering to the Securities Intermediary Senior Notes with an aggregate principal amount, equal to the aggregate principal amount at maturity of the Pledged Treasury Securities in exchange for the release of such Pledged Treasury Securities in accordance with the terms of the Purchase Contract Agreement and the Pledge Agreement. From and after such substitution, the Holder’s Units shall be referred to as a “Corporate Unit”. Any such creation of Corporate Units may be effected only in multiples of 40 Treasury Units for 40 Corporate Units.

If the Treasury Portfolio has replaced the Senior Notes as a component of the Corporate Units, a Holder may, at any time on or prior to the second Business Day immediately preceding the Purchase Contract Settlement Date, substitute Treasury Securities for the Applicable Ownership Interests in the Treasury Portfolio, but only in integral multiples of 16,000 Treasury Units. In such an event, the Holder shall transfer Treasury Securities to the Collateral Agent, and the Purchase Contract Agent shall instruct the Collateral Agent to release the Pledge of and transfer to the Holder the appropriate Applicable Ownership Interests in the Treasury Portfolio.

The Company shall pay, on each Payment Date, the Contract Adjustment Payments payable in respect of each Purchase Contract to the Person in whose name the Treasury Units Certificate evidencing such Purchase Contract is registered at the close of business on the Record Date for such Payment Date. Contract Adjustment Payments will be payable at the office of the Purchase Contract Agent in New York City. If the book-entry system for the Corporate Units has been terminated, the Contract Adjustment Payments will be payable, at the option of the Company, by check mailed to the address of the Person entitled thereto at such Person’s address as it appears on the Security Register, or by wire transfer to the account designated by such Person by a prior written notice to the Purchase Contract Agent.

B-9

The Purchase Contracts and all obligations and rights of the Company and the Holders thereunder, including, without limitation, the rights of the Holders to receive and the obligation of the Company to pay any Contract Adjustment Payments, shall immediately and automatically terminate, without the necessity of any notice or action by any Holder, the Purchase Contract Agent or the Company, if, on or prior to the Purchase Contract Settlement Date, a Termination Event shall have occurred. Upon the occurrence of a Termination Event, the Company shall promptly but in no event later than two Business Days thereafter give written notice to the Purchase Contract Agent, the Collateral Agent and the Holders, at their addresses as they appear in the Security Register. Upon and after the occurrence of a Termination Event, the Collateral Agent shall release the Pledged Treasury Securities (as defined in the Pledge Agreement) in accordance with the provisions of the Pledge Agreement. A Treasury Unit shall thereafter represent the right to receive the interest in the Treasury Security forming a part of such Treasury Unit, in accordance with the terms of and except as set forth in, the Purchase Contract Agreement and the Pledge Agreement.

Subject to and upon compliance with the provisions of the Purchase Contract Agreement, at the option of the Holder thereof, Purchase Contracts underlying Units may be settled early (“Early Settlement”) as provided in the Purchase Contract Agreement. In order to exercise the right to effect Early Settlement with respect to any Purchase Contract evidenced by this Certificate, the Holder of this Treasury Units Certificate shall deliver to the Purchase Contract Agent at the Corporate Trust Office an Election to Settle Early form set forth below duly completed and accompanied by payment in the form of immediately available funds payable to the order of the Company in an amount (the “Early Settlement Amount”) equal to the sum of:

(i) the product of (A) the Stated Amount times (B) the number of Purchase Contracts with respect to which the Holder has elected to effect Early Settlement, plus

(ii) if such delivery is made with respect to any Purchase Contracts during the period from the close of business on any Record Date next preceding any Payment Date to the opening of business on such Payment Date, an amount equal to the Contract Adjustment Payments payable on such Payment Date with respect to such Purchase Contracts.

Upon Early Settlement of Purchase Contracts by a Holder of the related Units, the Pledged Treasury Securities underlying such Units shall be released from the Pledge as provided in the Pledge Agreement and the Holder shall be entitled to receive a number of shares of Common Stock on account of each

B-10

Purchase Contract forming part of a Treasury Unit as to which Early Settlement is effected equal to the Minimum Share Number (the “Early Settlement Rate”) adjusted from time to time under Section 5.04 of the Purchase Contract Agreement.

Upon the occurrence of a Cash Merger, a Holder of Treasury Units may effect Cash Merger Early Settlement of the Purchase Contract underlying such Treasury Units pursuant to the terms of Section 5.04(b)(ii) of the Purchase Contract Agreement. Upon Cash Merger Early Settlement of Purchase Contracts by a Holder of the related Treasury Units, the Pledged Treasury Securities underlying such Treasury Units shall be released from the Pledge as provided in the Pledge Agreement.

Upon registration of transfer of this Treasury Units Certificate, the transferee shall be bound (without the necessity of any other action on the part of such transferee, except as may be required by the Purchase Contract Agent pursuant to the Purchase Contract Agreement), under the terms of the Purchase Contract Agreement and the Purchase Contracts evidenced hereby and the transferor shall be released from the obligations under the Purchase Contracts evidenced by this Treasury Units Certificate. The Company covenants and agrees, and the Holder, by its acceptance hereof, likewise covenants and agrees, to be bound by the provisions of this paragraph.

The Holder of this Treasury Units Certificate, by its acceptance hereof, authorizes the Purchase Contract Agent to enter into and perform the related Purchase Contracts forming part of the Treasury Units evidenced hereby on its behalf as its attorney-in-fact, expressly withholds any consent to the assumption (i.e., affirmance) of the Purchase Contracts by the Company or its trustee in the event that the Company becomes the subject of a case under the Bankruptcy Code, agrees to be bound by the terms and provisions thereof, covenants and agrees to perform its obligations under such Purchase Contracts, consents to the provisions of the Purchase Contract Agreement, authorizes the Purchase Contract Agent to enter into and perform the Purchase Contract Agreement and the Pledge Agreement on its behalf as its attorney-in-fact, and consents to the Pledge of the Treasury Securities underlying this Treasury Units Certificate pursuant to the Pledge Agreement. The Holder further covenants and agrees, that, to the extent and in the manner provided in the Purchase Contract Agreement and the Pledge Agreement, but subject to the terms thereof, payments in respect to the aggregate principal amount of the Pledged Treasury Securities on the Purchase Contract Settlement Date shall be paid by the Collateral Agent to the Company in satisfaction of such Holder’s obligations under such Purchase Contract and such Holder shall acquire no right, title or interest in such payments.

B-11

Subject to certain exceptions, the provisions of the Purchase Contract Agreement may be amended with the consent of the Holders of a majority of the Purchase Contracts.

The Purchase Contracts shall for all purposes be governed by, and construed in accordance with, the laws of the State of New York.

Prior to due presentment of this Certificate for registration or transfer, the Company, the Purchase Contract Agent and its Affiliates and any agent of the Company or the Purchase Contract Agent may treat the Person in whose name this Treasury Units Certificate is registered as the owner of the Treasury Units evidenced hereby for the purpose of receiving payments of interest on the Treasury Securities, receiving payments of Contract Adjustment Payments (subject to any applicable record date), performance of the Purchase Contracts and for all other purposes whatsoever, whether or not any payments in respect thereof be overdue and notwithstanding any notice to the contrary, and neither the Company, the Purchase Contract Agent nor any such agent shall be affected by notice to the contrary.

The Purchase Contracts shall not, prior to the settlement thereof, entitle the Holder to any of the rights of a holder of shares of Common Stock.

A copy of the Purchase Contract Agreement is available for inspection at the offices of the Purchase Contract Agent.

B-12

ABBREVIATIONS

The following abbreviations, when used in the inscription on the face of this instrument, shall be construed as though they were written out in full according to applicable laws or regulations:

TEN COM:	as tenants in common
UNIF GIFT MIN ACT:	Custodian
	(cust)                                   (minor)
	Under Uniform Gifts to Minors Act of
TENANT:	as tenants by the entireties
JT TEN:	as joint tenants with right of survivorship and not as tenants in common

Additional abbreviations may also be used though not in the above list.

FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto                                                      

(Please insert Social Security or Taxpayer I.D. or other Identifying Number of Assignee)

(Please print or type name and address including Postal Zip Code of Assignee)

the within Treasury Units Certificates and all rights thereunder, hereby irrevocably constituting and appointing attorney                                         , to transfer said Treasury Units Certificates on the books of The PMI Group, Inc., with full power of substitution in the premises.

Dated:	Signature
	NOTICE: The signature to this assignment must correspond with the name as it appears upon the face of the within Treasury Units Certificates in every particular, without alteration or enlargement or any change whatsoever.
Signature Guarantee:

B-13

SETTLEMENT INSTRUCTIONS

The undersigned Holder directs that a certificate for shares of Common Stock deliverable upon settlement on or after the Purchase Contract Settlement Date of the Purchase Contracts underlying the number of Treasury Units evidenced by this Treasury Units Certificate be registered in the name of, and delivered, together with a check in payment for any fractional share, to the undersigned at the address indicated below unless a different name and address have been indicated below. If shares are to be registered in the name of a Person other than the undersigned, the undersigned will pay any transfer tax payable incident thereto.

Dated:
If shares are to be registered in the name of and delivered to a Person other than the Holder, please (i) print such Person’s name and address and (ii) provide a guarantee of your signature:	Signature Signature Guarantee: (if assigned to another person) REGISTERED HOLDER
	Please print name and address of Registered Holder:
Name	Name
Address	Address

Social Security or other

Taxpayer Identification

Number, if any

B-14

ELECTION TO SETTLE EARLY/CASH MERGER EARLY SETTLEMENT

The undersigned Holder of this Treasury Units Certificate hereby irrevocably exercises the option to effect [Early Settlement] [Cash Merger Early Settlement upon a Cash Merger] in accordance with the terms of the Purchase Contract Agreement with respect to the Purchase Contracts underlying the number of Treasury Units evidenced by this Treasury Units Certificate specified below. The option to effect [Early Settlement] [Cash Merger Early Settlement] may be exercised only with respect to Purchase Contracts underlying Treasury Units with an aggregate Stated Amount equal to $1,000 or an integral multiple thereof. The undersigned Holder directs that a certificate for shares of Common Stock or other securities deliverable upon such [Early Settlement] [Cash Merger Early Settlement] be registered in the name of, and delivered, together with a check in payment for any fractional share and any Treasury Units Certificate representing any Treasury Units evidenced hereby as to which Cash Merger Early Settlement of the related Purchase Contracts is not effected, to the undersigned at the address indicated below unless a different name and address have been indicated below. Pledged Treasury Securities deliverable upon such [Early Settlement] [Cash Merger Early Settlement] will be transferred in accordance with the transfer instructions set forth below. If shares are to be registered in the name of a Person other than the undersigned, the undersigned will pay any transfer tax payable incident thereto.

Dated:	Signature
Signature Guarantee:

B-15

Number of Units evidenced hereby as to which [Early Settlement] [Cash Merger Early Settlement] of the related Purchase Contracts is being elected:

If shares of Common Stock or Treasury Units Certificates are to be registered in the name of and delivered to and Treasury Securities are to be transferred to a Person other than the Holder, please print such Person’s name and address:	REGISTERED HOLDER
	Please print name and address of Registered Holder:
Name
	Name
Address
	Address
Social Security or other
Taxpayer Identification
Number, if any

B-16

Transfer Instructions for Pledged Treasury Securities Transferable upon [Early Settlement] [Cash Merger Early Settlement] or a Termination Event:

B-17

TO BE ATTACHED TO GLOBAL CERTIFICATES

SCHEDULE OF INCREASES OR DECREASES IN GLOBAL CERTIFICATE

The following increases or decreases in this Global Certificate have been made:

Date Amount of increase in Number of Treasury Units
evidenced by the
Global Certificate Amount of decrease in Number of Treasury Units
evidenced by the Global Certificate Number of Treasury
Units evidenced by
this Global
Certificate following
such decrease or
increase
Signature of
authorized signatory
of Purchase Contract
Agent

B-18

EXHIBIT C

INSTRUCTION TO PURCHASE CONTRACT AGENT

The Bank of New York

The Purchase Contract Agent

101 Barclay Street, Floor 8W

New York, NY 10286

Attention: Corporate Trust Administration

Fax: 212-815-5707

Re:    [             Corporate Units] [             Treasury Units] of The PMI Group, Inc., a Delaware corporation (the “Company”).

The undersigned Holder hereby notifies you that it has delivered to [            ], as Securities Intermediary, for credit to the Collateral Account, $             aggregate principal amount of [Senior Notes] [Treasury Securities] in exchange for the [Pledged Senior Notes] [Pledged Treasury Securities] [Pledged Applicable Ownership Interests] held in the Collateral Account, in accordance with the Pledge Agreement, dated as of November 3, 2003 (the “Pledge Agreement”; unless otherwise defined herein, terms defined in the Pledge Agreement are used herein as defined therein), between you, the Company, the Collateral Agent, the Custodial Agent and the Securities Intermediary. The undersigned Holder has paid all applicable fees and expenses relating to such exchange. The undersigned Holder hereby instructs you to instruct the Collateral Agent to release to you on behalf of the undersigned Holder the [Pledged Senior Notes] [Pledged Treasury Securities] related to such [Corporate Units] [Treasury Units] [Pledged Applicable Ownership Interests].

Date:
	Signature
Signature Guarantee:

C-1

Please print name and address of Registered Holder:

Name	Social Security or other Taxpayer Identification Number, if any
Address

C-2

EXHIBIT D

NOTICE FROM PURCHASE CONTRACT AGENT

TO HOLDERS

(Transfer of Collateral upon Occurrence of a Termination Event)

[HOLDER]

Attention:

Telecopy:                     

Re: [             Corporate Units] [             Treasury Units] of The PMI Group, Inc., a Delaware corporation (the “Company”)

Please refer to the Purchase Contract Agreement, dated as of November 3, 2003 (the “Purchase Contract Agreement”; unless otherwise defined herein, terms defined in the Purchase Contract Agreement are used herein as defined therein), between the Company and the undersigned, as Purchase Contract Agent and as attorney-in-fact for the holders of Corporate Units and Treasury Units from time to time.

We hereby notify you that a Termination Event has occurred and that [the Senior Notes] [Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio] [the Treasury Securities] compromising a portion of your ownership interest in              [Corporate Units] [Treasury Units] have been released and are being held by us for your account pending receipt of transfer instructions with respect to such [Senior Notes][Applicable Ownership Interests][Treasury Securities] (the “Released Securities”).

Pursuant to Section 3.15 of the Purchase Contract Agreement, we hereby request written transfer instructions with respect to the Released Securities. Upon receipt of your instructions and upon transfer to us of your [Corporate Units][Treasury Units] effected through book-entry or by delivery to us of your [Corporate Units Certificate][Treasury Units Certificate], we shall transfer the Released Securities by book-entry transfer or other appropriate procedures, in accordance with your instructions. In the event you fail to effect such transfer or delivery, the Released Securities and any distributions thereon, shall be held in our name, or a nominee in trust for your benefit, until such time as such [Corporate Units][Treasury Units] are transferred or your [Corporate Units

D-1

Certificate] [Treasury Units Certificate] is surrendered or satisfactory evidence is provided that such [Corporate Units Certificate][Treasury Units Certificate] has been destroyed, lost or stolen, together with any indemnification that we or the Company may require.

Date:	By:    Bank of New York,   as the Purchase Contract Agent
	Name:
	Title:        Authorized Signatory

D-2

EXHIBIT E

NOTICE TO SETTLE BY CASH

The Bank of New York

The Purchase Contract Agent

101 Barclay Street, Floor 8W

New York, NY 10286

Attention: Corporate Trust Administration

Fax: 212-815-5707

Re:              Corporate Units of The PMI Group, Inc., a Delaware corporation (the “Company”)

The undersigned Holder hereby irrevocably notifies you in accordance with Section 5.02 of the Purchase Contract Agreement, dated as of November 3, 2003 (the “Purchase Contract Agreement”; unless otherwise defined herein, terms defined in the Purchase Contract Agreement are used herein as defined therein), between the Company and you, as Purchase Contract Agent and as attorney-in-fact for the Holders of the Purchase Contracts, that such Holder has elected to pay to the Securities Intermediary for deposit in the Collateral Account, on or prior to 5:00 p.m. (New York City time) on the [fourth] Business Day immediately preceding the Purchase Contract Settlement Date (in lawful money of the United States by certified or cashiers’ check or wire transfer, in immediately available funds), $             as the Purchase Price for the shares of Common Stock issuable to such Holder by the Company with respect to              Purchase Contracts on the Purchase Contract Settlement Date. The undersigned Holder hereby instructs you to notify promptly the Collateral Agent of the undersigned Holders’ election to make such Cash Settlement with respect to the Purchase Contracts related to such Holder’s Corporate Units.

Date:
	Signature
	Signature Guarantee:
Please print name and address of Registered Holder:

E-1

EXHIBIT F

NOTICE FROM PURCHASE CONTRACT AGENT

TO COLLATERAL AGENT

(Settlement of Purchase Contract through Remarketing)

Bank of New York

The Collateral Agent

101 Barclay Street, Floor 8W

New York, NY 10286

Attention: Corporate Trust Administration

Fax: 212-815-5707

Re:              Corporate Units of The PMI Group, Inc., a Delaware corporation (the “Company”)

Please refer to the Purchase Contract Agreement, dated as of November 3, 2003 (the “Purchase Contract Agreement”; unless otherwise defined herein, terms defined in the Purchase Contract Agreement are used herein as defined therein), between the Company and the undersigned, as Purchase Contract Agent and as attorney-in-fact for the Holders of Corporate Units from time to time.

In accordance with Section 5.02 of the Purchase Contract Agreement and, based on notices of [Early Settlements][Cash Settlements] received from Holders of Corporate Units as of 5:00 p.m. (New York City time), on the fifth Business Day immediately preceding the [Initial] [Final] Remarketing Date, we hereby notify you that an aggregate principal amount of $             Senior Notes are to be tendered for purchase in the Remarketing.

Date:	By:	Bank of New York, as the Purchase Contract Agent
	By:
		Name:
		Title:        Authorized Signatory

F-1

EX-10.30

Exhibit 10.30

The PMI Group, Inc.

TO

The Bank of New York

Trustee

Indenture

Dated as of November 3, 2003

Senior Debt Securities

Certain Sections of this Indenture relating to Sections 310 through 318,

inclusive, of the Trust Indenture Act of 1939:

Trust Indenture Act Section	Indenture Section
§ 310(a)(1)	609
(a)(2)	609
(a)(3)	Not Applicable
(a)(4)	Not Applicable
(b)	608 610
§ 311(a)	613
(b)	613
§ 312(a)	701 702
(b)	702
(c)	702
§ 313(a)	703
(b)	703
(c)	703
(d)	703
§ 314(a)	704
(a)(4)	101 1004
(b)	Not Applicable
(c)(1)	102
(c)(2)	102
(c)(3)	Not Applicable
(d)	Not Applicable
(e)	102
§ 315(a)	601
(b)	602
(c)	601
(d)	601
(e)	514
§ 316(a)	101
(a)(1)(A)	502 512
(a)(1)(B)	513
(a)(2)	Not Applicable
(b)	508
(c)	104
§ 317(a)(1)	503
(a)(2)	504
(b)	1003
§ 318(a)	107

NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture.

TABLE OF CONTENTS

		PAGE
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101.	Definitions.	1
	Act	2
	Affiliate	2
	Authenticating Agent	2
	Board of Directors	2
	Board Resolution	2
	Business Day	2
	Capital Stock	2
	Commission	2
	Common Stock	2
	Company	3
	Company Request	3
	Company Order	3
	Control	3
	Corporate Trust Office	3
	corporation	3
	Covenant Defeasance	3
	Defaulted Interest	3
	Defeasance	3
	Depositary	3
	Event of Default	3
	Exchange Act	3
	Expiration Date	3
	Global Security	3
	Holder	3
	Indenture	3
	interest	4
	Interest Payment Date	4
	Investment Company Act	4
	Lien	4
	Maturity	4
	Notice of Default	4
	Officers’ Certificate	4
	Opinion of Counsel	4
	Original Issue Discount Security	4
	Outstanding	4
	Paying Agent	5
	Person	5

NOTE:   This table of contents shall not, for any purpose, be deemed to be a part of the Indenture.

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		PAGE
	Place of Payment	5
	Predecessor Security	5
	Redemption Date	6
	Redemption Price	6
	Regular Record Date	6
	Securities	6
	Securities Act	6
	Security Register	6
	Security Registrar	6
	Special Record Date	6
	Stated Maturity	6
	Subsidiary	6
	Trust Indenture Act	6
	Trustee	6
	U.S. Government Obligation	6
	Vice President	7
	Voting Stock	7
	Wholly-Owned Subsidiary	7
SECTION 102.	Compliance Certificates and Opinions.	7
SECTION 103.	Form of Documents Delivered to Trustee.	7
SECTION 104.	Acts of Holders; Record Dates.	8
SECTION 105.	Notices, Etc., to Trustee and Company.	10
SECTION 106.	Notice to Holders; Waiver.	10
SECTION 107.	Conflict with Trust Indenture Act.	11
SECTION 108.	Effect of Headings and Table of Contents.	11
SECTION 109.	Successors and Assigns.	11
SECTION 110.	Separability Clause.	11
SECTION 111.	Benefits of Indenture.	11
SECTION 112.	Governing Law.	12
SECTION 113.	Legal Holidays.	12

NOTE:   This table of contents shall not, for any purpose, be deemed to be a part of the Indenture.

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		PAGE
ARTICLE TWO
SECURITY FORMS
SECTION 201.	Forms Generally.	12
SECTION 202.	Form of Face of Security.	13
SECTION 203.	Form of Reverse of Security.	14
SECTION 204.	Form of Legend for Global Securities.	19
SECTION 205.	Form of Trustee’s Certificate of Authentication.	19
SECTION 206.	Form of Conversion Notice.	19
ARTICLE THREE
THE SECURITIES
SECTION 301.	Amount Unlimited; Issuable in Series.	20
SECTION 302.	Denominations.	23
SECTION 303.	Execution, Authentication, Delivery and Dating.	23
SECTION 304.	Temporary Securities.	24
SECTION 305.	Registration; Registration of Transfer and Exchange.	25
SECTION 306.	Mutilated, Destroyed, Lost and Stolen Securities.	26
SECTION 307.	Payment of Interest; Interest Rights Preserved.	27
SECTION 308.	Persons Deemed Owners.	28
SECTION 309.	Cancellation.	29
SECTION 310.	Computation of Interest.	29

NOTE:   This table of contents shall not, for any purpose, be deemed to be a part of the Indenture.

-iii-

		PAGE
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401.	Satisfaction and Discharge of Indenture.	29
SECTION 402.	Application of Trust Money.	30
ARTICLE FIVE
REMEDIES
SECTION 501.	Events of Default.	31
SECTION 502.	Acceleration of Maturity; Rescission and Annulment.	32
SECTION 503.	Collection of Indebtedness and Suits for Enforcement by Trustee.	33
SECTION 504.	Trustee May File Proofs of Claim.	34
SECTION 505.	Trustee May Enforce Claims Without Possession of Securities.	34
SECTION 506.	Application of Money Collected.	34
SECTION 507.	Limitation on Suits.	35
SECTION 508.	Unconditional Right of Holders to Receive Principal, Premium and Interest and to Convert.	35
SECTION 509.	Restoration of Rights and Remedies.	36
SECTION 510.	Rights and Remedies Cumulative.	36
SECTION 511.	Delay or Omission Not Waiver.	36
SECTION 512.	Control by Holders.	36
SECTION 513.	Waiver of Past Defaults.	37
SECTION 514.	Undertaking for Costs.	37
SECTION 515.	Waiver of Usury, Stay or Extension Laws.	37

NOTE:   This table of contents shall not, for any purpose, be deemed to be a part of the Indenture.

-iv-

		PAGE
ARTICLE SIX
THE TRUSTEE
SECTION 601.	Certain Duties and Responsibilities.	38
SECTION 602.	Notice of Defaults.	38
SECTION 603.	Certain Rights of Trustee.	39
SECTION 604.	Not Responsible for Recitals or Issuance of Securities.	40
SECTION 605.	May Hold Securities and Act as Trustee Under Other Indentures.	40
SECTION 606.	Money Held in Trust.	41
SECTION 607.	Compensation and Reimbursement.	41
SECTION 608.	Conflicting Interests.	41
SECTION 609.	Corporate Trustee Required; Eligibility.	42
SECTION 610.	Resignation and Removal; Appointment of Successor.	42
SECTION 611.	Acceptance of Appointment by Successor.	43
SECTION 612.	Merger, Conversion, Consolidation or Succession to Business.	44
SECTION 613.	Preferential Collection of Claims Against Company.	45
SECTION 614.	Appointment of Authenticating Agent.	45
ARTICLE SEVEN
HOLDERS’ LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701.	Company to Furnish Trustee Names and Addresses of Holders.	46
SECTION 702.	Preservation of Information; Communications to Holders.	47
SECTION 703.	Reports by Trustee.	47

NOTE:   This table of contents shall not, for any purpose, be deemed to be a part of the Indenture.

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		PAGE
SECTION 704.	Reports by Company.	47
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 801.	Company May Consolidate, Etc., Only on Certain Terms.	48
SECTION 802.	Successor Substituted.	49
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901.	Supplemental Indentures Without Consent of Holders.	49
SECTION 902.	Supplemental Indentures With Consent of Holders.	50
SECTION 903.	Execution of Supplemental Indentures.	51
SECTION 904.	Effect of Supplemental Indentures.	52
SECTION 905.	Conformity with Trust Indenture Act.	52
SECTION 906.	Reference in Securities to Supplemental Indentures.	52
ARTICLE TEN
COVENANTS
SECTION 1001.	Payment of Principal, Premium and Interest.	52
SECTION 1002.	Maintenance of Office or Agency.	52
SECTION 1003.	Money for Securities Payments to Be Held in Trust.	53
SECTION 1004.	Statement by Officers as to Default.	54
SECTION 1005.	Existence.	54
SECTION 1006.	Maintenance of Properties.	54

NOTE:   This table of contents shall not, for any purpose, be deemed to be a part of the Indenture.

-vi-

		PAGE
SECTION 1007.	Payment of Taxes and Other Claims.	54
SECTION 1008.	Limitations on Liens and Dispositions of Capital Stock of PMI.	55
SECTION 1009.	Waiver of Certain Covenants.	55
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
SECTION 1101.	Applicability of Article.	56
SECTION 1102.	Election to Redeem; Notice to Trustee.	56
SECTION 1103.	Selection by Trustee of Securities to Be Redeemed.	56
SECTION 1104.	Notice of Redemption.	57
SECTION 1105.	Deposit of Redemption Price.	58
SECTION 1106.	Securities Payable on Redemption Date.	58
SECTION 1107.	Securities Redeemed in Part.	58
ARTICLE TWELVE
SINKING FUNDS
SECTION 1201.	Applicability of Article.	59
SECTION 1202.	Satisfaction of Sinking Fund Payments with Securities.	59
SECTION 1203.	Redemption of Securities for Sinking Fund.	59
ARTICLE THIRTEEN
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1301.	Company’s Option to Effect Defeasance or Covenant Defeasance.	60
SECTION 1302.	Defeasance and Discharge.	60

NOTE:   This table of contents shall not, for any purpose, be deemed to be a part of the Indenture.

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		PAGE
SECTION 1303.	Covenant Defeasance.	60
SECTION 1304.	Conditions to Defeasance or Covenant Defeasance.	61
SECTION 1305.	Deposited Money and U.S. Government Obligations to Be Held in Trust; Miscellaneous Provisions.	62
SECTION 1306.	Reinstatement.	63
ARTICLE FOURTEEN
CONVERSION OF SECURITIES
SECTION 1401.	Applicability of Article.	63
SECTION 1402.	Exercise of Conversion Privilege.	64
SECTION 1403.	No Fractional Shares.	65
SECTION 1404.	Adjustment of Conversion Price.	65
SECTION 1405.	Notice of Certain Corporate Actions.	66
SECTION 1406.	Reservation of Shares of Common Stock.	66
SECTION 1407.	Payment of Certain Taxes Upon Conversion.	67
SECTION 1408.	Nonassessability.	67
SECTION 1409.	Effect of Consolidation or Merger on Conversion Privilege.	67
SECTION 1410.	Duties of Trustee Regarding Conversion.	68
SECTION 1411.	Repayment of Certain Funds Upon Conversion.	68
Testimonium		69
Signatures and Seals		69

NOTE:   This table of contents shall not, for any purpose, be deemed to be a part of the Indenture.

-viii-

INDENTURE, dated as of November 3, 2003, between The PMI Group, Inc., a corporation duly organized and existing under the laws of the State of Delaware (herein called the “Company”), having its principal executive office at 3003 Oak Road, Walnut Creek, California 94597, and The Bank of New York, a banking corporation duly organized and existing under the laws of the State of New York, as Trustee (herein called the “Trustee”).

RECITALS OF THE COMPANY

The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (herein called the “Securities”), to be issued in one or more series as provided in this Indenture.

All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done.

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities or of series thereof, as follows:

ARTICLE ONE

DEFINITIONS AND OTHER PROVISIONS

OF GENERAL APPLICATION

SECTION 101. Definitions.

For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:

(1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular;

(2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein;

(3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term “generally accepted accounting principles” with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation;

(4) unless the context otherwise requires, any reference to an “Article” or a “Section” refers to an Article or a Section, as the case may be, of this Indenture; and

(5) the words “herein”, “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.

“Act”, when used with respect to any Holder, has the meaning specified in Section 104.

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Authenticating Agent” means any Person authorized by the Trustee pursuant to Section 614 to act on behalf of the Trustee to authenticate Securities of one or more series.

“Board of Directors” means either the board of directors of the Company or any duly authorized committee of that board empowered to act for it with respect to this Indenture.

“Board Resolution” means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee.

“Business Day”, when used with respect to any Place of Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in that Place of Payment are authorized or obligated by law or executive order to close.

“Capital Stock” of any Person means any and all shares, interests, participations or other equivalents (however designated) of corporate stock or other equity participations, including partnership interests, whether general or limited, of such Person.

“Commission” means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time.

“Common Stock” includes any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which is not subject to redemption by the Company; provided, however, subject to the provisions of Section 1409, shares issuable on conversions of Securities shall include only shares of the class designated as Common Stock of the Company at the date of this Indenture or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which are not subject to redemption by the Company; provided, further, that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications.

-2-

“Company” means the Person named as the “Company” in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Company” shall mean such successor Person.

“Company Request” or “Company Order“ means a written request or order signed in the name of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or a Vice President, and by its principal financial officer, its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee.

“Control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “Controlling” and “Controlled” shall have the meanings correlative to the foregoing.

“Corporate Trust Office” means the corporate trust office of the Trustee at 101 Barclay Street, Floor 8 West, New York, New York 10286 or the office or agency of the Trustee at which at any particular time its corporate trust business shall be principally administered.

“corporation” means a corporation, association, company, joint-stock company or business trust.

“Covenant Defeasance” has the meaning specified in Section 1303.

“Defaulted Interest” has the meaning specified in Section 307.

“Defeasance” has the meaning specified in Section 1302.

“Depositary” means, with respect to Securities of any series issuable in whole or in part in the form of one or more Global Securities, a clearing agency registered under the Exchange Act that is designated to act as Depositary for such Securities as contemplated by Section 301.

“Event of Default” has the meaning specified in Section 501.

“Exchange Act” means the Securities Exchange Act of 1934 and any statute successor thereto, in each case as amended from time to time.

“Expiration Date” has the meaning specified in Section 104.

“Global Security” means a Security that evidences all or part of the Securities of any series and bears the legend set forth in Section 204 (or such legend as may be specified as contemplated by Section 301 for such Securities).

“Holder” means a Person in whose name a Security is registered in the Security Register.

“Indenture” means this instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. The term “Indenture” shall also include the terms of particular series of Securities established as contemplated by Section 301.

-3-

“interest”, when used with respect to an Original Issue Discount Security which by its terms bears interest only after Maturity, means interest payable after Maturity.

“Interest Payment Date”, when used with respect to any Security, means the Stated Maturity of an installment of interest on such Security.

“Investment Company Act” means the Investment Company Act of 1940 and any statute successor thereto, in each case as amended from time to time.

“Lien” means any mortgage, security interest, pledge, lien, charge or other encumbrance.

“Maturity”, when used with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise.

“Notice of Default” means a written notice of the kind specified in Section 501(4).

“Officers’ Certificate” means a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, the President or a Vice President, and by the principal financial officer, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. One of the officers signing an Officers’ Certificate given pursuant to Section 1004 shall be the principal executive, financial or accounting officer of the Company.

“Opinion of Counsel” means a written opinion of counsel, who may be counsel for, or an employee of, the Company, and who shall be reasonably acceptable to the Trustee.

“Original Issue Discount Security” means any Security which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502.

“Outstanding”, when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except:

(1) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation;

(2) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made;

(3) Securities as to which Defeasance has been effected pursuant to Section 1302; and

-4-

(4) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company;

provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given, made or taken any request, demand, authorization, direction, notice, consent, waiver or other action hereunder as of any date, (A) the principal amount of an Original Issue Discount Security which shall be deemed to be Outstanding shall be the amount of the principal thereof which would be due and payable as of such date upon acceleration of the Maturity thereof to such date pursuant to Section 502, (B) if, as of such date, the principal amount payable at the Stated Maturity of a Security is not determinable, the principal amount of such Security which shall be deemed to be Outstanding shall be the amount as specified or determined as contemplated by Section 301, (C) the principal amount of a Security denominated in one or more foreign currencies or currency units which shall be deemed to be Outstanding shall be the U.S. dollar equivalent, determined as of such date in the manner provided as contemplated by Section 301, of the principal amount of such Security (or, in the case of a Security described in Clause (A) or (B) above, of the amount determined as provided in such Clause), and (D) Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, waiver or other action, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee’s right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor.

“Paying Agent” means any Person authorized by the Company to pay the principal of or any premium or interest on any Securities on behalf of the Company.

“Person” means any individual, corporation, partnership, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof.

“Place of Payment”, when used with respect to the Securities of any series, means the place or places where the principal of and any premium and interest on the Securities of that series are payable as specified as contemplated by Section 301.

“PMI” means PMI Mortgage Insurance Co., an Arizona corporation, so long as it remains a Subsidiary, or any Subsidiary which is a successor thereto.

“Predecessor Security” of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security.

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“Redemption Date”, when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture.

“Redemption Price”, when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture.

“Regular Record Date” for the interest payable on any Interest Payment Date on the Securities of any series means the date specified for that purpose as contemplated by Section 301.

“Securities” has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture.

“Securities Act” means the Securities Act of 1933 and any statute successor thereto, in each case as amended from time to time.

“Security Register” and “Security Registrar” have the respective meanings specified in Section 305.

“Special Record Date” for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307.

“Stated Maturity”, when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable.

“Subsidiary” means a corporation of which at least a majority of the outstanding voting stock having the power to elect a majority of the board of directors of such corporation is at the time owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, “voting stock” means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency.

“Trust Indenture Act” means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, “Trust Indenture Act” means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended.

“Trustee” means the Person named as the “Trustee” in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Trustee” shall mean or include each Person who is then a Trustee hereunder, and if at any time there is more than one such Person, “Trustee” as used with respect to the Securities of any series shall mean the Trustee with respect to Securities of that series.

“U.S. Government Obligation” has the meaning specified in Section 1304.

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“Vice President”, when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title “vice president”.

“Voting Stock” means Capital Stock which ordinarily has voting power for the election of directors (or, in the case of a Person that is not a corporation, persons performing similar functions), whether at all times or only so long as no senior class of Capital Stock has such voting power by reason of any contingency.

“Wholly-Owned Subsidiary” of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors’ qualifying shares) shall at the time be owned by such Person or by one or more Wholly-Owned Subsidiaries of such Person or by such Person and one or more Wholly-Owned Subsidiaries of such Person.

SECTION 102. Compliance Certificates and Opinions.

Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers’ Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirements set forth in this Indenture.

Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include,

(1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto;

(2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;

(3) a statement that, in the opinion of each such individual, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and

(4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with.

SECTION 103. Form of Documents Delivered to Trustee.

In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.

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Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his or her certificate or opinion is based are erroneous. Any such certificate or opinion of counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous.

Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.

SECTION 104. Acts of Holders; Record Dates.

Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. The Trustee shall promptly deliver to the Company copies of all such instrument or instruments and records delivered to the Trustee. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the “Act” of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section.

The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him or her the execution thereof. Where such execution is by a signer acting in a capacity other than his or her individual capacity, such certificate or affidavit shall also constitute sufficient proof of his or her authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient.

The ownership of Securities shall be proved by the Security Register.

Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security.

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The Company may set any day as a record date for the purposes of determining the Holders of Outstanding Securities of any series entitled to give, make or take any request, demand, authorization, direction, vote, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders of Securities of such series, and determining whether the requisite proportion of Outstanding Securities held by such Holders have authorized or agreed or consented to such request, demand, authorization, direction, vote, notice, consent, waiver or other action (it being understood that with respect to such determination, the Outstanding Securities shall be computed as of such record date), provided that the Company may not set a record date for, and the provisions of this paragraph shall not apply with respect to, the giving or making of any notice, declaration, request or direction referred to in the next paragraph. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities of the relevant series on such record date, and no other Holders, shall be entitled to take the relevant action, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities of such series on such record date. Nothing in this paragraph shall be construed to prevent the Company from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities of the relevant series on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Company, at its own expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Trustee in writing and to each Holder of Securities of the relevant series in the manner set forth in Section 106.

The Trustee may set any day as a record date for the purposes of determining the Holders of Outstanding Securities of any series entitled to join in the giving or making of (i) any Notice of Default, (ii) any declaration of acceleration referred to in Section 502, (iii) any request to institute proceedings referred to in Section 507(2) or (iv) any direction referred to in Section 512, in each case with respect to Securities of such series, and determining whether the requisite proportion of Outstanding Securities held by such Holders have authorized or agreed or consented to such request, demand, authorization, direction, vote, notice, consent, waiver or other action (it being understood that with respect to such determination, the Outstanding Securities shall be computed as of such record date). If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities of such series on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities of such series on such record date. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities of the relevant series on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Trustee, at the

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Company’s expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Company in writing and to each Holder of Securities of the relevant series in the manner set forth in Section 106.

With respect to any record date set pursuant to this Section, the party hereto which sets such record dates may designate any day as the “Expiration Date” and from time to time may change the Expiration Date to any earlier or later day; provided that no such change shall be effective unless notice of the proposed new Expiration Date is given to the other party hereto in writing, and to each Holder of Securities of the relevant series in the manner set forth in Section 106, on or prior to the existing Expiration Date. If an Expiration Date is not designated with respect to any record date set pursuant to this Section, the party hereto which set such record date shall be deemed to have initially designated the 180th day after such record date as the Expiration Date with respect thereto, subject to its right to change the Expiration Date as provided in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be later than the 180th day after the applicable record date.

Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such principal amount.

SECTION 105. Notices, Etc., to Trustee and Company.

Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with,

(1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing (or by facsimile transmissions ((212) 815-5707), provided that oral confirmation of receipt shall have been received) to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Trustee Administration, or

(2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company, Attention: Chief Financial Officer.

SECTION 106. Notice to Holders; Waiver.

Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at its address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail,

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neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.

In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder.

SECTION 107. Conflict with Trust Indenture Act.

If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act which is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act which may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be.

SECTION 108. Effect of Headings and Table of Contents.

The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.

SECTION 109. Successors and Assigns.

All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not.

SECTION 110. Separability Clause.

In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

SECTION 111. Benefits of Indenture.

Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture.

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SECTION 112. Governing Law.

THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK.

SECTION 113. Legal Holidays.

In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security or the last date on which a Holder has the right to convert a Security at a particular conversion price shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Securities (other than a provision of any Security which specifically states that such provision shall apply in lieu of this Section)) payment of interest or principal (and premium, if any) or, if applicable to a particular series of Securities, conversion need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or Redemption Date, at the Stated Maturity or on such last day for conversion, as the case may be.

ARTICLE TWO

SECURITY FORMS

SECTION 201. Forms Generally.

The Securities of each series shall be in substantially the form set forth in this Article, or in such other form as shall be established by or pursuant to a Board Resolution or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or Depositary therefor or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution thereof. If the form of Securities of any series is established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Company Order contemplated by Section 303 for the authentication and delivery of such Securities. Any such Board Resolution or record of such action shall have attached thereto a true and correct copy of the form of Security referred to therein approved by or pursuant to such Board Resolution.

The definitive Securities shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities.

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SECTION 202. Form of Face of Security.

Cusip No                     

No.                  $                 

The PMI Group, Inc., a corporation duly organized and existing under the laws of Delaware (herein called the “Company”, which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to                                                          , or registered assigns, the principal sum of                              Dollars on                                  [if the Security is to bear interest prior to Maturity, insert —, and to pay interest thereon from                      or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on                  and                  in each year, commencing                 , at the rate of         % per annum, until the principal hereof is paid or made available for payment [if applicable, insert — , provided that any principal and premium, and any such installment of interest, which is overdue shall bear interest at the rate of         % per annum (to the extent that the payment of such interest shall be legally enforceable), from the dates such amounts are due until they are paid or made available for payment, and such interest shall be payable on demand]. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the                      or                      (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture].

[If the Security is not to bear interest prior to Maturity, insert — The principal of this Security shall not bear interest except in the case of a default in payment of principal upon acceleration, upon redemption or at Stated Maturity and in such case the overdue principal and any overdue premium shall bear interest at the rate of         % per annum (to the extent that the payment of such interest shall be legally enforceable), from the dates such amounts are due until they are paid or made available for payment. Interest on any overdue principal or premium shall be payable on demand. [Any such interest on overdue principal or premium which is not paid on demand shall bear interest at the rate of         % per annum (to the extent that the payment of such interest on interest shall be legally enforceable), from the date of such demand until the amount so demanded is paid or made available for payment. Interest on any overdue interest shall be payable on demand.]]

Payment of the principal of (and premium, if any) and [if applicable, insert — any such] interest on this Security will be made at the office or agency of the Company maintained for that purpose in                     , in such coin or currency of the United States of America as at the time of

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payment is legal tender for payment of public and private debts [if applicable, insert — ; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register].

Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.

IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.

Dated:

	By
Attest:

SECTION 203. Form of Reverse of Security.

This Security is one of a duly authorized issue of securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an Indenture, dated as of                          (herein called the “Indenture”, which term shall have the meaning assigned to it in such instrument), between the Company and The Bank of New York, as Trustee (herein called the “Trustee”, which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture and all indentures supplemental thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof [if applicable, insert — , limited in aggregate principal amount to $                    ].

[If applicable, insert — The Securities of this series are subject to redemption upon not less than 30 days’ notice by mail, [if applicable, insert — (1) on                  in any year commencing with the year                  and ending with the year                  through operation of the sinking fund for this series at a Redemption Price equal to 100% of the principal amount, and (2)] at any time [if applicable, insert — on or after                 , 20    ], as a whole or in part, at the election of the Company, at the following Redemption Prices (expressed as percentages of the principal amount): If redeemed [if applicable, insert — on or before                ,         %, and if redeemed] during the 12-month period beginning                  of the years indicated,

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Year Redemption Price Year Redemption Price

and thereafter at a Redemption Price equal to         % of the principal amount, together in the case of any such redemption [if applicable, insert — (whether through operation of the sinking fund or otherwise)] with accrued interest to the Redemption Date, but interest installments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture.]

[If applicable, insert — The Securities of this series are subject to redemption upon not less than 30 days’ notice by mail, (1) on                  in any year commencing with the year          and ending with the year through operation of the sinking fund for this series at the Redemption Prices for redemption through operation of the sinking fund (expressed as percentages of the principal amount) set forth in the table below, and (2) at any time [if applicable, insert — on or after                 ], as a whole or in part, at the election of the Company, at the Redemption Prices for redemption otherwise than through operation of the sinking fund (expressed as percentages of the principal amount) set forth in the table below: If redeemed during the 12-month period beginning                  of the years indicated,

Year Redemption Price For Redemption Through Operation of the Sinking Fund Redemption Price For Redemption Otherwise Than Through Operation of the Sinking Fund

and thereafter at a Redemption Price equal to         % of the principal amount, together in the case of any such redemption (whether through operation of the sinking fund or otherwise) with accrued interest to the Redemption Date, but interest installments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture.]

[If applicable, insert — Notwithstanding the foregoing, the Company may not, prior to                 , redeem any Securities of this series as contemplated by [if applicable, insert — Clause (2) of] the preceding paragraph as a part of, or in anticipation of, any refunding operation by the application, directly or indirectly, of moneys borrowed having an interest cost to the Company (calculated in accordance with generally accepted financial practice) of less than         % per annum.]

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[If applicable, insert — The sinking fund for this series provides for the redemption on                  in each year beginning with the year          and ending with the year                  of [if applicable, insert — not less than $                 (“mandatory sinking fund”) and not more than] $                 aggregate principal amount of Securities of this series. Securities of this series acquired or redeemed by the Company otherwise than through [if applicable, insert — mandatory] sinking fund payments may be credited against subsequent [if applicable, insert — mandatory] sinking fund payments otherwise required to be made [if applicable, insert — , in the inverse order in which they become due].]

[If the Security is subject to redemption of any kind, insert — In the event of redemption of this Security in part only, a new Security or Securities of this series and of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.]

[If applicable, insert — The Indenture contains provisions for defeasance at any time of [the entire indebtedness of this Security] [or] [certain restrictive covenants and Events of Default with respect to this Security] [, in each case] upon compliance with certain conditions set forth in the Indenture.]

[If the Security is convertible into Common Stock of the Company, insert — Subject to the provisions of the Indenture, the Holder of this Security is entitled, at its option, at any time on or before [insert date] (except that, in case this Security or any portion hereof shall be called for redemption, such right shall terminate with respect to this Security or portion hereof, as the case may be, so called for redemption at the close of business on the date fixed for redemption as provided in the Indenture unless the Company defaults in making the payment due upon redemption), to convert the principal amount of this Security (or any portion hereof which is $1,000 or an integral multiple thereof), into fully paid and non-assessable shares (calculated as to each conversion to the nearest 1/100th of a share) of the Common Stock of the Company, as said shares shall be constituted at the date of conversion, at the conversion price of $                 principal amount of Securities for each share of Common Stock, or at the adjusted conversion price in effect at the date of conversion determined as provided in the Indenture, upon surrender of this Security, together with the conversion notice hereon duly executed, to the Company at the designated office or agency of the Company in                 , accompanied (if so required by the Company) by instruments of transfer, in form satisfactory to the Company and to the Trustee, duly executed by the Holder or by its duly authorized attorney in writing. Such surrender shall, if made during any period beginning at the close of business on a Regular Record Date and ending at the opening of business on the Interest Payment Date next following such Regular Record Date (unless this Security or the portion being converted shall have been called for redemption on a Redemption Date during such period), also be accompanied by payment in funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of this Security then being converted. Subject to the aforesaid requirement for payment and, in the case of a conversion after the Regular Record Date next preceding any Interest Payment Date and on or before such Interest Payment Date, to the right of the Holder of this Security (or any Predecessor Security) of record at such Regular Record Date to receive an installment of interest (with certain exceptions provided in the Indenture), no adjustment is to be made on conversion for interest accrued hereon or for dividends on shares of Common Stock issued on conversion. The Company is not required to issue fractional shares upon any such conversion, but shall make adjustment therefor in cash on the basis of the current market value of such fractional interest as provided in the Indenture. The conversion price is subject to adjustment

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as provided in the Indenture. In addition, the Indenture provides that in case of certain consolidations or mergers to which the Company is a party or the sale of substantially all of the assets of the Company, the Indenture shall be amended, without the consent of any Holders of Securities, so that this Security, if then outstanding, will be convertible thereafter, during the period this Security shall be convertible as specified above, only into the kind and amount of securities, cash and other property receivable upon the consolidation, merger or sale by a holder of the number of shares of Common Stock into which this Security might have been converted immediately prior to such consolidation, merger or sale (assuming such holder of Common Stock failed to exercise any rights of election and received per share the kind and amount received per share by a plurality of non-electing shares) [, assuming if such consolidation, merger or sale is prior to                 , 20        , that this Security were convertible at the time of such consolidation, merger or sale at the initial conversion price specified above as adjusted from                 , 20         to such time pursuant to the Indenture]. In the event of conversion of this Security in part only, a new Security or Securities for the unconverted portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof.]

[If the Security is convertible into other securities of the Company, specify the conversion features.]

[If the Security is not an Original Issue Discount Security, insert — If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.]

[If the Security is an Original Issue Discount Security, insert — If an Event of Default with respect to Securities of this series shall occur and be continuing, an amount of principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. Such amount shall be equal to — insert formula for determining the amount. Upon payment (i) of the amount of principal so declared due and payable and (ii) of interest on any overdue principal, premium and interest (in each case to the extent that the payment of such interest shall be legally enforceable), all of the Company’s obligations in respect of the payment of the principal of and premium and interest, if any, on the Securities of this series shall terminate.]

The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of more than 50% in principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.

As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the

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appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein.

No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.

As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or its attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.

The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.

No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.

All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.

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SECTION 204. Form of Legend for Global Securities.

Unless otherwise specified as contemplated by Section 301 for the Securities evidenced thereby, every Global Security authenticated and delivered hereunder shall bear a legend in substantially the following form:

THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.

SECTION 205. Form of Trustee’s Certificate of Authentication.

The Trustee’s certificates of authentication shall be in substantially the following form:

This is one of the Securities of the series designated herein referred to in the within-mentioned Indenture.

	The Bank of New York,
	As Trustee
By
	Authorized Signatory

SECTION 206. Form of Conversion Notice.

To The PMI Group, Inc.:

The undersigned owner of this Security hereby irrevocably exercises the option to convert this Security, or portion hereof (which is $1,000 or an integral multiple thereof) below designated, into shares of Common Stock of the Company in accordance with the terms of the Indenture referred to in this Security, and directs that the shares issuable and deliverable upon the conversion, together with any check in payment for fractional shares and any Securities representing any unconverted principal amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If this Notice is being delivered on a date after the close of business on a Regular Record Date and prior to the opening of business on the related Interest Payment Date (unless this Security or the portion thereof being converted has been called for redemption on a Redemption Date within such period), this Notice is accompanied by payment, in funds acceptable to the Company, of an amount equal to the interest payable on such Interest Payment Date of the principal of this Security to be converted. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect hereto. Any amount required to be paid by the undersigned on account of interest accompanies this Security.

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Principal Amount to be Converted (in an integral multiple of $1,000, if less than all): $
Dated
	Signature(s) must be guaranteed by a commercial bank or trust company or a member firm of a national stock exchange if shares of Common Stock are to be delivered, or Securities to be issued, other than to and in the name of the registered owner.
	Signature Guaranty

Fill in for registration of shares of Common Stock and Security if to be issued otherwise than to the registered holder.

(Name)	Social Security or other Taxpayer Identification Number
(Address)
Please print Name and Address (including zip code number)

[The above conversion notice is to be modified, as appropriate, for conversion into other securities or property of the Company.]

ARTICLE THREE

THE SECURITIES

SECTION 301. Amount Unlimited; Issuable in Series.

The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited.

The Securities may be issued in one or more series. There shall be established in or pursuant to a Board Resolution and, subject to Section 303, set forth, or determined in the manner provided, in an Officers’ Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series,

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(1) the title of the Securities of the series (which shall distinguish the Securities of the series from Securities of any other series);

(2) any limit upon the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 304, 305, 306, 906 or 1107 and except for any Securities which, pursuant to Section 303, are deemed never to have been authenticated and delivered hereunder);

(3) the Person to whom any interest on a Security of the series shall be payable, if other than the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest;

(4) the date or dates on which the principal of any Securities of the series is payable;

(5) the rate or rates at which any Securities of the series shall bear interest, if any, the date or dates from which any such interest shall accrue, the Interest Payment Dates on which any such interest shall be payable and the Regular Record Date for any such interest payable on any Interest Payment Date;

(6) the place or places where the principal of and any premium and interest on any Securities of the series shall be payable;

(7) the period or periods within which, the price or prices at which and the terms and conditions upon which any Securities of the series may be redeemed, in whole or in part, at the option of the Company and, if other than by a Board Resolution, the manner in which any election by the Company to redeem the Securities shall be evidenced;

(8) the obligation, if any, of the Company to redeem or purchase any Securities of the series pursuant to any sinking fund or analogous provisions or at the option of the Holder thereof and the period or periods within which, the price or prices at which and the terms and conditions upon which any Securities of the series shall be redeemed or purchased, in whole or in part, pursuant to such obligation;

(9) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which any Securities of the series shall be issuable;

(10) if the amount of principal of or any premium or interest on any Securities of the series may be determined with reference to an index or pursuant to a formula, the manner in which such amounts shall be determined;

(11) if other than the currency of the United States of America, the currency, currencies or currency units in which the principal of or any premium or interest on any Securities of the series shall be payable and the manner of determining the equivalent thereof in the currency of the United States of America for any purpose, including for purposes of the definition of “Outstanding” in Section 101;

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(12) if the principal of or any premium or interest on any Securities of the series is to be payable, at the election of the Company or the Holder thereof, in one or more currencies or currency units other than that or those in which such Securities are stated to be payable, the currency, currencies or currency units in which the principal of or any premium or interest on such Securities as to which such election is made shall be payable, the periods within which and the terms and conditions upon which such election is to be made and the amount so payable (or the manner in which such amount shall be determined);

(13) if other than the entire principal amount thereof, the portion of the principal amount of any Securities of the series which shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 502;

(14) if the principal amount payable at the Stated Maturity of any Securities of the series will not be determinable as of any one or more dates prior to the Stated Maturity, the amount which shall be deemed to be the principal amount of such Securities as of any such date for any purpose thereunder or hereunder, including the principal amount thereof which shall be due and payable upon any Maturity other than the Stated Maturity or which shall be deemed to be Outstanding as of any date prior to the Stated Maturity (or, in any such case, the manner in which such amount deemed to be the principal amount shall be determined);

(15) if applicable, that the Securities of the series, in whole or any specified part, shall be defeasible pursuant to Section 1302 or Section 1303 or both such Sections and, if other than by a Board Resolution, the manner in which any election by the Company to defease such Securities shall be evidenced;

(16) the terms of any right to convert Securities of the series into shares of Common Stock of the Company or other securities or property;

(17) if applicable, that any Securities of the series shall be issuable in whole or in part in the form of one or more Global Securities and, in such case, the respective Depositaries for such Global Securities, the form of any legend or legends which shall be borne by any such Global Security in addition to or in lieu of that set forth in Section 204 and any circumstances in addition to or in lieu of those set forth in Clause (2) of the last paragraph of Section 305 in which any such Global Security may be exchanged in whole or in part for Securities registered, and any transfer of such Global Security in whole or in part may be registered, in the name or names of Persons other than the Depositary for such Global Security or a nominee thereof;

(18) any addition to or change in the Events of Default which applies to any Securities of the series and any change in the right of the Trustee or the requisite Holders of such Securities to declare the principal amount thereof due and payable pursuant to Section 502;

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(19) any addition to or change in the covenants set forth in Article Ten which applies to Securities of the series; and

(20) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture, except as permitted by Section 901(5)).

All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to the Board Resolution referred to above and (subject to Section 303) set forth, or determined in the manner provided, in the Officers’ Certificate referred to above or in any such indenture supplemental hereto.

If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers’ Certificate setting forth the terms of the series.

SECTION 302. Denominations.

The Securities of each series shall be issuable only in registered form without coupons and only in such denominations as shall be specified as contemplated by Section 301. In the absence of any such specified denomination with respect to the Securities of any series, the Securities of such series shall be issuable in denominations of $1,000 and any integral multiple thereof.

SECTION 303. Execution, Authentication, Delivery and Dating.

The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Vice Chairman of the Board, its principal executive officer, its President or one of its Vice Presidents, attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile.

Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities.

At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. If the form or terms of the Securities of the series have been established by or pursuant to one or more Board Resolutions as permitted by Sections 201 and 301, in authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating,

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(1) if the form of such Securities has been established by or pursuant to Board Resolution as permitted by Section 201, that such form has been established in conformity with the provisions of this Indenture;

(2) if the terms of such Securities have been established by or pursuant to Board Resolution as permitted by Section 301, that such terms have been established in conformity with the provisions of this Indenture; and

(3) that such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles.

If such form or terms have been so established, the Trustee shall not be required to authenticate such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustee’s own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee.

Notwithstanding the provisions of Section 301 and of the preceding paragraph, if all Securities of a series are not to be originally issued at one time, it shall not be necessary to deliver the Officers’ Certificate otherwise required pursuant to Section 301 or the Company Order and Opinion of Counsel otherwise required pursuant to such preceding paragraph at or prior to the authentication of each Security of such series if such documents are delivered at or prior to the authentication upon original issuance of the first Security of such series to be issued.

Each Security shall be dated the date of its authentication.

No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 309, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture.

SECTION 304. Temporary Securities.

Pending the preparation of definitive Securities of any series, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities.

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If temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company in a Place of Payment for that series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor one or more definitive Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount. Until so exchanged, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series and tenor.

SECTION 305. Registration; Registration of Transfer and Exchange.

The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency of the Company in a Place of Payment being herein sometimes collectively referred to as the “Security Register”) in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee is hereby appointed “Security Registrar” for the purpose of registering Securities and transfers of Securities as herein provided.

Upon surrender for registration of transfer of any Security of a series at the office or agency of the Company in a Place of Payment for that series, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount.

At the option of the Holder, Securities of any series may be exchanged for other Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount, upon surrender of the Securities to be exchanged at the office or agency of the Company in a Place of Payment for that series. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive.

All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange.

Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or its attorney duly authorized in writing.

No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906 or 1107 not involving any transfer.

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If the Securities of any series (or of any series and specified tenor) are to be redeemed in part, the Company shall not be required (A) to issue, register the transfer of or exchange any Securities of that series (or of that series and specified tenor, as the case may be) during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of any such Securities selected for redemption under Section 1103 and ending at the close of business on the day of such mailing, or (B) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part.

The provisions of Clauses (1), (2), (3) and (4) below shall apply only to Global Securities:

(1) Each Global Security authenticated under this Indenture shall be registered in the name of the Depositary designated for such Global Security or a nominee thereof and delivered to such Depositary or a nominee thereof or custodian therefor, and each such Global Security shall constitute a single Security for all purposes of this Indenture.

(2) Notwithstanding any other provision in this Indenture, no Global Security may be exchanged in whole or in part for Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Security or a nominee thereof unless (A) such Depositary (i) has notified the Company that it is unwilling or unable to continue as Depositary for such Global Security or (ii) has ceased to be a clearing agency registered under the Exchange Act, (B) there shall have occurred and be continuing an Event of Default with respect to such Global Security or (C) there shall exist such circumstances, if any, in addition to or in lieu of the foregoing as have been specified for this purpose as contemplated by Section 301.

(3) Subject to Clause (2) above, any exchange of a Global Security for other Securities may be made in whole or in part, and all Securities issued in exchange for a Global Security or any portion thereof shall be registered in such names as the Depositary for such Global Security shall direct.

(4) Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof, whether pursuant to this Section, Section 304, 306, 906 or 1107 or otherwise, shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depositary for such Global Security or a nominee thereof.

SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.

If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding.

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If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding.

In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security.

Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith.

Every new Security of any series issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of that series duly issued hereunder.

The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities.

SECTION 307. Payment of Interest; Interest Rights Preserved.

Except as otherwise provided as contemplated by Section 301 with respect to any series of Securities, interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest.

Any interest on any Security of any series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called “Defaulted Interest”) shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below:

(1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security of such series and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to

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the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be given to each Holder of Securities of such series in the manner set forth in Section 106, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2).

(2) The Company may make payment of any Defaulted Interest on the Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee.

Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security.

Subject to the provisions of Section 1402, in the case of any Security (or any part thereof) which is converted after any Regular Record Date and on or prior to the next succeeding Interest Payment Date (other than any Security the principal of (or premium, if any, on) which shall become due and payable, whether at Stated Maturity or by declaration of acceleration prior to such Interest Payment Date), interest whose Stated Maturity is on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion and such interest (whether or not punctually paid or duly provided for) shall be paid to the Person in whose name that Security (or any one or more Predecessor Securities) is registered at the close of business on such Regular Record Date. Except as otherwise expressly provided in the immediately preceding sentence or in Section 1402, in the case of any Security (or any part thereof) which is converted, interest whose Stated Maturity is after the date of conversion of such Security (or such part thereof) shall not be payable.

SECTION 308. Persons Deemed Owners.

Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of

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principal of and any premium and (subject to Section 307) any interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary.

SECTION 309. Cancellation.

All Securities surrendered for payment, redemption, registration of transfer or exchange or for credit against any sinking fund payment shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, and all Securities so delivered shall be promptly cancelled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of as directed by a Company Order.

SECTION 310. Computation of Interest.

Except as otherwise specified as contemplated by Section 301 for Securities of any series, interest on the Securities of each series shall be computed on the basis of a 360-day year of twelve 30-day months.

ARTICLE FOUR

SATISFACTION AND DISCHARGE

SECTION 401. Satisfaction and Discharge of Indenture.

This Indenture shall upon Company Request cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when

(1) either

(A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or

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(B) all such Securities not theretofore delivered to the Trustee for cancellation

(i) have become due and payable, or

(ii) will become due and payable at their Stated Maturity within one year, or

(iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company,

and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose money in an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal and any premium and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be;

(2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and

(3) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with.

Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 607, the obligations of the Trustee to any Authenticating Agent under Section 614 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of Clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive.

SECTION 402. Application of Trust Money.

Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and any premium and interest for whose payment such money has been deposited with the Trustee.

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ARTICLE FIVE

REMEDIES

SECTION 501. Events of Default.

“Event of Default”, wherever used herein with respect to Securities of any series, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

(1) default in the payment of any accrued and unpaid interest upon any Security of that series when it becomes due and payable, and continuance of such default for a period of 30 days; or

(2) default in the payment of the principal of or any premium on any Security of that series at its Stated Maturity; or

(3) default in the deposit of any sinking fund payment, when and as due by the terms of a Security of that series; or

(4) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with or which has expressly been included in this Indenture solely for the benefit of series of Securities other than that series), and continuance of such default or breach for a period of 60 days after actual receipt by the Company of a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder, which notice has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Outstanding Securities of that series; or

(5) the occurrence of an event of default under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company or PMI, if (i) such default either (A) results from the failure to pay the principal of any such indebtedness at its stated maturity or (B) relates to an obligation other than the obligation to pay the principal of such indebtedness at its stated maturity and results in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, (ii) the principal amount of such indebtedness, together with the principal amount of any other such indebtedness in default for failure to pay principal at its stated maturity or the maturity of which has been so accelerated, aggregates $50,000,000 or more at any one time outstanding and (iii) such indebtedness is not discharged, or such acceleration is not rescinded or annulled, within a period of 30 days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of that series a written notice specifying such default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a “Notice of Default” hereunder; or

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(6) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or

(7) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action; or

(8) any other Event of Default provided with respect to Securities of that series.

SECTION 502. Acceleration of Maturity; Rescission and Annulment.

If an Event of Default (other than an Event of Default specified in Section 501(6) or 501(7)) with respect to Securities of any series at the time Outstanding occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities of that series may declare the principal amount of all the Securities of that series (or, if any Securities of that series are Original Issue Discount Securities, such portion of the principal amount of such Securities as may be specified by the terms thereof) to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount (or specified amount) shall become immediately due and payable. If an Event of Default specified in Section 501(6) or 501(7) with respect to Securities of any series at the time Outstanding occurs, the principal amount of all the Securities of that series (or, if any Securities of that series are Original Issue Discount Securities, such portion of the principal amount of such Securities as may be specified by the terms thereof) shall automatically, and without any declaration or other action on the part of the Trustee or any Holder, become immediately due and payable.

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At any time after such a declaration of acceleration with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if

(1) the Company has paid or deposited with the Trustee a sum sufficient to pay

(A) all overdue interest on all Securities of that series,

(B) the principal of (and premium, if any, on) any Securities of that series which have become due otherwise than by such declaration of acceleration and any interest thereon at the rate or rates prescribed therefor in such Securities,

(C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate or rates prescribed therefor in such Securities, and

(D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel;

and

(2) all Events of Default with respect to Securities of that series, other than the non-payment of the principal of Securities of that series which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513.

No such rescission shall affect any subsequent default or impair any right consequent thereon.

SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee.

The Company covenants that if

(1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or

(2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof,

the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and any premium and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and premium and on any overdue interest, at the rate or rates prescribed therefor in such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel.

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If an Event of Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy.

SECTION 504. Trustee May File Proofs of Claim.

In case of any judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607.

No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; provided, however, that the Trustee may, on behalf of the Holders, vote for the election of a trustee in bankruptcy or similar official and be a member of a creditors’ or other similar committee.

SECTION 505. Trustee May Enforce Claims Without Possession of Securities.

All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered.

SECTION 506. Application of Money Collected.

Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or any premium or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:

FIRST: To the payment of all amounts due the Trustee under Section 607; and

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SECOND: To the payment of the amounts then due and unpaid for principal of and any premium, if any, and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and any premium, if any, and interest, respectively.

SECTION 507. Limitation on Suits.

No Holder of any Security of any series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless

(1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that series;

(2) the Holders of not less than 25% in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;

(3) such Holder or Holders have offered to the Trustee indemnity satisfactory to it against the costs, expenses and liabilities to be incurred in compliance with such request;

(4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and

(5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities of that series;

it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such Holders.

SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest and to Convert.

Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and any premium and (subject to Section 307) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date), to convert such Securities in accordance with Article Fourteen and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder.

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SECTION 509. Restoration of Rights and Remedies.

If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted.

SECTION 510. Rights and Remedies Cumulative.

Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.

SECTION 511. Delay or Omission Not Waiver.

No delay or omission of the Trustee or of any Holder of any Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee (subject to the limitations contained in this Indenture) or by the Holders, as the case may be.

SECTION 512. Control by Holders.

The Holders of a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, with respect to the Securities of such series, provided that

(1) such direction shall not be in conflict with any rule of law or with this Indenture, and

(2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction or this Indenture.

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SECTION 513. Waiver of Past Defaults.

The Holders of not less than a majority in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of such series waive any past default hereunder with respect to such series and its consequences, except a default

(1) in the payment of the principal of or any premium or interest on any Security of such series, or

(2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected.

Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon.

SECTION 514. Undertaking for Costs.

In any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant, in the manner and to the extent provided in the Trust Indenture Act; provided that neither this Section nor the Trust Indenture Act shall be deemed to authorize any court to require such an undertaking or to make such an assessment in any suit instituted by the Company or the Trustee or in any suit for the enforcement of the right to convert any Security in accordance with Article Fourteen.

SECTION 515. Waiver of Usury, Stay or Extension Laws.

The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.

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ARTICLE SIX

THE TRUSTEE

SECTION 601. Certain Duties and Responsibilities.

(a) The duties and responsibilities of the Trustee shall be as provided by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.

(b) Except during the continuance of an Event of Default, the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee.

(c) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs.

(d) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that:

(i) this Subsection shall not be construed to limit the effect of Subsection (a) of this Section;

(ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and

(iii) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture.

(e) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section.

SECTION 602. Notice of Defaults.

If a default occurs hereunder with respect to Securities of any series, the Trustee shall give the Holders of Securities of such series notice of such default as and to the extent provided by the Trust Indenture Act; provided, however, that in the case of any default of the character

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specified in Section 501(4) with respect to Securities of such series, no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term “default” means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to Securities of such series.

SECTION 603. Certain Rights of Trustee.

Subject to the provisions of Section 601:

(1) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;

(2) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order, and any resolution of the Board of Directors shall be sufficiently evidenced by a Board Resolution;

(3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, conclusively rely upon an Officers’ Certificate;

(4) the Trustee may consult with counsel and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon;

(5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity satisfactory to it against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction;

(6) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney;

(7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder;

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(8) the Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture;

(9) the Trustee shall not be deemed to have notice of any Default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such a default is received by the Trustee at the Corporate Trust Office of the Trustee and such notice references the Securities and this Indenture;

(10) the rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and each agent, custodian and other Person employed to act hereunder; and

(11) the Trustee may request that the Company deliver an Officers’ Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officers’ Certificate may be signed by any person authorized to sign an Officers’ Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded.

SECTION 604. Not Responsible for Recitals or Issuance of Securities.

The recitals contained herein and in the Securities, except the Trustee’s certificates of authentication, shall be taken as the statements of the Company, and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. Neither the Trustee nor any Authenticating Agent shall be accountable for the use or application by the Company of Securities or the proceeds thereof.

SECTION 605. May Hold Securities and Act as Trustee Under Other Indentures.

The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent.

Subject to the limitations imposed by the Trust Indenture Act, nothing in this Indenture shall prohibit the Trustee from becoming and acting as trustee under other indentures under which other securities, or certificates of interest of participation in other securities, of the Company are outstanding in the same manner as if it were not Trustee hereunder.

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SECTION 606. Money Held in Trust.

Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company.

SECTION 607. Compensation and Reimbursement.

The Company agrees

(1) to pay to the Trustee from time to time compensation for all services rendered by it hereunder as such parties may agree in writing (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust);

(2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and

(3) to indemnify the Trustee for, and to hold it harmless against, any and all loss, liability, damage, claim or expense including taxes (other than taxes based upon, measured by or determined by the income of the Trustee) incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against any claim (whether asserted by the Company, any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder.

The Trustee shall have a lien prior to the Securities as to all property and funds held by it hereunder for any amount owing it or any predecessor Trustee pursuant to this Section 607, except with respect to funds held in trust for the benefit of the Holders of particular Securities.

When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 501(6) or Section 501(7), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable Federal or state bankruptcy, insolvency or other similar law.

The provisions of this Section shall survive the termination of this Indenture and the resignation or removal of the Trustee.

SECTION 608. Conflicting Interests.

If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the

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manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. To the extent permitted by such Act, the Trustee shall not be deemed to have a conflicting interest by virtue of being a trustee under this Indenture with respect to Securities of more than one series.

SECTION 609. Corporate Trustee Required; Eligibility.

There shall at all times be one (and only one) Trustee hereunder with respect to the Securities of each series, which may be Trustee hereunder for Securities of one or more other series. Each Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000. If any such Person publishes reports of condition at least annually, pursuant to law or to the requirements of its supervising or examining authority, then for the purposes of this Section and to the extent permitted by the Trust Indenture Act, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee with respect to the Securities of any series shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.

SECTION 610. Resignation and Removal; Appointment of Successor.

No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 611.

The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 611 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction, at the expense of the Company, for the appointment of a successor Trustee with respect to the Securities of such series.

The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series, delivered to the Trustee and to the Company.

If at any time:

(1) the Trustee shall fail to comply with Section 608 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or

(2) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any such Holder, or

(3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation,

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then, in any such case, (A) the Company by a Board Resolution may remove the Trustee with respect to all Securities, or (B) subject to Section 514, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees.

If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of removal, the Trustee being removed may petition, at the expense of the Company, any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, with respect to the Securities of one or more series, the Company, by a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series) and shall comply with the applicable requirements of Section 611. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 611, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 611, any Holder who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series.

The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series to all Holders of Securities of such series in the manner provided in Section 106. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office.

SECTION 611. Acceptance of Appointment by Successor.

In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an

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instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder.

In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates.

Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in the first or second preceding paragraph, as the case may be.

No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article.

SECTION 612. Merger, Conversion, Consolidation or Succession to Business.

Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities.

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SECTION 613. Preferential Collection of Claims Against Company.

If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor).

SECTION 614. Appointment of Authenticating Agent.

The Trustee may appoint an Authenticating Agent or Agents with respect to one or more series of Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities of such series issued upon original issue and upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 306, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee’s certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section.

Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent.

An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable

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to the Company and shall give notice of such appointment in the manner provided in Section 106 to all Holders of Securities of the series with respect to which such Authenticating Agent will serve. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section.

The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section.

If an appointment with respect to one or more series is made pursuant to this Section 614, the Securities of such series may have endorsed thereon, in addition to the Trustee’s certificate of authentication, an alternative certificate of authentication in the following form:

This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

The Bank of New York,

As Trustee

By

As Authenticating Agent

By

Authorized Officer

ARTICLE SEVEN

HOLDERS’ LISTS AND REPORTS BY TRUSTEE AND COMPANY

SECTION 701. Company to Furnish Trustee Names and Addresses of Holders.

The Company will furnish or cause to be furnished to the Trustee

(1) semi-annually, not later than 15 days after the Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Securities of each series as of such Regular Record Date, as the case may be, and

(2) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar.

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SECTION 702. Preservation of Information; Communications to Holders.

The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished.

The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and privileges of the Trustee, shall be as provided by the Trust Indenture Act.

Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act.

SECTION 703. Reports by Trustee.

The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto.

Reports so required to be transmitted at stated intervals of not more than 12 months shall be transmitted no later than July 1 in each calendar year, commencing with the first July 1 after the first issuance of Securities pursuant to this Indenture.

A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which any Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when any Securities are listed on any stock exchange.

SECTION 704. Reports by Company.

The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to the Trust Indenture Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission.

Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee’s receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company’s compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely conclusively on Officers’ Certificates).

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ARTICLE EIGHT

CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE

SECTION 801. Company May Consolidate, Etc., Only on Certain Terms.

The Company shall not consolidate with or merge with or into any other Person or convey, transfer or lease all or substantially all of its properties and assets to any Person, unless:

(1) either (A) the Company shall be the continuing corporation or (B) the Person formed by a consolidation with the Company or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, all or substantially all of the properties and assets of the Company shall be a corporation, partnership or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia or Bermuda or the Cayman Islands and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and any premium and interest on all the Securities and the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed and the conversion rights shall be provided for in accordance with Article Fourteen, if applicable, or as otherwise specified pursuant to Section 301, by supplemental indenture satisfactory in form to the Trustee, executed and delivered to the Trustee, by the Person (if other than the Company) formed by such consolidation or into which the Company shall have been merged or by the Person which shall have acquired the Company’s assets;

(2) immediately after giving effect to such transaction no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing;

(3) if, as a result of any such consolidation or merger or such conveyance, transfer or lease, Capital Stock of PMI (or any Subsidiary of the Company having direct or indirect Control of PMI) would become subject to a Lien prohibited by the covenant in Section 1008(1) of this Indenture, the Company or such successor Person, as the case may be, shall have secured the Securities as required by such covenant; and

(4) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that (A) such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with and (B) in the case of a merger or consolidation in which the Company is not the continuing corporation and in which the successor to the Company is an entity organized under the laws of Bermuda or the Cayman Islands, that such merger will not result in any material adverse tax consequences to any Holders of the Securities.

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SECTION 802. Successor Substituted.

Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 801, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities.

ARTICLE NINE

SUPPLEMENTAL INDENTURES

SECTION 901. Supplemental Indentures Without Consent of Holders.

Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes:

(1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or

(2) to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company; or

(3) to add any additional Events of Default for the benefit of the Holders of all or any series of Securities (and if such additional Events of Default are to be for the benefit of less than all series of Securities, stating that such additional Events of Default are expressly being included solely for the benefit of such series); or

(4) to add to or change any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the issuance of Securities in bearer form, registrable or not registrable as to principal, and with or without interest coupons, or to permit or facilitate the issuance of Securities in uncertificated form; or

(5) to add to, change or eliminate any of the provisions of this Indenture in respect of one or more series of Securities, provided that any such addition, change or

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elimination (A) shall neither (i) apply to any Security of any series created prior to the execution of such supplemental indenture and entitled to the benefit of such provision nor (ii) modify the rights of the Holder of any such Security with respect to such provision or (B) shall become effective only when there is no such Security Outstanding; or

(6) to secure the Securities; or

(7) to establish the form or terms of Securities of any series as permitted by Sections 201 and 301; or

(8) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 611; or

(9) to make provision with respect to the conversion rights of Holders pursuant to the requirements of Article Fourteen, including providing for the conversion of the securities into any security (other than the Common Stock of the Company) or property of the Company; or

(10) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, provided that such action pursuant to this Clause (10) shall not adversely affect the interests of the Holders of Securities of any series in any material respect; or

(11) to supplement any of the provisions of the Indenture to such extent as shall be necessary to permit or facilitate the defeasance and discharge of any series of Securities pursuant to Articles Four and Thirteen, provided that any such action shall not adversely affect the interests of the Holders of Securities of such series or any other series of Securities in any material respect.

SECTION 902. Supplemental Indentures With Consent of Holders.

With the consent of the Holders of a majority in principal amount of the Outstanding Securities of each series affected by such supplemental indenture, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities of such series under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby,

(1) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or reduce the amount of the principal of an Original Issue Discount Security or any other Security

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which would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502, or change any Place of Payment where, or the coin or currency in which, any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or

(2) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or

(3) modify any of the provisions of this Section, Section 513 or Section 1009, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby; provided, however, that this clause shall not be deemed to require the consent of any Holder with respect to changes in the references to “the Trustee” and concomitant changes in this Section and Section 1009, or the deletion of this proviso, in accordance with the requirements of Sections 611 and 901(8), or

(4) if applicable, make any change that adversely affects the right to convert any Security as provided in Article Fourteen or pursuant to Section 301 (except as permitted by Section 901(9)) or decrease the conversion rate or increase the conversion price of any such Security.

A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series.

It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof.

SECTION 903. Execution of Supplemental Indentures.

In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Sections 601 and 603) shall be fully protected in relying upon, an Opinion of Counsel and an Officers’ Certificate stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise.

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SECTION 904. Effect of Supplemental Indentures.

Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby.

SECTION 905. Conformity with Trust Indenture Act.

Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act.

SECTION 906. Reference in Securities to Supplemental Indentures.

Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series.

ARTICLE TEN

COVENANTS

SECTION 1001. Payment of Principal, Premium and Interest.

The Company covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay the principal of and any premium and interest on the Securities of that series in accordance with the terms of the Securities and this Indenture.

SECTION 1002. Maintenance of Office or Agency.

The Company will maintain in each Place of Payment for any series of Securities an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange, where Securities of that series may be surrendered for conversion and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands.

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The Company may also from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in each Place of Payment for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency.

SECTION 1003. Money for Securities Payments to Be Held in Trust.

If the Company shall at any time act as its own Paying Agent with respect to any series of Securities, it will, on or before each due date of the principal of or any premium or interest on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal and any premium and interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act.

Whenever the Company shall have one or more Paying Agents for any series of Securities, it will, prior to each due date of the principal of or any premium or interest on any Securities of that series, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held as provided by the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act.

The Company will cause each Paying Agent for any series of Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (1) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (2) during the continuance of any default by the Company (or any other obligor upon the Securities of that series) in the making of any payment in respect of the Securities of that series, upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent for payment in respect of the Securities of that series.

The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money.

Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of or any premium or interest on any Security of any series and remaining unclaimed for two years after such principal, premium or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the

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Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in each Place of Payment, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company.

SECTION 1004. Statement by Officers as to Default.

The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers’ Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge.

SECTION 1005. Existence.

Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors, or the principal executive officer and principal financial officer of the Company acting jointly, shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders.

SECTION 1006. Maintenance of Properties.

The Company will cause all properties used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the Holders.

SECTION 1007. Payment of Taxes and Other Claims.

The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might

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by law become a lien upon the property of the Company or any Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim (i) whose amount, applicability or validity is being contested in good faith by appropriate proceedings or (ii) if the failure to pay or discharge would not have a material adverse effect on the assets, business, operations, properties or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole.

SECTION 1008. Limitations on Liens and Dispositions of Capital Stock of PMI.

So long as any Securities shall remain Outstanding:

(1) The Company shall not, and shall not permit any Subsidiary to, directly or indirectly, create, issue, assume, incur or guarantee any indebtedness for money borrowed which is secured by a Lien on any of the present or future Capital Stock of PMI (or any Subsidiary of the Company having direct or indirect Control of PMI), which Capital Stock is directly or indirectly owned by the Company, unless the Securities and, if the Company so elects, any other indebtedness of the Company ranking at least pari passu with the Securities, shall be secured equally and ratably with (or prior to) such other secured indebtedness for money borrowed so long as it is outstanding; and

(2) The Company shall not, and shall not permit any Subsidiary to, sell, transfer or otherwise dispose of any shares of Capital Stock of PMI (or of any corporation having direct or indirect Control of PMI) except (subject to Article Eight) for a sale, transfer or other disposition of any Capital Stock of PMI to a Wholly-Owned Subsidiary of the Company; a sale, transfer or other disposition of the entire Capital Stock of PMI for at least fair value (as determined by the Board of Directors acting in good faith); or a sale, transfer or other disposition of the Capital Stock of PMI for at least fair value (as determined by the Board of Directors acting in good faith), if, after giving effect thereto, the Company and its Subsidiaries would own more than 80% of the issued and outstanding Voting Stock of PMI.

SECTION 1009. Waiver of Certain Covenants.

Except as otherwise specified as contemplated by Section 301 for Securities of such series, the Company may, with respect to the Securities of any series, omit in any particular instance to comply with any term, provision or condition set forth in any covenant provided pursuant to Section 301(19), 901(2) or 901(7) for the benefit of the Holders of such series if before the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities of such series shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect.

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ARTICLE ELEVEN

REDEMPTION OF SECURITIES

SECTION 1101. Applicability of Article.

Securities of any series which are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 301 for such Securities) in accordance with this Article.

SECTION 1102. Election to Redeem; Notice to Trustee.

The election of the Company to redeem any Securities shall be evidenced by a Board Resolution or in another manner specified as contemplated by Section 301 for such Securities. In case of any redemption at the election of the Company of less than all the Securities of any series (including any such redemption affecting only a single Security), the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date, of the principal amount of Securities of such series to be redeemed and, if applicable, of the tenor of the Securities to be redeemed. In the case of any redemption of Securities prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers’ Certificate evidencing compliance with such restriction.

SECTION 1103. Selection by Trustee of Securities to Be Redeemed.

If less than all the Securities of any series are to be redeemed (unless all the Securities of such series and of a specified tenor are to be redeemed or unless such redemption affects only a single Security), the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of a portion of the principal amount of any Security of such series, provided that the unredeemed portion of the principal amount of any Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security. If less than all the Securities of such series and of a specified tenor are to be redeemed (unless such redemption affects only a single Security), the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series and specified tenor not previously called for redemption in accordance with the preceding sentence.

If any Security selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Security so selected, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption. Securities which have been converted during a selection of Securities to be redeemed shall be treated by the Trustee as Outstanding for the purpose of such selection.

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The Trustee shall promptly notify the Company in writing of the Securities selected for redemption as aforesaid and, in case of any Securities selected for partial redemption as aforesaid, the principal amount thereof to be redeemed.

The provisions of the two preceding paragraphs shall not apply with respect to any redemption affecting only a single Security, whether such Security is to be redeemed in whole or in part. In the case of any such redemption in part, the unredeemed portion of the principal amount of the Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security.

For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed.

SECTION 1104. Notice of Redemption.

Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at its address appearing in the Security Register.

All notices of redemption shall identify the Securities to be redeemed (including the CUSIP Numbers) and state:

(1) the Redemption Date,

(2) the Redemption Price (including accrued interest, if any),

(3) if less than all the Outstanding Securities of any series consisting of more than a single Security are to be redeemed, the identification (and, in the case of partial redemption of any such Securities, the principal amounts) of the particular Securities to be redeemed and, if less than all the Outstanding Securities of any series consisting of a single Security are to be redeemed, the principal amount of the particular Security to be redeemed,

(4) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and, if applicable, that interest thereon will cease to accrue on and after said date,

(5) the place or places where each such Security is to be surrendered for payment of the Redemption Price,

(6) if applicable, the conversion price, that the date on which the right to convert the principal of the Securities or the portions thereof to be redeemed will terminate will be the Redemption Date and the place or places where such Securities may be surrendered for conversion, and

(7) that the redemption is for a sinking fund, if such is the case.

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Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company’s request, by the Trustee in the name and at the expense of the Company and shall be irrevocable.

SECTION 1105. Deposit of Redemption Price.

Prior to 10:00 a.m. New York City time on any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date.

If any Security called for redemption is converted, any money deposited with the Trustee or with a Paying Agent or so segregated and held in trust for the redemption of such Security shall (subject to the right of any Holder of such Security to receive interest as provided in the last paragraph of Section 307) be paid to the Company on Company Request, or if then held by the Company, shall be discharged from such trust.

SECTION 1106. Securities Payable on Redemption Date.

Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that, unless otherwise specified as contemplated by Section 301, installments of interest whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307.

If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and any premium shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security.

SECTION 1107. Securities Redeemed in Part.

Any Security which is to be redeemed only in part shall be surrendered at a Place of Payment therefor (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or its attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series and of like tenor, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered.

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ARTICLE TWELVE

SINKING FUNDS

SECTION 1201. Applicability of Article.

The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of any series except as otherwise specified as contemplated by Section 301 for such Securities.

The minimum amount of any sinking fund payment provided for by the terms of any Securities is herein referred to as a “mandatory sinking fund payment”, and any payment in excess of such minimum amount provided for by the terms of such Securities is herein referred to as an “optional sinking fund payment”. If provided for by the terms of any Securities, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 1202. Each sinking fund payment shall be applied to the redemption of Securities as provided for by the terms of such Securities.

SECTION 1202. Satisfaction of Sinking Fund Payments with Securities.

The Company (1) may deliver Outstanding Securities of a series (other than any previously called for redemption) and (2) may apply as a credit Securities of a series which have been redeemed either at the election of the Company pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, in each case in satisfaction of all or any part of any sinking fund payment with respect to any Securities of such series required to be made pursuant to the terms of such Securities as and to the extent provided for by the terms of such Securities; provided that the Securities to be so credited have not been previously so credited. The Securities to be so credited shall be received and credited for such purpose by the Trustee at the Redemption Price, as specified in the Securities so to be redeemed, for redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly.

SECTION 1203. Redemption of Securities for Sinking Fund.

Not less than 60 days prior to each sinking fund payment date for any Securities, the Company will deliver to the Trustee an Officers’ Certificate specifying the amount of the next ensuing sinking fund payment for such Securities pursuant to the terms of such Securities, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities pursuant to Section 1202 and will also deliver to the Trustee any Securities to be so delivered. Not less than 30 days prior to each such sinking fund payment date, the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 1103 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 1104. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 1106 and 1107.

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ARTICLE THIRTEEN

DEFEASANCE AND COVENANT DEFEASANCE

SECTION 1301. Company’s Option to Effect Defeasance or Covenant Defeasance.

The Company may elect, at its option at any time, to have Section 1302 or Section 1303 applied to any Securities or any series of Securities, as the case may be, designated pursuant to Section 301 as being defeasible pursuant to such Section 1302 or 1303, in accordance with any applicable requirements provided pursuant to Section 301 and upon compliance with the conditions set forth below in this Article. Any such election shall be evidenced by a Board Resolution or in another manner specified as contemplated by Section 301 for such Securities.

SECTION 1302. Defeasance and Discharge.

Upon the Company’s exercise of its option (if any) to have this Section applied to any Securities or any series of Securities, as the case may be, the Company shall be deemed to have been discharged from its obligations with respect to such Securities as provided in this Section on and after the date the conditions set forth in Section 1304 are satisfied (hereinafter called “Defeasance”). For this purpose, such Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by such Securities and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), subject to the following which shall survive until otherwise terminated or discharged hereunder: (1) the rights of Holders of such Securities to receive, solely from the trust fund described in Section 1304 and as more fully set forth in such Section, payments in respect of the principal of and any premium and interest on such Securities when payments are due, (2) the Company’s obligations with respect to such Securities under Sections 304, 305, 306, 1002 and 1003, (3) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (4) this Article. Subject to compliance with this Article, the Company may exercise its option (if any) to have this Section applied to any Securities notwithstanding the prior exercise of its option (if any) to have Section 1303 applied to such Securities.

SECTION 1303. Covenant Defeasance.

Upon the Company’s exercise of its option (if any) to have this Section applied to any Securities or any series of Securities, as the case may be, (1) the Company shall be released from its obligations under Section 801(3), Sections 1006 through 1008, inclusive, and any covenants provided pursuant to Section 301(19), 901(2) or 901(7) for the benefit of the Holders of such Securities and (2) the occurrence of any event specified in Sections 501(4) (with respect to any of Section 801(3), Sections 1006 through 1008, inclusive, and any such covenants provided pursuant to Section 301(19), 901(2) or 901(7)) shall be deemed not to be or result in an Event of Default, in each case with respect to such Securities as provided in this Section on and after the date the conditions set forth in Section 1304 are satisfied (hereinafter called “Covenant Defeasance”). For this purpose, such Covenant Defeasance means that, with respect to such Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation

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set forth in any such specified Section (to the extent so specified in the case of Section 501(4)), whether directly or indirectly by reason of any reference elsewhere herein to any such Section or by reason of any reference in any such Section to any other provision herein or in any other document, but the remainder of this Indenture and such Securities shall be unaffected thereby.

SECTION 1304. Conditions to Defeasance or Covenant Defeasance.

The following shall be the conditions to the application of Section 1302 or Section 1303 to any Securities or any series of Securities, as the case may be:

(1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee which satisfies the requirements contemplated by Section 609 and agrees to comply with the provisions of this Article applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefits of the Holders of such Securities, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, in each case sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or any such other qualifying trustee) to pay and discharge, the principal of and any premium and interest on such Securities on the respective Stated Maturities, in accordance with the terms of this Indenture and such Securities. As used herein, “U.S. Government Obligation” means (x) any security which is (i) a direct obligation of the United States of America for the payment of which the full faith and credit of the United States of America is pledged or (ii) an obligation of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case (i) or (ii), is not callable or redeemable at the option of the issuer thereof, and (y) any depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any U.S. Government Obligation which is specified in Clause (x) above and held by such bank for the account of the holder of such depositary receipt, or with respect to any specific payment of principal of or interest on any U.S. Government Obligation which is so specified and held, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal or interest evidenced by such depositary receipt.

(2) In the event of an election to have Section 1302 apply to any Securities or any series of Securities, as the case may be, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of this instrument, there has been a change in the applicable Federal income tax law, in either case (A) or (B) to the effect that, and based thereon such opinion shall confirm that, the Holders of such Securities will not recognize gain or loss for Federal income tax purposes

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as a result of the deposit, Defeasance and discharge to be effected with respect to such Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit, Defeasance and discharge were not to occur.

(3) In the event of an election to have Section 1303 apply to any Securities or any series of Securities, as the case may be, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of such Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit and Covenant Defeasance to be effected with respect to such Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit and Covenant Defeasance were not to occur.

(4) The Company shall have delivered to the Trustee an Officers’ Certificate to the effect that neither such Securities nor any other Securities of the same series, if then listed on any securities exchange, will be delisted as a result of such deposit.

(5) No event which is, or after notice or lapse of time or both would become, an Event of Default with respect to such Securities or any other Securities shall have occurred and be continuing at the time of such deposit or, with regard to any such event specified in Sections 501(6) and (7), at any time on or prior to the 90th day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until after such 90th day).

(6) Such Defeasance or Covenant Defeasance shall not cause the Trustee to have a conflicting interest within the meaning of the Trust Indenture Act (assuming all Securities are in default within the meaning of such Act).

(7) Such Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which it is bound.

(8) Such Defeasance or Covenant Defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the Investment Company Act unless such trust shall be registered under such Act or exempt from registration thereunder.

(9) The Company shall have delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent with respect to such Defeasance or Covenant Defeasance have been complied with.

SECTION 1305. Deposited Money and U.S. Government Obligations to Be Held in Trust; Miscellaneous Provisions.

Subject to the provisions of the last paragraph of Section 1003, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee or other qualifying trustee (solely for purposes of this Section and Section 1306, the Trustee and any such other trustee are referred to collectively as the “Trustee”) pursuant to Section 1304 in respect of

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any Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any such Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities, of all sums due and to become due thereon in respect of principal and any premium and interest, but money so held in trust need not be segregated from other funds except to the extent required by law.

The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 1304 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of Outstanding Securities.

Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 1304 with respect to any Securities which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect the Defeasance or Covenant Defeasance, as the case may be, with respect to such Securities.

SECTION 1306. Reinstatement.

If the Trustee or the Paying Agent is unable to apply any money in accordance with this Article with respect to any Securities by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations under this Indenture and such Securities from which the Company has been discharged or released pursuant to Section 1302 or 1303 shall be revived and reinstated as though no deposit had occurred pursuant to this Article with respect to such Securities, until such time as the Trustee or Paying Agent is permitted to apply all money held in trust pursuant to Section 1305 with respect to such Securities in accordance with this Article; provided, however, that if the Company makes any payment of principal of or any premium or interest on any such Security following such reinstatement of its obligations, the Company shall be subrogated to the rights (if any) of the Holders of such Securities to receive such payment from the money so held in trust.

ARTICLE FOURTEEN

CONVERSION OF SECURITIES

SECTION 1401. Applicability of Article.

The provisions of this Article shall be applicable to the Securities of any series which are convertible into shares of Common Stock of the Company, and the issuance of such shares of Common Stock upon the conversion of such Securities, except as otherwise specified as contemplated by Section 301 for the Securities of such series.

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SECTION 1402. Exercise of Conversion Privilege.

In order to exercise a conversion privilege, the Holder of a Security of a series with such a privilege shall surrender such Security to the Company at the office or agency maintained for that purpose pursuant to Section 1002, accompanied by a duly executed conversion notice to the Company substantially in the form set forth in Section 206 stating that the Holder elects to convert such Security or a specified portion thereof. Such notice shall also state, if different from the name and address of such Holder, the name or names (with address) in which the certificate or certificates for shares of Common Stock which shall be issuable on such conversion shall be issued. Securities surrendered for conversion shall (if so required by the Company or the Trustee) be duly endorsed by or accompanied by instruments of transfer in forms satisfactory to the Company and the Trustee duly executed by the registered Holder or its attorney duly authorized in writing; and Securities so surrendered for conversion (in whole or in part) during the period from the close of business on any Regular Record Date to the opening of business on the next succeeding Interest Payment Date (excluding Securities or portions thereof called for redemption during such period) shall also be accompanied by payment in funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of such Security then being converted, and such interest shall be payable to such registered Holder notwithstanding the conversion of such Security, subject to the provisions of Section 307 relating to the payment of Defaulted Interest by the Company. As promptly as practicable after the receipt of such notice and of any payment required pursuant to a Board Resolution and, subject to Section 303, set forth, or determined in the manner provided, in an Officers’ Certificate, or established in one or more indentures supplemental hereto setting forth the terms of such series of Security, and the surrender of such Security in accordance with such reasonable regulations as the Company may prescribe, the Company shall issue and shall deliver, at the office or agency at which such Security is surrendered, to such Holder or on its written order, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of such Security (or specified portion thereof), in accordance with the provisions of such Board Resolution, Officers’ Certificate or supplemental indenture, and cash as provided therein in respect of any fractional share of such Common Stock otherwise issuable upon such conversion. Such conversion shall be deemed to have been effected immediately prior to the close of business on the date on which such notice and such payment, if required, shall have been received in proper order for conversion by the Company and such Security shall have been surrendered as aforesaid (unless such Holder shall have so surrendered such Security and shall have instructed the Company to effect the conversion on a particular date following such surrender and such Holder shall be entitled to convert such Security on such date, in which case such conversion shall be deemed to be effected immediately prior to the close of business on such date) and at such time the rights of the Holder of such Security as such Security Holder shall cease and the person or persons in whose name or names any certificate or certificates for shares of Common Stock of the Company shall be issuable upon such conversion shall be deemed to have become the Holder or Holders of record of the shares represented thereby. Except as set forth above and subject to the final paragraph of Section 307, no payment or adjustment shall be made upon any conversion on account of any interest accrued on the Securities (or any part thereof) surrendered for conversion or on account of any dividends on the Common Stock of the Company issued upon such conversion.

In the case of any Security which is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to or on the order of the Holder thereof, at the expense of the Company, a new Security or Securities of the same series, of authorized denominations, in aggregate principal amount equal to the unconverted portion of such Security.

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SECTION 1403. No Fractional Shares.

No fractional share of Common Stock of the Company shall be issued upon conversions of Securities of any series. If more than one Security shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion shall be computed on the basis of the aggregate principal amount of the Securities (or specified portions thereof to the extent permitted hereby) so surrendered. If, except for the provisions of this Section 1403, any Holder of a Security or Securities would be entitled to a fractional share of Common Stock of the Company upon the conversion of such Security or Securities, or specified portions thereof, the Company shall pay to such Holder an amount in cash equal to the current market value of such fractional share computed, (i) if such Common Stock is listed or admitted to unlisted trading privileges on a national securities exchange, on the basis of the last reported sale price regular way on such exchange on the last trading day prior to the date of conversion upon which such a sale shall have been effected, or (ii) if such Common Stock is not at the time so listed or admitted to unlisted trading privileges on a national securities exchange, on the basis of the average of the bid and asked prices of such Common Stock in the over-the-counter market, on the last trading day prior to the date of conversion, as reported by the National Quotation Bureau, Incorporated or similar organization if the National Quotation Bureau, Incorporated is no longer reporting such information, or if not so available, the fair market price as determined by the Board of Directors. For purposes of this Section, “trading day” shall mean each Monday, Tuesday, Wednesday, Thursday and Friday other than any day on which the Common Stock is not traded on the Nasdaq National Market System, or if the Common Stock is not traded on the Nasdaq National Market System, on the principal exchange or market on which the Common Stock is traded or quoted.

SECTION 1404. Adjustment of Conversion Price.

The conversion price of Securities of any series that is convertible into Common Stock of the Company shall be adjusted for any stock dividends, stock splits, reclassifications, combinations or similar transactions in accordance with the terms of the supplemental indenture or Board Resolutions setting forth the terms of the Securities of such series.

Whenever the conversion price is adjusted, the Company shall compute the adjusted conversion price in accordance with terms of the applicable Board Resolution or supplemental indenture and shall prepare an Officers’ Certificate setting forth the adjusted conversion price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be filed at each office or agency maintained for the purpose of conversion of Securities pursuant to Section 1002 and, if different, with the Trustee. The Company shall forthwith cause a notice setting forth the adjusted conversion price to be mailed, first class postage prepaid, to each Holder of Securities of such series at its address appearing on the Security Register and to any conversion agent other than the Trustee.

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SECTION 1405. Notice of Certain Corporate Actions.

In case:

(1) the Company shall declare a dividend (or any other distribution) on its Common Stock payable otherwise than in cash out of its retained earnings (other than a dividend for which approval of any shareholders of the Company is required); or

(2) the Company shall authorize the granting to the holders of its Common Stock of rights, options or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights (other than any such grant for which approval of any shareholders of the Company is required); or

(3) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding shares of Common Stock, or of any consolidation, merger or share exchange to which the Company is a party and for which approval of any shareholders of the Company is required), or of the sale of all or substantially all of the assets of the Company; or

(4) of the voluntary or involuntary dissolution, liquidation or winding up of the Company;

then the Company shall cause to be filed with the Trustee, and shall cause to be mailed to all Holders at their last addresses as they shall appear in the Securities Register, at least 20 days (or 10 days in any case specified in Clause (1) or (2) above) prior to the applicable record date hereinafter specified, a notice stating (i) the date on which a record is to be taken for the purpose of such dividend, distribution, rights, options or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, options or warrants are to be determined, or (ii) the date on which such reclassification, consolidation, merger, share exchange, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, sale, dissolution, liquidation or winding up. If at any time the Trustee shall not be the conversion agent, a copy of such notice shall also forthwith be filed by the Company with the Trustee.

SECTION 1406. Reservation of Shares of Common Stock.

The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of Securities, the full number of shares of Common Stock of the Company then issuable upon the conversion of all outstanding Securities of any series that has conversion rights.

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SECTION 1407. Payment of Certain Taxes Upon Conversion.

The Company will pay any and all taxes that may be payable in respect of the issue or delivery of shares of its Common Stock on conversion of Securities pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of its Common Stock in a name other than that of the Holder of the Security or Securities to be converted, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Company the amount of any such tax, or has established, to the satisfaction of the Company, that such tax has been paid.

SECTION 1408. Nonassessability.

The Company covenants that all shares of its Common Stock which may be issued upon conversion of Securities will upon issue in accordance with the terms hereof be duly and validly issued and fully paid and nonassessable.

SECTION 1409. Effect of Consolidation or Merger on Conversion Privilege.

In case of any consolidation of the Company with, or merger of the Company into or with any other Person, or in case of any sale of all or substantially all of the assets of the Company, the Company or the Person formed by such consolidation or the Person into which the Company shall have been merged or the Person which shall have acquired such assets, as the case may be, shall execute and deliver to the Trustee a supplemental indenture providing that the Holder of each Security then outstanding of any series that is convertible into Common Stock of the Company shall have the right, which right shall be the exclusive conversion right thereafter available to said Holder (until the expiration of the conversion right of such Security), to convert such Security into the kind and amount of shares of stock or other securities or property (including cash) receivable upon such consolidation, merger or sale by a holder of the number of shares of Common Stock of the Company into which such Security might have been converted immediately prior to such consolidation, merger or sale, subject to compliance with the other provisions of this Indenture, such Security and such supplemental indenture. Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in such Security. The above provisions of this Section shall similarly apply to successive consolidations, mergers or sales. It is expressly agreed and understood that anything in this Indenture to the contrary notwithstanding, if, pursuant to such merger, consolidation or sale, holders of outstanding shares of Common Stock of the Company do not receive shares of common stock of the surviving corporation but receive other securities, cash or other property or any combination thereof, Holders of Securities shall not have the right to thereafter convert their Securities into common stock of the surviving corporation or the corporation which shall have acquired such assets, but rather, shall have the right upon such conversion to receive the other securities, cash or other property receivable by a holder of the number of shares of Common Stock of the Company into which the Securities held by such holder might have been converted immediately prior to such consolidation, merger or sale, all as more fully provided in the first sentence of this Section 1409. Anything in this Section 1409 to the contrary notwithstanding, the provisions of this Section 1409 shall not apply to a merger or consolidation of another corporation with or into the Company pursuant to which both of the following conditions are applicable: (i) the Company is the surviving corporation and (ii) the

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outstanding shares of Common Stock of the Company are not changed or converted into any other securities or property (including cash) or changed in number or character or reclassified pursuant to the terms of such merger or consolidation.

As evidence of the kind and amount of shares of stock or other securities or property (including cash) into which Securities may properly be convertible after any such consolidation, merger or sale, or as to the appropriate adjustments of the conversion prices applicable with respect thereto, the Trustee shall be furnished with and may accept the certificate or opinion of an independent certified public accountant with respect thereto; and, in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely thereon, and shall not be responsible or accountable to any Holder of Securities for any provision in conformity therewith or approved by such independent certified accountant which may be contained in said supplemental indenture.

SECTION 1410. Duties of Trustee Regarding Conversion.

Neither the Trustee nor any conversion agent shall at any time be under any duty or responsibility to any Holder of Securities of any series that is convertible into Common Stock of the Company to determine whether any facts exist which may require any adjustment of the conversion price, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, whether herein or in any supplemental indenture, any resolutions of the Board of Directors or written instrument executed by one or more officers of the Company provided to be employed in making the same. Neither the Trustee nor any conversion agent shall be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock of the Company, or of any securities or property, which may at any time be issued or delivered upon the conversion of any Securities and neither the Trustee nor any conversion agent makes any representation with respect thereto. Subject to the provisions of Section 601, neither the Trustee nor any conversion agent shall be responsible for any failure of the Company to issue, transfer or deliver any shares of its Common Stock or stock certificates or other securities or property upon the surrender of any Security for the purpose of conversion or to comply with any of the covenants of the Company contained in this Article Fourteen or in the applicable supplemental indenture, resolutions of the Board of Directors or written instrument executed by one or more duly authorized officers of the Company.

SECTION 1411. Repayment of Certain Funds Upon Conversion.

Any funds which at any time shall have been deposited by the Company or on its behalf with the Trustee or any other paying agent for the purpose of paying the principal of, and premium, if any, and interest, if any, on any of the Securities (including, but not limited to, funds deposited for the sinking fund referred to in Article Twelve hereof and funds deposited pursuant to Article Thirteen hereof) and which shall not be required for such purposes because of the conversion of such Securities as provided in this Article Fourteen shall after such conversion be repaid to the Company by the Trustee upon the Company’s written request.

This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written.

	THE PMI GROUP, INC.
	By	/s/ Donald P. Lofe, Jr.
		Name: Donald P. Lofe, Jr.
		Title: Executive Vice President and Chief Financial Officer
Attest:
/s/ Victor J. Bacigalupi
Authorized Officer
	THE BANK OF NEW YORK, as Trustee
	By	/s/ Michael Pitfick
		Michael Pitfick
		Assistant Vice President

-69-

EX-10.31

Exhibit 10.31

THE PMI GROUP, INC.

AND

THE BANK OF NEW YORK,

as Trustee

SUPPLEMENTAL INDENTURE NO. 1

Dated as of November 3, 2003

THIS SUPPLEMENTAL INDENTURE No. 1 (this “Supplemental Indenture”), dated as of November 3, 2003, is between THE PMI GROUP, INC., a Delaware corporation (the “Company”), and The Bank of New York, as Trustee (the “Trustee”).

R E C I T A L S

WHEREAS, the Company has heretofore executed and delivered to the Trustee an Indenture dated as of November 3, 2003 (the “Base Indenture” and together with this Supplemental Indenture, the “Indenture”), providing for the issuance from time to time of series of the Company’s Securities (as defined in the Base Indenture);

WHEREAS, Section 901(7) of the Base Indenture provides for the Company and the Trustee to enter into an indenture supplemental to the Base Indenture to establish the form or terms of Securities of any series as permitted by Section 301 of the Base Indenture;

WHEREAS, pursuant to Section 301 of the Base Indenture, the Company wishes to provide for the issuance of a new series of Securities to be known as its 3.0 % Senior Notes due November 15, 2008 (the “Senior Notes”), the form and terms of such Senior Notes and the terms, provisions and conditions thereof to be set forth as provided in this Supplemental Indenture;

WHEREAS, the Company has requested that the Trustee execute and deliver this Supplemental Indenture and all requirements necessary to make this Supplemental Indenture a valid, binding and enforceable instrument in accordance with its terms, and to make the Senior Notes, when executed by the Company and authenticated and delivered by the Trustee, the valid, binding and enforceable obligations of the Company, have been done and performed, and the execution and delivery of this Supplemental Indenture has been duly authorized in all respects.

NOW, THEREFORE, in consideration of the covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

ARTICLE 1

DEFINITIONS

Section 1.01 Relation to Base Indenture. This Supplemental Indenture constitutes an integral part of the Base Indenture.

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Section 1.02. Definition Of Terms. For all purposes of this Supplemental Indenture:

(a) Capitalized terms used herein without definition shall have the meanings specified in the Base Indenture, or, if not defined in the Base Indenture, in the Purchase Contract Agreement, the Pledge Agreement or the Remarketing Agreement, as applicable;

(b) a term defined anywhere in this Supplemental Indenture has the same meaning throughout;

(c) the singular includes the plural and vice versa;

(d) headings are for convenience of reference only and do not affect interpretation;

(e) the following terms have the meanings given to them in this Article 1:

“Accounting Event” means the receipt by the audit committee of the board of directors of the Company of a written report in accordance with Statement on Auditing Standards (“SAS”) No. 97, “Amendment to SAS No. 50 – Reports on the Application of Accounting Principles”, from the Company’s independent auditors, provided at the request of the management of the Company, to the effect that, as a result of a change in accounting rules after the date hereof, the Company must either (i) account for all or any portion of the Purchase Contracts as derivatives under SFAS 133 (or otherwise mark-to-market or measure at fair value all or any portion of the Purchase Contracts, with changes appearing in the Company’s income statement) or (ii) account for the Units using the if-converted method under SFAS 128, and that such accounting treatment will cease to apply upon redemption of the Senior Notes.

“Applicable Principal Amount” means the aggregate principal amount of the Senior Notes that are part of Corporate Units on the Special Event Redemption Date.

“Business Day” shall have the meaning specified in the Purchase Contract Agreement.

“Corporate Units” shall have the meaning specified in the Purchase Contract Agreement.

“Coupon Rate” shall have the meaning set forth in Section 2.05(a).

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“Depositary” means a clearing agency registered under Section 17A of the Securities Exchange Act of 1934, as amended, that is designated to act as Depositary for the Corporate Units pursuant to the Purchase Contract Agreement.

“Depositary Participant” means a broker, dealer, bank, other financial institution or other Person for whom from time to time the Depositary effects book entry transfers and pledges of securities deposited with the Depositary.

“Final Remarketing Price” shall have the meaning set forth in Section 8.02(b).

“Global Senior Notes” shall have the meaning set forth in Section 2.04.

“Interest Payment Date” shall have the meaning set forth in Section 2.05(b).

“Maturity Date” shall have the meaning specified in Section 2.02.

“Pledge Agreement” means the Pledge Agreement, dated as of the date hereof among the Company, The Bank of New York, as Collateral Agent, Custodial Agent and Securities Intermediary, and The Bank of New York, as Purchase Contract Agent and attorney-in-fact for the Holders of the Purchase Contracts, as amended from time to time.

“Purchase Contract Agreement” means the Purchase Contract Agreement, dated as of the date hereof, between the Company and The Bank of New York, as purchase contract agent, as amended from time to time.

“Purchase Contracts” and “Purchase Contract” shall have their respective meanings specified in the Purchase Contract Agreement.

“Purchase Contract Settlement Date” means November 15, 2006.

“Put Price” shall have the meaning set forth in Section 8.05(a).

“Put Right” shall have the meaning set forth in Section 8.05(a).

“Quotation Agent” means any primary U.S. government securities dealer selected by the Company.

“Record Date” means, with respect to any Interest Payment Date for the Senior Notes, the first Business Day of the calendar month in which such Interest Payment Date falls; provided that the Company may, at its option, select any other day as the Record Date for any Interest Payment Date so long as such Record Date selected is more than one Business Day but less than sixty Business Days prior to such Interest Payment Date.

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“Redemption Amount” means, for each Senior Note, the product of the principal amount of such Senior Note and a fraction, the numerator of which is the Treasury Portfolio Purchase Price and the denominator of which is the Applicable Principal Amount.

“Redemption Price” shall mean, for each Senior Note, the Redemption Amount plus any accrued and unpaid interest on such Senior Note to but excluding the Special Event Redemption Date.

“Remarketed Senior Notes” shall have the meaning set forth in Section 8.01(c).

“Remarketing Agent” shall have the meaning set forth in the Remarketing Agreement.

“Remarketing Agreement” means the Remarketing Agreement, dated as of November 3, 2003, among the Company, Banc of America Securities LLC and The Bank of New York, as Purchase Contract Agent, as amended from time to time.

“Remarketing Price” shall have the meaning set forth in Section 8.02(a).

“Reset Effective Date” means the date three Business Days following the date of a Successful Remarketing pursuant to which the Coupon Rate is reset to a Reset Rate.

“Reset Rate” means the interest rate per annum on the Senior Notes (i) in the case of a Successful Remarketing prior to the Final Remarketing Date, as determined by the Remarketing Agent as necessary to remarket the Remarketed Senior Notes at a price per Remarketed Senior Note such that the aggregate price for the Remarketed Senior Notes is equal to approximately 100.25% of the sum of the Treasury Portfolio Purchase Price and the Separate Senior Notes Purchase Price, and (ii) in the case of a Successful Remarketing on the Final Remarketing Date, as the rate necessary to remarket the Remarketed Senior Notes at a price per Remarketed Senior Note such that the aggregate price for the Remarketed Senior Notes is equal to approximately 100.25% of the aggregate principal amount of the Remarketed Senior Notes; provided that if there are no Corporate Units outstanding and none of the Holders elect to have Separate Senior Notes held by them remarketed, or in the case of a Failed Remarketing, the interest rate payable on the Senior Notes will not be reset and the interest rate payable on the Senior Notes shall continue to be the Coupon Rate.

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“Separate Senior Notes” means Senior Notes that are no longer a component of Corporate Units.

“Special Event” shall mean either a Tax Event or an Accounting Event.

“Special Event Redemption” means the redemption of the Senior Notes pursuant to the terms hereof following the occurrence of a Special Event.

“Special Event Redemption Date” shall have the meaning set forth in Section 3.01.

“Tax Event” means the receipt by the Company of an opinion of counsel, rendered by a law firm having a recognized national tax practice, to the effect that, as a result of any amendment to, change in or announced proposed change in the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative decision, pronouncement, judicial decision or action interpreting or applying such laws or regulations, which amendment or change is effective or which proposed change, pronouncement, action or decision is announced on or after the date hereof, there is more than an insubstantial increase in the risk that interest payable by the Company on the Senior Notes is not, or within 90 days of the date of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes.

“Treasury Portfolio” means a portfolio of (1) U.S. treasury securities (or principal or interest strips thereof) that mature on or prior to November 15, 2006 in an aggregate amount at maturity equal to the Applicable Principal Amount, and (2) (x) in the case of a Successful Remarketing prior to the Final Remarketing Date, for the scheduled Interest Payment Date on the Purchase Contract Settlement Date, U.S. treasury securities (or principal or interest strips thereof) that mature on or prior to November 15, 2006 in an aggregate amount at maturity equal to the aggregate interest payment (assuming no reset of the interest rate) that would have been due on the Purchase Contract Settlement Date on the Applicable Principal Amount, and (y) in the case of a Special Event Redemption, for each scheduled Interest Payment Date that occurs after the Special Event Redemption Date to and including the Purchase Contract Settlement Date, U.S. treasury securities (or principal or interest strips thereof) that mature on or prior to the business day immediately preceding such scheduled Interest Payment Date in an aggregate amount equal to the aggregate interest payment (assuming no reset of the interest rate) that would have been due on such scheduled Interest Payment Date on the Applicable Principal Amount.

“Treasury Portfolio Purchase Price” means the lowest aggregate ask-side price quoted by a Primary Treasury Dealer to the Quotation Agent between

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9:00 a.m. and 11:00 a.m., New York City time, (i) in the case of a Special Event Redemption, on the third Business Day immediately preceding the Special Event Redemption Date for the purchase of the applicable Treasury Portfolio for settlement on the Special Event Redemption Date, and (ii) in the case of a Successful Remarketing prior to the Final Remarketing Date, on the date of such Successful Remarketing for the purchase of the applicable Treasury Portfolio for settlement on the third Business Day immediately following the date of such Successful Remarketing.

The terms “Company,” “Trustee,” “Indenture,” “Base Indenture” and “Senior Notes” shall have the respective meanings set forth in the recitals to this Supplemental Indenture and the paragraph preceding such recitals.

ARTICLE 2

GENERAL TERMS AND CONDITIONS OF THE SENIOR NOTES

Section 2.01. Designation and Principal Amount. There is hereby authorized a series of Securities designated as 3.0% Senior Notes due November 15, 2008 limited in aggregate principal amount $345,000,000. The Senior Notes may be issued from time to time upon written order of the Company for the authentication and delivery of Senior Notes pursuant to Section 303 of the Base Indenture.

Section 2.02. Maturity. Unless a Special Event Redemption occurs prior to the Maturity Date (defined below), the date upon which the Senior Notes shall become due and payable at final maturity, together with any accrued and unpaid interest, is November 15, 2008 (the “Maturity Date”).

Section 2.03. Form, Payment and Appointment. Except as provided in Section 2.04, the Senior Notes shall be issued in fully registered, certificated form, bearing identical terms. Principal of and interest on the Senior Notes will be payable, the transfer of such Senior Notes will be registrable, and such Senior Notes will be exchangeable for Senior Notes of a like aggregate principal amount bearing identical terms and provisions, at the office or agency of the Company maintained for such purpose in the Borough of Manhattan, the City of New York, which shall initially be the Corporate Trust Office of the Trustee; provided, however, that payment of interest may be made at the option of the Company by check mailed to the Holder at such address as shall appear in the Security Register or by wire transfer to an account appropriately designated by the Holder entitled to payment.

No service charge shall be made for any registration of transfer or exchange of the Senior Notes, but the Company may require payment from the Holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith.

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The Security Registrar and Paying Agent for the Senior Notes shall initially be the Trustee.

The Senior Notes shall be issuable in denominations of $25 and integral multiples of $25 in excess thereof.

Section 2.04. Global Senior Notes. Senior Notes that are no longer a component of the Corporate Units and are released from the Collateral Account (as defined in the Pledge Agreement) will be issued in permanent global form (a “Global Senior Note”), and if issued as one or more Global Senior Notes, the Depositary shall be The Depository Trust Company or such other depositary as any officer of the Company may from time to time designate. Upon the creation of Treasury Units or the recreation of Corporate Units, an appropriate annotation shall be made on the Schedule of Increases and Decreases on the Global Senior Notes held by the Depositary. Unless and until such Global Senior Note is exchanged for Senior Notes in certificated form, Global Senior Notes may be transferred, in whole but not in part, and any payments on the Senior Notes shall be made, only to the Depositary or a nominee of the Depositary, or to a successor Depositary selected or approved by the Company or to a nominee of such successor Depositary.

Section 2.05. Interest. (a) The Senior Notes will bear interest initially at the rate of 3.0% per year (the “Coupon Rate”) from the original date of issuance through and including the earlier of (i) the Maturity Date and (ii) the day immediately preceding any Reset Effective Date. In the event of a Successful Remarketing of the Senior Notes, the Coupon Rate will be reset by the Remarketing Agent at the appropriate Reset Rate with effect from the related Reset Effective Date, as set forth under Section 8.03. If the Coupon Rate is so reset, the Senior Notes will bear interest at the Reset Rate from the related Reset Effective Date until the principal thereof and interest thereon is paid or duly made available for payment and shall bear interest, to the extent permitted by law, compounded quarterly, on any overdue principal and payment of interest at the Coupon Rate through and including the day immediately preceding the Reset Effective Date and at the Reset Rate thereafter.

(b) Interest on the Senior Notes shall be payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year (each, an “Interest Payment Date”), commencing February 15, 2004, to the Person in whose name such Senior Note, or any predecessor Senior Note, is registered at the close of business on the Record Date for such Interest Payment Date. Interest on the Senior Notes shall accrue from November 3, 2003.

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(c) The amount of interest payable for any full quarterly period will be computed on the basis of a 360-day year consisting of twelve 30-day months. The amount of interest payable for any period shorter than a full quarterly period for which interest is computed will be computed on the basis of a 30-day month and, for any period less than a month, on the basis of the actual number of days elapsed per 30-day month. In the event that any scheduled Interest Payment Date falls on a day that is not a Business Day, then payment of interest payable on such Interest Payment Date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next calendar year, then such payment will be made on the preceding Business Day.

Section 2.06. No Defeasance. The provisions of Article 13 of the Base Indenture shall not apply to the Senior Notes.

Section 2.07. No Sinking Fund. The provisions of Article 12 of the Base Indenture shall not apply to the Senior Notes and the Senior Notes are not entitled to the benefit of any sinking fund.

Section 2.08. No Conversion. The provisions of Article 14 of the Base Indenture shall not apply to the Senior Notes.

ARTICLE 3

REDEMPTION OF THE SENIOR NOTES

Section 3.01. Special Event Redemption. If a Special Event shall occur and be continuing, the Company may, at its option, redeem the Senior Notes in whole, but not in part, on any Interest Payment Date prior to the earlier of the date of a Successful Remarketing or the Purchase Contract Settlement Date, at a price per Senior Note equal to the Redemption Price, payable on the date of redemption (the “Special Event Redemption Date”) to the Holders of the Senior Notes registered at the close of business on the Record Date for such Interest Payment Date. If the Company so elects to redeem the Senior Notes, the Company shall appoint the Quotation Agent to assist the Company in determining the Treasury Portfolio Purchase Price. Notice of any Special Event Redemption will be mailed by the Company (with a copy to the Trustee) at least 30 days but not more than 60 days before the Special Event Redemption Date to each registered Holder of the Senior Notes at its registered address. In addition, the Company shall notify the Collateral Agent in writing that a Special Event has occurred and that the Company intends to redeem the Senior Notes on the Special Event Redemption Date. Unless the Company defaults in the payment of the Redemption Price, on and after the Special Event Redemption Date, (a) interest shall cease to accrue on

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the Senior Notes, (b) the Senior Notes shall become due and payable at the Redemption Price, and (c) the Senior Notes shall be void and all rights of the Holders in respect of the Senior Notes shall terminate and lapse (other than the right to receive the Redemption Price upon surrender of such Senior Notes but without interest on such Redemption Price). Following the notice of a Special Event Redemption, neither the Company nor the Trustee shall be required to register the transfer of or exchange the Senior Notes to be redeemed.

Section 3.02. Redemption Procedures. On or prior to 10:00 a.m. New York City time on the Special Event Redemption Date, the Company shall deposit with the Trustee immediately available funds in an amount sufficient to pay, on the Special Event Redemption Date, the aggregate Redemption Price for all outstanding Senior Notes. In exchange for any Senior Notes surrendered for redemption on or after the Special Event Redemption Date, the Trustee shall pay an amount equal to the Redemption Price (a) to the Collateral Agent, in the case of Senior Notes that are included in Corporate Units, which amount shall be applied by the Collateral Agent in accordance with the terms of the Pledge Agreement, and (b) to the holders of the Separate Senior Notes, in the case of Separate Senior Notes.

ARTICLE 4

FORM OF SENIOR NOTE

Section 4.01. Form of Senior Note. The Senior Notes and the Trustee’s Certificate of Authentication to be endorsed thereon are to be substantially in the forms attached as Exhibit A hereto, with such changes therein as the officers of the Company executing the Senior Notes (by manual or facsimile signature) may approve, such approval to be conclusively evidenced by their execution thereof.

ARTICLE 5

ORIGINAL ISSUE OF SENIOR NOTES

Section 5.01. Original Issue of Senior Notes. Senior Notes in the aggregate principal amount of $345,000,000 may from time to time, upon execution of this Supplemental Indenture, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Senior Notes to or upon the written order of the Company pursuant to Section 303 of the Base Indenture without any further action by the Company (other than as required by the Base Indenture).

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ARTICLE 6

ORIGINAL ISSUE DISCOUNT

Section 6.01. Original Issue Discount. The Company shall file with the Trustee promptly at the end of each calendar year (i) a written notice specifying the amount of original issue discount (including daily rates and accrual periods) accrued on Senior Notes that are Outstanding as of the end of the year and (ii) such other specific information relating to such original issue discount as may then be relevant under the Internal Revenue Code of 1986, as amended from time to time.

ARTICLE 7

MISCELLANEOUS

Section 7.01. Ratification of Indenture. The Indenture, as supplemented by this Supplemental Indenture, is in all respects ratified and confirmed, and this Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided.

Section 7.02. Trustee not Responsible for Recitals. The recitals herein contained are made by the Company and not by the Trustee, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representation as to the validity or sufficiency of this Supplemental Indenture.

Section 7.03. New York Law to Govern. THIS SUPPLEMENTAL INDENTURE AND EACH SENIOR NOTE SHALL BE DEEMED TO BE CONTRACTS MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF.

Section 7.04. Separability. In case any one or more of the provisions contained in this Supplemental Indenture or in the Senior Notes shall for any reason be held to be invalid, illegal or unenforceable in any respect, then, to the extent permitted by law, such invalidity, illegality or unenforceability shall not affect any other provisions of this Supplemental Indenture or of the Senior Notes, but this Supplemental Indenture and the Senior Notes shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein.

Section 7.05. Counterparts. This Supplemental Indenture may be executed in any number of counterparts each of which shall be an original, but such counterparts shall together constitute but one and the same instrument.

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ARTICLE 8

REMARKETING

Section 8.01. Remarketing Procedures. (a) Unless a Special Event Redemption or a Successful Remarketing has occurred prior to the applicable Remarketing Date, the Company shall engage the Remarketing Agent pursuant to the Remarketing Agreement for the Remarketing of the Senior Notes. The Company will request, not later than seven nor more than 15 calendar days prior to the applicable Remarketing Date, that the Depositary or its nominee notify the Beneficial Owners or Depositary Participants holding Separate Senior Notes, Corporate Units and Treasury Units of the procedures to be followed in the applicable Remarketing.

(b) Each Holder of Separate Senior Notes may elect to have Separate Senior Notes held by such Holder remarketed in any Remarketing. A Holder making such an election must, pursuant to the Pledge Agreement, notify the Custodial Agent and deliver such Separate Senior Notes to the Custodial Agent on or prior to 5:00 p.m. (New York City time) on or prior to the fifth Business Day immediately preceding the applicable Remarketing Date (but no earlier than the Interest Payment Date immediately preceding the applicable Remarketing Date). Any such notice and delivery may not be conditioned upon the level at which the Reset Rate is established in the Remarketing. Any such notice and delivery may be withdrawn on or prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the applicable Remarketing Date in accordance with the provisions set forth in the Pledge Agreement. Any such notice and delivery not withdrawn by such time will be irrevocable with respect to such Remarketing. Pursuant to Section 5.07(c) of the Pledge Agreement, promptly after 11:00 a.m., New York City time, on the Business Day immediately preceding the applicable Remarketing Date, the Custodial Agent, based on the notices and deliveries received by it prior to such time, shall notify the Remarketing Agent of the principal amount of Separate Senior Notes to be tendered for remarketing and shall cause such Separate Senior Notes to be presented to the Remarketing Agent. Under Section 5.02 of the Purchase Contract Agreement, Senior Notes that are components of Corporate Units will be deemed tendered for Remarketing and will be remarketed in accordance with the terms of the Remarketing Agreement.

(c) The right of each Holder of Senior Notes that are included in Corporate Units to have such Senior Notes, and each Holder of Separate Senior Notes to have any Separate Senior Notes (together, the “Remarketed Senior Notes”), remarketed and sold on any Remarketing Date shall be limited to the extent that (i) the Remarketing Agent conducts a Remarketing pursuant to the terms of the Remarketing Agreement, (ii) a Special Event Redemption has not occurred prior to such Remarketing Date, (iii) the Remarketing Agent is able to

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find a purchaser or purchasers for Remarketed Senior Notes at the Remarketing Price or the Final Remarketing Price, as the case may be, and (iv) the purchaser or purchasers deliver the purchase price therefor to the Remarketing Agent as and when required.

(d) Neither the Trustee, the Company nor the Remarketing Agent shall be obligated in any case to provide funds to make payment upon tender of Senior Notes for remarketing.

Section 8.02. Remarketing. (a) Unless a Special Event Redemption has occurred prior to the Initial Remarketing Date, on the Initial Remarketing Date, the Remarketing Agent shall, pursuant and subject to the terms of the Remarketing Agreement, use commercially reasonable efforts to remarket the Remarketed Senior Notes at a price (the “Remarketing Price”) equal to approximately 100.25% of the sum of the Treasury Portfolio Purchase Price and the Separate Senior Note Purchase Price.

(b) In the case of a Failed Initial Remarketing and unless a Special Event Redemption has occurred prior to the Final Remarketing Date, on the Final Remarketing Date, the Remarketing Agent shall use commercially reasonable efforts to remarket the Remarketed Senior Notes at a price (the “Final Remarketing Price”) equal to approximately 100.25% of the aggregate principal amount of the Remarketed Senior Notes. It is understood and agreed that Remarketing on any Remarketing Date will be considered successful and no further attempts will be made if the resulting proceeds are at least 100% of the sum of the Treasury Portfolio Purchase Price and the Separate Senior Note Purchase Price, and 100% of the aggregate principal amount of the Remarketed Senior Notes in the case of the Final Remarketing.

Section 8.03. Reset Rate. (a) In connection with each Remarketing, the Remarketing Agent shall determine, in consultation with the Company, the Reset Rate (rounded to the nearest one-thousandth (0.001) of one percent per annum) that the Remarketed Senior Notes should bear in order to have an aggregate market value equal to the Remarketing Price or the Final Remarketing Price, as the case may be, and that in the sole discretion of the Remarketing Agent will enable it to remarket all of the Remarketed Senior Notes at the Remarketing Price or Final Remarketing Price, as the case may be, in such Remarketing.

(b) Anything herein to the contrary notwithstanding, the Remarketing Agent shall have no obligation to determine whether there is any limitation under applicable law on the Reset Rate or, if there is any such limitation, the maximum permissible Reset Rate on the Senior Notes and shall rely solely upon written notice from the Company (which the Company agrees to provide prior to the eighth Business Day before the Initial Remarketing Date) as to whether or not there is any such limitation in any applicable jurisdiction.

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(c) In the event of a Failed Remarketing or if no Senior Notes are included in Corporate Units and none of the holders of the Separate Senior Notes elect to have their Senior Notes remarketed in any Remarketing, the applicable interest rate on the Senior Notes will not be reset and will continue to be the Coupon Rate.

(d) In the event of a Successful Remarketing, the Coupon Rate shall be reset at the Reset Rate as determined by the Remarketing Agent under the Remarketing Agreement.

Section 8.04. Failed Remarketing. (a) If, by 4:00 p.m. (New York City time) on any Remarketing Date, the Remarketing Agent is unable to remarket all of the Remarketed Senior Notes at the Remarketing Price or the Final Remarketing Price, as the case may be, pursuant to the terms and conditions hereof, a Failed Remarketing shall be deemed to have occurred, and the Remarketing Agent shall so advise by telephone the Depositary, the Purchase Contract Agent and the Company. Whether or not there has been a Failed Remarketing will be determined in the sole reasonable discretion of the Remarketing Agent. Promptly following any Failed Remarketing, the Remarketing Agent shall return Separate Senior Notes submitted for remarketing, if any, to the Custodial Agent for distribution to the appropriate Holders.

(b) The Company shall cause a notice of such Failed Remarketing to be published in a daily newspaper in the English language of general circulation in the City of New York, which is expected to be The Wall Street Journal.

Section 8.05. Put Right. (a) Subject to paragraph (b) hereof, if there has not been a Successful Remarketing prior to the Purchase Contract Settlement Date, Holders of Separate Senior Notes and Holders of Senior Notes that are a component of Corporate Units will, subject to this Section 8.05, have the right (the “Put Right”) to require the Company to purchase their Senior Notes, on the Purchase Contract Settlement Date, at a price per Senior Note equal to $25.00 plus accrued and unpaid interest to but excluding the Purchase Contract Settlement Date (the “Put Price”).

(b) The Put Right of Holders of Senior Notes that are part of Corporate Units will be automatically exercised unless such Holders (1) prior to 11:00 a.m., New York City time, on the second Business Day immediately preceding the Purchase Contract Settlement Date, provide written notice to the Purchase Contract Agent of their intention to settle the related Purchase Contract with separate cash, and (2) on or prior to 5:00 p.m., New York City time, on the

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Business Day immediately preceding the Purchase Contract Settlement Date, deliver to the Collateral Agent $25 in cash per Purchase Contract, in each case pursuant to the Purchase Contract Agreement and such Holders shall be deemed to have elected to pay the Purchase Price for the shares of Common Stock to be issued under the related Purchase Contract from a portion of the Proceeds of the Put Right of such Senior Notes equal to the Purchase Price in full satisfaction of such Holders’ obligations under the Purchase Contracts, and any remaining amount of the Put Price following satisfaction of the related Purchase Contract will be paid to such Holder

(c) The Put Right of a Holder of a Separate Senior Note shall only be exercisable upon delivery of a notice to the Trustee by such Holder on or prior to the second Business Day prior to the Purchase Contract Settlement Date. On or prior to the Purchase Contract Settlement Date, the Company shall deposit with the Trustee immediately available funds in an amount sufficient to pay, on the Purchase Contract Settlement Date, the aggregate Put Price of all Separate Senior Notes with respect to which a Holder has exercised a Put Right. In exchange for any Separate Senior Notes surrendered pursuant to the Put Right, the Trustee shall then distribute such amount to the Holders of such Separate Senior Notes.

Section 8.06. Additional Event of Default. In addition to the events listed as Events of Default in Section 501 of the Base Indenture, it shall be an additional Event of Default with respect to the Senior Notes, if the Company shall not have satisfied its obligation to pay the Put Price when due with respect to any Separate Senior Note following exercise of the Put Right in accordance with Section 8.05.

ARTICLE 9

TAX TREATMENT

Section 9.01. Tax Treatment. The Company agrees, and by acceptance of a Corporate Unit, each holder of a Corporate Unit will be deemed to have agreed (1) for United States federal, state and local income and franchise tax purposes to treat the acquisition of a Corporate Unit as the acquisition of the Senior Note and the Purchase Contract constituting the Corporate Unit and (2) to treat the Senior Note as indebtedness for United States federal, state and local income and franchise tax purposes. A Holder of Senior Notes may obtain the comparable yield and projected payment schedule for the Senior Notes, determined by the Company pursuant to Treas. Reg. Sec. 1.1275-4, by submitting a written request for such information to the Company at the following address: The PMI Group, Inc., 3003 Oak Road, Walnut Creek, California 94597, Attention: Treasurer.

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IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, as of the day and year first written above.

THE PMI GROUP, INC.
By:	/s/ Donald P. Lofe, Jr.
	Name:	Donald P. Lofe, Jr.
	Title:	Executive Vice President and Chief Financial Officer

Attest:
/s/ Victor J. Bacigalupi
Name:	Victor J. Bacigalupi
Title:	Senior Executive Vice President, General Counsel and Secretary

THE BANK OF NEW YORK, as Trustee
By:	/s/ Michael Pitfick
	Name:	Michael Pitfick
	Title:	Assistant Vice President

EXHIBIT A

IF THIS SENIOR NOTE IS TO BE A GLOBAL SECURITY, INSERT:

THIS SENIOR NOTE IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY OR A NOMINEE OF THE DEPOSITORY TRUST COMPANY. THIS SENIOR NOTE IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY TRUST COMPANY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TRUST COMPANY TO A NOMINEE OF THE DEPOSITORY TRUST COMPANY OR BY A NOMINEE OF THE DEPOSITORY TRUST COMPANY TO THE DEPOSITORY TRUST COMPANY OR ANOTHER NOMINEE OF THE DEPOSITORY TRUST COMPANY.

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

THE PMI GROUP, INC.

3.0% Senior Notes due November 15, 2008	No.
$	CUSIP No. 69344M 30 9

THE PMI GROUP, INC., a corporation organized and existing under the laws of Delaware (hereinafter called the “Company”, which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to                    , or registered assigns, the principal sum of up to Three Hundred Forty-Five Million Dollars ($345,000,000), as set forth in the Schedule of Increases or Decreases In Senior Note attached hereto, on November 15, 2008 (such date is hereinafter referred to as the “Maturity Date”), and to pay

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interest thereon from November 3, 2003 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, commencing February 15, 2004, at the rate of 3.0% per annum through and including the day immediately preceding the Reset Effective Date, if any, and thereafter at the Reset Rate, if any, on the basis of a 360-day year consisting of twelve 30-day months, until the principal hereof is paid or duly provided for or made available for payment, and (to the extent that the payment of such interest shall be legally enforceable) to pay interest, compounded quarterly, at the rate of 3.0% per annum on any overdue principal and payment of interest through and including the day immediately preceding the Reset Effective Date, if any, and thereafter at the Reset Rate, if any. The amount of interest payable for any period shorter than a full quarterly period for which interest is computed will be computed on the basis of a 30-day month and, for any period less than a month, on the basis of the actual number of days elapsed per 30-day month. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Senior Note (or one or more Predecessor Senior Notes) is registered at the close of business on the Record Date for such Interest Payment Date.

Payment of the principal of and interest on this Senior Note will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, the City of New York, which shall initially be the Corporate Trust Office of the Trustee, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the Holder at such address as shall appear in the Security Register or by wire transfer to an account appropriately designated by the Holder entitled to payment.

Reference is hereby made to the further provisions of this Senior Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Senior Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.

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IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.

Dated:

THE PMI GROUP, INC.
By:
	Name:
	Title:

Attest:
By:
	Name:
	Title:

TRUSTEE’S CERTIFICATE OF AUTHENTICATION

This is one of the Senior Notes referred to in the within mentioned Indenture.

Dated:
THE BANK OF NEW YORK, as Trustee
By:
	Authorized Signatory

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FORM OF REVERSE OF SENIOR NOTE

This Senior Note is one of a duly authorized issue of securities of the Company (herein called the “Senior Notes”), issued and to be issued in one or more series under an Indenture, dated as of November 3, 2003, between the Company and The Bank of New York, as Trustee, (herein called the “Trustee”, which term includes any successor trustee) (the “Base Indenture”), as supplemented by the Supplemental Indenture No. 1 between the Company and the Trustee (the “Supplemental Indenture” and together with the Base Indenture, the “Indenture”), to which Indenture reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Senior Notes and of the terms upon which the Senior Notes are, and are to be, authenticated and delivered. This Senior Note is one of the series designated on the face hereof, limited in aggregate principal amount to $345,000,000.

If a Special Event shall occur and be continuing, the Company may, at its option, redeem the Senior Notes of this series in whole, but not in part, on any Interest Payment Date prior to the earlier of the date of a Successful Remarketing and the Purchase Contract Settlement Date, at a price per Senior Note equal to the Redemption Price as set forth in the Indenture.

If there has not been a Successful Remarketing prior to the Purchase Contract Settlement Date, the holders of Senior Notes will have the right to require the Company to purchase their Senior Notes on the Purchase Contract Settlement Date, all as more fully described in the Supplemental Indenture.

The Senior Notes are not entitled to the benefit of any sinking fund and will not be subject to defeasance.

If an Event of Default with respect to Senior Notes of this series shall occur and be continuing, the principal of the Senior Notes of this series may be declared due and payable in the manner and with the effect provided in the Indenture.

The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Senior Notes at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Senior Notes at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Senior Notes at the time Outstanding, on behalf of the Holders of all Senior Notes, to waive compliance by the Company with certain provisions of

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the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Senior Note shall be conclusive and binding upon such Holder and upon all future Holders of this Senior Note and of any Senior Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Senior Note.

No reference herein to the Indenture and no provision of this Senior Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Senior Note at the times, place and rate, and in the coin or currency, herein prescribed.

As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Senior Note is registrable in the Securities Register, upon surrender of this Senior Note for registration of transfer at the office or agency of the Company in any place where the principal of and interest on this Senior Note are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Securities Registrar duly executed by the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Senior Notes of this series, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.

The Senior Notes of this series are issuable only in registered form without coupons in denominations of $25 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Senior Notes of this series are exchangeable for a like aggregate principal amount of Senior Notes of this series of a different authorized denomination, as requested by the Holder surrendering the same.

No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

Prior to due presentment of this Senior Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Senior Note is registered as the owner hereof for all purposes, whether or not this Senior Note be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.

All terms used in this Senior Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture.

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This Senior Note shall be governed by the laws of New York.

The Company agrees, and by acceptance of a Corporate Unit, each holder of a Corporate Unit will be deemed to have agreed (1) for United States federal, state and local income and franchise tax purposes to treat the acquisition of a Corporate Unit as the acquisition of the Senior Note and the Purchase Contract constituting the Corporate Unit and (2) to treat the Senior Note as indebtedness for United States federal, state and local income and franchise tax purposes. A Holder of Senior Notes may obtain the comparable yield and projected payment schedule for the Senior Notes, determined by the Company pursuant to Treas. Reg. Sec. 1.1275-4, by submitting a written request for it to the Company at the following address: The PMI Group, Inc., 3003 Oak Road, Walnut Creek, California 94597; Attention: Treasurer.

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ASSIGNMENT

FOR VALUE RECEIVED, the undersigned assigns and transfers this Senior Note to:

(Insert assignee’s social security or taxpayer identification number)

(Insert address and zip code of assignee)

and irrevocably appoints

agent to transfer this Senior Note on the books of the Company. The agent may substitute another to act for him or her.

Date:                     

Signature:

Signature Guarantee:

(Sign exactly as your name appears on the other side of this Senior Note)

SIGNATURE GUARANTEE

Signatures must be guaranteed by an “eligible guarantor institution” meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program (“STAMP”) or such other “signature guarantee program” as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.

By:
	Name
	Title:

SCHEDULE OF INCREASES OR DECREASES IN SENIOR NOTE

The following increases or decreases in a part of this Senior Note have been made:

Date Amount of decrease in principal amount of this Senior Note Amount of increase in principal amount of this Senior Note Principal amount of this
Senior Note
following such
decrease (or
increase) Signature of
authorized officer of Trustee

EX-10.32

Exhibit 10.32

THE PMI GROUP, INC.

and

THE BANK OF NEW YORK, as Collateral Agent, Custodial Agent and

Securities Intermediary

and

THE BANK OF NEW YORK, as Purchase Contract Agent

PLEDGE AGREEMENT

Dated as of November 3, 2003

TABLE OF CONTENTS

		PAGE
ARTICLE 1
DEFINITIONS
Section 1.01.	Definitions	1
ARTICLE 2
PLEDGE
Section 2.01.	Pledge	5
Section 2.02.	Control	5
Section 2.03.	Termination	5
ARTICLE 3
DISTRIBUTIONS ON PLEDGED COLLATERAL
Section 3.01.	Income and Distributions	6
Section 3.02.	Principal Payments Following Termination Event	6
Section 3.03.	Principal Payments Prior to or on Purchase Contract Settlement Date.	6
Section 3.04.	Payments to Purchase Contract Agent	7
Section 3.05.	Assets Not Properly Released	7
ARTICLE 4
CONTROL
Section 4.01.	Establishment of Collateral Account	7
Section 4.02.	Treatment as Financial Assets	8
Section 4.03.	Sole Control by Collateral Agent	8
Section 4.04.	Securities Intermediary’s Location	8
Section 4.05.	No Other Claims	8
Section 4.06.	Investment and Release	8
Section 4.07.	Statements and Confirmations	9
Section 4.08.	Tax Allocations	9
Section 4.09.	No Other Agreements	9
Section 4.10.	Powers Coupled with an Interest	9
Section 4.11.	Waiver of Lien; Waiver of Set-off	9

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ARTICLE 5
INITIAL DEPOSIT; CREATION OF TREASURY UNITS AND RECREATION OF CORPORATE UNITS
Section 5.01.	Initial Deposit of Senior Notes.	9
Section 5.02.	Creation of Treasury Units.	10
Section 5.03.	Recreation of Corporate Units.	11
Section 5.04.	Termination Event.	12
Section 5.05.	Cash Settlement.	14
Section 5.06.	Early Settlement and Cash Merger Early Settlement	15
Section 5.07.	Application of Proceeds in Settlement of Purchase Contracts.	16
ARTICLE 6
VOTING RIGHTS — PLEDGED SENIOR NOTES
Section 6.01.	Voting Rights	18
ARTICLE 7
RIGHTS AND REMEDIES
Section 7.01.	Rights and Remedies of the Collateral Agent.	19
Section 7.02.	Special Event Redemption	20
Section 7.03.	Successful Initial Remarketing	20
Section 7.04.	Substitutions	21
ARTICLE 8
REPRESENTATIONS AND WARRANTIES; COVENANTS
Section 8.01.	Representations and Warranties	21
Section 8.02.	Covenants	22
ARTICLE 9
THE COLLATERAL AGENT, THE CUSTODIAL AGENT AND THE SECURITIES INTERMEDIARY
Section 9.01.	Appointment, Powers and Immunities	22
Section 9.02.	Instructions of the Company	23
Section 9.03.	Reliance by Collateral Agent, Custodial Agent and Securities Intermediary	24
Section 9.04.	Certain Rights	24
Section 9.05.	Merger, Conversion, Consolidation or Succession to Business	24
Section 9.06.	Rights in Other Capacities	25
Section 9.07.	Non-reliance on Collateral Agent, the Custodial Agent and Securities Intermediary	25
Section 9.08.	Compensation and Indemnity	25
Section 9.09.	Failure to Act	26

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Section 9.10.	Resignation of Collateral Agent, the Custodial Agent and Securities Intermediary.	27
Section 9.11.	Right to Appoint Agent or Advisor	28
Section 9.12.	Survival	29
Section 9.13.	Exculpation	29
ARTICLE 10
AMENDMENT
Section 10.01.	Amendment Without Consent of Holders	29
Section 10.02.	Amendment with Consent of Holders	29
Section 10.03.	Execution of Amendments	30
Section 10.04.	Effect of Amendments	31
Section 10.05.	Reference of Amendments	31
ARTICLE 11
MISCELLANEOUS
Section 11.01.	No Waiver	31
Section 11.02.	Governing Law; Submission to Jurisdiction	31
Section 11.03.	Notices	32
Section 11.04.	Successors and Assigns	32
Section 11.05.	Counterparts	32
Section 11.06.	Severability	32
Section 11.07.	Expenses, Etc	33
Section 11.08.	Security Interest Absolute	33
Section 11.09.	Notice of Special Event, Special Event Redemption and Termination Event	34

EXHIBITS

Exhibit A	–  Instruction from Purchase Contract Agent to Collateral Agent (Creation of Treasury Units)
Exhibit B	–  Instruction from Collateral Agent to Securities Intermediary (Creation of Treasury Units)
Exhibit C	–  Instruction from Purchase Contract Agent to Collateral Agent (Recreation of Corporate Units)
Exhibit D	–  Instruction from Collateral Agent to Securities Intermediary (Recreation of Corporate Units)
Exhibit E	–  Notice of Cash Settlement from Collateral Agent to Purchase Contract Agent
Exhibit F	–  Instruction to Custodial Agent Regarding Remarketing
Exhibit G	–  Instruction to Custodial Agent Regarding Withdrawal From Remarketing

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PLEDGE AGREEMENT

PLEDGE AGREEMENT dated as of November 3, 2003 among THE PMI GROUP, INC., a Delaware corporation (the “Company”), The Bank of New York, as collateral agent (in such capacity, together with its successors in such capacity, the “Collateral Agent”), as custodial agent (in such capacity, together with its successors in such capacity, the “Custodial Agent”), and as securities intermediary (as defined in Section 8-102(a)(14) of the UCC) with respect to the Collateral Account (in such capacity, together with its successors in such capacity, the “Securities Intermediary”), and The Bank of New York, as purchase contract agent and as attorney-in-fact of the Holders from time to time of the Units (in such capacity, together with its successors in such capacity, the “Purchase Contract Agent”) under the Purchase Contract Agreement.

RECITALS

WHEREAS, the Company and the Purchase Contract Agent are parties to the Purchase Contract Agreement dated as of the date hereof (as modified and supplemented and in effect from time to time, the “Purchase Contract Agreement”), pursuant to which 12,000,000 Corporate Units will be issued.

WHEREAS, each Corporate Unit, at issuance, consists of a unit comprised of (a) a stock purchase contract (a “Purchase Contract”) pursuant to which the Holder will purchase from the Company on the Purchase Contract Settlement Date, for an amount equal to $25 (the “Stated Amount”), a number of shares of the Company’s common stock, par value $0.01 per share (“Common Stock”), equal to the Settlement Rate and (b) a Senior Note.

WHEREAS, pursuant to the terms of the Purchase Contract Agreement and the Purchase Contracts, the Holders of the Units have irrevocably authorized the Purchase Contract Agent, as attorney-in-fact of such Holders, among other things, to execute and deliver this Agreement on behalf of such Holders and to grant the pledge provided herein of the Collateral to secure the Obligations.

NOW, THEREFORE, the Company, the Collateral Agent, the Custodial Agent, the Securities Intermediary and the Purchase Contract Agent agree as follows:

ARTICLE 1

DEFINITIONS

Section 1.01. Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires:

(a) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section, Exhibit or other subdivision;

(b) the following terms which are defined in the UCC shall have the meanings set forth therein: “certificated security,” “control,” “financial asset,” “entitlement order,” “securities account” and “security entitlement”;

(c) capitalized terms used herein and not defined herein have the meanings assigned to them in the Purchase Contract Agreement; and

(d) the following terms have the meanings given to them in this Section 1.01(d):

“Agreement” means this Pledge Agreement, as the same may be amended, modified or supplemented from time to time.

“Cash” means any coin or currency of the United States as at the time shall be legal tender for payment of public and private debts.

“Collateral” means the collective reference to:

(i) the Collateral Account and all investment property and other financial assets from time to time credited to the Collateral Account and all security entitlements with respect thereto, including, without limitation, (A) the Senior Notes and security entitlements relating thereto that are a component of the Corporate Units from time to time, (B) the Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio that are a component of the Corporate Units from time to time, (C) any Treasury Securities and security entitlements relating thereto delivered from time to time upon creation of Treasury Units in accordance with Section 5.02 hereof and (D) payments made by Holders pursuant to Section 5.05 hereof;

(ii) all Proceeds of any of the foregoing (whether such Proceeds arise before or after the commencement of any proceeding under any applicable bankruptcy, insolvency or other similar law, by or against the pledgor or with respect to the pledgor); and

(iii) all powers and rights now owned or hereafter acquired under or with respect to the Collateral.

“Collateral Account” means the securities account of The Bank of New York, as Collateral Agent, maintained by the Securities Intermediary and designated The Bank of New York, as Collateral Agent of The PMI Group, Inc., as pledgee of The Bank of New York, as the Purchase Contract Agent on behalf of and as attorney-in-fact for the Holders”.

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“Company” means the Person named as the “Company” in the first paragraph of this instrument until a successor shall have become such pursuant to the applicable provisions of the Purchase Contract Agreement, and thereafter “Company” shall mean such successor.

“Obligations” means, with respect to each Holder, all obligations and liabilities of such Holder under such Holder’s Purchase Contract, the Purchase Contract Agreement and this Agreement or any other document made, delivered or given in connection herewith or therewith, in each case whether on account of principal, interest (including, without limitation, interest accruing before and after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to such Holder, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Company or the Collateral Agent or the Securities Intermediary that are required to be paid by the Holder pursuant to the terms of any of the foregoing agreements).

“Permitted Investments” means any one of the following, in each case maturing on the Business Day following the date of acquisition:

(1) any evidence of indebtedness with an original maturity of 365 days or less issued, or directly and fully guaranteed or insured, by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support of the timely payment thereof or such indebtedness constitutes a general obligation of it);

(2) deposits, certificates of deposit or acceptances with an original maturity of 365 days or less of any institution which is a member of the Federal Reserve System having combined capital and surplus and undivided profits of not less than $500 million at the time of deposit (and which may include the Collateral Agent);

(3) investments with an original maturity of 365 days or less of any Person that are fully and unconditionally guaranteed by a bank referred to in clause (2);

(4) repurchase agreements and reverse repurchase agreements relating to marketable direct obligations issued or unconditionally guaranteed by the United States of America or issued by any agency thereof and backed as to timely payment by the full faith and credit of the United States of America;

(5) investments in commercial paper, other than commercial paper issued by the Company or its Affiliates, of any corporation incorporated under the laws of the United States or any State thereof,

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which commercial paper has a rating at the time of purchase at least equal to “A-1” by Standard & Poor’s Ratings Services (“S&P”) or at least equal to “P-1” by Moody’s Investors Service, Inc. (“Moody’s”); and

(6) investments in money market funds (including, but not limited to, money market funds managed by the Collateral Agent or an affiliate of the Collateral Agent) registered under the Investment Company Act of 1940, as amended, rated in the highest applicable rating category by S&P or Moody’s.

“Pledge” means the lien and security interest created by this Agreement.

“Pledged Applicable Ownership Interests” means the Holder’s Applicable Ownership Interests (as specified in clause (i) of the definition thereof) in the Treasury Portfolio and security entitlements with respect thereto from time to time credited to the Collateral Account and not then released from the Pledge.

“Pledged Senior Notes” means Senior Notes and security entitlements with respect thereto from time to time credited to the Collateral Account and not then released from the Pledge.

“Pledged Securities” means the Pledged Senior Notes, the Pledged Applicable Ownership Interests and the Pledged Treasury Securities, collectively.

“Pledged Treasury Securities” means Treasury Securities and security entitlements with respect thereto from time to time credited to the Collateral Account and not then released from the Pledge.

“Proceeds” has the meaning ascribed thereto in the UCC and includes, without limitation, all interest, dividends, cash, instruments, securities, financial assets and other property received, receivable or otherwise distributed upon the sale (including, without limitation, the Remarketing), exchange, collection or disposition of any financial assets from time to time held in the Collateral Account.

“Purchase Contract Agent” has the meaning specified in the paragraph preceding the recitals of this Agreement.

“TRADES” means the Treasury/Reserve Automated Debt Entry System maintained by the Federal Reserve Bank of New York pursuant to the TRADES Regulations.

“TRADES Regulations” means the regulations of the United States Department of the Treasury, published at 31 C.F.R. Part 357, as amended from time to time. Unless otherwise defined herein, all terms defined in the TRADES Regulations are used herein as therein defined.

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“Transfer” means (i) in the case of certificated securities in registered form, delivery as provided in ‘8-301(a) of the UCC, endorsed to the transferee or in blank by an effective endorsement, (ii) in the case of Treasury Securities, registration of the transferee as the owner of such Treasury Securities on TRADES and (iii) in the case of security entitlements, including, without limitation, security entitlements with respect to Treasury Securities, a securities intermediary indicating by book entry that such security entitlement has been credited to the transferee’s securities account.

“Treasury Securities” means zero-coupon U.S. treasury securities that mature on November 15, 2006 (CUSIP No. 912820GQ4).

“UCC” means the Uniform Commercial Code as in effect in the State of New York from time to time.

“Value” means, with respect to any item of Collateral on any date, as to (1) Cash, the face amount thereof, (2) Treasury Securities or Senior Notes, the aggregate principal amount thereof at maturity and (3) Applicable Ownership Interests (as specified in clause (i) of the definition of such term), the appropriate percentage of the aggregate principal amount at maturity of the Treasury Portfolio.

ARTICLE 2

PLEDGE

Section 2.01. Pledge. Each Holder, acting through the Purchase Contract Agent as such Holder’s attorney-in-fact, and the Purchase Contract Agent, acting solely as such attorney-in-fact, hereby pledges and grants to the Collateral Agent, as agent of and for the benefit of the Company, a continuing first priority security interest in and to, and a lien upon and right of set-off against, all of such Person’s right, title and interest in and to the Collateral to secure the prompt and complete payment and performance when due (whether at stated maturity, by acceleration or otherwise) of the Obligations. The Collateral Agent shall have all of the rights, remedies and recourses with respect to the Collateral afforded a secured party by the UCC, in addition to, and not in limitation of, the other rights, remedies and recourses afforded to the Collateral Agent by this Agreement.

Section 2.02. Control. The Collateral Agent shall have control of the Collateral Account pursuant to the provisions of Article 4 of this Agreement.

Section 2.03. Termination. As to each Holder, this Agreement and the Pledge created hereby shall terminate upon the satisfaction of such Holder’s Obligations. Upon such termination, the Collateral Agent shall, except as otherwise provided herein, instruct the Securities Intermediary to Transfer such Holder’s portion of the Collateral to the Purchase Contract Agent for distribution to such Holder, free and clear of the Pledge created hereby.

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ARTICLE 3

DISTRIBUTIONS ON PLEDGED COLLATERAL

Section 3.01. Income and Distributions. The Collateral Agent shall transfer all income and distributions received by the Collateral Agent on account of the Pledged Senior Notes, the Pledged Applicable Ownership Interests or Permitted Investments from time to time held in the Collateral Account (ABA No. 021000018, A/C No. 290453, Re: The PMI Group, Inc.) to the Purchase Contract Agent for distribution to the applicable Holders as provided in the Purchase Contracts or Purchase Contract Agreement.

Section 3.02. Principal Payments Following Termination Event. Following a Termination Event, the Collateral Agent shall transfer all principal payments it receives, if any, in respect of (1) the Pledged Senior Notes, (2) the Pledged Applicable Ownership Interests and (3) the Pledged Treasury Securities, to the Purchase Contract Agent for the benefit of the applicable Holders for distribution to such Holders in accordance with their respective interests, free and clear of the Pledge created hereby.

Section 3.03. Principal Payments Prior to or on Purchase Contract Settlement Date.

(a) Subject to the provisions of Section 5.06, and except as provided in Section 3.03(b) below, if no Termination Event shall have occurred, all principal payments received by the Securities Intermediary in respect of (1) the Pledged Senior Notes, (2) the Pledged Applicable Ownership Interests and (3) the Pledged Treasury Securities shall be held and invested in Permitted Investments until the Purchase Contract Settlement Date, and transferred to the Company on the Purchase Contract Settlement Date as provided in Section 5.07 hereof. Any balance remaining in the Collateral Account shall be released from the Pledge and transferred to the Purchase Contract Agent for the benefit of the applicable Holders for distribution to such Holders in accordance with their respective interests, free and clear of the Pledge created thereby. The Company shall instruct the Collateral Agent in writing as to the type of Permitted Investments in which any payments made under this Section 3.03(a) shall be invested. In no event shall the Collateral Agent be liable for the selection of Permitted Investments or for investment losses incurred thereon. The Collateral Agent shall have no liability in respect of losses incurred as a result of the failure of the Company to provide timely written investment direction.

(b) All principal payments received by the Securities Intermediary in respect of (1) the Pledged Senior Notes, (2) the Applicable Ownership Interests (as specified in clause (i) of the definition thereof) in the Treasury Portfolio and (3) the Treasury Securities or security entitlements thereto, that, in each case, have been released from the Pledge pursuant hereto shall be transferred to the Purchase Contract Agent for the benefit of the applicable Holders for distribution to such Holders in accordance with their respective interests.

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Section 3.04. Payments to Purchase Contract Agent. The Securities Intermediary shall use commercially reasonable efforts to deliver payments to the Purchase Contract Agent hereunder to the account designated by the Purchase Contract Agent for such purpose not later than 12:00 p.m. (New York City time) on the Business Day such payment is received by the Securities Intermediary; provided, however, that if such payment is received on a day that is not a Business Day or after 11:00 a.m. (New York City time) on a Business Day, then the Securities Intermediary shall use commercially reasonable efforts to deliver such payment to the Purchase Contract Agent no later than 10:30 a.m. (New York City time) on the next succeeding Business Day.

Section 3.05. Assets Not Properly Released. If the Purchase Contract Agent or any Holder shall receive any principal payments on account of financial assets credited to the Collateral Account and not released therefrom in accordance with this Agreement, the Purchase Contract Agent or such Holder shall hold the same as trustee of an express trust for the benefit of the Company and, upon receipt of an Officers’ Certificate of the Company so directing, promptly deliver the same to the Securities Intermediary for credit to the Collateral Account or to the Company for application to the Obligations of the Holders, and the Purchase Contract Agent and Holders shall acquire no right, title or interest in any such payments of principal amounts so received. The Purchase Contract Agent shall have no liability under this Section 3.05 unless and until it has been notified in writing that such payment was delivered to it erroneously and shall have no liability for any action taken, suffered or omitted to be taken prior to its receipt of such notice.

ARTICLE 4

CONTROL

Section 4.01. Establishment of Collateral Account. The Securities Intermediary hereby confirms that:

(a) the Securities Intermediary has established the Collateral Account;

(b) the Collateral Account is a securities account;

(c) subject to the terms of this Agreement, the Securities Intermediary shall identify in its records the Collateral Agent as the entitlement holder entitled to exercise the rights that comprise any financial asset credited to the Collateral Account;

(d) all property delivered to the Securities Intermediary pursuant to this Agreement or the Purchase Contract Agreement, including any Applicable Ownership Interests (as specified in clause (i) of such definition) in the Treasury Portfolio and any Permitted Investments, will be credited promptly to the Collateral Account; and

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(e) all securities or other property underlying any financial assets credited to the Collateral Account shall be (i) registered in the name of the Purchase Contract Agent and endorsed to the Securities Intermediary or in blank, (ii) registered in the name of the Securities Intermediary or (iii) credited to another securities account maintained in the name of the Securities Intermediary. In no case will any financial asset credited to the Collateral Account be registered in the name of the Purchase Contract Agent or any Holder or specially endorsed to the Purchase Contract Agent or any Holder unless such financial asset has been further endorsed to the Securities Intermediary or in blank.

Section 4.02. Treatment as Financial Assets. Each item of property (whether investment property, financial asset, security, instrument or cash) credited to the Collateral Account shall be treated as a financial asset.

Section 4.03. Sole Control by Collateral Agent. Except as provided in Section 6.01, at all times prior to the termination of the Pledge, the Collateral Agent shall have sole control of the Collateral Account, and the Securities Intermediary shall take instructions and directions with respect to the Collateral Account solely from the Collateral Agent. If at any time the Securities Intermediary shall receive an entitlement order issued by the Collateral Agent and relating to the Collateral Account, the Securities Intermediary shall comply with such entitlement order without further consent by the Purchase Contract Agent or any Holder or any other Person. Except as otherwise permitted under this Agreement, until termination of the Pledge, the Securities Intermediary will not comply with any entitlement orders issued by the Purchase Contract Agent or any Holder.

Section 4.04. Securities Intermediary’s Location. The Collateral Account, and the rights and obligations of the Securities Intermediary, the Collateral Agent, the Purchase Contract Agent and the Holders with respect thereto, shall be governed by the laws of the State of New York. Regardless of any provision in any other agreement, for purposes of the UCC, New York shall be deemed to be the Securities Intermediary’s jurisdiction.

Section 4.05. No Other Claims. Except for the claims and interest of the Collateral Agent and of the Purchase Contract Agent and the Holders in the Collateral Account, the Securities Intermediary (without having conducted any investigation) does not know of any claim to, or interest in, the Collateral Account or in any financial asset credited thereto. If any Person asserts any lien, encumbrance or adverse claim (including any writ, garnishment, judgment, warrant of attachment, execution or similar process) against the Collateral Account or in any financial asset carried therein, the Securities Intermediary will promptly notify the Collateral Agent and the Purchase Contract Agent.

Section 4.06. Investment and Release. All proceeds of financial assets from time to time deposited in the Collateral Account shall be invested and reinvested as provided in this Agreement. At no time prior to termination of the

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Pledge with respect to any particular property shall such property be released from the Collateral Account except in accordance with this Agreement or upon written instructions of the Collateral Agent.

Section 4.07. Statements and Confirmations. The Securities Intermediary will promptly send copies of all statements, confirmations and other correspondence concerning the Collateral Account and any financial assets credited thereto simultaneously to each of the Purchase Contract Agent and the Collateral Agent at their addresses for notices under this Agreement.

Section 4.08. Tax Allocations. The Purchase Contract Agent shall report all items of income, gain, expense and loss recognized in the Collateral Account, to the extent such reporting is required by law, to the Internal Revenue Service authorities in the manner required by law. Neither the Securities Intermediary nor the Collateral Agent shall have any tax reporting duties hereunder.

Section 4.09. No Other Agreements. The Securities Intermediary has not entered into, and prior to the termination of the Pledge will not enter into, any agreement with any other Person relating to the Collateral Account or any financial assets credited thereto, including, without limitation, any agreement to comply with entitlement orders of any Person other than the Collateral Agent.

Section 4.10. Powers Coupled with an Interest. The rights and powers granted in this Article 4 to the Collateral Agent have been granted in order to perfect its security interests in the Collateral Account, are powers coupled with an interest and will be affected neither by the bankruptcy of the Purchase Contract Agent or any Holder nor by the lapse of time. The obligations of the Securities Intermediary under this Article 4 shall continue in effect until the termination of the Pledge with respect to any and all Collateral.

Section 4.11. Waiver of Lien; Waiver of Set-off. The Securities Intermediary waives any security interest, lien or right to make deductions or set-offs that it may now have or hereafter acquire in or with respect to the Collateral Account, any financial asset credited thereto or any security entitlement in respect thereof. Neither the financial assets credited to the Collateral Account nor the security entitlements in respect thereof will be subject to deduction, set-off, banker’s lien or any other right in favor of any person other than the Company.

ARTICLE 5

INITIAL DEPOSIT; CREATION OF TREASURY UNITS AND RECREATION OF

CORPORATE UNITS

Section 5.01. Initial Deposit of Senior Notes.

(a) Prior to or concurrently with the execution and delivery of this Agreement, the Purchase Contract Agent, on behalf of the initial Holders of the

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Corporate Units, shall Transfer to the Securities Intermediary, for credit to the Collateral Account, the Senior Notes or security entitlements relating thereto, and, in the case of security entitlements, the Securities Intermediary shall indicate by book-entry that a securities entitlement to such Senior Notes has been credited to the Collateral Account.

(b) The Collateral Agent may, at any time or from time to time, in its sole discretion, cause any or all securities or other property underlying any financial assets credited to the Collateral Account to be registered in the name of the Securities Intermediary, the Collateral Agent or their respective nominees; provided, however, that unless any Event of Default (as defined in the Indenture) shall have occurred and be continuing, the Collateral Agent agrees not to cause any Senior Notes to be so re-registered.

Section 5.02. Creation of Treasury Units.

(a) Unless the Treasury Portfolio has replaced the Senior Notes as a component of the Corporate Units, a Holder of Corporate Units shall have the right, at any time on or prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the Purchase Contract Settlement Date, to create Treasury Units by substitution of Treasury Securities or security entitlements with respect thereto for the Pledged Senior Notes comprising a part of all or a portion of such Holder’s Corporate Units, in integral multiples of 40 Corporate Units by:

(i) Transferring to the Securities Intermediary, for credit to the Collateral Account, Treasury Securities or security entitlements with respect thereto having a Value equal to the aggregate principal amount of the Pledged Senior Notes to be released, accompanied by a notice, substantially in the form of Exhibit C to the Purchase Contract Agreement, whereupon the Purchase Contract Agent shall deliver to the Collateral Agent a notice, substantially in the form of Exhibit A hereto, (A) stating that such Holder has notified the Purchase Contract Agent that such Holder has Transferred Treasury Securities or security entitlements with respect thereto to the Collateral Agent for credit to the Collateral Account, (B) stating the Value of the Treasury Securities or security entitlements with respect thereto Transferred by such Holder and (C) requesting that the Collateral Agent release from the Pledge the Pledged Senior Notes that are a component of such Corporate Units; and

(ii) delivering the related Corporate Units to the Purchase Contract Agent.

Upon receipt of such notice and confirmation that Treasury Securities or security entitlements with respect thereto have been credited to the Collateral Account as described in such notice, the Collateral Agent shall instruct the Securities Intermediary by a notice, substantially in the form of Exhibit B hereto,

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to release such Pledged Senior Notes from the Pledge by Transfer to the Purchase Contract Agent for distribution to such Holder, free and clear of the Pledge created hereby.

If the Treasury Portfolio has replaced the Senior Notes as a component of the Corporate Units and subject to the conditions of the Purchase Contract Agreement, a Holder of Corporate Units may, at any time on or prior to the second Business Day immediately preceding the Purchase Contract Settlement Date, substitute Treasury Securities for the Applicable Ownership Interests in the Treasury Portfolio with respect to such Corporate Units, but only in multiples of 16,000 Corporate Units. In such an event, the Holder shall transfer the required amount of Treasury Securities to the Securities Intermediary, for credit to the Collateral Account, and the Purchase Contract Agent shall request the Collateral Agent to instruct the Securities Intermediary to release the Pledge of and transfer to the Holder the appropriate Applicable Ownership Interests in the Treasury Portfolio in the manner set forth above.

(b) Upon credit to the Collateral Account of Treasury Securities or security entitlements with respect thereto delivered by a Holder of Corporate Units and receipt of the related instruction from the Collateral Agent, the Securities Intermediary shall release such Pledged Senior Notes or Applicable Ownership Interest in the Treasury Portfolio, as the case may be, and shall promptly Transfer the same to the Purchase Contract Agent for distribution to such Holder, free and clear of the Pledge created hereby.

Section 5.03. Recreation of Corporate Units.

(a) Unless the Treasury Portfolio has replaced the Senior Notes as a component of the Corporate Units, at any time on or prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the Purchase Contract Settlement Date, a Holder of Treasury Units shall have the right to recreate Corporate Units by substitution of Senior Notes or security entitlements with respect thereto for Pledged Treasury Securities in integral multiples of 40 Treasury Units by:

(i) Transferring to the Securities Intermediary, for credit to the Collateral Account, Senior Notes or security entitlements with respect thereto having a principal amount equal to the Value of the Pledged Treasury Securities to be released, accompanied by a notice, substantially in the form of Exhibit C to the Purchase Contract Agreement, whereupon the Purchase Contract Agent shall deliver to the Collateral Agent a notice, substantially in the form of Exhibit C hereto, stating that such Holder has Transferred the Senior Notes or security entitlements with respect thereto to the Collateral Account for credit to the Collateral Account and requesting that the Collateral Agent release from the Pledge the Pledged Treasury Securities related to such Treasury Units; and

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(ii) delivering the related Treasury Units to the Purchase Contract Agent.

Upon receipt of such notice and confirmation that Senior Notes or security entitlements with respect thereto have been credited to the Collateral Account as described in such notice, the Collateral Agent shall instruct the Securities Intermediary by a notice, substantially in the form of Exhibit D hereto, to release such Pledged Treasury Securities from the Pledge by Transfer to the Purchase Contract Agent for distribution to such Holder, free and clear of the Pledge created hereby.

If the Treasury Portfolio has replaced the Senior Notes as a component of the Corporate Units, a Holder of Treasury Units may, at any time on or prior to the second Business Day immediately preceding the Purchase Contract Settlement Date, substitute the Applicable Ownership Interests in the Treasury Portfolio for the Pledged Treasury Securities with respect to such Treasury Units, but only in multiples of 16,000 Treasury Units. In such an event, the Holder shall Transfer the required Applicable Ownership Interests in the Treasury Portfolio to the Securities Intermediary, for credit to the Collateral Account, and the Purchase Contract Agent shall request the Collateral Agent to instruct the Securities Intermediary to release and Transfer to the Holder the Pledged Treasury Securities in the manner set forth above.

(b) Upon credit to the Collateral Account of Senior Notes or security entitlements with respect thereto or Applicable Ownership Interests in the Treasury Portfolio delivered by a Holder of Treasury Units and receipt of the related instruction from the Collateral Agent, the Securities Intermediary shall release such Pledged Treasury Securities and shall promptly Transfer the same to the Purchase Contract Agent for distribution to such Holder, free and clear of the Pledge created hereby.

Section 5.04. Termination Event.

(a) Upon receipt by the Collateral Agent of written notice from the Company or the Purchase Contract Agent that a Termination Event has occurred, the Collateral Agent shall release all Collateral from the Pledge and shall promptly instruct the Securities Intermediary to Transfer:

(i) any Pledged Senior Notes or security entitlements with respect thereto or Pledged Applicable Ownership Interests;

(ii) any Pledged Treasury Securities; and

(iii) any payments by Holders (or the Permitted Investments of such payments) pursuant to Section 5.05 hereof,

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to the Purchase Contract Agent for the benefit of the Holders for distribution to such Holders, in accordance with their respective interests, free and clear of the Pledge created hereby; provided, however, if any Holder shall be entitled to receive less than $1,000 with respect to its interest in the Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, the Purchase Contract Agent shall dispose of such interest for cash and deliver to such Holder cash in lieu of delivering the Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio.

(b) If such Termination Event shall result from the Company’s becoming a debtor under the Bankruptcy Code, and if the Collateral Agent shall for any reason fail promptly to effectuate the release and Transfer of all Pledged Senior Notes, Pledged Applicable Ownership Interests, Pledged Treasury Securities and payments by Holders (or the Permitted Investments of such payments) pursuant to Section 5.05 and Proceeds of any of the foregoing, as the case may be, as provided by this Section 5.04, the Purchase Contract Agent shall:

(i) use its best efforts to obtain an opinion of a nationally recognized law firm to the effect that, notwithstanding the Company’s being the debtor in such a bankruptcy case, the Collateral Agent will not be prohibited from releasing or Transferring the Collateral as provided in this Section 5.04 and shall deliver or cause to be delivered such opinion to the Collateral Agent within ten days after the occurrence of such Termination Event, and if (A) the Purchase Contract Agent shall be unable to obtain such opinion within ten days after the occurrence of such Termination Event or (B) the Collateral Agent shall continue, after delivery of such opinion, to refuse to effectuate the release and Transfer of all Pledged Senior Notes, Pledged Applicable Ownership Interests, Pledged Treasury Securities and the payments by Holders (or the Permitted Investments of such payments) pursuant to Section 5.05 hereof and Proceeds of any of the foregoing, as the case may be, as provided in this Section 5.04, then the Purchase Contract Agent shall within fifteen days after the occurrence of such Termination Event commence an action or proceeding in the court having jurisdiction of the Company’s case under the Bankruptcy Code seeking an order requiring the Collateral Agent to effectuate the release and transfer of all Pledged Senior Notes, Pledged Applicable Ownership Interests, Pledged Treasury Securities and the payments by Holders (or the Permitted Investments of such payments) pursuant to Section 5.05 hereof and Proceeds of any of the foregoing, or as the case may be, as provided by this Section 5.04; or

(ii) commence an action or proceeding like that described in Section 5.04(b)(i) hereof within ten days after the occurrence of such Termination Event.

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Section 5.05. Cash Settlement.

(a) Upon receipt by the Collateral Agent of (1) a notice from the Purchase Contract Agent promptly after the receipt by the Purchase Contract Agent of a notice from a Holder of Corporate Units that such Holder has elected, in accordance with the procedures specified in Section 5.02(b)(i) or 5.02(e)(i) of the Purchase Contract Agreement to effect a Cash Settlement and (2) payment by such Holder by deposit in the Collateral Account on or prior to 5:00 p.m. (New York City time) on the fourth Business Day or the first Business Day, as applicable, immediately preceding the Purchase Contract Settlement Date of the Purchase Price in lawful money of the United States by certified or cashier’s check or wire transfer of immediately available funds payable to or upon the order of the Securities Intermediary, then the Collateral Agent shall:

(i) instruct the Securities Intermediary promptly to invest any such Cash in Permitted Investments;

(ii) instruct the Securities Intermediary to release from the Pledge such Holder’s related Pledged Senior Notes or Pledged Applicable Ownership Interests, as applicable, as to which such Holder has effected a Cash Settlement pursuant to this Section 5.05(a); and

(iii) instruct the Securities Intermediary to Transfer all such Pledged Senior Notes or Pledged Applicable Ownership Interests, as the case may be, to the Purchase Contract Agent for distribution to such Holder, in each case free and clear of the Pledge created hereby.

The Company shall instruct the Collateral Agent in writing as to the type of Permitted Investments in which any such Cash shall be invested. In no event shall the Collateral Agent or Securities Intermediary be liable for the selection of Permitted Investments or for investment losses incurred thereon. The Collateral Agent and Securities Intermediary shall have no liability in respect of losses incurred as a result of the failure of the Company to provide timely written investment direction.

Upon receipt of Proceeds upon the maturity of the Permitted Investments on the Purchase Contract Settlement Date, the Collateral Agent shall (A) instruct the Securities Intermediary to pay the portion of such Proceeds and deliver any certified or cashier’s checks received, in an aggregate amount equal to the Purchase Price, to the Company on the Purchase Contract Settlement Date, and (B) release any amounts in excess of the Purchase Price earned from such Permitted Investments to the Purchase Contract Agent for distribution to such Holder in accordance with the Purchase Contract Agreement.

(b) If a Holder of Corporate Units (unless the Treasury Portfolio has replaced the Senior Notes as a component of such Corporate Units) (i) fails to notify the Purchase Contract Agent of its intention to make a Cash Settlement as provided in Section 5.02(b)(i) of the Purchase Contract Agreement or (ii) does notify the Purchase Contract Agent of its intention to pay the Purchase Price in

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cash, but fails to make such payment as required by Section 5.02(b)(ii) of the Purchase Contract Agreement, such Holder shall be deemed to have consented to the disposition of such Holder’s Pledged Senior Notes in accordance with Section 5.02(b)(iii) of the Purchase Contract Agreement.

(c) As soon as practicable after 5:00 p.m. (New York City time) on the fourth Business Day immediately preceding the Purchase Contract Settlement Date, the Collateral Agent shall deliver to the Purchase Contract Agent a notice, substantially in the form of Exhibit E hereto, stating (i) the amount of Cash that it has received with respect to the Cash Settlement of Corporate Units and (ii) the amount of Pledged Senior Notes to be remarketed in the Final Remarketing pursuant to Section 5.02(c)(i) of the Purchase Contract Agreement.

(d) If there has been a Failed Final Remarketing, as soon as practicable after 5:00 p.m. (New York City time) on the Business Day immediately preceding the Purchase Contract Settlement Date, the Collateral Agent shall deliver to the Purchase Contract Agent a notice, stating (i) the amount of Cash that it has received with respect to the Cash Settlement of Corporate Units and (ii) the amount of Pledged Senior Notes with respect to which an automatic deemed exercise of the Put Right has occurred pursuant to Section 5.02(c)(iii) of the Purchase Contract Agreement.

Section 5.06. Early Settlement and Cash Merger Early Settlement. Upon receipt by the Collateral Agent of a notice from the Purchase Contract Agent that a Holder of Units has elected to effect either (i) Early Settlement of its obligations under the Purchase Contracts forming a part of such Units in accordance with the terms of the Purchase Contracts and Section 5.07 of the Purchase Contract Agreement or (ii) Cash Merger Early Settlement of its obligations under the Purchase Contracts forming a part of such Units in accordance with the terms of the Purchase Contracts and Section 5.04(b)(ii) of the Purchase Contract Agreement (which notice shall set forth the number of such Purchase Contracts as to which such Holder has elected to effect Early Settlement or Cash Merger Early Settlement), and that the Purchase Contract Agent has received from such Holder, and paid to the Company as confirmed in writing by the Company, the related Purchase Price pursuant to the terms of the Purchase Contracts and the Purchase Contract Agreement and that all conditions to such Early Settlement or Cash Merger Early Settlement, as the case may be, have been satisfied, then the Collateral Agent shall release from the Pledge, (1) Pledged Senior Notes or the Pledged Applicable Ownership Interests in the case of a Holder of Corporate Units or (2) Pledged Treasury Securities, in the case of a Holder of Treasury Units, in each case with a Value equal to the product of (x) the Stated Amount times (y) the number of Purchase Contracts as to which such Holder has elected to effect Early Settlement or Cash Merger Early Settlement, and shall instruct the Securities Intermediary to Transfer all such Pledged Applicable Ownership Interests or Pledged Senior Notes or Pledged Treasury Securities, as the case may be, to the Purchase Contract Agent for distribution to such Holder, in each case free and clear of the Pledge created hereby. A holder of Treasury Units may settle

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early only in integral multiples of 40 Treasury Units, and a Holder of Corporate Units, if the Treasury Portfolio has replaced the Senior Notes as a component of such Corporate Units, may settle early only in integral multiples of 16,000 Corporate Units.

Section 5.07. Application of Proceeds in Settlement of Purchase Contracts.

(a) If a Holder of Corporate Units (unless the Treasury Portfolio has replaced the Senior Notes as a component of such Corporate Units) has not elected to make an effective Cash Settlement by notifying the Purchase Contract Agent in the manner provided for in Section 5.02(b)(i) of the Purchase Contract Agreement or does notify the Purchase Contract Agent as provided in paragraph 5.02(b)(i) of the Purchase Contract Agreement of its intention to pay the Purchase Price in cash, but fails to make such payment as required by paragraph 5.02(b)(ii) of the Purchase Contract Agreement, such Holder shall be deemed to have elected to pay for the shares of Common Stock to be issued under such Purchase Contracts from the Proceeds of the Final Remarketing of the related Pledged Senior Notes. In the event of a Successful Final Remarketing, the Collateral Agent shall instruct the Securities Intermediary to Transfer the related Pledged Senior Notes to the Remarketing Agent, upon confirmation of deposit by the Remarketing Agent of the Proceeds of such Final Remarketing (less, to the extent permitted by the Remarketing Agreement, the Remarketing Fee) in the Collateral Account. On the Purchase Contract Settlement Date, the Collateral Agent shall, in consultation with the Purchase Contract Agent, instruct the Securities Intermediary to remit a portion of the Proceeds from such Final Remarketing equal to the aggregate principal amount of such Pledged Senior Notes to satisfy in full such Holder’s obligations to pay the Purchase Price to purchase the shares of Common Stock under the related Purchase Contracts and to remit the balance of the Proceeds from the Final Remarketing, if any, to the Purchase Contract Agent for distribution to such Holder.

Upon a Failed Final Remarketing, each Holder of Corporate Units (unless the Treasury Portfolio has replaced the Senior Notes represented by such Corporate Units) that has not elected to make an effective Cash Settlement by notifying the Purchase Contract Agent in the manner provided for in Section 5.02(e)(i) of the Purchase Contract Agreement or does notify the Purchase Contract Agent as provided in paragraph 5.02(e)(i) of the Purchase Contract Agreement of its intention to pay the Purchase Price in cash, but fails to make such payment as required by paragraph 5.02(e)(ii) of the Purchase Contract Agreement, shall be deemed to have exercised such Holder’s Put Right with respect to the Senior Notes that are a component of Corporate Units and to have elected to have a portion of the Proceeds of the Put Right set-off against such Holder’s obligation to pay the aggregate Purchase Price for the shares of Common Stock to be issued under the Purchase Contracts underlying such Corporate Units in full satisfaction of such Holders’ obligations under the Purchase Contracts. Following such set-off, the Holder’s obligations to pay the Purchase Price for the

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shares of Common Stock will be deemed to be satisfied in full, and the Collateral Agent shall cause the Securities Intermediary to release the Pledged Senior Notes from the Collateral Account and shall promptly transfer the Pledged Senior Notes to the Company. Thereafter, the Collateral Agent shall promptly remit the remaining Proceeds of the Holder’s exercise of the Put Right in excess of the aggregate Purchase Price for the shares of Common Stock to be issued under such Purchase Contracts to the Purchase Contract Agent for payment to the Holder of the Corporate Units to which such Senior Notes relate.

(b) A Holder of a Treasury Unit or a Holder of a Corporate Unit (if the Treasury Portfolio has replaced the Senior Notes as a component of such Corporate Unit) shall be deemed to have elected to pay for the shares of Common Stock to be issued under such Purchase Contracts from the Proceeds of the related Pledged Treasury Securities or Pledged Applicable Ownership Interests, as the case may be. Promptly, after 11:00 a.m. (New York City time) on the Business Day immediately prior to the Purchase Contract Settlement Date, the Company shall instruct the Collateral Agent in writing as to the type of Permitted Investments in which any Proceeds shall be invested. In no event shall the Collateral Agent be liable for the selection of Permitted Investments or for investment losses incurred thereon. The Collateral Agent shall have no liability in respect of losses incurred as a result of the failure of the Company to provide timely written investment direction. Without receiving any instruction from any Holder, the Collateral Agent shall instruct the Securities Intermediary to remit the Proceeds of the related Pledged Treasury Securities or Pledged Applicable Ownership Interests, as the case may be, to the Company in settlement of such Purchase Contracts on the Purchase Contract Settlement Date. In the event the sum of the Proceeds from the related Pledged Treasury Securities or Pledged Applicable Ownership Interests, as the case may be, and the investment earnings from the investment in Permitted Investments exceeds the aggregate Purchase Price of the Purchase Contracts being settled thereby, the Collateral Agent shall instruct the Securities Intermediary to transfer such excess, when received, to the Purchase Contract Agent for distribution to Holders.

(c) On or prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the applicable Remarketing Date, but no earlier than the Payment Date immediately preceding such date, Holders of Separate Senior Notes may elect to have their Separate Senior Notes remarketed under the Remarketing Agreement, by delivering their Separate Senior Notes along with a notice of such election, substantially in the form of Exhibit F hereto, to the Collateral Agent. The Collateral Agent, acting as Custodial Agent, shall hold Separate Senior Notes in an account separate from the Collateral Account in which the Pledged Securities shall be held. Holders of Separate Senior Notes electing to have their Separate Senior Notes remarketed will also have the right to withdraw that election by written notice to the Collateral Agent, substantially in the form of Exhibit G hereto, on or prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the applicable Remarketing Date,

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upon which notice the Custodial Agent shall return such Separate Senior Notes to such Holder. After such time, such election shall become an irrevocable election to have such Separate Senior Notes remarketed in such Remarketing.

By 11:00 a.m. (New York City time) on the Business Day immediately preceding the applicable Remarketing Date, the Custodial Agent shall notify the Remarketing Agent of the aggregate principal amount of the Separate Senior Notes to be remarketed and deliver to the Remarketing Agent for remarketing all Separate Senior Notes delivered to the Custodial Agent pursuant to this Section 5.07(c) and not validly withdrawn prior to such date. In the event of a Successful Remarketing, after deducting the Remarketing Fee, the Remarketing Agent will remit to the Custodial Agent the remaining portion of the proceeds of such Remarketing for payment to the Holders of the remarketed Separate Senior Notes, in accordance with their respective interests. In the event of a Failed Remarketing, the Remarketing Agent will promptly return such Separate Senior Notes to the Custodial Agent for distribution to the appropriate Holders.

ARTICLE 6

VOTING RIGHTS — PLEDGED SENIOR NOTES

Section 6.01. Voting Rights. Subject to the terms of Section 4.02 of the Purchase Contract Agreement, the Purchase Contract Agent may exercise, or refrain from exercising, any and all voting and other consensual rights pertaining to the Pledged Senior Notes or any part thereof for any purpose not inconsistent with the terms of this Agreement and in accordance with the terms of the Purchase Contract Agreement; provided, that the Purchase Contract Agent shall not exercise or shall not refrain from exercising such right, as the case may be, if, in the reasonable judgment of the Purchase Contract Agent, such action would impair or otherwise have a material adverse effect on the value of all or any of the Pledged Senior Notes; and provided, further, that the Purchase Contract Agent shall give the Company and the Collateral Agent at least five Business Days’ prior written notice of the manner in which it intends to exercise, or its reasons for refraining from exercising, any such right. Upon receipt of any notices and other communications in respect of any Pledged Senior Notes, including notice of any meeting at which holders of the Senior Notes are entitled to vote or solicitation of consents, waivers or proxies of holders of the Senior Notes, the Collateral Agent shall use reasonable efforts to send promptly to the Purchase Contract Agent such notice or communication, and as soon as reasonably practicable after receipt of a written request therefor from the Purchase Contract Agent, execute and deliver to the Purchase Contract Agent such proxies and other instruments in respect of such Pledged Senior Notes as are prepared by the Company and delivered to the Purchase Contract Agent with respect to the Pledged Senior Notes.

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ARTICLE 7

RIGHTS AND REMEDIES

Section 7.01. Rights and Remedies of the Collateral Agent.

(a) In addition to the rights and remedies specified in Section 5.07 hereof or otherwise available at law or in equity, after an event of default (as specified in Section 7.01(b) below) hereunder, the Collateral Agent shall have all of the rights and remedies with respect to the Collateral of a secured party under the UCC (whether or not the UCC is in effect in the jurisdiction where the rights and remedies are asserted) and the TRADES Regulations and such additional rights and remedies to which a secured party is entitled under the laws in effect in any jurisdiction where any rights and remedies hereunder may be asserted. Without limiting the generality of the foregoing, such remedies may include, to the extent permitted by applicable law, (1) retention of the Pledged Senior Notes, Pledged Treasury Securities or the applicable Pledged Applicable Ownership Interests in full satisfaction of the Holders’ obligations under the Purchase Contracts and the Purchase Contract Agreement or (2) sale of the Pledged Senior Notes, Pledged Treasury Securities or the applicable Pledged Applicable Ownership Interests in one or more public or private sales.

(b) Without limiting any rights or powers otherwise granted by this Agreement to the Collateral Agent, in the event the Collateral Agent is unable to make payments to the Company on account of the applicable Pledged Applicable Ownership Interests, or on account of principal payments of any Pledged Treasury Securities as provided in Article 3 hereof, in satisfaction of the Obligations of the Holder of the Units of which such applicable Pledged Applicable Ownership Interests or such Pledged Treasury Securities, as applicable, are a part, under the related Purchase Contracts, the inability to make such payments shall constitute an event of default hereunder and the Collateral Agent shall have and may exercise, with reference to such Pledged Treasury Securities or Pledged Applicable Ownership Interests, as applicable, any and all of the rights and remedies available to a secured party under the UCC and the TRADES Regulations after default by a debtor, and as otherwise granted herein or under any other law.

(c) Without limiting any rights or powers otherwise granted by this Agreement to the Collateral Agent, the Collateral Agent is hereby irrevocably authorized to receive and collect all payments of (i) the principal amount of the Pledged Senior Notes, (ii) the principal amount of the Pledged Treasury Securities and (iii) the principal amount of the Pledged Applicable Ownership Interests, subject, in each case, to the provisions of Article 3 hereof, and as otherwise granted herein.

(d) The Purchase Contract Agent and each Holder of Units agrees that, from time to time, upon the written request of the Collateral Agent or the Purchase Contract Agent, such Holder shall execute and deliver such further

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documents and do such other acts and things as the Collateral Agent may reasonably request in order to maintain the Pledge, and the perfection and priority thereof, and to confirm the rights of the Collateral Agent hereunder. The Purchase Contract Agent shall have no liability to any Holder for executing any documents or taking any such acts requested by the Collateral Agent hereunder, except for liability for its own grossly negligent acts, its own grossly negligent failure to act or its own willful misconduct.

Section 7.02. Special Event Redemption. Upon the occurrence of a Special Event Redemption while Senior Notes are still credited to the Collateral Account, the Collateral Agent is hereby authorized to present the Pledged Senior Notes for payment as may be required by their respective terms and to direct the Indenture Trustee to remit the Redemption Price to the Securities Intermediary for credit to the Collateral Account on or prior to 12:30 p.m., New York City time on such Special Event Redemption Date, by federal funds check or wire transfer of immediately available funds. Upon receipt of such funds, the Pledged Senior Notes shall be released from the Collateral Account and promptly transferred to the Company. Upon the crediting of such funds to the Collateral Account, the Collateral Agent, at the written direction of the Company, shall instruct the Securities Intermediary to (a) apply an amount of such funds equal to the Redemption Amount to purchase the Treasury Portfolio from the Quotation Agent, (b) credit to the Collateral Account the Applicable Ownership Interests (specified in clause (i) of the definition of such term) in the Treasury Portfolio and (c) promptly remit the remaining portion of such funds, if any, to the Purchase Contract Agent for payment to the Holders of Corporate Units, in accordance with their respective interests and the Purchase Contract Agreement.

Section 7.03. Successful Initial Remarketing. In the event of a Successful Initial Remarketing prior to the Final Remarketing Date, the Collateral Agent shall, at the direction of the Company, instruct the Securities Intermediary to (i) Transfer the Pledged Senior Notes to the Remarketing Agent upon confirmation of deposit by the Remarketing Agent of the Proceeds of such Successful Initial Remarketing (after deducting any Remarketing Fee in accordance with the Remarketing Agreement) in the Collateral Account, (ii) apply an amount equal to the Treasury Portfolio Purchase Price to purchase from the Quotation Agent the Treasury Portfolio, (iii) credit the Applicable Ownership Interests (specified in clause (i) of the definition of such term) in the Treasury Portfolio to the Collateral Account, and (iv) promptly remit the remaining portion of such Proceeds to the Purchase Contract Agent for payment to the Holders of Corporate Units, in accordance with their respective interests and the Purchase Contract Agreement. With respect to Separate Senior Notes, any Proceeds of such Initial Remarketing (after deducting any Remarketing Fee in accordance with the Remarketing Agreement) attributable to the Separate Senior Notes will be remitted to the Custodial Agent for payment to the holders of Separate Senior Notes. The Pledged Applicable Ownership Interests thus credited to the Collateral Account will secure the obligation of all Holders of Corporate Units to purchase Common

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Stock of the Company under the Purchase Contracts constituting a part of such Corporate Units, in substitution for the Pledged Senior Notes, which shall be released from the Collateral Account. In the event of a Failed Final Remarketing, the Pledged Senior Notes shall remain credited to the Collateral Account and Section 5.07 shall apply.

Section 7.04. Substitutions. Whenever a Holder has the right to substitute Treasury Securities, Senior Notes or security entitlements for any of them or the appropriate Applicable Ownership Interest (as defined in clause (i) of the definition of such term) in the Treasury Portfolio, as the case may be, for financial assets held in the Collateral Account, such substitution shall not constitute a novation of the security interest created hereby.

ARTICLE 8

REPRESENTATIONS AND WARRANTIES; COVENANTS

Section 8.01. Representations and Warranties. Each Holder from time to time, acting through the Purchase Contract Agent as attorney-in-fact (it being understood that the Purchase Contract Agent shall not be liable for any representation or warranty made by or on behalf of a Holder), hereby represents and warrants to the Collateral Agent (with respect to such Holder’s interest in the Collateral), which representations and warranties shall be deemed repeated on each day a Holder Transfers Collateral, that:

(a) such Holder has the power to grant a security interest in and lien on the Collateral;

(b) such Holder is the sole beneficial owner of the Collateral and, in the case of Collateral delivered in physical form, is the sole holder of such Collateral and is the sole beneficial owner of, or has the right to Transfer, the Collateral it Transfers to the Collateral Agent for credit to the Collateral Account, free and clear of any security interest, lien, encumbrance, call, liability to pay money or other restriction other than the security interest and lien granted under Article 2 hereof;

(c) upon the Transfer of the Collateral to the Collateral Agent for credit to the Collateral Account, the Collateral Agent, for the benefit of the Company, will have a valid and perfected first priority security interest therein (assuming that any central clearing operation or any securities intermediary or other entity not within the control of the Holder involved in the Transfer of the Collateral, including the Collateral Agent and the Securities Intermediary, gives the notices and takes the action required of it hereunder and under applicable law for perfection of that interest and assuming the establishment and exercise of control pursuant to Article 4 hereof); and

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(d) the execution and performance by the Holder of its obligations under this Agreement will not result in the creation of any security interest, lien or other encumbrance on the Collateral other than the security interest and lien granted under Article 2 hereof or violate any provision of any existing law or regulation applicable to it or of any mortgage, charge, pledge, indenture, contract or undertaking to which it is a party or which is binding on it or any of its assets.

Section 8.02. Covenants. The Holders from time to time, acting through the Purchase Contract Agent as their attorney-in-fact (it being understood that the Purchase Contract Agent shall not be liable for any covenant made by or on behalf of a Holder), hereby covenant to the Collateral Agent that for so long as the Collateral remains subject to the Pledge:

(a) neither the Purchase Contract Agent nor such Holders will create or purport to create or allow to subsist any mortgage, charge, lien, pledge or any other security interest whatsoever over the Collateral or any part of it other than pursuant to this Agreement; and

(b) neither the Purchase Contract Agent nor such Holders will sell or otherwise dispose (or attempt to dispose) of the Collateral or any part of it except for the beneficial interest therein, subject to the Pledge hereunder, transferred in connection with the Transfer of the Units.

ARTICLE 9

THE COLLATERAL AGENT, THE CUSTODIAL AGENT AND THE SECURITIES

INTERMEDIARY

It is hereby agreed as follows:

Section 9.01. Appointment, Powers and Immunities. The Collateral Agent, the Custodial Agent or Securities Intermediary shall act as agent for the Company hereunder with such powers as are specifically vested in the Collateral Agent, the Custodial Agent or Securities Intermediary, as the case may be, by the terms of this Agreement. The Collateral Agent, the Custodial Agent and Securities Intermediary shall:

(a) have no duties or responsibilities except those expressly set forth in this Agreement and no implied covenants or obligations shall be inferred from this Agreement against the Collateral Agent, the Custodial Agent and Securities Intermediary, nor shall the Collateral Agent, the Custodial Agent and Securities Intermediary be bound by the provisions of any agreement by any party hereto beyond the specific terms hereof;

(b) not be responsible for any recitals contained in this Agreement, or in any certificate or other document referred to or provided for in, or received by it under, this Agreement, the Units or the Purchase Contract Agreement, or for the

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value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement (other than as against the Collateral Agent, the Custodial Agent or Securities Intermediary, as the case may be), the Units, any Collateral or the Purchase Contract Agreement or any other document referred to or provided for herein or therein or for any failure by the Company or any other Person (except the Collateral Agent, the Custodial Agent or Securities Intermediary, as the case may be) to perform any of its obligations hereunder or thereunder or for the perfection, priority or, except as expressly required hereby, maintenance of any security interest created hereunder;

(c) not be required to initiate or conduct any litigation or collection proceedings hereunder (except pursuant to directions furnished under Section 9.02 hereof, subject to Section 9.08 hereof);

(d) not be responsible for any action taken or omitted to be taken by it hereunder or under any other document or instrument referred to or provided for herein or in connection herewith or therewith, except for its own gross negligence or willful misconduct; and

(e) not be required to advise any party as to selling or retaining, or taking or refraining from taking any action with respect to, any securities or other property deposited hereunder.

Subject to the foregoing, during the term of this Agreement, the Collateral Agent, the Custodial Agent and the Securities Intermediary shall take all reasonable action in connection with the safekeeping and preservation of the Collateral hereunder as determined by industry standards.

No provision of this Agreement shall require the Collateral Agent, Custodial Agent or Securities Intermediary to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder. In no event shall the Collateral Agent, Custodial Agent or Securities Intermediary be liable for any amount in excess of the Value of the Collateral.

Section 9.02. Instructions of the Company. The Company shall have the right, by one or more written instruments executed and delivered to the Collateral Agent, to direct the time, method and place of conducting any proceeding for the realization of any right or remedy available to the Collateral Agent, or of exercising any power conferred on the Collateral Agent, or to direct the taking or refraining from taking of any action authorized by this Agreement; provided, however, that (i) such direction shall not conflict with the provisions of any law or of this Agreement or involve the Collateral Agent in personal liability and (ii) the Collateral Agent shall be indemnified to its satisfaction as provided herein. Nothing contained in this Section 9.02 shall impair the right of the Collateral Agent in its discretion to take any action or omit to take any action which it deems proper and which is not inconsistent with such direction. None of the Collateral Agent, the Custodial Agent or the Securities Intermediary has any obligation or responsibility to file UCC financing statements.

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Section 9.03. Reliance by Collateral Agent, Custodial Agent and Securities Intermediary. Each of the Collateral Agent, the Custodial Agent and the Securities Intermediary shall be entitled, in the absence of bad faith, to rely conclusively upon any certification, order, judgment, opinion, notice or other written communication (including, without limitation, any thereof by e-mail or similar electronic means, telecopy, telex or facsimile) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons (without being required to determine the correctness of any fact stated therein) and consult with and conclusively rely upon advice, opinions and statements of legal counsel and other experts selected by the Collateral Agent, the Custodial Agent or the Securities Intermediary, as the case may be. As to any matters not expressly provided for by this Agreement, the Collateral Agent, the Custodial Agent and the Securities Intermediary shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions given by the Company in accordance with this Agreement.

Section 9.04. Certain Rights. (a) Whenever in the administration of the provisions of this Agreement, the Collateral Agent, the Custodial Agent or the Securities Intermediary shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action to be taken hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of gross negligence or bad faith on the part of the Collateral Agent, the Custodial Agent or the Securities Intermediary, be deemed to be conclusively proved and established by a certificate signed by one of the Company’s officers, and delivered to the Collateral Agent, the Custodial Agent or the Securities Intermediary and such certificate, in the absence of gross negligence or bad faith on the part of the Collateral Agent, the Custodial Agent or the Securities Intermediary, shall be full warrant to the Collateral Agent, the Custodial Agent or the Securities Intermediary for any action taken, suffered or omitted by it under the provisions of this Agreement upon the faith thereof.

(b) The Collateral Agent, the Custodial Agent or the Securities Intermediary shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, entitlement order, approval or other paper or document.

Section 9.05. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Collateral Agent, the Custodial Agent or the Securities Intermediary may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Collateral Agent, the Custodial Agent or the Securities Intermediary shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Collateral Agent, the Custodial Agent or the Securities Intermediary shall be the successor of the Collateral Agent, the

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Custodial Agent or the Securities Intermediary hereunder without the execution or filing of any paper with any party hereto or any further act on the part of any of the parties hereto except where an instrument of transfer or assignment is required by law to effect such succession, anything herein to the contrary notwithstanding.

Section 9.06. Rights in Other Capacities. The Collateral Agent, the Custodial Agent and the Securities Intermediary and their Affiliates may (without having to account therefor to the Company) accept deposits from, lend money to, make their investments in and generally engage in any kind of banking, trust or other business with the Purchase Contract Agent, any other Person interested herein and any Holder of Units (and any of their respective subsidiaries or affiliates) as if it were not acting as the Collateral Agent, the Custodial Agent or the Securities Intermediary, as the case may be, and the Collateral Agent, the Custodial Agent, the Securities Intermediary and their affiliates may accept fees and other consideration from the Purchase Contract Agent and any Holder of Units without having to account for the same to the Company; provided that each of the Securities Intermediary, the Custodial Agent and the Collateral Agent covenants and agrees with the Company that it shall not accept, receive or permit there to be created in favor of itself and shall take no affirmative action to permit there to be created in favor of any other Person, any security interest, lien or other encumbrance of any kind in or upon the Collateral other than the lien created by the Pledge.

Section 9.07. Non-reliance on Collateral Agent, the Custodial Agent and Securities Intermediary. None of the Securities Intermediary, the Custodial Agent or the Collateral Agent shall be required to keep itself informed as to the performance or observance by the Purchase Contract Agent or any Holder of Units of this Agreement, the Purchase Contract Agreement, the Units or any other document referred to or provided for herein or therein or to inspect the properties or books of the Purchase Contract Agent or any Holder of Units. None of the Collateral Agent, the Custodial Agent or the Securities Intermediary shall have any duty or responsibility to provide the Company with any credit or other information concerning the affairs, financial condition or business of the Purchase Contract Agent or any Holder of Units (or any of their respective affiliates) that may come into the possession of the Collateral Agent, the Custodial Agent or the Securities Intermediary or any of their respective affiliates.

Section 9.08. Compensation and Indemnity. The Company agrees to:

(a) pay the Collateral Agent, the Custodial Agent and the Securities Intermediary from time to time such compensation as shall be agreed in writing between the Company and the Collateral Agent, the Custodial Agent or the Securities Intermediary, as the case may be, for all services rendered by them hereunder;

(b) indemnify and hold harmless the Collateral Agent, the Custodial Agent, the Securities Intermediary and each of their respective directors, officers,

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agents and employees (collectively, the “Indemnitees”), from and against any and all claims, liabilities, losses, damages, fines, penalties and expenses (including reasonable fees and expenses of counsel) and taxes (other than those based upon, determined by or measured by the income of the Collateral Agent, the Custodial Agent and Securities Intermediary (collectively, “Losses” and individually, a “Loss”) that may be imposed on, incurred by, or asserted against, the Indemnitees or any of them for following any instructions or other directions upon which either the Collateral Agent, the Custodial Agent or the Securities Intermediary is entitled to rely pursuant to the terms of this Agreement, provided that the Collateral Agent, the Custodial Agent or the Securities Intermediary has not acted with gross negligence or engaged in willful misconduct or bad faith with respect to the specific Loss against which indemnification is sought; and

(c) in addition to and not in limitation of paragraph (b) immediately above, indemnify and hold the Indemnitees and each of them harmless from and against any and all Losses that may be imposed on, incurred by or asserted against, the Indemnitees or any of them in connection with or arising out of the Collateral Agent’s, the Custodial Agent’s or the Securities Intermediary’s acceptance or performance of its powers and duties under this Agreement, provided that the Collateral Agent, the Custodial Agent or the Securities Intermediary has not acted with gross negligence or engaged in willful misconduct or bad faith with respect to the specific Loss against which indemnification is sought.

The provisions of this Section and Section 11.07 shall survive the resignation or removal of the Collateral Agent, Custodial Agent or Securities Intermediary and the termination of this Agreement.

Section 9.09. Failure to Act. In the event of any ambiguity in the provisions of this Agreement or any dispute between or conflicting claims by or among the parties hereto or any other Person with respect to any funds or property deposited hereunder, then at its sole option, each of the Collateral Agent, the Custodial Agent and the Securities Intermediary shall be entitled, after prompt notice to the Company and the Purchase Contract Agent, to refuse to comply with any and all claims, demands or instructions with respect to such property or funds so long as such dispute or conflict shall continue, and the Collateral Agent, the Custodial Agent and the Securities Intermediary shall not be or become liable in any way to any of the parties hereto for its failure or refusal to comply with such conflicting claims, demands or instructions. The Collateral Agent, the Custodial Agent and the Securities Intermediary shall be entitled to refuse to act until either:

(a) such conflicting or adverse claims or demands shall have been finally determined by a court of competent jurisdiction or settled by agreement between the conflicting parties as evidenced in a writing satisfactory to the Collateral Agent, the Custodial Agent or the Securities Intermediary; or

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(b) the Collateral Agent, the Custodial Agent or the Securities Intermediary shall have received security or an indemnity satisfactory to it sufficient to save it harmless from and against any and all loss, liability or reasonable out-of-pocket expense which it may incur by reason of its acting.

The Collateral Agent, the Custodial Agent and the Securities Intermediary may in addition elect to commence an interpleader action or seek other judicial relief or orders as the Collateral Agent, the Custodial Agent or the Securities Intermediary may deem necessary. Notwithstanding anything contained herein to the contrary, none of the Collateral Agent, the Custodial Agent or the Securities Intermediary shall be required to take any action that is in its opinion contrary to law or to the terms of this Agreement, or which would in its opinion subject it or any of its officers, employees or directors to liability.

Section 9.10. Resignation of Collateral Agent, the Custodial Agent and Securities Intermediary.

(a) Subject to the appointment and acceptance of a successor Collateral Agent, Custodial Agent or Securities Intermediary as provided below:

(i) the Collateral Agent, the Custodial Agent and the Securities Intermediary may resign at any time by giving notice thereof to the Company and the Purchase Contract Agent as attorney-in-fact for the Holders of Units;

(ii) the Collateral Agent, the Custodial Agent and the Securities Intermediary may be removed at any time by the Company; and

(iii) if the Collateral Agent, the Custodial Agent or the Securities Intermediary fails to perform any of its material obligations hereunder in any material respect for a period of not less than 20 days after receiving written notice of such failure by the Purchase Contract Agent and such failure shall be continuing, the Collateral Agent, the Custodial Agent and the Securities Intermediary may be removed by the Purchase Contract Agent, acting at the direction of the Holders of Units.

The Purchase Contract Agent shall promptly notify the Company of any removal of the Collateral Agent, the Custodial Agent or the Securities Intermediary pursuant to clause (iii) of this Section 9.10. Upon any such resignation or removal, the Company shall have the right to appoint a successor Collateral Agent, Custodial Agent or Securities Intermediary, as the case may be, which shall not be an Affiliate of the Purchase Contract Agent. If no successor Collateral Agent, Custodial Agent or Securities Intermediary shall have been so appointed and shall have accepted such appointment within 30 days after the retiring Collateral Agent’s, Custodial Agent’s or Securities Intermediary’s giving of notice of resignation or the Company’s or the Purchase Contract Agent’s giving notice of such removal, then the retiring or removed Collateral Agent,

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Custodial Agent or Securities Intermediary may petition any court of competent jurisdiction, at the expense of the Company, for the appointment of a successor Collateral Agent, Custodial Agent or Securities Intermediary. The Collateral Agent, the Custodial Agent and the Securities Intermediary shall each be a bank or a national banking association which has an office (or an agency office) in New York City with a combined capital and surplus of at least $50,000,000. Upon the acceptance of any appointment as Collateral Agent, Custodial Agent or Securities Intermediary hereunder by a successor Collateral Agent, Custodial Agent or Securities Intermediary, as the case may be, such successor Collateral Agent, Custodial Agent or Securities Intermediary, as the case may be, shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Collateral Agent, Custodial Agent or Securities Intermediary, as the case may be, and the retiring Collateral Agent, Custodial Agent or Securities Intermediary, as the case may be, shall take all appropriate action, subject to payment of any amounts then due and payable to it hereunder, to transfer any money and property held by it hereunder (including the Collateral) to such successor. The retiring Collateral Agent, Custodial Agent or Securities Intermediary shall, upon such succession, be discharged from its duties and obligations as Collateral Agent, Custodial Agent or Securities Intermediary hereunder. After any retiring Collateral Agent’s, Custodial Agent’s or Securities Intermediary’s resignation hereunder as Collateral Agent, Custodial Agent or Securities Intermediary, the provisions of this Article 9 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Collateral Agent, Custodial Agent or Securities Intermediary. Any resignation or removal of the Collateral Agent, Custodial Agent or Securities Intermediary hereunder, at a time when such Person is acting as the Collateral Agent, Custodial Agent or Securities Intermediary, shall be deemed for all purposes of this Agreement as the simultaneous resignation or removal of the Collateral Agent, Securities Intermediary or Custodial Agent, as the case may be.

(b) Because The Bank of New York is serving as the Collateral Agent hereunder and the Purchase Contract Agent under the Purchase Contract Agreement, if an event of default occurs hereunder or under the Purchase Contract Agreement, The Bank of New York will resign as the Collateral Agent, but continue to act as the Purchase Contract Agent. A successor Collateral Agent will be appointed in accordance with the terms hereof. If any such event of default is cured or waived prior to the appointment of a successors Collateral Agent, the duty of The Bank of New York to resign in respect of such event of default shall cease.

Section 9.11. Right to Appoint Agent or Advisor. The Collateral Agent shall have the right to appoint agents or advisors in connection with any of its duties hereunder, and the Collateral Agent shall not be liable for any action taken or omitted by, or in reliance upon the advice of, such agents or advisors selected in good faith.

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Section 9.12. Survival. The provisions of this Article 9 shall survive termination of this Agreement and the resignation or removal of the Collateral Agent, the Custodial Agent or the Securities Intermediary.

Section 9.13. Exculpation. Anything contained in this Agreement to the contrary notwithstanding, in no event shall the Collateral Agent, the Custodial Agent or the Securities Intermediary or their officers, directors, employees or agents be liable under this Agreement to any third party for indirect, special, punitive, or consequential loss or damage of any kind whatsoever, including, but not limited to, lost profits, whether or not the likelihood of such loss or damage was known to the Collateral Agent, the Custodial Agent or the Securities Intermediary, or any of them and regardless of the form of action.

ARTICLE 10

AMENDMENT

Section 10.01. Amendment Without Consent of Holders. Without the consent of any Holders, the Company, when duly authorized, the Collateral Agent, the Custodial Agent, the Securities Intermediary and the Purchase Contract Agent, at any time and from time to time, may amend this Agreement, in form satisfactory to the Company, the Collateral Agent, the Custodial Agent, the Securities Intermediary and the Purchase Contract Agent, to:

(a) evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company;

(b) evidence and provide for the acceptance of appointment hereunder by a successor Collateral Agent, Custodial Agent, Securities Intermediary or Purchase Contract Agent;

(c) add to the covenants of the Company for the benefit of the Holders, or surrender any right or power herein conferred upon the Company, provided that such covenants or such surrender do not adversely affect the validity, perfection or priority of the Pledge created hereunder;

(d) cure any ambiguity (or formal defect), correct or supplement any provisions herein which may be inconsistent with any other such provisions herein; or

(e) make any other provisions with respect to such matters or questions arising under this Agreement, provided that such action shall not adversely affect the interests of the Holders in any material respect.

Section 10.02. Amendment with Consent of Holders. With the consent of the Holders of not less than a majority of the Purchase Contracts at the time outstanding, including without limitation the consent of the Holders obtained in

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connection with a tender or an exchange offer, by Act of such Holders delivered to the Company, the Purchase Contract Agent, the Custodial Agent, the Securities Intermediary and the Collateral Agent, as the case may be, the Company, when duly authorized by a Board Resolution, the Purchase Contract Agent, the Collateral Agent, the Securities Intermediary and the Collateral Agent may amend this Agreement for the purpose of modifying in any manner the provisions of this Agreement or the rights of the Holders in respect of the Units; provided, however, that no such supplemental agreement shall, without the unanimous consent of the Holders of each Outstanding Unit adversely affected thereby in any material respect:

(a) change the amount or type of Collateral underlying a Unit (except for the rights of holders of Corporate Units to substitute the Treasury Securities for the Pledged Senior Notes or the Pledged Applicable Ownership Interests, as the case may be, or the rights of Holders of Treasury Units to substitute Senior Notes or the Applicable Ownership Interests (as specified in clause (i) of the definition of such term) in the Treasury Portfolio, as applicable, for the Pledged Treasury Securities), unless such change is not adverse to the Holders, impair the right of the Holder of any Unit to receive distributions on the underlying Collateral or otherwise adversely affect the Holder’s rights in or to such Collateral; or

(b) otherwise effect any action that would require the consent of the Holder of each Outstanding Unit affected thereby pursuant to the Purchase Contract Agreement if such action were effected by a modification or amendment of the provisions of the Purchase Contract Agreement; or

(c) reduce the percentage of Purchase Contracts the consent of whose Holders is required for the modification or amendment of the provisions of this Agreement;

provided that if any amendment or proposal referred to above would adversely affect only the Corporate Units or only the Treasury Units, then only the affected class of Holders as of the record date for the Holders entitled to vote thereon will be entitled to vote on such amendment or proposal, and such amendment or proposal shall not be effective except with the consent of Holders of not less than a majority of such class; provided, further, that the unanimous consent of the Holders of each outstanding Purchase Contract of such class affected thereby shall be required to approve any amendment or proposal specified in clauses (a) through (c) above.

It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed amendment, but it shall be sufficient if such Act shall approve the substance thereof.

Section 10.03. Execution of Amendments. In executing any amendment permitted by this Article, the Collateral Agent, the Custodial Agent, the Securities

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Intermediary and the Purchase Contract Agent shall be entitled to receive and (subject to Section 7.01 of the Purchase Contract Agreement with respect to the Purchase Contract Agent) shall be fully authorized and protected in relying upon, an Opinion of Counsel and an officers’ certificate stating that the execution of such amendment is authorized or permitted by this Agreement and that all conditions precedent, if any, to the execution and delivery of such amendment have been satisfied. The Collateral Agent, Custodial Agent, Securities Intermediary and Purchase Contract Agent may, but shall not be obligated to, enter into any such amendment which affects their own respective rights, duties or immunities under this Agreement or otherwise.

Section 10.04. Effect of Amendments. Upon the execution of any amendment under this Article, this Agreement shall be modified in accordance therewith, and such amendment shall form a part of this Agreement for all purposes; and every Holder of Certificates theretofore or thereafter authenticated, executed on behalf of the Holders and delivered under the Purchase Contract Agreement shall be bound thereby.

Section 10.05. Reference of Amendments. Certificates authenticated, executed on behalf of the Holders and delivered after the execution of any amendment pursuant to this Section may, and shall if required by the Collateral Agent or the Purchase Contract Agent, bear a notation in form approved by the Purchase Contract Agent and the Collateral Agent as to any matter provided for in such amendment. If the Company shall so determine, new Certificates so modified as to conform, in the opinion of the Collateral Agent, the Purchase Contract Agent and the Company, to any such amendment may be prepared and executed by the Company and authenticated, executed on behalf of the Holders and delivered by the Purchase Contract Agent in accordance with the Purchase Contract Agreement in exchange for Certificates representing Outstanding Units.

ARTICLE 11

MISCELLANEOUS

Section 11.01. No Waiver. No failure on the part of the Company, the Collateral Agent, the Custodial Agent, the Securities Intermediary or any of their respective agents to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Company, the Collateral Agent, the Custodial Agent, the Securities Intermediary or any of their respective agents of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein are cumulative and are not exclusive of any remedies provided by law.

Section 11.02. Governing Law; Submission to Jurisdiction. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN

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ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. The Company, the Collateral Agent, the Custodial Agent, the Securities Intermediary and the Holders from time to time of the Units, acting through the Purchase Contract Agent as their attorney-in-fact, hereby submit to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York state court sitting in New York City for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Company, the Collateral Agent, the Custodial Agent, the Securities Intermediary and the Holders from time to time of the Units, acting through the Purchase Contract Agent as their attorney-in-fact, irrevocably waive, to the fullest extent permitted by applicable law, any objection that they may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum.

Section 11.03. Notices. All notices, requests, consents and other communications provided for herein (including, without limitation, any modifications of, or waivers or consents under, this Agreement) shall be given or made in writing (including, without limitation, by telecopy) delivered to the intended recipient at the “Address for Notices” specified below its name on the signature pages hereof or, as to any party, at such other address as shall be designated by such party in a notice to the other parties. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopier or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid.

Section 11.04. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Company, the Collateral Agent, the Custodial Agent, the Securities Intermediary and the Purchase Contract Agent, and the Holders from time to time of the Units, by their acceptance of the same, shall be deemed to have agreed to be bound by the provisions hereof and to have ratified the agreements of, and the grant of the Pledge hereunder by, the Purchase Contract Agent.

Section 11.05. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart.

Section 11.06. Severability. If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (i) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intentions of the parties hereto as nearly as may be possible and (ii) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction.

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Section 11.07. Expenses, Etc. The Company agrees to reimburse the Collateral Agent, the Custodial Agent and the Securities Intermediary for:

(a) all reasonable costs and expenses of the Collateral Agent, the Custodial Agent and the Securities Intermediary (including, without limitation, the reasonable fees and expenses of counsel to the Collateral Agent, the Custodial Agent and the Securities Intermediary), in connection with (i) the negotiation, preparation, execution and delivery or performance of this Agreement and (ii) any modification, supplement or waiver of any of the terms of this Agreement;

(b) all reasonable costs and expenses of the Collateral Agent, the Custodial Agent and the Securities Intermediary (including, without limitation, reasonable fees and expenses of counsel) in connection with (i) any enforcement or proceedings resulting or incurred in connection with causing any Holder of Units to satisfy its obligations under the Purchase Contracts forming a part of the Units and (ii) the enforcement of this Section 11.07;

(c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement or any other document referred to herein and all costs, expenses, taxes, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any security interest contemplated hereby;

(d) all reasonable fees and expenses of any agent or advisor appointed by the Collateral Agent and consented to by the Company under Section 9.11 of this Agreement; and

(e) any other out-of-pocket costs and expenses reasonably incurred by the Collateral Agent, the Custodial Agent and the Securities Intermediary in connection with the performance of their duties hereunder.

Section 11.08. Security Interest Absolute. All rights of the Collateral Agent and security interests hereunder, and all obligations of the Holders from time to time hereunder, shall be absolute and unconditional irrespective of:

(a) any lack of validity or enforceability of any provision of the Purchase Contracts or the Units or any other agreement or instrument relating thereto;

(b) any change in the time, manner or place of payment of, or any other term of, or any increase in the amount of, all or any of the obligations of Holders of the Units under the related Purchase Contracts, or any other amendment or waiver of any term of, or any consent to any departure from any requirement of, the Purchase Contract Agreement or any Purchase Contract or any other agreement or instrument relating thereto; or

33

(c) any other circumstance which might otherwise constitute a defense available to, or discharge of, a borrower, a guarantor or a pledgor.

Section 11.09. Notice of Special Event, Special Event Redemption and Termination Event. Upon the occurrence of a Special Event, a Special Event Redemption or a Termination Event, the Company shall deliver written notice to the Purchase Contract Agent, the Collateral Agent and the Securities Intermediary. Upon the written request of the Collateral Agent or the Securities Intermediary, the Company shall inform such party whether or not a Special Event, a Special Event Redemption or a Termination Event has occurred.

SIGNATURES ON THE FOLLOWING PAGE

34

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written.

THE PMI GROUP, INC.			THE BANK OF NEW YORK, as Purchase Contract Agent and as attorney-in-fact of the Holders from time to time of the Units
By:	/s/ Donald P. Lofe, Jr.		By:	/s/ Michael Pitfick
	Name:	Donald P. Lofe, Jr.		Name:	Michael Pitfick
	Title:	Executive Vice President and Chief Financial Officer		Title:	Assistant Vice President
Address for Notices:			Address for Notices:
The PMI Group, Inc. 303 Oak Road Walnut Creek, California 94597 Telecopier No.: (925) 658-6175 Attention: General Counsel			The Bank of New York 101 Barclay Street, Floor 8W New York, NY 10286 Telecopier No.: 212-815-5707 Attention: Corporate Trust Administration

THE BANK OF NEW YORK, as Collateral Agent, Custodial Agent and Securities Intermediary
By:	/s/ Michael Pitfick
	Name:	Michael Pitfick
	Title:	Assistant Vice President

Address for Notices:

The Bank of New York

101 Barclay Street, Floor 8W

New York, NY 10286

Telecopier No.: 212-815-5707

Attention: Corporate Trust

Administration

EXHIBIT A

INSTRUCTION

FROM PURCHASE CONTRACT AGENT

TO COLLATERAL AGENT

(Creation of Treasury Units)

The Bank of New York

The Collateral Agent

101 Barclay Street, Floor 8W

New York, NY 10286

Telecopier No.: 212-815-5707

Attention: Corporate Trust Administration

Re:                 Corporate Units of The PMI Group, Inc. (the “Company”)

The securities account of The Bank of New York, as Collateral Agent, maintained by the Securities Intermediary and designated The Bank of New York, as Collateral Agent of The PMI Group, Inc., as pledgee of The Bank of New York, as the Purchase Contract Agent on behalf of and as attorney-in-fact for the Holders” (the “Collateral Account”)

Please refer to the Pledge Agreement, dated as of November 3, 2003 (the “Pledge Agreement”), among the Company, you, as Collateral Agent, as Securities Intermediary and as Custodial Agent and the undersigned, as Purchase Contract Agent and as attorney-in-fact for the holders of Corporate Units from time to time. Capitalized terms used herein but not defined shall have the meaning set forth in the Pledge Agreement.

We hereby notify you in accordance with Section 5.02 of the Pledge Agreement that the holder of securities named below (the “Holder”) has elected to substitute $             Value of Treasury Securities or security entitlements with respect thereto in exchange for an equal Value of Pledged Senior Notes relating to              Corporate Units and has delivered to the undersigned a notice stating that the Holder has Transferred such Treasury Securities or security entitlements with respect thereto to the Securities Intermediary, for credit to the Collateral Account.

We hereby request that you instruct the Securities Intermediary, upon confirmation that such Treasury Securities or security entitlements thereto have been credited to the Collateral Account, to release to the undersigned an equal Value of Pledged Senior Notes in accordance with Section 5.02 of the Pledge Agreement.

Date:

A-1

The Bank of New York, as Purchase Contract Agent and as attorney-in-fact of the Holders from time to time of the Units
By:
	Name:
	Title:

A-2

Please print name and address of Holder electing to substitute Treasury Securities or security entitlements with respect thereto for the Pledged Senior Notes:

Name	Social Security or other Taxpayer Identification Number, if any
Address

A-3

EXHIBIT B

INSTRUCTION

FROM COLLATERAL AGENT

TO SECURITIES INTERMEDIARY

(Creation of Treasury Units)

The Bank of New York

as Securities Intermediary

101 Barclay Street, Floor 8W

New York, NY 10286

Telecopier No.: 212-815-5707

Attention: Corporate Trust Administration

Re:                 Corporate Units of The PMI Group, Inc. (the “Company”)

The securities account of The Bank of New York, as Collateral Agent, maintained by the Securities Intermediary and designated The Bank of New York, as Collateral Agent of The PMI Group, Inc. as pledgee of The Bank of New York, as the Purchase Contract Agent on behalf of and as attorney-in-fact for the Holders” (the “Collateral Account”)

Please refer to the Pledge Agreement, dated as of November 3, 2003 (the “Pledge Agreement”), among the Company, you, as Collateral Agent, as Securities Intermediary and as Custodial Agent and The Bank of New York, as Purchase Contract Agent and as attorney-in-fact for the holders of Corporate Units from time to time. Capitalized terms used herein but not defined shall have the meanings set forth in the Pledge Agreement.

When you have confirmed that $             Value of Treasury Securities or security entitlements thereto has been credited to the Collateral Account by or for the benefit of             , as Holder of Corporate Units (the “Holder”), you are hereby instructed to release from the Collateral Account an equal Value of Pledged Senior Notes or security entitlements with respect thereto relating to              Corporate Units of the Holder by Transfer to the Purchase Contract Agent.

B-1

Dated:                     

The Bank of New York, as Collateral Agent
By:
	Name:
	Title:

B-2

Please print name and address of Holder:

Name	Social Security or other Taxpayer Identification Number, if any
Address

B-3

EXHIBIT C

INSTRUCTION

FROM PURCHASE CONTRACT AGENT

TO COLLATERAL AGENT

(Recreation of Corporate Units)

The Bank of New York

The Collateral Agent

101 Barclay Street, Floor 8W

New York, NY 10286

Telecopier No.: 212-815-5707

Attention: Corporate Trust Administration

Re:                 Treasury Units of The PMI Group, Inc. (the “Company”)

Please refer to the Pledge Agreement dated as of November 3, 2003 (the “Pledge Agreement”), among the Company, you, as Collateral Agent, as Securities Intermediary, as Custodial Agent and the undersigned, as Purchase Contract Agent and as attorney-in-fact for the holders of Treasury Units from time to time. Capitalized terms used herein but not defined shall have the meaning set forth in the Pledge Agreement.

We hereby notify you in accordance with Section 5.03 of the Pledge Agreement that the holder of securities named below (the “Holder”) has elected to substitute $             Value of Senior Notes or security entitlements with respect thereto in exchange for an equal value of Value of Pledged Treasury Securities with respect to              Treasury Units and has delivered to the undersigned a notice stating that the holder has Transferred such Senior Notes or security entitlements with respect thereto to the Securities Intermediary, for credit to the Collateral Account.

C-1

We hereby request that you instruct the Securities Intermediary, upon confirmation that such Senior Notes or security entitlements with respect thereto have been credited to the Collateral Account, to release to the undersigned an equal Value of Treasury Securities in accordance with Section 5.03 of the Pledge Agreement.

	The Bank of New York, as Purchase Contract Agent and as attorney-in-fact of the Holders from time to time of the Units
Dated:	By:
		Name:
		Title:

C-2

Please print name and address of Holder electing to substitute Senior Notes or security entitlements with respect thereto for Pledged Treasury Securities:

Name	Social Security or other Taxpayer Identification Number, if any
Address

C-3

EXHIBIT D

INSTRUCTION

FROM COLLATERAL AGENT

TO SECURITIES INTERMEDIARY

(Recreation of Corporate Units)

The Bank of New York

as Securities Intermediary

101 Barclay Street, Floor 8W

New York, NY 10286

Telecopier No.: 212-815-5707

Attention: Corporate Trust Administration

Re:                 Treasury Units of The PMI Group, Inc. (the “Company”)

The securities account of The Bank of New York, as Collateral Agent, maintained by the Securities Intermediary and designated The Bank of New York, as Collateral Agent of The PMI Group, Inc., as pledgee of The Bank of New York, as the Purchase Contract Agent on behalf of and as attorney-in-fact for the Holders” (the “Collateral Account”)

Please refer to the Pledge Agreement dated as of November 3, 2003 (the “Pledge Agreement”), among the Company, you, as Securities Intermediary, Custodial Agent and Collateral Agent and The Bank of New York, as Purchase Contract Agent and as attorney-in-fact for the holders of Corporate Units from time to time. Capitalized terms used herein but not defined shall have the meanings set forth in the Pledge Agreement.

When you have confirmed that $              Value of Senior Notes or security entitlements with respect thereto has been credited to the Collateral Account by or for the benefit of             , as Holder of Treasury Units (the “Holder”), you are hereby instructed to release from the Collateral Account an equal Value of Treasury Securities or security entitlements with respect thereto relating to              Treasury Units of the Holder by Transfer to the Purchase Contract Agent.

D-1

	The Bank of New York, as Collateral Agent
Dated:	By:
		Name:
		Title:

Please print name and address of Holder:

Name	Social Security or other Taxpayer      Identification Number, if any
Address

D-2

EXHIBIT E

NOTICE OF CASH SETTLEMENT FROM COLLATERAL

AGENT TO PURCHASE CONTRACT AGENT

(Cash Settlement Amounts)

The Bank of New York

The Purchase Contract Agent

101 Barclay Street, Floor 8W

New York, NY 10286

Telecopier No.: 212-815-5707

Attention: Corporate Trust Administration

Re:                 Corporate Units of The PMI Group, Inc. (the “Company”)              Treasury Units of the Company

Please refer to the Pledge Agreement dated as of November 3, 2003 (the “Pledge Agreement”), by and among you, the Company, and The Bank of New York, as Collateral Agent, Custodial Agent and Securities Intermediary. Unless otherwise defined herein, terms defined in the Pledge Agreement are used herein as defined therein.

In accordance with Section 5.05(c) of the Pledge Agreement, we hereby notify you that as of 5:00 p.m. (New York City time) on the fourth Business Day immediately preceding November 15, 2006 (the “Purchase Contract Settlement Date”), we have received (i) $              in immediately available funds paid in an aggregate amount equal to the Purchase Price due to the Company on the Purchase Contract Settlement Date with respect to              Corporate Units and (ii) based on the funds received set forth in clause (i) above, an aggregate principal amount of $             of Pledged Senior Notes are to be tendered for purchase in the Final Remarketing.

	The Bank of New York, as Collateral Agent
Dated:	By:
		Name:
		Title:

E-1

EXHIBIT F

INSTRUCTION TO CUSTODIAL AGENT REGARDING

REMARKETING

The Bank of New York

The Custodial Agent

101 Barclay Street, Floor 8W

New York, NY 10286

Telecopier No.: 212-815-5707

Attention: Corporate Trust Administration

Re: Senior Notes Due November 15, 2008 of The PMI Group, Inc. (the “Company”)

The undersigned hereby notifies you in accordance with Section 5.07(c) of the Pledge Agreement, dated as of November 3, 2003 (the “Pledge Agreement”), among the Company, you, as Collateral Agent, Custodial Agent and Securities Intermediary and The Bank of New York, as the Purchase Contract Agent and as attorney-in-fact for the holders of Corporate Units from time to time, that the undersigned elects to deliver $                     aggregate principal amount of Separate Senior Notes for delivery to the Remarketing Agent on or prior to 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the Initial Remarketing Date for remarketing pursuant to Section 5.07(c) of the Pledge Agreement. The undersigned will, upon request of the Remarketing Agent, execute and deliver any additional documents deemed by the Remarketing Agent or by the Company to be necessary or desirable to complete the sale, assignment and transfer of the Separate Senior Notes tendered hereby. Capitalized terms used herein but not defined shall have the meaning set forth in the Pledge Agreement.

The undersigned hereby instructs you, upon receipt of the Proceeds of such remarketing from the Remarketing Agent, to deliver such Proceeds to the undersigned in accordance with the instructions indicated herein under “A. Payment Instructions.” The undersigned hereby instructs you, in the event of a Failed Remarketing, upon receipt of the Separate Senior Notes tendered herewith from the Remarketing Agent, to deliver such Separate Senior Notes to the person(s) and the address(es) indicated herein under “B. Delivery Instructions.”

With this notice, the undersigned hereby (i) represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Separate Senior Notes tendered hereby and that the undersigned is the record owner of any Senior Notes tendered herewith in physical form or a participant in The Depository Trust Company (“DTC”) and the beneficial owner of any Senior Notes tendered herewith by book-entry transfer to your account at DTC, (ii)

F-1

agrees to be bound by the terms and conditions of Section 5.07(c) of the Pledge Agreement and (iii) acknowledges and agrees that after 5:00 p.m. (New York City time) on the fifth Business Day immediately preceding the Remarketing Date, such election shall become an irrevocable election to have such Separate Senior Notes remarketed in the Remarketing. In the case of a Failed Remarketing, such Separate Senior Notes shall be returned to the undersigned.

Date:	By:
		Name:
		Title:
		Signature Guarantee:
Name		Social Security or other Taxpayer Identification Number, if any
Address

F-2

A. PAYMENT INSTRUCTIONS

Proceeds of the remarketing should be paid by check in the name of the person(s) set forth below and mailed to the address set forth below.

Name(s)

(Please Print)

Address

(Please Print)

(Zip Code)

(Taxpayer Identification or Social Security Number)

B. DELIVERY INSTRUCTIONS

In the event of a Failed Final Remarketing, Senior Notes that are in physical form should be delivered to the person(s) set forth below and mailed to the address set forth below.

Name(s)

(Please Print)

Address

(Please Print)

(Zip Code)

(Tax Identification or Social Security Number)

F-3

In the event of a failed final remarketing, Senior Notes that are in book-entry form should be credited to the account at The Depository Trust Company set forth below.

DTC Account Number

Name of Account Party:

F-4

EXHIBIT G

INSTRUCTION TO CUSTODIAL AGENT REGARDING

WITHDRAWAL FROM REMARKETING

The Bank of New York

The Custodial Agent

101 Barclay Street, Floor 8W

New York, NY 10286

Telecopier No.: 212-815-5707

Attention: Corporate Trust Administration

Re: Senior Notes due November 15, 2008 of The PMI Group, Inc. (the “Company”)

The undersigned hereby notifies you in accordance with Section 5.07(c) of the Pledge Agreement, dated as of November 3, 2003 (the “Pledge Agreement”), among the Company and you, as Collateral Agent, Custodial Agent and Securities Intermediary, and The Bank of New York, as Purchase Contract Agent and as attorney-in-fact for the holders of Corporate Units from time to time, that the undersigned elects to withdraw the $             aggregate principal amount of Separate Senior Notes delivered to the Collateral Agent on             , 200     for remarketing pursuant to Section 5.07(c) of the Pledge Agreement. The undersigned hereby instructs you to return such Senior Notes to the undersigned in accordance with the undersigned’s instructions. With this notice, the Undersigned hereby agrees to be bound by the terms and conditions of Section 5.07(c) of the Pledge Agreement. Capitalized terms used herein but not defined shall have the meaning set forth in the Pledge Agreement.

Date:	By:
		Name:
		Title:
		Signature Guarantee:
Name		Social Security or other Taxpayer Identification Number, if any
Address

G-1

EX-10.33

Exhibit 10.33

REMARKETING AGREEMENT

November 3, 2003

Banc of America Securities LLC

9 West 57^th Street

New York, New York 10019

Ladies and Gentlemen:

This Agreement is dated as of November 3, 2003 (the “Agreement”) among The PMI Group, Inc., a Delaware corporation (the “Company”), Banc of America Securities LLC (“Banc of America”) and The Bank of New York, a New York banking corporation, not individually but solely as Purchase Contract Agent (the “Purchase Contract Agent”) and as attorney-in-fact of the holders of Purchase Contracts (as defined in the Purchase Contract Agreement referred to below).

Section 1. Definitions.

(a) Capitalized terms used and not defined in this Agreement shall have the meanings set forth in the Purchase Contract Agreement, dated as of November 3, 2003, between the Company and The Bank of New York, as Purchase Contract Agent, as amended from time to time (the “Purchase Contract Agreement”).

(b) As used in this Agreement, the following terms have the following meanings:

“Preliminary Prospectus” means any preliminary prospectus relating to the Remarketed Senior Notes included in the Registration Statement or supplementing such Registration Statement pursuant to Rule 424(b) under the Securities Act, including the documents incorporated by reference therein as of the date of such Preliminary Prospectus; and any reference to any amendment or supplement to such Preliminary Prospectus shall be deemed to refer to and include any documents filed after the date of such Preliminary Prospectus under the Exchange Act, and incorporated by reference in such Preliminary Prospectus.

“Prospectus” means the prospectus relating to the Remarketed Senior Notes included in the Registration Statement, in the form in which it was first used by the Remarketing Agent to confirm sales of the Remarketed Senior Notes in the Remarketing, including the documents incorporated by reference therein as of the date of such Prospectus; and any reference to any amendment or supplement to such Prospectus shall be deemed to refer to and include any documents filed after the date of such Prospectus under the Exchange Act, and incorporated by reference in such Prospectus.

“Registration Statement” means a registration statement under the Securities Act of 1933, as amended (the “Securities Act”) prepared by the Company pursuant to Section 5

hereunder covering, inter alia, the Remarketing of the Remarketed Senior Notes, including all exhibits thereto and the documents incorporated by reference in the prospectus contained in such registration statement, and any post-effective amendments thereto.

“Remarketed Senior Notes” means the Pledged Senior Notes and the Separate Senior Notes, if any, subject to Remarketing as identified to the Remarketing Agent by the Purchase Contract Agent and the Custodial Agent, respectively, after 11:00 a.m., New York City time, on the Business Day immediately preceding the applicable Remarketing Date, and shall include: (a) (i) in the case of the Initial Remarketing, the Pledged Senior Notes and (ii) in the case of the Final Remarketing, the Senior Notes of the Holders of Corporate Units who have not notified the Purchase Contract Agent on or prior to 5:00 p.m., New York Time, on the fifth Business Day immediately preceding the Purchase Contract Settlement Date of their intention to effect a Cash Settlement of the related Purchase Contracts pursuant to the terms of the Purchase Contract Agreement or who have so notified the Purchase Contract Agent but failed to make the required cash payment on the fourth Business Day immediately preceding the Purchase Contract Settlement Date pursuant to the terms of the Purchase Contract Agreement, and (b) the Separate Senior Notes of the holders of Separate Senior Notes, if any, who have elected to have their Separate Senior Notes be remarketed in such Remarketing pursuant to the terms of the Purchase Contract Agreement.

“Remarketing” means the remarketing of the Remarketed Senior Notes pursuant to this Remarketing Agreement.

“Remarketing Agent” means Banc of America or any successor remarketing agent appointed by the Company pursuant to Section 10 hereof.

“Remarketing Date” means either the Initial Remarketing Date (as defined herein) or the Final Remarketing Date (as defined herein), as context requires.

“Remarketing Materials” means the Preliminary Prospectus, the Prospectus or any other information furnished by the Company to the Remarketing Agent for distribution to investors in connection with the Remarketing.

“Senior Notes” means the senior notes due November 15, 2008 of the Company.

“Transaction Documents” means this Agreement, the Purchase Contract Agreement, the Pledge Agreement and the Indenture, in each case as amended or supplemented from time to time.

Section 2. Appointment and Obligations of the Remarketing Agent.

(a) The Company hereby appoints Banc of America as the exclusive Remarketing Agent, and, subject to the terms and conditions set forth herein, Banc of America hereby accepts appointment as Remarketing Agent, for the purpose of (i) Remarketing the Remarketed Senior Notes on behalf of the holders thereof, (ii) determining, in consultation with the Company, in the manner provided for herein and in the Purchase Contract Agreement and the Indenture, the Reset Rate for the Senior Notes, and (iii) performing such other duties as are assigned to the Remarketing Agent in the Transaction Documents.

2

(b) Unless a Special Event Redemption has occurred prior to such date, on the third Business Day immediately preceding August 15, 2006 (the “Initial Remarketing Date”), the Remarketing Agent shall use commercially reasonable efforts to remarket (based on the Reset Rate) (the “Initial Remarketing”) the Remarketed Senior Notes, at a price (the “Remarketing Price”) equal to approximately 100.25% (or, if the Remarketing Agent is unable to remarket the Remarketed Senior Notes at such a rate, at a rate below 100.25% in the discretion of the Remarketing Agent, but in no event less than 100.00%) of the sum of the Treasury Portfolio Purchase Price and the Separate Senior Notes Purchase Price.

(c) In the case of a Failed Initial Remarketing and unless a Special Event Redemption has occurred prior to such date, on the third Business Day immediately preceding the Purchase Contract Settlement Date (the “Final Remarketing Date”), the Remarketing Agent shall use its commercially reasonable efforts to remarket (based on the Reset Rate) (the “Final Remarketing”) the Remarketed Senior Notes at a price (the “Final Remarketing Price”) equal to approximately 100.25% (or, if the Remarketing Agent is unable to remarket the Remarketed Senior Notes at such a rate, at a rate below 100.25% in the discretion of the Remarketing Agent, but in no event less than 100.00%)of the aggregate principal amount of the Remarketed Senior Notes being remarketed in such Final Remarketing. It is understood and agreed that the Remarketing on any Remarketing Date will be considered successful and no further attempts will be made if the resulting proceeds are at least 100% of the sum of the Treasury Portfolio Purchase Price and the Separate Senior Notes Purchase Price; in the case of the Initial Remarketing, and at least 100% of the aggregate principal amount of the Remarketed Senior Notes, in the case of the Final Remarketing.

(d) In connection with each Remarketing, the Remarketing Agent shall determine, in consultation with the Company, the rate per annum, rounded to the nearest one-thousandth (0.001) of one percent per annum, that the Senior Notes should bear (the “Reset Rate”) in order for the Remarketed Senior Notes to have an aggregate market value equal to the Remarketing Price or the Final Remarketing Price, as the case may be, and that in the sole reasonable discretion of the Remarketing Agent will enable it to remarket all of the Remarketed Senior Notes at the Remarketing Price or Final Remarketing Price, as the case may be, in such Remarketing.

(e) In the event of a Failed Remarketing or if no Senior Notes are included in Corporate Units, and if none of the holders of the Separate Senior Notes elect to have Senior Notes be remarketed in such Remarketing, the applicable interest rate on the Senior Notes will not be reset and will continue to be the Coupon Rate set forth in the Indenture, as supplemented from time to time.

(f) If, by 4:00 p.m. (New York City time) on the applicable Remarketing Date, the Remarketing Agent is unable to remarket all of the Remarketed Senior Notes at the Remarketing Price or the Final Remarketing Price, as the case may be, pursuant to the terms and conditions hereof, a Failed Remarketing shall be deemed to have occurred, and the Remarketing Agent shall so advise, by telephone, the Depositary, the Purchase Contract Agent and the Company. Whether or not there has been a Failed Remarketing will be determined in the sole reasonable discretion of the Remarketing Agent. Promptly following any Failed Remarketing, the Remarketing Agent shall return Separate Senior Notes submitted for remarketing, if any, to the Custodial Agent for distribution to the appropriate Holders.

3

(g) In the event of a Successful Remarketing, by approximately 4:30 p.m. (New York City time) on the applicable Remarketing Date, the Remarketing Agent shall advise, by telephone:

(i) the Depositary, the Purchase Contract Agent and the Company of the Reset Rate determined by the Remarketing Agent in such Remarketing and the number of Remarketed Senior Notes sold in such Remarketing;

(ii) each purchaser (or the Depositary Participant thereof) of Remarketed Senior Notes of the Reset Rate and the number of Remarketed Senior Notes such purchaser is to purchase; and

(iii) each such purchaser to give instructions to its Depositary Participant to pay the purchase price on the third Business Day immediately following the date of such Successful Remarketing in same-day funds against delivery of the Remarketed Senior Notes purchased through the facilities of the Depositary.

The Remarketing Agent shall also, if required by the Securities Act or the rules and regulations promulgated thereunder, deliver to each purchaser a Prospectus in connection with the Remarketing.

(h) After deducting any fees specified in Section 4 below, the proceeds from a Successful Remarketing (i) with respect to the Senior Notes that are components of the Corporate Units, shall be paid to the Collateral Agent in accordance with Sections 5.07 and 7.03 of the Pledge Agreement, as the case may be, and Section 5.02 of the Purchase Contract Agreement and (ii) with respect to the Separate Senior Notes, shall be paid to the Custodial Agent for payment to the holders of such Separate Senior Notes in accordance with Section 5.02 of the Purchase Contract Agreement and Sections 5.07 and 7.03 of the Pledge Agreement.

(i) The right of each holder of Separate Senior Notes or Corporate Units to have Remarketed Senior Notes remarketed and sold on any Remarketing Date shall be subject to the conditions that (i) the Remarketing Agent conducts a Remarketing pursuant to the terms of this Agreement, (ii) a Special Event Redemption has not occurred prior to such Remarketing Date, (iii) the Remarketing Agent is able to find a purchaser or purchasers for Remarketed Senior Notes at the Remarketing Price or the Final Remarketing Price, as the case may be, based on the Reset Rate, and (iv) such purchaser or purchasers deliver the purchase price therefor to the Remarketing Agent as and when required.

(j) It is understood and agreed that the Remarketing Agent shall not have any obligation whatsoever to purchase any Remarketed Senior Notes, whether in the Remarketing or otherwise, and shall in no way be obligated to provide funds to make payment upon tender of Senior Notes for Remarketing or to otherwise expend or risk its own funds or incur or to be exposed to financial liability in the performance of its duties under this Agreement, and without limitation of the foregoing, the Remarketing Agent shall not be deemed an underwriter of the Remarketed Senior Notes. The Company shall similarly not be obligated in any case to provide funds to make payment upon tender of the Senior Notes for Remarketing.

4

Section 3. Representations and Warranties of the Company. The Company represents and warrants (i) on and as of the date any Remarketing Materials are first distributed in connection with the Remarketing (the “Commencement Date”) and (ii) on and as of the applicable Remarketing Date, in each case except as disclosed in writing to the Remarketing Agent by the Company prior to the applicable date, that:

(a) Each of the representations and warranties of the Company as set forth in Section 1 (except for paragraphs (a) and (z) and the last sentence of paragraph (y) of such section) of the Underwriting Agreement dated as of October 28, 2003 relating to the issuance of Units by the Company (the “Underwriting Agreement”) among the Company and the Underwriters identified in Schedule A thereto, is true and correct as if made on each of the dates specified above; provided that for purposes of this Section 3(a), (i) any reference in such sections of the Underwriting Agreement to the “Underwriter” or “Underwriters” or the “Representative” or “Representatives” shall be deemed to refer to the Remarketing Agent, (ii) the “Designated Securities” shall be deemed to refer to the Remarketed Senior Notes, (iii) the “Registration Statement”, the “Prospectus” or the “Preliminary Prospectus” shall be deemed to refer to such terms as defined herein, (iv) the “First Closing Date” and “Optional Closing Date” shall be each deemed to refer to the settlement date for the applicable Remarketing Date, (v) “this Agreement”, the “Underwriting Agreement”, “hereof”, “herein” and all references of similar import, shall be deemed to mean and refer to this Remarketing Agreement and (vi) “the date hereof”, “the date of this Agreement” and all similar references shall be deemed to refer to the date of this Remarketing Agreement.

(b) The Registration Statement, if any, in the form delivered prior to the applicable date set forth in the first paragraph of this Section 3 or to be delivered to the Remarketing Agent, has been declared effective by the Securities and Exchange Commission (the “Commission”) under the Securities Act. The Company has complied to the Commission’s satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened by the Commission.

(c) The documents incorporated or deemed to be incorporated by reference in the Prospectus, if any, at the time they were or hereafter are filed with the Commission, complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission thereunder, and, when read together with the other information in the Prospectus, at the time the Registration Statement and any amendments thereto became effective, and at the Commencement Date, applicable Remarketing Date and applicable settlement date, will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information relating to the Remarketing Agent furnished in writing to the Company by the Remarketing Agent or its counsel expressly for use in the Prospectus.

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(d) The Registration Statement, if any, complies, and any post-effective amendment thereto, any Rule 462(b) Registration Statement and any Remarketing Materials (and any amendment or supplement thereto) will comply in all material respects with the requirements of the Securities Act and the rules and regulations promulgated thereunder, and the Trust Indenture Act, and the Registration Statement as amended and supplemented by the Prospectus, any post-effective amendment thereto and any Rule 462(b) Registration Statement do not and will not, as of the applicable effective date thereof, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date, and any further supplements to the Prospectus, as of the applicable filing date as to any such supplement and any Remarketing Materials (and any amendment or supplement thereto), as of the date of such Remarketing Materials and the Remarketing Date, do not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. No representation and warranty is made as to any statement of eligibility on Form T-1 filed or incorporated by reference as part of the Registration Statement, the Prospectus or the Remarketing Materials, or as to statements in or omissions from the Registration Statement, the Prospectus or the Remarketing Materials made in reliance upon and in conformity with written information furnished to the Company by the Remarketing Agent.

(e) This Agreement has been duly authorized, executed and delivered by the Company.

Section 4. Fees.

(a) In the event of a Successful Initial Remarketing of the Remarketed Senior Notes, the Remarketing Agent may retain as a remarketing fee an amount equal to 25 basis points (.25%) of the sum of the Treasury Portfolio Purchase Price and the Separate Senior Note Purchase Price from any proceeds of the Successful Remarketing in excess of the Treasury Portfolio Purchase Price plus the Separate Senior Notes Purchase Price. To the extent that such excess proceeds are less than 25 basis points of the Treasury Portfolio Price plus the Separate Senior Notes Purchase Price, the Company shall pay an amount, as an additional remarketing fee, to the Remarketing Agent equal to such shortfall (such amount, together with the amount in the previous sentence, the “Remarketing Fee”).

(b) In the event of a Successful Final Remarketing of the Remarketed Senior Notes, the Remarketing Agent may retain as a remarketing fee an amount equal to 25 basis points (.25%) of the aggregate principal amount of the remarketed Pledged Senior Notes and Separate Senior Notes (if any) from any proceeds of the Successful Final Remarketing in excess of the aggregate principal amount of the remarketed Pledged Senior Notes and Separate Senior Notes. To the extent that such excess proceeds are less than 25 basis points of the aggregate principal amount of the remarketed Pledged Senior Notes and Separate Senior Notes, the Company shall pay an amount, as an additional remarketing fee, to the Remarketing Agent equal to such shortfall (such amount, together with the amount in the previous sentence, the “Final Remarketing Fee”).

Section 5. Covenants of the Company. If and to the extent the Remarketed Senior Notes are required, in connection with the Remarketing (in the view of counsel, which need not be in the form of a written opinion, for either the Remarketing Agent or the Company), to be registered under the Securities Act as in effect at the time of the Remarketing, the Company covenants and agrees as follows:

(a) The Company shall prepare the Registration Statement and the Prospectus, in a form approved by the Remarketing Agent, which approval shall not be unreasonably withheld, shall file any such Prospectus pursuant to the Securities Act within the period required by the Securities Act and the rules and regulations thereunder and shall use commercially reasonable efforts to cause the Registration Statement to be declared effective by the Commission prior to the second Business Day immediately preceding the applicable Remarketing Date.

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(b) The Company shall file promptly with the Commission any amendment to the Registration Statement or the Prospectus or any supplement to the Prospectus that may, in the reasonable judgment of the Company or the Remarketing Agent, be required by the Securities Act or requested by the Commission.

(c) The Company shall advise the Remarketing Agent, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Remarketing Agent with copies thereof.

(d) The Company shall file promptly all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a Prospectus is required in connection with the offering or sale of the Remarketed Senior Notes.

(e) The Company shall advise the Remarketing Agent, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of the Prospectus, of the suspension of the qualification of any of the Remarketed Senior Notes for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information, and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Prospectus or suspending any such qualification, to use promptly commercially reasonable efforts to obtain its withdrawal.

(f) The Company shall furnish promptly to the Remarketing Agent such copies of the following documents as the Remarketing Agent shall reasonably request: (A) conformed copies of the Registration Statement as originally filed with the Commission and each amendment thereto (in each case excluding exhibits); (B) the Preliminary Prospectus and any amended or supplemented Preliminary Prospectus; (C) the Prospectus and any amended or supplemented Prospectus; and (D) any document incorporated by reference in the Prospectus (excluding exhibits thereto); and, if at any time when delivery of a prospectus is required in connection with the Remarketing, (i) any event shall have occurred as a result of which the Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading,

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or (ii) if in the opinion of the Remarketing Agent or counsel for the Remarketing Agent it shall otherwise be necessary during such same period to amend or supplement the Prospectus or to file under the Exchange Act any document incorporated by reference in the Prospectus in order to comply with the Securities Act or the Exchange Act, to in the case of (i) notify the Remarketing Agent and, upon its request in each case, to file such document and to prepare and furnish without charge to the Remarketing Agent and to any dealer in securities as many copies as the Remarketing Agent may from time to time reasonably request of an amended or supplemented Prospectus that will correct such statement or omission or effect such compliance.

(g) Prior to filing with the Commission (A) any amendment to the Registration Statement or supplement to the Prospectus (other than any amendment or supplement resulting solely from the incorporation by reference of any report under the Exchange Act) or (B) any Prospectus pursuant to Rule 424 under the Securities Act, the Company shall furnish a copy thereof to the Remarketing Agent and counsel to the Remarketing Agent; and shall not file any such amendment or supplement that shall be reasonably disapproved by the Remarketing Agent promptly after reasonable notice.

(h) As soon as practicable, but in any event not later than eighteen months, after the effective date of the Registration Statement, the Company shall make “generally available to its security holders” an “earnings statement” of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Securities Act and the rules and regulations thereunder (including, at the option of the Company, Rule 158 under the Securities Act). The terms “generally available to its security holders” and “earnings statement” shall have the meanings set forth in Rule 158 under the Securities Act.

(i) The Company shall take such action as the Remarketing Agent may reasonably request in order to qualify the Remarketed Senior Notes for offer and sale under the securities or “blue sky” laws of such jurisdictions as the Remarketing Agent may reasonably request; provided that in no event shall the Company be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction or to subject itself to taxation in any jurisdiction in which it is not otherwise subject.

(j) The Company shall furnish the Remarketing Agent with such information and documents as the Remarketing Agent may reasonably request in connection with the transactions contemplated hereby, and to make reasonably available to the Remarketing Agent and any accountant, attorney or other advisor retained by the Remarketing Agent such information that parties would customarily require in connection with a due diligence investigation conducted in accordance with applicable securities laws and to cause the Company’s officers, directors, employees and accountants to participate in all such discussions and to supply all such information reasonably requested by any such Person in connection with such investigation.

Section 6. Payment of Expenses. The Company agrees to pay (a) all costs incident to the preparation and printing of the Registration Statement, if any, any Prospectus and any other Remarketing Materials and any amendments or supplements thereto, (b) all costs of distributing the Registration Statement, if any, any Prospectus and any other Remarketing Materials and any amendments or supplements thereto, (c) any fees and expenses of qualifying the Remarketed Senior Notes under the securities laws of the several jurisdictions as provided in Section 5(i) and

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of preparing, printing and distributing a Blue Sky Memorandum, if any (including any related fees and expenses of counsel to the Remarketing Agent), (d) all other costs and expenses incident to the performance of the obligations of the Company hereunder and the Remarketing Agent hereunder and (e) the reasonable fees and expenses of counsel to the Remarketing Agent in connection with its duties hereunder.

Section 7. Conditions to the Remarketing Agent’s Obligations. The obligations of the Remarketing Agent hereunder shall be subject to the following conditions:

(a) The representations and warranties of the Company contained herein shall be true and correct in all material respects on and as of the applicable Remarketing Date and the settlement date for the applicable Remarketing Date, without giving effect to any disclosure by the Company contemplated by the preamble to Section 3, and the Company, the Purchase Contract Agent and the Collateral Agent shall have performed in all material respects all covenants and agreements contained herein or in the Purchase Contract Agreement or Pledge Agreement to be performed on their part at or prior to such date.

(b) During the period commencing on a date prior to the Remarketing, chosen by the Remarketing Agent in its reasonable discretion, until (and including) the Remarketing Date, there shall not have occurred any of the following: (i) Trading generally shall have been suspended or materially limited on the New York Stock Exchange, (ii) trading of any securities of the Company shall have been materially suspended or limited on the New York Stock Exchange, (iii) a banking moratorium shall have been declared by either Federal or New York State authorities, or (iv) there shall have occurred a material adverse change in the financial markets, any escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war, if the effect of any such event specified in this clause (b) in the judgment of the Remarketing Agent makes it impracticable or inadvisable to proceed with the Remarketing or the delivery of the Remarketed Senior Notes on the terms and in the manner contemplated in the Transaction Documents.

(c) The Prospectus, if any, shall have been filed with the Commission pursuant to Rule 424(b) in the manner and within the time period required by Rule 424(b) under the Securities Act; no stop order suspending the effectiveness of the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment to the Registration Statement shall be in effect and no proceedings for such purpose shall have been instituted or threatened by the Commission and any request of the Commission for inclusion of additional information in the Registration Statement or the Prospectus or otherwise shall have been complied with.

(d) The Company shall have furnished to the Remarketing Agent a certificate, dated the applicable Remarketing Date, of the Chief Executive Officer and the Treasurer satisfactory to the Remarketing Agent stating that: (1) no order suspending the effectiveness of the Registration Statement, if any, or prohibiting the sale of the Remarketed Senior Notes is in effect, and no proceedings for such purpose are pending before or, to the knowledge of such officers, threatened by the Commission; (2) the representations and warranties of the Company in Section 3 are true and correct on and as of the applicable Remarketing Date without giving effect to any disclosure by the Company contemplated by the preamble to Section 3 and the Company has performed in all material respects all covenants and agreements contained herein to be performed

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on its part at or prior to such Remarketing Date; and (3) the Registration Statement, if any, as of its effective date, did not contain any untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and the Prospectus or any other Remarketing Material did not, as of the date of such Prospectus or such Remarketing Material, if any, contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

(e) On the applicable Remarketing Date, the Remarketing Agent shall have received a letter addressed to the Remarketing Agent and dated such date, in form and substance satisfactory to the Remarketing Agent, from the Company’s independent accountants reasonably acceptable to the Remarketing Agent, containing statements and information of the type ordinarily included in accountants’ “comfort letters” with respect to the financial statements and certain financial information of the Company and its consolidated subsidiaries contained in the Remarketing Materials, if any.

(f) The General Counsel for the Company shall have furnished to the Remarketing Agent its opinion, addressed to the Remarketing Agent and dated the Remarketing Date, in form and substance reasonably satisfactory to the Remarketing Agent addressing such matters as are set forth in such counsel’s opinion furnished pursuant to Section 5(e) of the Underwriting Agreement, adapted as necessary to relate to the securities being remarketed hereunder and to the Remarketing Materials, if any, or to any changed circumstances or events occurring subsequent to the date of this Agreement, such adaptations being reasonably acceptable to counsel to the Remarketing Agent.

(g) Sullivan & Cromwell LLP, or such other counsel reasonably acceptable to the Remarketing Agent, shall have furnished to the Remarketing Agent its written opinion and letter, as special counsel to the Company, addressed to the Remarketing Agent and dated such Delivery Date, in form and substance satisfactory to the Remarketing Agent in form and substance satisfactory to the Remarketing Agent as set forth in Exhibit A to the Underwriting Agreement.

(h) Davis Polk & Wardwell, or such other counsel reasonably acceptable to the Remarketing Agent, shall have furnished to the Remarketing Agent its opinion, as counsel to the Remarketing Agent, addressed to the Remarketing Agent and dated the applicable Remarketing Date, in form and substance satisfactory to the Remarketing Agent.

(i) During the period commencing on a date prior to the Remarketing, chosen by the Remarketing Agent in its reasonable discretion, until (and including) the Remarketing Date and prior to the applicable Remarketing Date, there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate an improvement, in the rating accorded any of the Company’s securities by any “nationally recognized statistical rating organization,” as such term is defined for purposes of Rule 436(g)(2) under the Securities Act.

(j) The Senior Notes shall not have been called for redemption following the occurrence of a Special Event.

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If any condition specified in this Section 7 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Remarketing Agent by notice to the Company at any time on or prior to the applicable Remarketing Date, which termination shall be without liability on the part of any party to any other party, except that Section 6, Section 8 and Section 9 shall at all times be effective and shall survive such termination.

Section 8. Indemnification.

(a) The Company agrees to indemnify and hold harmless the Remarketing Agent, its affiliates, their respective officers, directors, employees, representatives and agents, and each person, if any, who controls the Remarketing Agent within the meaning of the Securities Act or the Exchange Act, from and against any loss, claim, damage, liability, joint or several, or any action in respect thereof to which the Remarketing Agent or any such affiliate officer, employee, representative, agent or controlling person may become subject, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in (A) the Registration Statement, any Preliminary Prospectus or the Prospectus, or in any amendment or supplement thereto, (B) any blue sky application or other document prepared or executed by the Company (or based upon any written information furnished by the Company) filed in any jurisdiction specifically for the purpose of qualifying any or all of the Remarketed Senior Notes under the securities laws of any state or other jurisdiction (such application, document or information being hereinafter called “Blue Sky Application”) or (C) in any materials or information provided to investors by, or with the approval in writing of, the Company in connection with the Remarketing (“Marketing Materials”), (ii) the omission or alleged omission to state in the Registration Statement, any Preliminary Prospectus, the Prospectus or in any amendment or supplement thereto, in any Remarketing Materials or any amendment or supplement thereto, or in any Blue Sky Application, any material fact necessary to make the statements therein not misleading, or (iii) any act or failure to act or any alleged act or failure to act by the Remarketing Agent in connection with, or relating in any manner to, the Remarketed Senior Notes or the Remarketing contemplated hereby, and which is included as part of any loss, claim, damage, liability or action arising out of or based upon matters covered by clause (i) or (ii) above (provided that the Company shall not be liable under this clause (iii) to the extent that it is determined in a judgment by a court of competent jurisdiction that such loss, claim, damage, liability or action resulted from any such acts or failure to act undertaken or omitted to be taken by the Remarketing Agent through its negligence or willful misconduct or from a breach of the Remarketing Agent of its representations herein); and shall reimburse the Remarketing Agent and each such affiliate, officer, employee, representative, agent or controlling person promptly upon demand for any legal or other expenses reasonably incurred by the Remarketing Agent or any such affiliate, officer, employee, representative agent or controlling person in damage, liability or action as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus or the Prospectus, or in any such amendment or supplement, or any other Remarketing Materials (or any amendment or supplement thereto), in reliance upon and in conformity with the written information furnished to the Company by or on behalf of the Remarketing Agent concerning the Remarketing Agent

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specifically for inclusion therein; and provided, further, that the Company shall not be liable to the Remarketing Agent under the indemnity agreement in this subsection (a) with respect to any Preliminary Prospectus to the extent that such loss, claim, damaged, liability or action of the Remarketing Agent results from the fact that the Remarketing Agent sold the Remarketed Senior Notes to a person as to whom it shall be established that such sale was an initial resale by the Remarketing Agent and there was not sent or given to such person, if required by law to have been so sent or given, at or prior to the written confirmation of the sale to such person, a copy of the Prospectus, if the Company had previously furnished copies thereof in sufficient quantities to the Remarketing Agent on a timely basis and the loss, claim, damage or liability of the Remarketing Agent results from an untrue statement or omission of a material fact contained in the Preliminary Prospectus which was (i) identified to the Remarketing Agent prior to the furnishing to the Remarketing Agent of the corrected Prospectus and (ii) corrected in the Prospectus. The foregoing indemnity agreement is in addition to any liability which the Company may otherwise have to the Remarketing Agent or to any affiliate, officer, employee, representative, agent or controlling person of the Remarketing Agent.

(b) The Remarketing Agent shall indemnify and hold harmless the Company, its affiliates, their respective officers, directors, employees, representatives and agents, and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act from and against any loss, claim, damage, liability or any action in respect thereof, to which the Company, or any such affiliate, director, officer, employee, representative, agent or controlling person may become subject, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus (or any amendment or supplement thereto), any Blue Sky Application, or any other Remarketing Materials (or any amendment or supplement thereto), or (ii) the omission or alleged omission to state in the Registration Statement, any Preliminary Prospectus, the Prospectus (or any amendment or supplement thereto), any Blue Sky Application, or any other Remarketing Materials (or any amendment or supplement thereto), any material fact necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by the Remarketing Agent specifically for inclusion therein; and shall reimburse the Company and any such director, officer or controlling person promptly upon demand for any legal and other expenses reasonably incurred by the Company or any such affiliate, director, officer, employee, representative, agent or controlling person in connection with investigating, defending, or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred. The Company hereby acknowledges that the only information that the Remarketing Agent has furnished to the Company expressly for use in the Registration Statement, any Preliminary Prospectus, the Prospectus, any Blue Sky Application or any other Remarketing Materials (or any amendment or supplement thereto) is the information set forth in a certificate to be provided by the Remarketing Agent on or prior to the Remarketing Date. The foregoing indemnity agreement is in addition to any liabilities that each Underwriter may otherwise have.

(c) Promptly after receipt by an indemnified party under this Section 8 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect

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thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the claim or commencement of that action; provided, however, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have had under this Section 8 except to the extent it has been materially prejudiced by such failure and, provided, further, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 8. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 8 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party’s election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party in connection with the defense thereof unless the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (the Remarketing Agent in the case of Section 8(b), representing the indemnified parties who are parties to such action). No indemnifying party shall, (i) without the prior written consent of the indemnified parties (which consent shall not be unreasonably withheld) settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding, or (ii) be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with its written consent or if there be a final judgment of the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss of liability by reason of such settlement or judgment.

Section 9. Contribution. If the indemnification provided for in Section 8 is for any reason held to be unavailable or insufficient to hold harmless an indemnified party under Section 8(a) or 8(b) in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall in lieu of indemnifying such indemnified

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party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company, on the one hand, and the Remarketing Agent, on the other hand, from the Remarketing of the Remarketed Senior Notes pursuant to this Agreement or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Remarketing Agent, on the other hand, with respect to the statements or omissions or alleged statements or alleged omissions that resulted in such loss, claim, damage, or liability (or action in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Remarketing Agent, on the other hand, with respect to the Remarketing of the Remarketed Senior Notes pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the Remarketing of the Remarketed Senior Notes pursuant to this Agreement received by holders of the Remarketed Senior Notes on the one hand, and the total Remarketing Fee received by the Remarketing Agent, on the other hand, bear to the aggregate Remarketing Price plus an additional Remarketing Fee paid by the Company which is not included in the Remarketing Price of the Remarketed Senior Notes. The relative fault of the Company, on the one hand, and the Remarketing Agent, on the other hand, shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or the Remarketing Agent, on the other hand, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission.

The Company and the Remarketing Agent agree that it would not be just and equitable if the amount of contributions pursuant to this Section 9 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to herein.

The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to in this Section 9 shall be deemed to include, for purposes of this Section 9, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim.

Notwithstanding the provisions of this Section 9, the Remarketing Agent shall not be required to contribute any amount in excess of the amount by which the Remarketing Fee exceeds the amount of any damages which the Remarketing Agent has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 9, each officer and employee of the Remarketing Agent and each person, if any, who controls the Remarketing Agent within the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as the Remarketing Agent, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as the Company.

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Section 10. Resignation and Removal of the Remarketing Agent. The Remarketing Agent may resign and be discharged from its duties and obligations hereunder, and the Company may remove the Remarketing Agent, by giving 30 days’ prior written notice, in the case of a resignation, to the Company, the Purchase Contract Agent and the Depositary and, in the case of a removal, to the removed Remarketing Agent, the Purchase Contract Agent and the Depositary; provided, however, that no such resignation nor any such removal shall become effective until the Company shall have appointed at least one nationally recognized broker-dealer as successor Remarketing Agent and such successor Remarketing Agent shall have entered into a remarketing agreement with the Company and the Purchase Contract Agent, in which it shall have agreed to conduct the Remarketing in accordance with the Transaction Documents in all material respects.

In any such case, the Company will use commercially reasonable efforts to appoint a successor Remarketing Agent and enter into such a remarketing agreement with such person as soon as reasonably practicable.

Section 11. Dealing in Securities. The Remarketing Agent, when acting as a Remarketing Agent or in its individual or any other capacity, may, to the extent permitted by law, buy, sell, hold and deal in any of the Remarketed Senior Notes, Corporate Units, Treasury Units or any of the securities of the Company (together, the “Securities”). The Remarketing Agent may exercise any vote or join in any action which any beneficial owner of such Securities may be entitled to exercise or take pursuant to the Indenture with like effect as if it did not act in any capacity hereunder. The Remarketing Agent, in its individual capacity, either as principal or agent, may also engage in or have an interest in any financial or other transaction with the Company as freely as if it did not act in any capacity hereunder.

Section 12. Remarketing Agent’s Performance; Duty of Care. The duties and obligations of the Remarketing Agent shall be determined solely by the express provisions of this Agreement and the Transaction Documents. No implied covenants or obligations of or against the Remarketing Agent shall be read into this Agreement or any of the Transaction Documents. In the absence of bad faith on the part of the Remarketing Agent, the Remarketing Agent may conclusively rely upon any document furnished to it, as to the truth of the statements expressed in any of such documents. The Remarketing Agent shall be protected in acting upon any document or communication reasonably believed by it to have been signed, presented or made by the proper party or parties except as otherwise set forth herein. The Remarketing Agent, acting under this Agreement, shall incur no liability to the Company or to any holder of Remarketed Senior Notes in its individual capacity or as Remarketing Agent for any action or failure to act, on its part in connection with a Remarketing or otherwise, except if such liability is judicially determined to have resulted from its failure to comply with the material terms of this Agreement or the gross negligence or willful misconduct on its part. The provisions of this Section 12 shall survive the termination of this Agreement and shall survive the resignation or removal of any Remarketing Agent pursuant to this Agreement.

Section 13. Termination. This Agreement shall automatically terminate (i) as to the Remarketing Agent on the effective date of the resignation or removal of the Remarketing Agent pursuant to Section 10 and (ii) on the earlier of (x) any Special Event Redemption Date and (y) the Purchase Contract Settlement Date. If this Agreement is terminated pursuant to any of the other provisions hereof, except as otherwise provided herein, the Company shall not be under

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any liability to the Remarketing Agent and the Remarketing Agent shall not be under any liability to the Company, except that if this Agreement is terminated by the Remarketing Agent because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, the Company will reimburse the Remarketing Agent for all of its out-of-pocket expenses (including the fees and disbursements of its counsel) reasonably incurred by it. Section 8, Section 9 and Section 12 hereof shall survive the termination of this Agreement or the resignation or removal of the Remarketing Agent.

Section 14. Notices. All statements, requests, notices and agreements hereunder shall be in writing, and:

(a) if to the Remarketing Agent, shall be delivered or sent by mail, telex or facsimile transmission to:

Banc of America Securities LLC

9 West 57^th Street

New York, NY 10019

Telecopier No.: 212-847-5124

Attention: Eric Hambleton

(b) if to the Company, shall be delivered or sent by mail, telex or facsimile transmission to The PMI Group, Inc., 3003 Oak Road, Walnut Creek, California 94597, Telecopier No.: 925-658-6175; Attention: General Counsel; and

(c) if to the Purchase Contract Agent, shall be delivered or sent by mail, telex or facsimile transmission to The Bank of New York, Telecopier No.: 212-815-5707; Attention: Corporate Trust Administration.

Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof.

Section 15. Persons Entitled to Benefit of Agreement. This Agreement shall inure to the benefit of and be binding upon each party hereto and its respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that (x) the representations, warranties, indemnities and agreements of the Company contained in this Agreement shall also be deemed to be for the benefit of the Remarketing Agent and the person or persons, if any, who control the Remarketing Agent within the meaning of Section 15 of the Securities Act and (y) the indemnity agreement of the Remarketing Agent contained in Section 8 of this Agreement shall be deemed to be for the benefit of the Company’s directors and officers who sign the Registration Statement, if any, and any person controlling the Company within the meaning of Section 15 of the Securities Act. Nothing contained in this Agreement is intended or shall be construed to give any person, other than the persons referred to herein, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein.

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Section 16. Survival. Notwithstanding Section 13, the respective indemnities, representations, warranties and agreements of the Company and the Remarketing Agent contained in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall survive any Remarketing and shall remain in full force and effect, regardless of any investigation made by or on behalf of any of them or any person controlling any of them.

Section 17. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of New York, without regard to conflicts of laws principles.

Section 18. Counterparts. This Agreement may be executed in one or more counterparts and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original but all such counterparts shall together constitute one and the same instrument.

Section 19. Headings. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement.

Section 20. Severability. If any provision of this Agreement shall be held or deemed to be or shall, in fact, be invalid, inoperative or unenforceable as applied in any particular case in any or all jurisdictions because it conflicts with any provisions of any constitution, statute, rule or public policy or for any other reason, then, to the extent permitted by law, such circumstances shall not have the effect of rendering the provision in question invalid, inoperative or unenforceable in any other case, circumstance or jurisdiction, or of rendering any other provision or provisions of this Agreement invalid, inoperative or unenforceable to any extent whatsoever.

Section 21. Amendments. This Agreement may be amended by an instrument in writing signed by the parties hereto. The Company agrees that it will not enter into, cause or permit any amendment or modification of the Transaction Documents or any other instruments or agreements relating to the Senior Notes or the Corporate Units that would in any way adversely affect the rights, duties or obligations of the Remarketing Agent, without the prior written consent of the Remarketing Agent.

Section 22. Successors and Assigns. The rights and obligations of the Company hereunder may not be assigned or delegated to any other Person without the prior written consent of Banc of America. The rights and obligations of the Remarketing Agent hereunder may not be assigned or delegated to any other Person (other than an affiliate of the Remarketing Agent) without the prior written consent of the Company.

If the foregoing correctly sets forth the agreement by and between the Company, the Remarketing Agent and the Purchase Contract Agent, please indicate your acceptance in the space provided for that purpose below.

SIGNATURES ON THE FOLLOWING PAGE

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Very truly yours,
THE PMI GROUP, INC.
By:	/s/ Donald P. Lofe, Jr.
	Name:	Donald P. Lofe, Jr.
	Title:	Executive Vice President and Chief Financial Officer

CONFIRMED AND ACCEPTED:
BANC OF AMERICA SECURITIES LLC
By:	/s/ Trevor Ganshaw
	Name:	Trevor Ganshaw
	Title:	Managing Director

THE BANK OF NEW YORK

not individually but solely as Purchase Contract Agent and as attorney-in-fact for the Holders of the Purchase Contracts

By:	/s/ Michael Pitfick
	Name:	Michael Pitfick
	Title:	Assistant Vice President

EX-10.37

EXHIBIT 10.37

THE PMI GROUP, INC.

Performance Share Agreement

Grant #             

The PMI Group, Inc. (the “Company”) hereby grants you,                                  (the “Employee”), an award of Performance Shares under the Company’s Amended and Restated Equity Incentive Plan (the “Plan”). The date of this Agreement is                         . Subject to the provisions of Appendix A (attached) and of the Plan, the principal features of this award are as follows:

Number of Performance Shares:

Vesting of Performance Shares:

Your signature below indicates your agreement and understanding that this award is subject to all of the terms and conditions contained in Appendix A and the Plan. For example, important additional information on vesting and forfeiture of the Performance Shares is contained in Paragraphs 3 through 5 of Appendix A. PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS AGREEMENT.

THE PMI GROUP, INC.	EMPLOYEE
[NAME]
[TITLE]
Date:	Date:

APPENDIX A

TERMS AND CONDITIONS OF PERFORMANCE SHARES

Grant #             

1. Grant. The Company hereby grants to the Employee under the Plan for past services and as a separate incentive in connection with his or her employment and not in lieu of any salary or other compensation for his or her services, an award of                      Performance Shares, subject to all of the terms and conditions in this Agreement and the Plan.

2. Company’s Obligation to Pay. Each Performance Share has a value equal to the Fair Market Value of a Share on the date of this Agreement. Unless and until the Performance Shares will have vested in the manner set forth in paragraphs 3 and 4, the Employee will have no right to payment of any such Performance Shares. Prior to actual payment of any vested Performance Shares, such Performance Shares will represent an unsecured obligation of the Company, payable (if at all) only from the general assets of the Company.

3. Vesting Schedule. Subject to paragraph 4, the Performance Shares awarded by this Agreement will vest in the Employee on                                                                          , subject to the Employee’s continued employment with the Company or its Subsidiaries through the applicable vesting date.

4. Vesting and/or Forfeiture upon Termination of Employment; Non-Acceleration upon Retirement. Notwithstanding any contrary provision of this Agreement, if the Employee incurs a Termination of Service for a reason other than death or Disability, the Performance Shares awarded by this Agreement will thereupon be forfeited at no cost to the Company. Upon Employee’s Termination of Service due to the Employee’s death or Disability, the Performance Shares will immediately vest. The Performance Shares will not vest upon the Employee’s Termination of Service due to his Retirement.

5. Payment after Vesting. Any Performance Shares that vest in accordance with paragraphs 3 and 4 will be paid to the Employee (or in the event of the Employee’s death, to his or her estate) in Shares which have a Fair Market Value equal to the cash value of the vested Performance Shares, provided that to the extent determined appropriate by the Company, any federal, state and local withholding taxes with respect to such Performance Shares will be paid by reducing the number of vested Performance Shares actually paid to the Employee.

6. Payments after Death. Any distribution or delivery to be made to the Employee under this Agreement will, if the Employee is then deceased, be made to the Employee’s designated beneficiary, or if no beneficiary survives the Employee, administrator or executor of the Employee’s estate. Any such transferee must furnish the Company with (a) written notice of his or her status as transferee, and (b) evidence satisfactory to the Company to establish the validity of the transfer and compliance with any laws or regulations pertaining to said transfer.

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7. Deferral Election. The Employee may elect to defer delivery of the payment of any Performance Shares, which election will be subject to such documentation as the Company may promptly and reasonably request. Any such deferral election by the Employee will be void and not given effect unless the Employee’s deferral election is made at least twelve (12) months prior to the date the Performance Shares otherwise are scheduled to be paid. The Committee may require that the Employee make an election earlier than twelve (12) months prior to the date the Performance Shares are scheduled to be paid. Upon the date the Performance Shares vest to which a deferral election applies, the Company will create a bookkeeping entry initially representing an amount equivalent to the Fair Market Value of the number of Shares that would have otherwise been payable pursuant to the Performance Shares had a deferral election not been made. Any such obligation will represent an unfunded and unsecured obligation of the Company.

8. Rights as Stockholder. Neither the Employee nor any person claiming under or through the Employee will have any of the rights or privileges of a stockholder of the Company in respect of any Shares deliverable hereunder unless and until certificates representing such Shares will have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Employee.

9. No Effect on Employment. The Employee’s employment with the Company and its Subsidiaries is on an at-will basis only. Accordingly, the terms of the Employee’s employment with the Company and its Subsidiaries will be determined from time to time by the Company or the Subsidiary employing the Employee (as the case may be), and the Company or the Subsidiary will have the right, which is hereby expressly reserved, to terminate or change the terms of the employment of the Employee at any time for any reason whatsoever, with or without good cause.

10. Address for Notices. Any notice to be given to the Company under the terms of this Agreement will be addressed to the Company, in care of Human Resources Department, The PMI Group, Inc., 3003 Oak Road, Walnut Creek, California 94597, or at such other address as the Company may hereafter designate in writing.

11. Grant is Not Transferable. Except to the limited extent provided in paragraph 6, this grant and the rights and privileges conferred hereby will not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and will not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this grant, or any right or privilege conferred hereby, or upon any attempted sale under any execution, attachment or similar process, this grant and the rights and privileges conferred hereby immediately will become null and void.

12. Binding Agreement. Subject to the limitation on the transferability of this grant contained herein, this Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.

13. Additional Conditions to Issuance of Stock. If at any time the Company will determine, in its discretion, that the listing, registration or qualification of the Shares upon any securities exchange or under any state or federal law, or the consent or approval of any

3

governmental regulatory authority is necessary or desirable as a condition to the issuance of Shares to the Employee (or his estate), such issuance will not occur unless and until such listing, registration, qualification, consent or approval will have been effected or obtained free of any conditions not acceptable to the Company. The Company will make all reasonable efforts to meet the requirements of any such state or federal law or securities exchange and to obtain any such consent or approval of any such governmental authority.

14. Plan Governs. This Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Agreement and one or more provisions of the Plan, the provisions of the Plan will govern. Capitalized terms used and not defined in this Agreement will have the meaning set forth in the Plan.

15. Committee Authority. The Committee will have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules (including, but not limited to, the determination of whether or not any Performance Shares have vested). All actions taken and all interpretations and determinations made by the Committee in good faith will be final and binding upon Employee, the Company and all other interested persons. No member of the Committee will be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement.

16. Captions. Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.

17. Agreement Severable. In the event that any provision in this Agreement will be held invalid or unenforceable, such provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement.

o O o

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EX-11.1

EXHIBIT 11.1

THE PMI GROUP, INC. AND SUBSIDIARIES

COMPUTATION OF NET INCOME PER SHARE

Years Ended December 31, 2003, 2002 and 2001

	2003		2002		2001
	(Dollars in thousands, except per share data)
Basic net income per common share:
Net income	$	299,433	$	346,217	$	307,212
Average common shares outstanding		89,915		89,843		88,887
Basic net income per common share	$	3.33	$	3.85	$	3.46
Diluted net income per common share:
Net Income	$	299,433	$	346,217	$	307,212
Average common shares outstanding		89,915		89,843		88,887
Net shares to be issued upon exercise of dilutive stock options and other dilutive components		1,130		1,537		1,781
Average shares outstanding		91,045		91,380		90,668
Diluted net income per common share	$	3.29	$	3.79	$	3.39

EX-12.1

EXHIBIT 12.1

THE PMI GROUP, INC. AND SUBSIDIARIES

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

	Year Ended December 31,
	2003			2002			2001			2000			1999
	(Dollars in thousands, except for ratios)
Earnings
Income from continuing operations before income taxes (1)	$	393,122		$	450,162		$	432,272		$	364,348		$	277,556
Less: Equity in earnings from unconsolidated subsidiaries		(4,597	)		(44,225	)		(18,788	)		(11,880	)		(7,061	)
Add: Equity earnings from unconsolidated subsidiaries with greater than 50% ownership		(31,096	)		23,371			—			—			—
Add: Distributed earnings of subsidiaries with less than 50% ownership		157			5,798			—			—			—
Fixed charges		40,414			30,598			27,172			22,426			19,774
Total earnings	$	398,000		$	465,705		$	440,657		$	374,894		$	290,269
Fixed charges
Interest expense	$	20,815		$	17,654		$	15,218		$	10,361			8,705
Interest expense of unconsolidated subsidiaries with greater than 50% ownership		12,389			5,493			—			—			—
Distributions on manditorily redeemable preferred securities		3,676			4,030			7,604			8,309			8,309
Interest component of rent expense (2)		3,534			3,422			4,351			3,756			2,760
Total fixed charges	$	40,414		$	30,599		$	27,172		$	22,426		$	19,774
Ratio of earnings to fixed charges		9.85			15.22			16.22			16.72			14.68

(1) In October 2003, the Company announced that it had reached a definitive agreement to sell APTIC. Following the announcement, the Company began reporting APTIC's results as discontinued operations in the Consolidated Statements of Operations. The calculation of of the ratio of earnings to fixed charges excludes discontinued operations. Prior periods have been restated to conform to the 2003 presentation.

(2) Represents an estimated interest factor.

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EX-21.1

EXHIBIT 21.1

THE PMI GROUP, INC. – SUBSIDIARIES

Subsidiary Name	Name Under Which Subsidiary Does Business (if different)	Jurisdiction of Incorporation
PMI Mortgage Insurance Co.		Arizona
PMI Capital Corporation		Delaware
American Pioneer Title Insurance Co.	Chelsea Title Company	Florida
Residential Guaranty Co.		Arizona
PMI Mortgage Guaranty Co.		Arizona
Residential Insurance Co.		Arizona
TPG Insurance Co.		Vermont
TPG Segregated Portfolio Company		Cayman
PMI Mortgage Insurance Australia (Holdings) Pty Limited		Australia
PMI Mortgage Insurance Ltd		Australia
PMI Indemnity Limited		Australia
TPG Reinsurance Company Limited		Ireland
PMI Mortgage Insurance Company Limited		Ireland
PMI Insurance Services Limited		United Kingdom
PMI Plaza LLC		Delaware
Fairbanks Capital Holding Corp. (unconsolidated, partially owned)		Delaware
RAM Holdings Ltd (unconsolidated, partially owned)		Bermuda
RAM Holdings Ltd II (unconsolidated, partially owned)		Bermuda
CMG Mortgage Insurance Company (unconsolidated, partially owned)		Wisconsin
CMG Mortgage Reinsurance Company (unconsolidated, partially owned)		Wisconsin
CMG Mortgage Assurance Company (unconsolidated, partially owned)		Wisconsin
FGIC Corporation (unconsolidated, partially owned)		Delaware

EX-23.1

EXHIBIT 23.1

Consent of Independent Auditors

We consent to the incorporation by reference in the following registration statements of our report dated January 26, 2004, with respect to the consolidated financial statements and schedules of The PMI Group, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2003.

Registration Statement Number	On Form
333-32190	S-8
333-47473	S-8
333-63122	S-8
333-66829	S-8
333-76742	S-8
333-81679	S-8
333-92636	S-8
333-99378	S-8
333-48035	S-3
333-67125	S-3
333-70306	S-3
333-29777	S-4
333-102761	S-8
333-107747	S-3
333-110044	S-3

/s/ Ernst & Young LLP

Los Angeles, California

March 9, 2003

EX-31.1

Exhibit 31.1

CERTIFICATION

I, W. Roger Haughton, certify that:

1. I have reviewed this annual report on Form 10-K of The PMI Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 12, 2004

/s/    W. ROGER HAUGHTON        

W. Roger Haughton

Chairman and Chief Executive Officer

Principal Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Donald P. Lofe, Jr., certify that:

1. I have reviewed this report on Form 10-K of The PMI Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 12, 2004

/s/    DONALD P. LOFE, JR.       

Donald P. Lofe, Jr.

Executive Vice President and Chief Financial Officer

Principal Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION

Pursuant to 18 U.S.C. Section 1350, I, W. Roger Haughton, Chief Executive Officer of The PMI Group, Inc. (“Company”), hereby certify that the Annual report on Form 10-K of the Company for the year ended December 31, 2003 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 12, 2004 /s/    W. ROGER HAUGHTON        W. Roger Haughton Chief Executive Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.

EX-32.2

Exhibit 32.2

CERTIFICATION

Pursuant to 18 U.S.C. Section 1350, I, Donald P. Lofe, Jr., Chief Financial Officer of The PMI Group, Inc. (“Company”), hereby certify that the Annual report on Form 10-K of the Company for the year ended December 31, 2003 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 12, 2004 /s/    DONALD P. LOFE, JR.        Donald P. Lofe, Jr. Chief Financial Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.