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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, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-13664
THE PMI GROUP, INC.
(Exact name of registrant as specified in its charter)
601 Montgomery Street
Delaware San Francisco, California 94111 94-3199675
State of Incorporation Address of principal executive offices I.R.S. Employer
Identification No.
(415) 788-7878
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the voting stock (common stock) held by
non-affiliates of the registrant as of the close of business on February 28,
1997 was $1,290,681,000, based on the closing sale price of the common stock on
the New York Stock Exchange consolidated tape on that date.
Number of shares outstanding of the Registrant's common stock, as of the close
of business on February 28, 1997: 34,134,084.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Annual Report to
Shareholders for the fiscal year ended December 31, 1996 are incorporated by
reference into Items 6 through 8 of Part II. Portions of the Proxy Statement for
registrant's 1997 Annual Meeting of Shareholders to be held on May 13, 1997 are
incorporated by reference into Items 10 through 13 of Part III. The Exhibit
Index is located on page 50.
1
PART I
ITEM 1. BUSINESS
A. GENERAL
The PMI Group, Inc. ("TPG") is a holding company which conducts its business
through its direct wholly-owned subsidiaries PMI Mortgage Insurance Co. ("PMI"),
an Arizona corporation, Residential Guaranty Co. ("RGC"), an Arizona
corporation, PMI Mortgage Guaranty Co., an Arizona corporation and American
Pioneer Title Insurance Company ("APTIC"), a Florida corporation. In addition,
PMI owns all of the outstanding common stock of PMI Mortgage Services Co.
("MSC"), a California corporation. PMI also owns 45% of the outstanding shares
of common stock of CMG Mortgage Insurance Company ("CMG"), a Wisconsin
corporation. (TPG, its subsidiaries, MSC and CMG are collectively referred to
as the "Company").
TPG, through PMI, is one of the leading mortgage insurers in the United States.
In addition to primary mortgage insurance, TPG, through its subsidiaries,
provides title insurance, contract underwriting and various services and
products for the home mortgage finance industry. PMI was founded in 1972 and was
acquired by Allstate Insurance Company ("Allstate") in 1973. In April 1995,
Allstate sold a majority of TPG in an initial public offering (the "IPO").
PMI is licensed in all 50 states of the United States and the District of
Columbia. At December 31, 1996, the Company's total assets were $1,509,919,000
and its shareholders' equity was $986,862,000. At December 31, 1996, 84.0% of
the Company's $1,291,746,000 investment portfolio was invested in fixed income
securities, over 98% of which were investment grade. PMI's claims-paying ability
is currently rated "AA+" (Excellent) by Standard & Poor's Rating Services
("S&P"), "AA+" (Very Strong) by Fitch Investors Service, Inc. ("Fitch"), "AA+"
(Very High) by Duff & Phelps Credit Rating Co. ("Duff & Phelps") and "Aa2"
(Excellent) by Moody's Investors Service, Inc. ("Moody's"). See "L. Claims
Paying Ability --Ratings", below.
Strategy
The Company's strategy is to maintain a leading position in the private mortgage
insurance industry and enhance its profitability by increasing its insurance in
force, from which it earns premiums, while sustaining the quality of its
insurance portfolio through disciplined underwriting. PMI's overall risk
management is based on loan-by-loan underwriting and utilization of its
proprietary underwriting technology system ("pmiAURA(sm)"), and its
proprietary automated residential appraisal analysis system ("pmiTERRA(sm)").
(See "I. Underwriting Practices -- Role of Technology", below.) PMI continually
monitors and attempts to adjust the diversification of its insurance portfolio
by emphasizing more profitable geographic regions and risk characteristics.
The Company also seeks to develop ancillary businesses that support its core
mortgage insurance business, such as its investment in CMG, a joint venture with
CUNA Mutual Investment Corporation, which offers mortgage guaranty insurance for
mortgage loans originated by credit unions, reinsurance support provided by RCG
to PMI and CMG relating to the deep coverage requirements instituted by the
Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan
Mortgage Corporation ("Freddie Mac") and MSC's contract underwriting services
for mortgage loan originators. See "M. Other Businesses", below.
2
B. PRODUCTS
PMI provides mortgage insurance coverage for lenders who receive a down payment
of 20% or less from a borrower. PMI also provides mortgage insurance coverage
for lenders for mortgages with: (i) loan-to-value ratios ("LTVs") in excess of
90% and less than or equal to 95% ("95s"); (ii) LTVs equal to or less than 90%
and over 85% ("90s"); and (iii) LTVs in excess of 95% and up to 97% ("97s").
Fannie Mae and Freddie Mac require that 95s must have 30% coverage, 90s must
have 25% coverage, and 97s must have 30% coverage.
Primary Insurance
PMI issues primary insurance for first lien mortgage loans on one-to-four unit
residential properties, including condominiums. Primary coverage can be used on
any type of residential mortgage loan instrument approved by PMI and is
generally underwritten on a loan-by-loan basis. (See "I. Underwriting Practices
- -- Delegated Underwriting", below.) Primary mortgage insurance provides mortgage
default protection to lenders or investors on individual loans. PMI's obligation
to an insured with respect to a claim is determined by applying the appropriate
coverage percentage to the claim amount. In lieu of paying the coverage
percentage of the claim amount, PMI has the option of: (i) paying the entire
claim amount and taking title to the mortgaged property, or (ii) in the case of
certain sales, paying the difference between the sales proceeds received by the
insured and the claim amount up to a maximum of the coverage percentage. See "J.
Defaults and Claims -- Claims", below.
PMI offers coverage ranging from 6% to 35% of the total of the outstanding loan
principal, delinquent interest and certain expenses associated with a default
and the subsequent foreclosure of a mortgage loan ("claim amount"), with the
percentage of the total claim amount subject to payment by PMI in the event of a
claim on a mortgage loan that is the subject of primary insurance ("coverage
percentage") being predominantly in the 25% to 30% range for new insurance
written ("NIW") for the year ended December 31, 1996. Fannie Mae and Freddie Mac
requirements concerning levels of coverage on certain mortgages with high LTV
ratios had the effect of increasing the average coverage percentage for PMI to
26.1% for the year ended December 31, 1996 from 25.4% for the year ended
December 31, 1995. Certain states limit the amount of risk a mortgage insurer
may retain with respect to coverage of an insured loan to 25% of the
indebtedness to the insured. Coverage in excess of 25% of the indebtedness to
the insured ("deep coverage") 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, TPG formed RGC to provide reinsurance of such deep
coverage to PMI and CMG. (See "K. Reinsurance -- RGC", below.) The coverage
percentage insured by PMI is determined by the lender, usually to comply with
Fannie Mae's and Freddie Mac's requirements to reduce the loss exposure on loans
purchased by them. At December 31, 1996, PMI's average coverage percentage on
insurance in force was 22.4%. See "C. Industry Overview-- Fannie Mae and Freddie
Mac", below.
Mortgage insurance coverage cannot be canceled by PMI, except for nonpayment of
premiums or certain material violations of PMI's Master Policy. Generally,
mortgage insurance remains renewable at the option of the insured for the life
of the loan at a 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 generally cannot be offset by renewal premium
increases on policies in force or mitigated by nonrenewal of insurance coverage.
Mortgage insurance premiums are usually charged to the borrower by the mortgage
lender or loan servicer, which in turn remits the premiums to the mortgage
insurer. PMI has two basic types of premium payment plans.
3
The first is a premium payment plan in which premiums are paid monthly over the
term of the coverage ("Monthly Premium Plan"). Under PMI's Monthly Premium Plan
only one or two months' premium is paid at the mortgage loan closing, and
thereafter monthly premiums are collected by the loan servicer for monthly
remittance to PMI. Monthly Premium Plans represented 95.1% of NIW in 1996. In
January 1996, PMI introduced a mortgage insurance product called pmiNU
MONTHLY(sm), under which the first monthly premium is payable at the time the
first monthly mortgage payment is due. This plan reduces the amount a borrower
would typically have to pay at closing, thereby, increasing mortgage loan
affordability.
The second type of premium payment plan requires the payment of the first-year
premium to be paid at the time of mortgage loan closing and annual renewal
premium payments are paid in advance each year thereafter ("Annual Premium
Plan"). Renewal payments generally are collected monthly from the borrower along
with the mortgage payment and held in escrow by the loan servicer for annual
remittance to PMI in advance of each renewal year. Annual Premium Plans
represented 4.1% of NIW in 1996.
PMI also offers a premium payment plan which requires an initial premium payment
that extends coverage for more than one year and involves a lump-sum payment at
the loan closing, which may be refundable if the coverage is canceled by the
insured lender (which generally occurs when the loan is repaid or the value of
the property has increased significantly). The single premium can be financed by
the borrower by adding it to the principal amount of the mortgage and generally
covers the greater of 10 years or amortization of the underlying loan to an 80%
LTV.
Risk-Sharing Products
In addition to standard primary insurance, PMI offers: (i) layered co-insurance,
a primary mortgage insurance program for a covered loan for which a mortgage
originator or a state housing authority retains liability for losses above a
certain level of aggregate losses and below a second specified level of
aggregate losses, above which the mortgage insurer retains liability; (ii)
pmiADVANTAGE(sm), a lender paid mortgage insurance program that provides
reductions from standard rates based on the quality of the business generated;
(iii) captive reinsurance, a program that allows a reinsurance company,
generally an affiliate of the lender, to assume mortgage insurance default
losses at a specified entry point up to a maximum aggregate exposure, up to an
agreed upon amount of total coverage; and (iv) pmiEXTRA(sm) coverage, a
product which provides an additional layer of primary mortgage insurance
coverage (up to 15%) on all insured loans in a portfolio sold to government
sponsored enterprises ("GSEs"). TPG has also offered a risk-sharing product that
is based on the performance of a specified group of mortgage insurance
policies. This product is designed to encourage quality originations and loss
mitigation by lenders. To date the risk-sharing products have not represented a
significant portion of PMI's or TPG's revenues. Several of the above risk-
sharing products are not presently offered by PMI or TPG in all states due to
the pendency of various regulatory issues. Management is unable to predict the
impact of these regulatory issues on these products. See "K. Reinsurance",
below.
4
C. INDUSTRY OVERVIEW
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are the predominant purchasers and sellers of
conventional mortgage loans in the United States, providing a direct link
between the primary mortgage origination markets and the capital markets.
Since 1970, Fannie Mae and Freddie Mac have been permitted to purchase
conventional high LTV mortgages only if the lender (i) secures private mortgage
insurance from an eligible insurer on those loans; (ii) retains a participation
of not less than 10% in the mortgage; or (iii) agrees to repurchase or replace
the mortgage in the event of a default under specified conditions. 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 by the loan originations. Because loan
originators prefer to make loans that may be marketed in the secondary market to
Fannie Mae and Freddie Mac without having to hold such capital, they are
motivated to purchase mortgage insurance from insurers deemed eligible by Fannie
Mae and Freddie Mac. PMI is an authorized mortgage insurer for both Fannie Mae
and Freddie Mac. See "N. Regulation", below.
Since 1992, Fannie Mae and Freddie Mac have been subject to oversight
legislation for GSEs which simultaneously tightened their capital requirements
and set goals for affordable housing. Their goals are based on the percentage of
loans purchased by the GSEs, determined by the number of dwelling units securing
such loans. Fannie Mae's program of purchasing 97s is designed to help achieve
its stated goal that 30% of the units financed be low-to-moderate income
borrowers or in central cities. Fannie Mae also expanded its Community Home
Buyers Program to include a commitment to purchase a certain volume of 97s.
While 97s are likely to have greater risk than 95s, and, although priced higher,
97s have greater uncertainty as to pricing adequacy since they are relatively
new to the market place. PMI began offering a 97% product in the third quarter
of 1994. To aid in managing the greater risks, PMI offers pre-and post-loan
credit counseling to borrowers using the 97% product.
TPG believes that the GSEs' announced goals for 1996 were that at least 40% of
the units financed by each GSE be low- and moderate- income housing, and that
21% of such units be in underserved areas (which are defined as census tracts
with either a median income no greater than 90% of area median, or with a median
income no greater than 120% of area median income and a minority population of
at least 30%). TPG believes that the GSEs' goals to expand purchases of
affordable housing loans have increased the overall size of the total mortgage
insurance market because such loans are traditionally in excess of 80% LTV, with
a majority being in excess of 90% LTV.
To the extent Fannie Mae or Freddie Mac implements new eligibility requirements
for mortgage insurers, changes the pricing arrangements for purchasing retained
participation mortgages as compared to insured mortgages or alters or
liberalizes underwriting standards on low down payment mortgages it purchases,
private mortgage insurers, including PMI, will likely respond to or comply with
such actions. Such actions could have a material adverse impact on the results
of operations and financial condition of the Company. See "N. Regulation", and
"Q. Factors That May Affect Future Results and Market Price of Stock", below.
5
Freddie Mac's and Fannie Mae's automated underwriting services Loan
Prospector(sm) and Desktop Underwriter(tm), respectively, can be used by
mortgage originators to determine whether Freddie Mac or Fannie Mae will
purchase a loan prior to closing. Through these systems, lenders are able to
obtain approval for mortgage guaranty insurance with any participating mortgage
insurer. PMI works with both agencies in offering insurance services through
their systems, while utilizing its proprietary risk management systems to
monitor the risk quality of loans insured through such systems. See "I.
Underwriting Practices -- Delegated Underwriting", below.
Fannie Mae announced in 1996 its intentions to revise its policies regarding
cancellation of mortgage guaranty insurance and the procedures its servicers
will be required to follow regarding notifying borrowers of their rights to
discontinue paying for mortgage guaranty coverage. To date, no final regulations
have been issued. See "N. Regulation", below
Industry Performance
The results of operations of a primary mortgage insurer are affected, among
other things, by: (i) the overall demand for and persistency of mortgage
insurance. Persistency is the percentage of insurance policies in force 12
months prior to such date which remain in force on such date. Demand and
persistency are related to the levels of home sales and refinancing activity,
which in turn are influenced by a number of economic and demographic factors and
trends, including housing affordability, interest rates, consumer confidence,
GDP growth, rates of employment and inflation, and the aging of the U.S.
population; (ii) the amount of NIW and any given mortgage insurer's percentage
thereof, which are affected by such mortgage insurer's ability to compete
against other private mortgage insurance companies as well as mortgage insurance
provided by the Federal Housing Administration ("FHA") and, to a lesser extent,
the Department of Veterans' Affairs (the "VA") and state housing insurance
funds, and by the extent to which lenders forego third-party coverage and retain
the full risk of loss on high LTV mortgage loans; (iii) the degree to which an
insurer is able to charge premiums commensurate with the ultimate cost of the
risks insured; (iv) claim frequency, which is influenced by national and
regional economic conditions (including recessions), the geographic dispersion
of risk in force, the borrower's equity in the home at the time of default, the
underlying mortgage amount, the type and term of the insured mortgage and the
type of property securing the mortgage; (v) claims severity, which is influenced
in part by the amount of accrued interest on the mortgage loan, the foreclosure
expenses and appreciation or depreciation in housing prices; (vi) an insurer's
expenses; and (vii) the performance of an insurer's investment portfolio. The
results of operations for PMI may be significantly affected in any period by any
of the foregoing factors, as well as those matters described in Section Q.
"Factors That May Affect Future Results and Market Price of Stock", below.
6
The following table shows key financial performance ratios for the private
mortgage insurance industry since 1991. Private mortgage insurance industry
numbers for 1996 will not be available from Moody's Investors Service, Inc.,
until November 1997. The combined ratio is a principal indicator of a
private mortgage insurer's profitability on its insurance written. In respect
of any year, the lower the combined ratio, the higher an insurer's earnings
from its insurance underwriting activities, with a combined ratio below 100%
indicating an underwriting profit for such year.
Private Mortgage Insurance Industry Performance Ratios(1)(2)
--------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Active Companies(3)
Loss ratio ............. 48.5% 56.1% 54.4% 47.2% 44.8%
Expense ratio .......... 24.2 25.5 24.3 25.4 26.2
------ ------ ------ ------ ------
Combined ratio ......... 72.7% 81.6% 78.7% 72.6% 71.0%
====== ====== ====== ====== ======
Total Industry
Loss ratio ............. 51.4% 59.5% 56.6% 57.3% 58.3%
Expense ratio .......... 23.6 25.1 24.4 25.2 24.1
------ ------ ------ ------ ------
Combined ratio ......... 75.0% 84.6% 81.0% 82.5% 82.4%
====== ====== ====== ====== ======
- -------------
(1) Calculated using amounts determined under statutory accounting practices.
(2) Due to the increase in premiums written by active companies in recent years
and the runoff of pre-1985 business, which constituted the bulk of the nonactive
companies' operations, nonactive companies represent a decreasing percentage of
total industry figures shown in the table, constituting 3.3% of the total
industry net premiums earned in 1995.
(3) Includes mortgage insurers writing new mortgage insurance as of December 31,
1995.
Source: Moody's Investors Service, Inc. Global Credit Research (November 1996)
D. COMPETITION
The U.S. private mortgage insurance industry consists of nine active mortgage
insurers, including Mortgage Guaranty Insurance Corporation ("MGIC"), GE Capital
Mortgage Insurance Corporation ("GEMICO"), an affiliate of GE Capital
Corporation, and United Guaranty Residential Insurance Company ("UGC"), an
affiliate of American International Group, Inc. PMI is the third largest private
mortgage insurer in the United States based on new primary insurance written in
1996 and direct primary insurance in force at December 31, 1996. (Source: Inside
Mortgage Finance.) In 1996, MGIC possessed the largest share of the private
mortgage insurance market, with approximately 25.4% of new primary insurance
written, and GEMICO, PMI and UGC had market shares of approximately 18.5%, 14.7%
and 12.7%, respectively. (Source: Inside Mortgage Finance.) PMI presently
anticipates that competitive pressures related to the availability of mortgage
pool insurance will continue to negatively impact market share during the first
half of 1997, due primarily to PMI's decision not to offer mortgage pool
insurance. PMI's market share percentage includes 0.6% of the market held by
CMG. See Part II, Item VII--"Management's Discussion And Analysis Of Financial
Condition And Results of Operations".
PMI and other private mortgage insurers also compete directly with federal and
state governmental and quasi-governmental agencies, principally the FHA and, to
a lesser degree, the VA. These agencies sponsor government-backed mortgage
insurance programs which(1), accounted for 51.8%, 38.5% and 44.8% for 1994, 1995
and 1996, respectively, of all loans insured or guaranteed. The maximum
individual loan amount that the FHA can insure is currently $160,950 and the
maximum individual loan amount that the VA can insure has recently been
increased to $203,150. Private mortgage insurers have no limit as to individual
loan amounts that they can insure. Generally, PMI and other private mortgage
insurers have a greater variety of insurance products than the FHA and VA.
However, the FHA and VA
_____________________
(1) According to data from the Department of Housing and Urban Development
("HUD"), VA and Inside Mortgage Finance.
7
generally have more flexible loan underwriting guidelines than PMI and the other
private mortgage insurers, the servicers of FHA- or VA-insured loans receive a
higher servicing fee than they generally receive from loans insured with private
mortgage insurance, and the FHA and VA provide higher insurance coverage
percentages than private mortgage insurers. In addition, FHA and VA regulations
allow the financing of almost all closing costs, including the initial mortgage
insurance premium; thus, resulting in little or no cash being required of the
borrower at closing. In contrast, mortgage lenders originating conventional
loans and using private mortgage insurance generally are unable to finance the
same level of closing costs, thus requiring the borrower to provide a greater
amount of cash at closing.
In addition to competition from federal agencies, PMI and other private mortgage
insurers face limited competition from state-supported mortgage insurance funds.
As of December 31, 1996, several states (among them, California, Connecticut,
Maryland, Massachusetts, New York and Vermont) have state housing insurance
funds which are either independent agencies or affiliated with state housing
agencies.
8
The following table sets forth (i) the dollar amount of total mortgage loan
originations, (ii) mortgage loan originations insured by FHA/VA or private
mortgage insurance and (iii) the percentage of such insured loan originations to
total mortgage loan originations during the years 1992 through 1996:
Total Mortgage Loan Originations
Year Ended December 31,
------------------------------------------------
1996(1) 1995 1994 1993 1992
-------- ------ ------ -------- -------
(Dollars in billions)
Total originations.. $808.1 $635.8 $773.1 $1,009.3 $893.7
FHA/VA and private
mortgage
insured $230.2 $178.9 $273.5 $257.5 $174.5
originations.......
Percentage of total
originations ....... 28.5% 28.1% 35.4% 25.5% 19.5%
- ----------
(1) Total originations data for the year ended December 31, 1996 are estimated.
For the year ended December 31, 1996, total mortgage originations increased to
$808.1 billion from $635.8 billion for the year ended December 31, 1995 due to
positive economic factors. During 1995 and 1996, loan originations where the
borrower has only a 5% or less down payment have been running at historically
high levels. Concurrently, consumer debt had risen to record levels, negatively
affecting some borrowers' ability to meet their credit obligations on a timely
basis. The Company believes this high level of debt was a factor in 1995,
reflected in the poor quality of credit which occurred in several regions of the
country and resulted, in part, in the mortgage origination market showing a
decline during 1995. PMI expects the total volume of mortgage orginations to
decrease in 1997. See "P. Cautionary Statement" and "Q. Factors That May Affect
Future Results and Market Price of Stock", below.
The following table indicates the relative share of the mortgage insurance
market based on NIW by FHA/VA and private mortgage insurers over the past five
years.
Federal Government and Private Mortgage Insurance Market Share
Year Ended December 31
1996(1) 1995 1994 1993 1992
---- ---- ---- ---- -----
FHA/VA.......................... 44.8% 38.5% 51.8% 46.9% 42.1%
Private Mortgage Insurance...... 55.2% 61.5% 48.2% 53.1% 57.9%
---------------------------------------------------------------
TOTAL........................... 100.0% 100.0% 100.0% 100.0% 100.0%
===============================================================
- ----------
(1) Market share data for the year ended December 31, 1996 is estimated.
Various proposals are being discussed by Congress and certain federal agencies
to reform or modify the FHA. One such proposal relates to increasing the FHA
single-family loan limit to the same level as the Fannie Mae and Freddie Mac
conforming loan limit. If enacted, the FHA loan limit would be increased to
$214,600 nationwide. In another proposal, HUD is considering the viability of
sharing single-family mortgage risk between the FHA and other partners,
including private mortgage insurance
9
companies. The Company is unable at this time to predict the scope and content
of such proposals, or whether any such proposals will be enacted into law, and,
if enacted, the effect on the Company, although the Company believes that any
increase in the FHA loan limit could adversely affect the competitive position
of PMI. In addition, the Office of the Comptroller of the Currency in 1996
granted permission to national banks to have a reinsurance company as a
wholly-owned operating subsidiary for the purpose of reinsuring mortgage
insurance written on loans originated by such bank. The Office of Thrift
Supervision is in the process of considering whether similar activities are
permitted for savings institutions. These reinsurance subsidiaries of national
banks or savings institutions could become significant competitors of the
Company in the future.
PMI and other private mortgage insurers also compete indirectly with mortgage
lenders that elect to retain the risk of loss from defaults on all or a portion
of their high LTV mortgage loans rather than obtain insurance for such risk. In
addition, Fannie Mae and Freddie Mac have in certain cases elected to accept a
spread account funded from a portion of the servicing fees or a credit
enhancement in lieu of mortgage insurance. Any change in legislation which
affects the risk-based capital rules imposed on banks and savings institutions,
or which change the GSEs' insurance requirements may affect the desirability of
foregoing insurance for savings institutions or the GSEs and, therefore, affect
the size of the insurance mortgage market. See "N. Regulation", below.
Certain mortgage insurers reinsure some portion of coverage issued to certain
lenders with affiliates of those lenders. In addition, PMI is pursuing various
risk-sharing arrangements for certain of its customers, including offering
various premium rates based on the risk characteristics, loss performance or
class of business of the loans to be insured, or the costs associated with doing
such business. While many factors are considered in determining rates, there can
be no assurance that the premiums charged will be adequate to compensate PMI for
the risks associated with the coverage provided to its customers. Management is
unable to predict the impact of these arrangements on their long-term
competitive effect. See "K. Reinsurance", below.
E. MORTGAGE INSURANCE INDUSTRY MARKET SHARE
PMI's and CMG's market share of NIW grew to 14.7% at December 31, 1996 from
13.5% at December 31, 1995. (Source: Inside Mortgage Finance.) Numerous factors
bear on the relative position of the private mortgage insurance industry versus
the "direct" government and quasi-governmental competition as well as the
"indirect" competition of lending institutions which choose to offer loans on an
uninsured basis. PMI's market share, as measured by NIW, declined in the fourth
quarter of 1996, compared to the third quarter of 1996, due primarily to PMI's
decision not to offer mortgage pool insurance. PMI presently anticipates that
competitive pressures related to the availability of mortgage pool insurance
will continue to negatively impact market share during the first half of 1997.
PMI's 1996 and 1995 market share includes approximately $810 million and $330
million, respectively, of NIW by CMG. See "D. Competition", above, "P.
Cautionary Statement" and Part II, Item VII, "Management's Discussion And
Analysis Of Financial Condition And Results of Operations".
10
The following table shows (i) the amount of primary insurance in force and new
primary insurance written in the years 1992 through 1996 for all private
mortgage insurers and for PMI, and (ii) PMI's market share for each of those
periods.
New Primary Insurance
Primary Insurance in Force (1) Written (2)
--------------------------------------------------------------------------------------------------
All Private All Private PMI
Mortgage PMI Market Mortgage Market
Year Insurers PMI Share Insurers PMI (3) Share
-------------------------------------------------------------------------------------------------
(Dollars in billions)
1992............................. $284.6 $43.7 15.4% $101.0 $19.4 19.2%
1993............................. 337.7 57.0 16.9 136.8 25.5 18.6
1994............................. 387.4 66.0 17.0 131.4 18.4 14.0
1995............................. 464.6 71.4 15.4 109.6 14.8 13.5
1996............................. 511.2 77.3 15.1 127.0 18.7 14.7
- ----------
(1) Amounts shown are at period end and include active and inactive private
mortgage insurers. Source: MICA Fact Book.
(2) Does not include insurance written on seasoned loans (loans originated at
least 12 months prior to the date on which they are insured with primary
mortgage insurance). Source: Inside Mortgage Finance.
(3) Includes CMG NIW of $810 million and $330 million for the years ended
December 31, 1996 and 1995, respectively.
F. CUSTOMERS
PMI insures mortgage loans funded by mortgage originators. Mortgage originators
include mortgage bankers, savings institutions, commercial banks and other
mortgage lenders. During 1996 the mortgage origination industry experienced
significant consolidation, resulting in the market share for mortgage
originators being concentrated among a smaller number of higher volume financial
institutions. PMI expects this trend to continue into 1997. See "P. Cautionary
Statement", below.
For the year ended December 31, 1996, PMI's primary customers were mortgage
bankers, with the balance of its customers being savings institutions,
commercial banks and other mortgage lenders. Mortgage brokers originate loans on
behalf of mortgage lenders and are not master policyholders. As a result,
mortgage brokers are not the beneficiaries of policies issued by PMI. The
beneficiary under the master policy is the owner of the insured loan and,
accordingly, when a loan is sold, the purchaser of the loan is entitled to the
policy benefits.
To obtain primary insurance from PMI, a mortgage lender must first apply for and
receive a master policy from PMI. PMI's approval of a lender as a master
policyholder is based upon an evaluation of the lender's capacity to originate,
underwrite and service mortgage loans, its financial soundness, and its
management's demonstrated adherence to sound loan origination practices, among
other factors. Substantially all of PMI's customers obtain mortgage insurance
from more than one insurer. PMI had approximately 5,760 active master
policyholders at December 31, 1996 (lenders who have purchased insurance since
1992 but not including branches and affiliates).
PMI's master policy sets forth the general published terms and conditions of the
mortgage insurance coverage provided by PMI. The master policy does not obligate
the lender to secure insurance from PMI, nor, except in the case of delegated
underwriting, does it obligate PMI to issue insurance on a particular loan. The
master policy requires that the lender apply for insurance coverage on
individual loans and that a certificate must be issued for a loan before
coverage becomes effective. See "I. Underwriting Practices", below.
A foundation of PMI's business strategy is proactive risk selection. PMI
analyzes its portfolio in a number of ways to identify concentrations of risk.
PMI believes that the quality of its insurance portfolio is affected
predominantly by (i) the quality of loan originations (including the financial
strength
11
of the borrower and the marketability of the property); (ii) the attributes of
loans insured (including LTV, purpose of loan, type of loan instrument and type
of underlying property securing the loan); (iii) the geographic dispersion of
the underlying properties subject to mortgage insurance; (iv) the seasoning of
the insured portfolio; and (v) the quality of lenders' operations from which PMI
receives loans to insure.
The composition of PMI's risk in force reflects several changes over the
five-year period from 1992 to 1996. The relatively low interest rates during
this period resulted in an increasing percentage of mortgages insured by PMI at
a fixed rate of interest. For example, such mortgages represented 80.6% of risk
in force at December 31, 1996, up from 73.2% at year-end 1992. Based on PMI's
experience, fixed rate loans represent less risk than adjustable rate mortgages
("ARMs") because claim frequency on ARMs is generally higher than on fixed rate
loans. Historically, borrowers prefer fixed rate mortgages during periods of low
or decreasing interest rates due to a borrower's desire to lock in what are
perceived to be desirable rates. PMI believes this trend will continue if
interest rates remain at their current levels or decrease (See "P. Cautionary
Statement" and "Q. Factors That May Affect Future Results and Market Price of
Stock", below.) PMI's percentage of risk in force has steadily increased during
the five-year period from 1992 to 1996, although the percentage of new risk
written comprised of 95s has decreased slightly from 51.7% for the year ended
December 31, 1995 to 50.4%, for the year ended December 31, 1996. PMI charges
higher premium rates for ARMs and 95s to compensate for the higher risk
associated with such loans, although there can be no certainty that the
differential in the higher premium rate will be adequate to compensate for the
higher risk.
12
The following table reflects the percentage of PMI's direct risk in force (as
determined on the basis of information available on the date of mortgage
origination) by categories and as of the dates indicated:
Direct Risk in Force
------------------------------------------------------------
As of December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- --------- ------- ----------- -----------
Direct Risk in Force
(In millions)........................... $ 17,336 $15,130 $13,243 $ 11,267 $ 8,676
======== ======= ======= =========== ===========
Lender Concentration:
Top 10 Lenders (by original applicant).. 26.0% 22.5% 20.4% 19.5% 18.3%
======== ======= ======= =========== ==========
LTV:
95s (1)................................. 44.7% 40.6% 35.7% 31.7% 30.4%
90s and below (2)....................... 55.3 59.4 64.3 68.3 69.6
-------- ----- ------ ------------- ---------
Total................................ 100.0% 100.0% 100.0% 100.0% 100.0%
======== ====== ====== ============= =========
Average Coverage Percentage.............. 22.4 % 21.2% 20.1% 19.8% 19.9%
======= ====== ====== ============ ========
Loan Type:
Fixed.................................. 80.6% 76.5% 74.1% 74.9% 73.2%
ARM.................................... 17.7 21.3 23.9 23.3 23.7
ARM (scheduled/potential negative
amortization).......................... 1.7 1.9 1.7 1.3 2.1
Other................................. 0 0.3 0.3 0.5 1.0
------- ----- ---- ----------- ------
Total................................. 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======= ====== =========== =======
Mortgage Term:
15 years and under..................... 9.4% 8.6% 10.3% 11.5% 9.9%
Over 15 years.......................... 90.6 91.4 89.7 88.5 90.1
------- ------- ------ ----------- -------
Total................................ 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ====== =========== ======
Property Type:
Single-family detached................. 86.7% 86.7% 86.3% 85.2% 83.0%
Condominium............................ 6.9 7.1 7.5 8.1 10.2
Other (3).............................. 6.4 6.2 6.2 6.7 6.8
------- ------ ------- ----------- ------
Total............................... 100.0% 100.0% 100.0% 100.0% 100.0%
======= ====== ======= =========== =======
Occupancy Status:
Primary residence...................... 99.2% 99.3% 99.4% 99.3% 99.3%
Second home............................ 0.6 0.5 0.3 0.3 0.2
Non-owner occupied..................... 0.2 0.2 0.3 0.4 0.5
------- ------- -------- ----------- --------
Total............................... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======= ======= =========== ========
Loan Amount:
$100,000 or less........................ 28.3% 28.8% 29.9% 31.7% 35.0%
Over $100,000 and up to $151,725 (4).... 35.9 35.6 35.7 35.4 36.7
Over $151,725 and up to $203,150 (5).... 23.8 23.0 22.3 21.1 19.1
Over $203,150 and up to $250,000........ 5.1 5.7 5.5 5.4 4.6
Over $250,000........................... 6.9 6.9 6.6 6.4 4.6
------- --------- -------- ---------- --------
Total................................. 100.0% 100.0% 100.0% 100.0% 100.0%
- ----------
(1) Includes 97s, representing 1.1% of PMI's risk in force as of December 31,
1996.
(2) PMI includes in its classification of 90s, for purposes of applying its
underwriting standards, determining premiums and in the table above, loans
where the borrower makes a down payment of 10% and finances the mortgage
insurance premium payment as part of the loan (thus, increasing the
principal balance of the loan to over 90% LTV). Fannie Mae classifies these
loans as 95s, which has had the effect of limiting the marketability of
these. At December 31, 1996, less than 5% of PMI's risk in force consisted
of these types of loans.
(3) Includes two-to-four unit dwellings, townhouses, row houses and
cooperatives.
(4) $151,725 was the maximum individual loan amount that the FHA could insure.
Such amount was increased to $152,363 in the third quarter of 1994 and
increased to $160,950 as of February 1997.
(5) $203,150 is the maximum principal balance of loans originated after November
1, 1992 eligible for purchase by Fannie Mae and Freddie Mac. After January
1996, the maximum principal balance of loans eligible for purchase increased
to $207,000 and further increased to $214,600 as of February 1997.
13
G. SALES AND MARKETING
PMI's Marketing Department has primary responsibility for advertising, sales
materials, and the creation of new products and services. The Operations
Division of the Marketing Department is accountable for coordinating new product
development among all appropriate internal PMI functions. PMI's Strategic
Marketing Division focuses on emerging opportunities in PMI's markets, such as
new products and services and strategic alliances.
PMI employs a field sales force of over 100 people located throughout the
country to sell its products, and underwrites loans and services lenders through
19 field offices located in 17 states. PMI's sales force is made up of
individuals in five basic sales positions: (i) account representatives, who
provide day-to-day service to PMI's customers in a particular geographic
territory and who also work to expand the customer base within the sales
territory by making prospect calls; (ii) account executives, who are responsible
for sales in a particular geographic territory and who focus on loan officers,
branch managers and executives at PMI's customers; (iii) account managers, who
are responsible for sales in a one or two state area and provide services to
regional offices of PMI's customers; (iv) managing directors, who are
responsible for sales in a particular multistate sales region; and (v) national
account directors, who are responsible for sales management on a national level
and call on executives at PMI's largest customers. During 1996, PMI's sales
force received compensation comprised of a base salary with incentive
compensation tied to performance objectives.
H. PRICING
PMI's Actuarial Services Department has primary responsibility for setting
premium rates and for setting and reviewing PMI's reserves for losses and loss
adjustment expenses. In addition, the Strategic Pricing Division of the
Department works with the Strategic Marketing Division to develop and price new
products to meet emerging customer needs.
PMI's premium rates are based upon the expected risk of a claim on the insured
loan and take into account the LTV, loan type, mortgage term, occupancy status
and coverage percentage. In addition, PMI's premium rates take into account
persistency, operating expenses and reinsurance costs, assets pledged by the
borrower in lieu of a down payment, possible risk-sharing with the lender or
other parties, as well as company profit and capital needs, and the prices
offered by competitors.
PMI generally uses a national pricing strategy, although PMI underwrites loans
on the basis of both national and territorial underwriting guidelines. In
establishing national prices, PMI takes into account the geographic dispersion
of its book of insurance by considering the levels of claims expense that PMI
expects will be associated with different states. From time to time, regional
economies can perform much worse than the national average. PMI believes that a
national pricing strategy helps to offset deficiencies in one region with
surpluses in other regions on a year-to-year basis.
PMI's premium rates and policy forms are subject to regulation in every state in
which it is licensed to transact business in order to protect policyholders
against the adverse effects of excessive, inadequate or unfairly discriminatory
rates and to encourage competition in the insurance marketplace. In most states,
premium rates and policy forms must be filed prior to their use. In some states,
such rates and forms must also be approved prior to use. Changes in premium
rates are subject to being justified, generally on the basis of the insurer's
loss experience, expenses and future trend analysis. The general loss experience
in the mortgage insurance industry may also be considered.
14
I. UNDERWRITING PRACTICES
Risk Management Approach
PMI underwrites its primary business based upon the historical performance of
risk factors of individual loan profiles, and utilizes automated underwriting
systems in the risk selection process to assist the underwriter with decision
making. PMI's underwriting process evaluates five categories of risk:
o BORROWER. An evaluation of the borrower's credit history is
an integral part of PMI's risk selection process. In addition
to the borrower's credit history, PMI analyzes several
factors, including the borrower's employment history, income,
funds needed for closing, and the details of the home
purchase.
o LOAN CHARACTERISTICS. PMI analyzes four general
characteristics of the loan product to quantify risk: (i)
LTV; (ii) type of loan instrument; (iii) type of property;
and (iv) purpose of the loan. Certain categories of loans are
generally not insured by PMI because such loans are deemed to
have an unacceptable level of risk, including loans on
non-owner occupied properties, loans with scheduled negative
amortization, and loans originated using limited
documentation.
o PROPERTY PROFILE. PMI reviews appraisals regarding
methodology used to determine the property price.
o HOUSING MARKET PROFILE. PMI places significant emphasis on
the condition of regional housing markets in determining its
underwriting guidelines. PMI analyzes the factors that impact
housing values in each of its major markets and closely
monitors regional market activity on a quarterly basis.
o MORTGAGE LENDER. PMI tracks the historical risk
performance of all customers that hold a master
policy. This information is factored into the determination
of the loan programs that PMI will approve for various
lenders.
PMI uses national and territorial underwriting guidelines to evaluate the
potential risk of default on mortgage loans submitted for insurance coverage.
The national guidelines have developed over time and take into account PMI's
loss experience and the underwriting guidelines of Fannie Mae and Freddie Mac.
In 1988, PMI developed a report called the Economic Real Estate Trends ("ERET")
to assist in analyzing regional and local market conditions. ERET assigns
ratings to 100 Metropolitan Statistical Areas ("MSAs") by tracking and analyzing
a number of economic and housing industry factors on a quarterly basis. This
report is used to help establish territorial underwriting guidelines which allow
PMI to take more or less risk in a given market based on such market's economic
condition. This rating is also incorporated in the automated appraisal review
process during the underwriting evaluation. PMI was the first mortgage insurance
company to provide mortgage originators with formal territorial underwriting
guidelines to address local real estate market conditions.
PMI expects its underwriters to utilize their knowledge of local markets, risk
management principles and business judgment in evaluating loans on their own
merits in conjunction with PMI's underwriting guidelines. Accordingly, PMI's
underwriting staff is trained to consider combined risk characteristics and
their impact in different real estate markets and have discretionary authority
to insure loans which
15
are substantially in conformance with PMI's published underwriting guidelines.
Significant deviations from such guidelines require higher level underwriting
approval.
Underwriting Process
To obtain mortgage insurance on a specific mortgage loan, a master policyholder
typically submits an application to one of PMI's regional underwriting offices,
supported by various documents. Besides the standard full documentation
submission program, PMI also accepts applications for insurance under a reduced
documentation submission program (the "Quick Application Program"), which is
limited to those lenders with a track record of high quality business. The
amount of business written under the Quick Application Program was 18.5% of
PMI's NIW in 1996.
The documents submitted to PMI by the mortgage lender generally include a copy
of the borrower's loan application, an appraisal report or other statistical
evaluation on the property by either the lender's staff appraiser or an
independent appraiser, a written credit report on the borrower and, under the
standard full documentation submission program, a verification of the borrower's
employment, income and funds needed for the loan closing (principally, down
payment) and the home purchase contract. Once the loan package is received by
one of PMI's field underwriting offices, key borrower, property and loan product
information is extracted from the file by an underwriting staff member and
analyzed by pmiAURA(sm) and pmiTERRA(sm). Currently, a majority of
applications are approved by the automated underwriting systems and an insurance
certificate is automatically issued. Such applications generally have favorable
risk characteristics, such as strong borrower credit ratings, low borrower
debt-to-income ratios and stable borrower income histories. Any loans not
automatically approved are referred to an underwriter for review of the entire
insurance application package. The underwriter reviews the detailed systems
analysis and borrower, loan and property profiles to determine if the risk is
acceptable. The underwriter either approves, delays the final decision pending
receipt of more information or declines the application for insurance. PMI
generally responds within one business day after an application and supporting
documentation are received.
PMI's Quick Application Program allows selected lenders to submit insurance
applications that do not include all standard documents. The lender is required
to maintain written verification of employment and source of funds needed for
closing and other supporting documentation in its origination file. PMI may
schedule on-site audits of lenders' files on loans submitted under this program.
PMI's rejection rate declined to approximately 10% for the year ended December
31, 1996 from 12.6% for the year ended December 31, 1995, as a result of
improving real estate markets and the continued development of highly effective
risk management and monitoring tools. PMI shares its knowledge of risk
management principles and real estate economic conditions with customers to
improve the quality of submitted business and reduce the rejection rate.
Role of Technology
PMI was the first mortgage insurer to receive an application for insurance
electronically through an electronic data interchange ("EDI") link with a
lender. EDI links, through pmi PAPERLESS(sm), serve to reduce paperwork for
both PMI and its customers, streamline the process by which mortgage insurance
is applied for, reduce the number of errors associated with re-entering
information, and increase the speed with which PMI is able to respond to
applications, all of which can enhance PMI's relationship with lenders.
In 1987, PMI completed development of pmiAURA(sm) in conjunction with
Allstate. The system was developed utilizing five years of performance
information from approximately 300,000 borrower
16
profiles. The system employs claim and risk statistical models to predict the
relative likelihood of default by a mortgage borrower. pmiAURA(sm) assigns all
applications received by PMI a risk score predicting the likelihood of default,
and automatically refers certain applications to underwriters based on higher
risk characteristics, territorial underwriting guidelines or other
administrative requirements. PMI has updated the pmiAURA(sm) database with newer
performance data of over 1.5 million loans, and has added economic and
demographic information to the database in order to enhance pmiAURA(sm)`s
predictive power. During 1996, the third generation of pmiAURA(sm) was released
and is expected to give lenders and investors a more complete picture of a
loan's relative risk of default and the MSA economic factors that are related to
default risk. This latest upgrade will enable the pmiAURA(sm) system to generate
three types of scores: a loan risk score that assesses the risk solely due to
the borrower, loan and property characteristics independent of market risk; a
market score which is a measure of the default risk due solely to the
metropolitan area economic conditions; and the pmiAURA(sm) Score, which combines
the information in the loan risk and market scores. PMI intends to further
update the model from time to time.
In 1991, the pmiTERRA(sm) system was installed to complement pmiAURA(sm) by
providing a fully automated appraisal analysis, and currently contains over
750,000 residential property profiles. This analysis determines if the appraiser
adequately supported the final estimate of value. A key ingredient in the
appraisal model is the economic market acceptability rating from ERET. This
rating allows pmiTERRA(sm) to evaluate an appraisal considering the health of
the real estate market in which the property is located.
The automated underwriting systems free underwriters from having to review the
highest quality applications, and enable the underwriters to focus on more
complex credit packages and market and lender analyses. In addition to their use
in underwriting almost all of PMI's mortgage insurance applications from
lenders, the automated underwriting systems provide daily reports that assist
underwriting management in monitoring the credit and property risk being
committed for mortgage insurance. On the basis of its experience with the
automated underwriting systems, PMI believes that, in addition to improving
underwriting results, these automated underwriting systems have improved PMI's
underwriting efficiency and have brought consistency to the underwriting
judgment process.
As an added benefit, pmiAURA(sm)'s extensive database provides detailed
performance reports of underwriting quality trends by geographic region, product
type, customer characteristics and other key factors. These reports allow PMI's
underwriting management to monitor risk quality on a daily basis and to
formulate long-term responses to developing risk quality trends. Ultimately,
such responses can lead to regional variations from, or permanent changes to,
PMI's underwriting guidelines. PMI also furnishes these performance reports to
lenders in order to help them to understand more completely the risk profiles of
the loans they originate and the applications PMI is most likely to approve.
Underwriting Personnel
PMI employs a field underwriting staff of over 200 located in 19 regional
underwriting offices. The field underwriters are limited in their authority to
approve certain mortgage loans. The authority levels are tied to underwriter
position, knowledge and experience, and relate to loan amounts, percentage of
insurance coverage and property type, depending on territorial guidelines. All
PMI underwriting offices are subject to on-site annual reviews conducted by home
office underwriting management and periodic quality-control checks performed by
the internal audit department. The corporate underwriting department also
completes a monthly file review of approved applications from each field office.
PMI's underwriting management personnel are eligible to participate in a bonus
plan; all other
17
personnel are compensated solely by salary. PMI's field and corporate
underwriting managers have an average of over 14 years of loan underwriting
experience.
Delegated Underwriting
PMI's Partner Delivered Quality(R) Program (the "PDQ Program"), introduced in
1991, is a delegated underwriting program whereby approved lenders are allowed
to determine whether loans meet program guidelines and requirements approved by
PMI and are thus eligible for mortgage insurance. At present, over 1,100 lenders
actively approve applications under the PDQ Program. PMI's delegated business
accounted for 39.9% and 33.4% of PMI's NIW in 1996 and 1995, respectively, and
represented 22.7% of PMI's total risk in force at December 31, 1996. PMI
believes the percentage of risk in force written under the PDQ Program will
increase further in the future as the program is expanded to include additional
qualified lenders. Delegated underwriting enables PMI to meet mortgage lenders'
demands for immediate insurance coverage of certain loans. Such types of
programs have now become standard industry practice due, PMI believes, to
general customer satisfaction with delegated underwriting.
Under the PDQ Program, customers utilize their own PMI-approved underwriting
guidelines and eligibility requirements in determining whether PMI is committed
to insuring a loan. Once the lender notifies PMI of an insured loan, key loan
risk characteristics are evaluated by the pmiAURA(sm) model to monitor the
quality of delegated business on an ongoing immediate basis. Additionally, PMI
audits a representative sample of loans insured by each lender participating in
the PDQ Program on a regular basis to determine compliance with program
requirements. If a lender participating in the program tentatively commits PMI
to insure a loan which fails to meet all of the applicable underwriting
guidelines, PMI is obligated to insure such loan except under certain
narrowly-drawn exceptions to coverage (for example, maximum loan-to-value
criteria). Loans that are not eligible for the PDQ Program may be submitted to
PMI for insurance coverage through the normal process. PMI's PDQ Program is also
utilized to process loans approved by Freddie Mac's Loan Prospector(sm)
system. PMI has currently limited its participation with Loan Prospector(sm)
to only those lenders who are approved to use the PDQ program.
PMI believes that the performance of its delegated insured loans will not
vary materially over the long-term from the performance of all other insured
loans because: (i) only qualified lenders who demonstrate underwriting
proficiency are eligible for the program; (ii) only loans meeting average-to-
better underwriting eligibility criteria are eligible for the program; and (iii)
PMI has the ability to monitor the quality of loans submitted under the PDQ
Program with proprietary risk management tools and an on-site audit of each PDQ
lender. See "P. Cautionary Statement", below.
J. DEFAULTS AND CLAIMS
Defaults
PMI's default rate has increased to 2.19% at December 31, 1996 from the December
31, 1995 rate of 1.98%. This increase was primarily caused by a growth in the
inventory level of notices of delinquency ("NOD"), in 1996 due primarily to the
maturation of PMI's 1992, 1993 and 1994 books of business. PMI expects this
trend to continue in 1997. See "P. Cautionary Statement", below.
The claim process begins with the insurer's receipt of notification of a default
from the insured on an insured loan. Default is defined in the master policy as
the failure by the borrower to pay when due an amount equal to the scheduled
monthly mortgage payment under the terms of the mortgage. The
18
master policy requires insureds to notify PMI of defaults generally within 130
days after the initial default. Generally, defaults are reported sooner, and the
average time for default reporting in 1996 by PMI insureds was approximately 60
days after initial default. PMI has historically included all defaults reported
by the lenders in its default inventory, regardless of the time period since the
initial default. The incidence of default is affected by a variety of
factors, including the reduction of the borrower's income, unemployment,
divorce, illness, the inability to manage credit and the level of interest
rates. Defaults that are not cured result in a claim to PMI. See "Claims" below.
Borrowers may cure defaults by making all delinquent loan payments or by selling
the property in full satisfaction of all amounts due under the mortgage.
The following table shows the number of loans insured by PMI, related loans in
default, default rate, dollar amount of insured loans in default and dollar
amount of direct risk with respect to insured loans in default.
Historical Default Rates
Total Insured Loans in Force
Year Ended December 31
(Dollars in thousands)
_______________________________________________________________________
1996 1995 1994 1993 1992
_______________________________________________________________________
Number of Insured
Loans in Force 700,084 657,800 612,806 543,924 428,745
Number of Loans
in Default 15,326 13,022 11,550 9,842 8,702
Default Rate 2.19% 1.98% 1.88% 1.81% 2.03%
Dollar Amount of
Insured Loans in
Default $1,597,706 $1,387,999 $1,198,301 $925,469 $741,792
Dollar Amount of
Risk in Force with
Respect to Insured
Loans in Default $348,632 $286,981 $243,426 $191,110 $157,290
Default rates differ from region to region in the United States depending upon
economic conditions and cyclical growth patterns. The two tables below
illustrate the impact of economic cycles on the various regions of the United
States and the ten largest states by PMI's risk in force as of December 31,
1996. The South Central region (which includes the "Oil Patch" states)
experienced adverse economic conditions in the mid-to-late 1980s and New England
experienced adverse economic conditions in the early 1990s. Both regions have
subsequently recovered and show positive trends.
Default rates on PMI's California policies decreased to 3.81% at December 31,
1996, from 4.08% at December 31, 1995. Policies written in southern California
in the years 1989 through 1993, which are
19
in the historically highest claim period, are also generally believed to have
been written at the high point of southern California real estate prices. Claim
sizes on California policies tend to be larger than the national average claim
size due to higher loan balances relative to other states. (See "Claims",
below). The California economy continues to recover more slowly than anticipated
when the policies were issued. Accordingly, California default rates for each of
the policy years since 1989 may continue to experience an average default rate
higher than the national average default rate. However, the default rates for
California experienced year over year improvements in the third and fourth
quarters of 1996, and management expects this trend to continue in 1997. See "P.
Cautionary Statement" and "Q. Factors That May Affect Future Results and Market
Price of Stock", below.
20
Default Rates By Region (1)
As of Period End,
---------------------------------------------------------------------------
1996 1995
---------------------------------------------------------------------------
Region 4th Q 3rd Q 2nd Q 1st Q 4th Q 3rd Q 2nd Q 1st Q 1994 1993 1992
Pacific(2)....... 3.22% 3.03% 3.21 3.39% 3.34% 3.10% 3.09% 3.17% 2.99% 2.39% 1.97%
New England (3) 1.80 1.77 1.80 2.07 1.93 1.88 1.89 1.90 1.98 2.22 2.81
Northeast (4) . 2.52 2.38 2.22 2.33 2.22 2.14 2.09 2.09 2.11 2.19 2.53
South............ 1.67 1.63 1.55 1.64 1.51 1.56 1.76 1.70 1.76 1.87 2.42
Central(5)
Mid-Atlantic(6) 2.03 1.79 1.62 1.75 1.65 1.56 1.73 1.63 1.60 1.60 1.78
Great Lakes(7) 1.82 1.68 1.30 1.33 1.21 1.16 1.31 1.31 1.28 1.48 1.81
Southeast(8)..... 1.93 1.77 1.61 1.61 1.53 1.44 1.52 1.44 1.41 1.38 1.91
North............ 1.61 1.52 1.38 1.42 1.31 1.18 1.27 1.16 1.03 1.01 1.19
Central(9)
Plains(10)....... 1.21 1.08 1.02 0.81 0.89 0.78 0.75 0.69 0.68 0.72 0.96
Total Portfolio 2.19% 2.03% 1.96% 2.07% 1.98% 1.88% 1.95% 1.93% 1.88% 1.81% 2.03%
(1) Defaults rates are shown by region on location of the underlying
property
(2) Includes California, Hawaii, Nevada, Oregon and Washington.
(3) Includes Connecticut, Maine, Massachusetts, New Hampshire, Rhode
Island and Vermont.
(4) Includes New Jersey, New York and Pennsylvania.
(5) Includes Alaska, Arizona, Colorado, Louisiana, New Mexico, Oklahoma,
Texas and Utah.
(6) Includes Delaware, Maryland, Virginia, Washington, D.C. and West
Virginia.
(7) Includes Indiana, Kentucky, Michigan and Ohio.
(8) Includes Alabama, Arkansas, Florida, Georgia, Mississippi, North
Carolina, South Carolina and Tennessee.
(9) Includes Illinois, Minnesota, Missouri and Wisconsin.
(10) Includes Idaho, Iowa, Kansas, Montana, Nebraska, North Dakota, South
Dakota and Wyoming.
PMI's Default Rates for Top 10 States by Total Risk in Force (1)
Percent of PMI's
Primary Risk
in Default Rate
Force as of --------------------------------------------------------
December 31, As of December 31,
--------------------------------------------------------
State 1996 1996 1995 1994 1993 1992
- ----- ----------- ----- ----- ---- ----- -----
California 22.0% 3.81% 4.08% 3.72% 2.89% 2.35%
Florida 6.7 2.40 1.92 1.86 1.79 2.53
Texas 5.9 2.04 1.85 2.29 2.21 2.78
Virginia 4.8 1.54 1.18 1.20 1.24 1.50
Washington 4.3 1.58 1.21 0.96 0.96 0.84
Massachusetts 4.3 1.73 1.91 2.04 2.43 3.27
New York 4.1 2.59 2.30 2.00 1.99 2.31
Pennsylvania 4.0 2.13 1.91 1.72 1.83 2.05
Maryland 3.8 2.59 2.26 2.14 2.02 2.02
Illinois 3.7 2.14 1.84 0.60 1.71 1.59
Total Portfolio 100.0% 2.19% 1.98% 1.88% 1.81% 2.03%
(1)Top ten states as determined by total risk in force as December 31, 1996.
Default rates are shown by states based on location of the underlying
property.
21
Claims
The majority of claims under PMI policies have historically occurred during the
third through the sixth years after issuance of the policies. Insurance written
by PMI from the period January 1, 1991 through December 31, 1994 represents
55.4% of PMI's insurance in force at December 31, 1996, with the 1993 book of
business alone representing 22.5%. This substantial volume of PMI's business is
in its expected peak claim period. Consistent with increasing coverage
percentages and increasing mortgage principal amounts, claim amounts have risen
in recent years. Claims paid in 1996 were $130.1 million compared with $93.7
million in 1995. Also, PMI has been experiencing an acceleration in its claim
payment process. This acceleration is a result of Fannie Mae's and Freddie Mac's
loss mitigation efforts to make earlier determinations regarding delinquent
loans and to accelerate the loan foreclosure and claim process. PMI believes
that this is only an acceleration of the timing of payments, and will not
increase the expected number of claims ultimately paid by PMI. See "P.
Cautionary Statement" and "Q. Factors That May Affect Future Results and Market
Price of Stock", below.
Policies written in California accounted for approximately 73% and 67% of the
total dollar amount of claims paid in 1996 and 1995, respectively. Although PMI
expects that during 1997 California will continue to account for the majority of
total claims paid, PMI also anticipates that California claims paid as a
percentage of total claims paid will begin to decline consistent with the
decline in default rates on PMI's California policies. (See "Defaults", above).
Accordingly, PMI anticipates the average claim size to decrease over the long
term. See "P. Cautionary Statement" and "Q. Factors That May Affect Future
Results and Market Price of Stock", below.
The frequency of claims does not directly correlate to the frequency of defaults
because the rate at which defaults cure is influenced by (i) the individual
borrower's financial resources and circumstances, and (ii) regional economic
differences. Whether an uncured default leads to a claim principally depends on
the borrower's equity at the time of default and the borrower's (or the
insured's) ability to sell the home for an amount sufficient to satisfy all
amounts due under the mortgage loan. During the default period, PMI works with
the insured for possible early disposal of the underlying property when the
chance of the loan reinstating is minimal. Such dispositions typically result in
a savings to PMI over the percentage coverage amount payable under the master
policy.
Under the terms of PMI's master policy, the lender is required to file a claim
with PMI no later than 60 days after it has acquired title to the underlying
property, usually through foreclosure. An insurance claim amount includes (i)
the amount of unpaid principal due under the loan; (ii) the amount of
accumulated delinquent interest due on the loan (excluding late charges) to the
date of claim filing; (iii) expenses advanced by the insured under the terms of
the master policy, such as hazard insurance premiums, property maintenance
expenses and property taxes to the date of claim filing; and (iv) certain
foreclosure and other expenses, including attorneys' fees. Such claim amount is
subject to review and possible adjustment by PMI. Depending on the applicable
state foreclosure law, an average of about 12 months elapses from the date of
default to payment of a claim on an uncured default. PMI's master policy
excludes coverage on loans secured by property with physical damage, whether
caused by fire, earthquake or other hazard where the borrower's default was
caused primarily by an uninsured casualty.
PMI has the right to rescind coverage (and not pay a claim) if the lender, its
agents or the borrower misrepresent material information in the insurance
application. According to industry practice, a misrepresentation is generally
considered material if the insurer would not have agreed to insure the loan had
the true facts been known at the time of certificate issuance. In 1988, PMI
became the first mortgage insurer to offer an incontestability feature as part
of its master policy. This feature provides insureds relief from PMI's right of
rescission for material misrepresentations if parties other than the
22
lender or its agents made such misrepresentations, provided that the borrower
has made at least 12 regularly scheduled payments on the loan from the
borrower's own funds.
Within 60 days after a claim has been filed, PMI has the option of: (i) paying
the coverage percentage specified in the certificate of insurance (usually 17%
to 30% multiplied by the claim amount); (ii) in the event the property is sold
pursuant to an arrangement made prior to or during the 60-day period after the
claim is filed (a "prearranged sale"), paying the lesser of (A) 100% of the
claim amount less the proceeds of sale of the property and (B) the coverage
percentage multiplied by the claim amount, or (iii) 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 through the last option are included on PMI's balance sheet
in other assets as residential properties from claim settlements (also known as
"REO"). PMI attempts to choose the claim settlement option which best mitigates
the amount of its claim payment. Generally, however, PMI settles by paying the
coverage percentage multiplied by the claim amount. In 1996 and 1995, PMI
settled 11% and 13%, respectively, of the primary claims processed for payment
on the basis of a prearranged sale. In each of 1996 and 1995, PMI exercised the
option to acquire the property on less than 3% of the primary claims processed
for payment. At December 31, 1996, PMI owned $1.4 million of REO valued at the
lower of cost or estimated realizable value.
The ratio of the claim paid to the original risk in force relating to such loan
is referred to as claim severity and is a factor that influences PMI's losses.
The main determinants of claim severity are the accrued interest on the mortgage
loan and the foreclosure expenses. These amounts depend in part on the time
required to complete foreclosure, which varies depending on state laws.
Pre-foreclosure sales and other early workout efforts help to reduce overall
severity. The average claim severity level has decreased slightly from 99.9% in
1992 to 99.8% in 1996, but PMI expects this level will increase in 1997. See "P.
Cautionary Statement", below.
Technology for Claims and Servicing
Technology is an integral part of the claims and servicing process and PMI
believes that technology will continue to take on a greater role in increasing
internal efficiencies and improving customer service. PMI uses a personal
computer-based automated claim-for-loss worksheet program, developed in 1987,
which compiles pertinent data while automatically calculating the claim amount
and predicting the best settlement alternative. PMI also developed
ClaimEase(sm), a reduced documentation claim process which allows the insured
to file claims earlier, reduce paperwork and receive claim settlements more
quickly. To enhance efficiencies and ease of use for its customers, PMI
developed Document Free ClaimEase(sm), which is designed to require only an
addendum to the uniform claim-for-loss worksheet. In addition, several
technology tools have also been developed by PMI in 1995: pmiPHONE-CONNECT(sm),
which is a voice response application, enabling the insured to access PMI's
database by using their phones to inquire on the status of their coverages and
get information on billings, refunds, coverage and renewals; pmiPC-CONNECT(sm),
which gives the insured the ability to dial into PMI's database using a modem-
equipped personal computer to inquire about and update certain loan information,
including the filing of claims; PMI is also capable of receiving claims via EDI.
To contain costs and expand internal efficiencies, PMI uses optical imaging in
its claims functions, allowing PMI to eliminate the transfer and storage of
documents relating to claims. PMI, through its automatic default reporting
process ("ADR"), allows paperless reporting of default information by the
insured. In 1996, approximately 82% of all Notices of Delinquency were reported
using this ADR system.
23
Cumulative Losses
Cumulative losses paid by PMI at the end of each successive year after the year
of original policy issuance ("policy year"), are expressed as a percentage of
the cumulative premiums written on such policies. For example, for the 1985
policy year, at the end of the third year after origination (1987), cumulative
losses paid on all policies originally issued in 1985 represented 18.8% of the
cumulative premiums written on such policies; by the end of the twelfth year
after origination (1996), this percentage was 65.8%.
In 1985, PMI adopted substantially more conservative underwriting standards
that, along with increased prices and generally improving economic conditions in
various regions, are believed to have contributed to the substantially lower
cumulative loss payment ratios in 1985 and subsequent years. PMI's cumulative
loss payment ratios have shown general improvement since policy year 1982. This
reflects both improved claims experience for the more recent years and higher
premium rates charged by PMI beginning in 1984. Policy years 1986 through 1988
generally have had the best cumulative loss payment ratios of any years since
1981. Policy years 1989 through 1992, in most cases, display somewhat higher
loss payment ratios than 1986 through 1988 at the same age of development. This
is due primarily to the increased refinancing of mortgages originated in policy
years 1989 to 1993, resulting in reduced aggregate premiums, and to higher
default rates on California loans, which have demonstrated relatively higher
persistency. PMI believes three years of payment history from the loan
origination date is required to assess cumulative loss experience. As a
result, policy year 1993 is the last year discussed.
Loss Reserves
A significant period of time may elapse between the occurrence of the borrower's
default on mortgage payments (the event triggering a potential future claims
payment), the reporting of such default to PMI and the eventual payment of the
claim related to such uncured default. To recognize the liability for unpaid
losses related to the default inventory, PMI (similar to other mortgage
insurers) establishes loss reserves in respect of defaults included in such
inventory, based upon the estimated claim rate and estimated average claim
amount. Included in loss reserves are loss adjustment expense ("LAE") reserves
and incurred, but not reported, reserves. These reserves are estimates and there
can be no assurance that PMI's reserves will prove to be adequate to cover
ultimate loss developments on reported defaults. The Company's profitability and
financial condition would be adversely affected to the extent that loss reserves
are insufficient to cover the actual related claims paid and expenses incurred.
Consistent with industry accounting practices, PMI does not establish loss
reserves in respect of estimated potential defaults that may occur in the
future.
PMI's reserving process for primary insurance segments default notifications by
year of receipt of the notice by PMI (the "report year method"). In the report
year method, ultimate claim rates and average claim amounts selected for the
current and each of the four prior report years are estimated based on past
experience and management judgment. Claim rates and amounts are also estimated
by region for the most recent report years to validate nationwide report year
estimates, which are then used in the normal reserving methodology. For each
report year, the claim rate, estimated average claim amount and the number of
reported defaults are multiplied together to determine the amount of direct
incurred losses for that report year. Losses paid to date for that report year
are subtracted from the estimated report year incurred losses to obtain the loss
reserve for that report year. The sum of the reserves for those five years,
together with a reserve for expected losses on the few defaults still pending
from prior years, yields the total loss reserve on reported defaults. PMI
reviews its claim rate and claim-report amount assumptions on at least a
quarterly basis and adjusts its loss reserves accordingly. The impact of
inflation is not explicitly isolated from other factors influencing the reserve
estimates, although inflation is implicitly included in the estimates. PMI does
not discount its loss reserves for financial reporting purposes.
24
PMI's reserving process is based upon the assumption that past experience,
adjusted for the anticipated effect of current economic conditions and projected
future economic trends, provides a reasonable basis for estimating future
events. However, estimation of loss reserves is a difficult process, especially
in light of the rapidly changing economic conditions over the past few years in
certain regions of the United States. In addition, economic conditions that have
affected the development of the loss reserves in the past may not necessarily
affect development patterns in the future.
PMI's Actuarial Services department performs the loss reserve analysis. On the
basis of such loss reserve analysis, management believes that the loss reserves
are, in the aggregate, computed in accordance with commonly accepted loss
reserving standards and principles and meet the requirements of the insurance
laws and regulations of the State of Arizona. Management believes that the loss
reserves are a reasonable provision for all unpaid loss and LAE obligations
under the terms of its policies and agreements. See "P. Cautionary Statement"
and "Q. Factors That May Affect Future Results and Market Price of Stock",
below.
Such reserves are necessarily based on estimates and the ultimate net cost may
vary from such estimates. These estimates are regularly reviewed and updated
using the most current information available. Any resulting adjustments are
reflected in current financial statements. The following table is a
reconciliation of the beginning and ending reserve for losses and loss
adjustment expenses for each of the last three years:
1996 1995 1994
(In thousands)
Balance, January 1....................................... $192,087 $173,885 $135,471
Less reinsurance recoverables............................ 17,899 17,569 12,649
-------- -------- --------
Net Balance, January 1................................... 174,188 156,316 122,822
-------- -------- --------
Losses and loss adjustment expenses (principally in
respect of defaults occurring in)
Current year........................................... 161,740 133,536 121,464
Prior years............................................ (9,331) (20,699) (17,557)
-------- -------- --------
Total losses and loss adjustment expenses............. 152,409 112,837 103,907
-------- -------- --------
Losses and loss adjustment expense payment (principally
in respect of defaults occurring in)
Current year........................................... 23,353 16,180 13,651
Prior years............................................ 108,757 78,785 56,762
-------- -------- -------
Total payments....................................... 132,110 94,965 70,413
-------- -------- -------
Net balance, December 31................................. 194,487 174,188 156,316
Plus reinsurance recoverables............................ 5,287 17,899 17,569
-------- -------- --------
Balance, December 31..................................... $199,774 $192,087 $173,885
======== ======== ========
As a result of changes in estimates of ultimate losses resulting from insured
events in prior years, the provision for losses and loss adjustment expenses
(net of reinsurance recoverables) decreased by $9.3 million, $20.7 million, and
$17.6 million in 1996, 1995 and 1994, respectively, due primarily to
lower-than-anticipated losses in California. Such re-estimates were based on
management's analysis of various economic trends (including the real estate
market and unemployment rates) and their effect on recent claim rate and claim
severity experience.
25
K. REINSURANCE
The use of reinsurance as a source of capital and as a risk management tool is
well established within the mortgage insurance industry. In addition, certain
mortgage insurers, including PMI, have agreed to reinsure portions of the risk
written on loans originated by certain lenders with captive reinsurance
companies affiliated with such lenders. Reinsurance does not discharge PMI, as
the primary insurer, from liability to a policyholder. The reinsurer simply
agrees to indemnify PMI for the reinsurer's share of losses incurred under a
reinsurance agreement, unlike an assumption arrangement, where the assuming
reinsurer's liability to the policyholder is substituted for that of PMI's.
Forestview
In connection with its decision to discontinue its mortgage pool insurance
business segment, in 1993, PMI entered into a reinsurance agreement with
Forestview, a wholly-owned subsidiary of Allstate, whereby Forestview agreed to
reinsure all liabilities (net of amounts collected from third party reinsurers)
in connection with PMI's mortgage pool insurance business in exchange for
premiums received. In 1994, Forestview also agreed to assume PMI's mortgage pool
insurance business upon receipt of all required regulatory approvals. Pursuant
to the reinsurance agreement, during 1996 PMI ceded approximately $15.2 million
of premiums to Forestview, and Forestview reimbursed PMI for claims on the
covered policies in the amount of approximately $59.4 million. See "M. Other
Businesses -- Discontinued Operations" and "Q. Factors That May Affect Future
Results and Market Price of Stock", below.
Centre Re
Effective January 1992, PMI entered into a quota share reinsurance agreement
with Centre Reinsurance Company of New York and Centre Reinsurance International
Company (collectively, "Centre Re") whereby PMI ceded to Centre Re a portion of
PMI's liability under its primary insurance policies. The portion of PMI's
liability (and related premiums) ceded under the Centre Re agreement was
commuted and terminated effective December 31, 1996. PMI ceded to Centre Re 15%
of its liability (and 15% of the related premiums) under its primary policies
written in the years 1986 through 1992, 5% of its liability (and 5% of the
related premiums) under policies written in 1993, and for 1994 and 1995, 15% of
its liability (and 15% of the related premiums) for policies written in
California and 10% of its liability (and 10% of the related premiums) for
policies written in the rest of the United States. PMI did not cede any
liability or premiums for new business written in 1996. Centre Re's liability
under the Centre Re agreement is limited with respect to any policy year to 150%
of net premiums ceded for such policy year (defined as premiums ceded less
certain expenses). Under the Centre Re agreement, a ceding commission related to
premiums ceded was paid by Centre Re to PMI. See Part II, Item VII
"Management's Discussion And Analysis Of Financial Condition And Results of
Operations".
Capital Mortgage
In March 1994, PMI entered into a quota share reinsurance agreement with Capital
Mortgage Reinsurance Company ("Capital Mortgage") (claims-paying ability rating
of "AA+" at December 31, 1996 from S&P) whereby PMI ceded to Capital Mortgage 5%
of PMI's liability under its primary insurance policies written in 1993, 1994,
1995 and 1996 (and 5% of the related premiums). This agreement provides for a
ceding commission to be paid by Capital Mortgage to PMI relating to premiums
ceded. PMI has notified Capital Mortgage of its intention to cancel the
agreement on December 31, 1997. In the event of cancellation, Capital Mortgage
remains liable on a runoff basis for nine years (subject to either party's right
to commute the agreement at six years) and receives renewal premiums on the
ceded portion of the primary insurance in force at the time of cancellation of
the agreement.
26
RGC
Pursuant to the deep coverage requirements imposed by Fannie Mae and Freddie
Mac, 95s and 97s eligible for sale to such agencies require insurance with a
coverage percentage of 30%, in contrast to the 25% and 28% coverages,
respectively, previously required by these agencies. Certain states limit the
amount of risk a mortgage insurer may retain with respect to coverage of an
insured loan to 25% of the indebtedness to the insured, and, as a result, the
deep coverage portion of such insurance must be reinsured. To minimize reliance
on third party reinsurers and to permit PMI and CMG to retain the premiums (and
related risk) on deep coverage business, TPG formed RGC to provide reinsurance
of such deep coverage to PMI and CMG. PMI and CMG use reinsurance provided by
RGC solely for purposes of compliance with statutory coverage limits. RGC was
capitalized with a $5.0 million capital contribution from TPG, and additional
capital contributions of $13.0 million were made by TPG to RGC during 1996.
While RGC has the ability to write direct mortgage insurance and to provide
reinsurance to unaffiliated mortgage insurers, TPG currently intends to have RGC
write reinsurance solely for PMI and CMG.
L. CLAIMS-PAYING ABILITY RATINGS
Certain national mortgage lenders and a large segment of the mortgage
securitization market, including Fannie Mae and Freddie Mac, generally will not
purchase mortgages or mortgage-backed securities unless the private mortgage
insurance on the mortgages has been issued by an insurer with a claims-paying
ability rating of at least "AA-" from S&P or Fitch, or "AA+" from Duff & Phelps
or at least "Aa3" from Moody's.
PMI has its claims-paying ability rated by S&P, Fitch, Duff & Phelps and
Moody's. These ratings are an indication to a mortgage insurer's customers of
the insurer's present financial strength and its capacity to pay future claims.
Ratings are generally considered an important element in a mortgage insurer's
ability to compete for new insurance business. Each of S&P, Duff & Phelps and
Fitch currently rate PMI's claim paying ability "AA+", while Moody's rates its
claims-paying ability "Aa2."
S&P defines insurers rated "AA+" as offering excellent financial security and
having the capacity to meet policyholder obligations that is strong under a
variety of economic and underwriting conditions. This claims-paying ability
rating by S&P is the second highest ranking possible out of eight possible
generic rating categories. Fitch defines insurance companies rated "AA+" to have
a very strong claims-paying ability and to be only slightly more susceptible
than companies rated "AAA" to exhibiting any weakening of financial strength due
to adverse business and economic developments. A claims-paying ability rating of
"AA+" by Fitch is the second highest ranking possible from that agency out of
ten possible generic ratings categories. Duff & Phelps defines insurance
companies rated "AA+" to have a very strong claims-paying ability and to be only
slightly more susceptible than companies rated "AA" to exhibiting any weakening
of financial strength due to adverse business and economic developments. Ratings
from S&P, Duff & Phelps and Fitch may be modified with a "+" or "-" sign to
indicate the relative position of a company within its category. Moody's defines
insurance companies whose claims-paying ability is rated "Aa" to offer excellent
financial security. A claims-paying ability rating of "Aa" by Moody's is the
second highest generic ranking possible from the agency out of nine possible
rating categories ("Aaa" being the highest). Moody's further distinguishes the
ranking of an insurer within its generic rating classification from Aa to B with
"1," "2" or "3" ("1" being the highest).
27
When assigning a claims-paying ability rating, S&P, Fitch, Duff & Phelps and
Moody's generally consider: (i) the specific risks associated with the mortgage
insurance industry, such as regulatory climate, market demand, growth and
competition; (ii) management depth, corporate strategy and effectiveness of
operations; (iii) historical operating results and expectations of current and
future performance; and (iv) long-term capital structure, the ratio of debt to
equity, near-term liquidity and cash flow levels, as well as any reinsurance
relationships and the claims-paying ability ratings of such reinsurers.
Claims-paying ability ratings are based on factors relevant to policyholders,
agents, insurance brokers and intermediaries. Such ratings are not directed to
the protection of investors and do not apply to any securities issued by TPG.
Claims-paying ability ratings can be withdrawn or changed at any time by S&P,
Fitch, Duff & Phelps or Moody's for any reason. PMI's claims-paying ability
ratings by S&P, Fitch, Duff & Phelps and Moody's should be evaluated
independently of each other.
PMI's claims-paying ability ratings from certain national rating agencies have
been based in significant part on various capital support commitments from
Allstate ("Allstate Support Agreements"). On October 28, 1994, TPG entered into
a runoff support agreement with Allstate (the "Runoff Support Agreement") to
replace various capital support commitments that Allstate had previously
provided to PMI. Allstate agreed to pay claims on certain insurance policies
issued by PMI prior to October 28, 1994 if PMI's financial condition
deteriorates below specified levels, or if a third party brings a claim
thereunder or, in the alternative, Allstate may make contributions directly to
PMI or TPG. In the event that Allstate makes payments or contributions under the
Runoff Support Agreement, (which possibility management believes is remote),
Allstate would receive subordinated debt or preferred stock of PMI or TPG in
return.
M. OTHER BUSINESSES
TPG seeks to supplement its core mortgage insurance business and enhance its
customer relationships through ancillary businesses and may, from time to time,
invest in joint ventures or acquire related businesses. TPG, through certain
subsidiaries, provides title insurance and various services and products for the
home mortgage finance industry, such as contract underwriting and the licensing
of its proprietary underwriting systems and the licensing of REASON(R) software,
a real estate valuation program.
The revenues recognized for the year ended December 31, 1996 from TPG's
businesses other than mortgage insurance constituted approximately 12.7% of the
Company's consolidated revenues, compared to approximately 10.8% and 14.4%,
respectively, in 1995 and 1994.
American Pioneer Title Insurance Co.
PMI acquired APTIC, a Florida-based title insurance company, in 1992 as part of
its strategy to provide additional mortgage-related services to its customers.
APTIC is licensed in 31 states and the District of Columbia. Although APTIC is
currently writing business in 11 states, it primarily provides real estate title
insurance on residential property in Florida. A title insurance policy protects
the insured party against losses resulting from title defects, liens and
encumbrances existing as of the effective date of the policy and not
specifically excepted from the policy's coverage.
Based on direct premiums written during 1996, APTIC is ranked 5th among the 27
active title insurers conducting business in the State of Florida. For the year
ended December 31, 1996, 87.3% of APTIC's premiums earned came from its Florida
operations.
28
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 93.8% of APTIC's premiums
earned for the year ended December 31, 1996.
CMG Mortgage Insurance Company
CMG offers mortgage guaranty insurance for loans originated by credit unions.
CMG is operated as a joint venture between PMI and CUNA Mutual Investment
Corporation ("CMIC"), with PMI having a 45% ownership interest since September
1994. PMI and CMIC provide services to the venture, with CMIC providing
primarily sales and marketing services and PMI providing primarily insurance
operation services. CMIC is a part of the CUNA Mutual Group, which provides
insurance and selected financial services to credit unions and their members in
the United States and over 50 other countries.
As of December 31, 1996, CMG was licensed and operational in 49 states and the
District of Columbia. CMG is approved as a mortgage insurer by both Fannie Mae
and Freddie Mac, as well as by other purchasers of credit union originated
mortgage loans. Since inception, CMG has issued over 800 master policies to
credit union and credit union affiliated organizations nationwide. At December
31, 1996, CMG had over $1.1 billion of primary insurance in force.
Under the terms of the joint venture arrangement, at the end of the fifteen year
period, or earlier under certain limited conditions, CMIC has the right to
require PMI to sell, and PMI has the right to require CMIC to purchase, PMI's
interest in CMG for an amount equal to the then current fair market value. For
this purpose, fair market value will be determined by agreement between PMI and
CMIC, or failing such agreement, through appraisal by nationally recognized
investment banking firms.
PMI Mortgage Services Co.
MSC, established in 1993, provides a variety of technical products and mortgage
underwriting services through a staff of underwriters in 19 field offices. The
Customer Technology Department of MSC provides technical products and services
to PMI's customers. This department licenses use of pmiAURA(sm) and
pmiTERRA(sm) to customers for a fee, assists PMI's customers in establishing
EDI links with PMI, and provides other value added services.
In addition, the Risk Management Division of MSC provides contract underwriting
services that enable customers to improve the efficiency and quality of their
operations by outsourcing all or part of their mortgage loan underwriting to
MSC. Such contract underwriting services are provided for mortgage loans for
which PMI provides mortgage insurance and for loans on which PMI does not.
MSC also performs all of the mortgage insurance underwriting activities of CMG.
Contract underwriting services have become increasingly important to mortgage
lenders as they seek to reduce costs. Competition increased in 1996 among
mortgage insurance companies for contract underwriting customers. During 1996,
the Risk Management Division of MSC experienced significant growth in the number
of loans underwritten from approximately 18,000 loans in 1995 to approximately
87,000 loans in 1996.
29
Discontinued Operations
In December 1993, PMI ceased writing new business in its mortgage pool insurance
business segment (except for honoring certain commitments in existence prior to
the decision to discontinue). This business segment offered mortgage pool
insurance which was separately underwritten and marketed and which had risk
characteristics different from PMI's primary insurance business. Due primarily
to PMI's decision not to offer mortgage pool insurance, PMI presently
anticipates that competitive pressures related to the availability of mortgage
pool insurance will continue to negatively impact its market share during the
first half of 1997. (See "D. Competition", above, and Part II, Item VII
"Management's Discussion And Analysis Of Financial Condition And Results of
Operations".)
In 1993, PMI entered into a reinsurance agreement with Forestview, a
wholly-owned subsidiary of Allstate, whereby Forestview agreed to reinsure all
liabilities (net of amounts collected from third party reinsurers) in connection
with PMI's mortgage pool insurance business in exchange for premiums received.
In 1994, Forestview also agreed to assume PMI's mortgage pool insurance business
upon receipt of all required regulatory approvals. Pursuant to this agreement,
during 1996 PMI ceded approximately $15.2 million of premiums to Forestview, and
Forestview reimbursed PMI for claims on the covered policies in the amount of
approximately $59.4 million.
N. REGULATION
Fannie Mae and Freddie Mac; State and Federal Legislation
Upon request by an insured, PMI must cancel the mortgage insurance for a
mortgage loan. Fannie Mae and Freddie Mac guidelines and several state statutes
currently contain various provisions which give borrowers the right to request
cancellation of mortgage insurance when specified conditions are met. Recently,
cancellation of mortgage insurance has received media attention, and various
additional federal and state statutes and regulations have been proposed, or
enacted, that generally require lenders to give borrowers notice of the
borrowers' rights to cancel mortgage guaranty insurance and, in some cases,
establish cancellation criteria. Fannie Mae has also announced its intent to
revise its mortgage cancellation guidelines and to require its servicers to give
notice to borrowers regarding cancellation rights. The mortgage insurance
industry trade association, Mortgage Insurance Companies of America ("MICA"),
has been actively working with congressional committees, Fannie Mae and several
state legislators and regulators regarding these various proposals.
Proposals which would require notification to borrowers of their cancellation
rights, and the circumstances under which borrowers may request cancellation or
mortgage insurance premiums may no longer be charged to borrowers, are evolving,
and it is difficult to predict which of the various proposals will be enacted or
adopted, and how they will be integrated. However, it appears likely that more
borrowers will receive notification of their rights concerning cancellation of
mortgage insurance, and that new standards for cancellation of mortgage
insurance for some types of loans will be established. It is also possible that
automatic cancellation of mortgage insurance at some point in the life of a loan
could become effective for some types of loans. Depending upon whether state
and/or federal laws are enacted and upon the nature and extent of revisions made
to the current proposals, the effect on the persistency of PMI's insurance in
force could vary substantially. See "P. Cautionary Statement" and "Q. Factors
That May Affect Future Results and Market Price of Stock".
PMI's ability to pay dividends to TPG is limited under the insurance laws of
Arizona. Such laws provide
30
that: (i) PMI may pay dividends out of available surplus and (ii) without prior
approval of the Arizona Insurance Director, such dividends during any 12-month
period may not exceed the lesser of 10% of policyholders' surplus as of the
preceding year end, or the last calendar year's investment income. In accordance
with Arizona law, PMI is permitted to pay ordinary dividends to TPG of $30.7
million in 1997 without the prior approval of the Arizona Insurance Director.
Legislative and regulatory changes affecting the FHA and certain savings
institutions and commercial banks have affected and will continue to affect
demand for private mortgage insurance. For example, legislation has recently
been introduced that would increase the number of persons eligible for FHA or VA
mortgages. Any such expansion of eligibility would likely have an adverse effect
on PMI's ability to compete with the FHA or VA. In addition, the Office of the
Comptroller of the Currency granted permission in 1996, to national banks to
have a reinsurance company as a wholly-owned operating subsidiary for the
purpose of reinsuring mortgage insurance written on loans originated by such
bank. The Office of Thrift Supervision is in the process of considering whether
similar activities are permitted for savings institutions. The reinsurance
subsidiaries of national banks or savings institutions could become significant
competitors of the Company in the future.
0. EMPLOYEES
At December 31, 1996, TPG, including its subsidiaries had 878 full- and
part-time employees; 586 persons perform services primarily for PMI, 78 perform
services primarily for MSC, 8 of which perform services primarily for CMG and an
additional 206 persons are employed by APTIC. TPG's employees are not unionized
and TPG considers its employee relations to be good.
31
P. CAUTIONARY STATEMENT
Cautionary Statement for purposes of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. The statements contained in this
document, including statements which are incorporated by reference, that are not
historical facts, and that relate to future plans, events or performance are
forward-looking statements. The Company's actual results may differ materially
from those expressed in any forward-looking statements made by the Company.
These forward-looking statements involve a number of risks or uncertainties
including, but not limited to, the factors set forth below.
Several factors such as economic recessions, falling housing values, rising
unemployment rates, deteriorating borrower credit, interest rate volatility,
legislation impacting borrowers' rights, or combinations of such factors might
affect the mortgage insurance industry in general and could materially and
adversely affect the Company's financial condition and results of operations.
Such economic events could materially and adversely impact the demand for
mortgage insurance, cause claims on policies issued by PMI to increase, and/or
cause a similar adverse increase in PMI's loss experience.
In addition to nationwide economic conditions, PMI could be particularly
affected by economic downturns in specific regions where a large portion of its
business is concentrated, particularly California where PMI has 22.0% of its
risk in force concentrated and where the default rate on all PMI policies in
force is 3.81% compared to 2.19% nationwide, as of December 31, 1996.
Several other factors that may influence the amount of NIW by PMI include
mortgage insurance industry volumes of new business, the impact of competitive
underwriting criteria and products including mortgage pool insurance, the effect
of risk-sharing structured transactions, changes in the performance of the
financial markets, general economic conditions that affect the demand for or
acceptance of the Company's products, changes in government housing policy,
changes in the statutory charters, regulations and coverage requirements of the
GSEs, banks and savings institutions, customer consolidation and other risk
factors listed from time to time in TPG's Securities and Exchange Commission
filings.
Q. FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
Potential Increase in Claims
Mortgage insurance coverage generally cannot be canceled by PMI and remains
renewable at the option of the insured for the life of the loan. As a result,
the impact of increased claims from policies originated in a particular year
generally cannot be offset by premium increases on policies in force or
mitigated by nonrenewal of insurance coverage. There can be no assurance,
however, that the premiums charged will be adequate to compensate PMI for the
risks and costs associated with the coverage provided to its customers.
32
Recent Growth; Changes In Composition Of Insurance Written
The mortgage insurance industry has experienced a significant increase in NIW,
primarily as a result of historically low interest rates. Policies written by
PMI from January 1, 1991 through December 31, 1994 represent 55.4% of PMI's
insurance in force as of December 31, 1996. The majority of claims under PMI
policies have historically occurred during the third through the sixth years
after issuance of the policies. Thus, this substantial volume of PMI's business
is in its expected peak claims period, and management expects that the default
rate will rise in the future as such business continues through its expected
peak claims period. If actual claim frequency on such business significantly
exceeds expected claim frequency, the Company's financial condition and results
of operations could be materially and adversely affected.
The composition of PMI's NIW has included an increasing percentage of mortgages
with LTVs in excess of 90% and less than or equal to 95% ("95s"). At December
31, 1996, approximately 43.6% of PMI's risk in force consisted of 95s, which, in
PMI's experience, have had a claims frequency approximately twice that of
mortgages with LTVs equal to or less than 90% and over 85% ("90s"). PMI also
offers coverage for mortgages with LTVs in excess of 95% and up to 97% ("97s"),
which have even higher risk characteristics than 95s and greater uncertainty as
to pricing adequacy. PMI's NIW also includes adjustable rate mortgages ("ARMs"),
which, although priced higher, have risk characteristics that exceed the risk
characteristics associated with PMI's book of business as a whole. Although PMI
charges higher premium rates for loans which are ARMs and/or 95s and even higher
rates for 97s, the premiums earned on such products, and the associated
investment income, may ultimately prove to be inadequate to compensate for
future losses from such products.
Loss Reserves
PMI establishes loss reserves based upon estimates of the claim rate and average
claim amount, as well as the estimated costs, including legal and other fees, of
settling claims. Such reserves are based on estimates, which are regularly
reviewed and updated. There can be no assurance that PMI's reserves will prove
to be adequate to cover ultimate loss development on incurred defaults. The
Company's financial condition and results of operations could be materially and
adversely affected if PMI's reserve estimates are insufficient to cover the
actual related claims paid and expenses incurred.
Competition; Market Share
Numerous factors bear on the relative position of the private mortgage insurance
industry versus government and quasi-governmental competition as well as the
competition of lending institutions which choose to remain uninsured or to
reinsure through affiliates. PMI's market share, as measured by NIW declined in
the fourth quarter of 1996, compared to the third quarter of 1996, due primarily
to PMI's decision not to offer mortgage pool insurance. Management presently
anticipates that competitive pressures related to the availability of mortgage
pool insurance will continue to negatively impact market share during the first
half of 1997. The Company's financial condition and results of operation could
be materially and adversely affected by a continuing decline in its market
share.
TPG and PMI from time to time introduce new mortgage insurance products or
programs. The Company's financial condition and results of operations could be
materially and adversely affected if PMI or the Company experience delays in
introducing competitive new products or programs. In addition, for any
introduced product, there can be no assurance that such products or programs
will be as profitable as the Company's existing products and programs.
33
Fannie Mae and Freddie Mac; State and Federal Legislation
Fannie Mae and Freddie Mac impose requirements on private mortgage insurers for
such insurers to be eligible to insure loans sold to such agencies. Any change
in PMI's existing eligibility status could have a material adverse effect on
the Company's financial condition and results of operations.
Proposals have been advanced which would allow Fannie Mae and Freddie Mac
greater flexibility in utilizing substitutes for private mortgage insurance. The
Company cannot predict whether any such proposals will be adopted or, if
adopted, whether such proposals would materially and adversely affect the
Company's financial condition and results of operations.
PMI must cancel mortgage insurance for a mortgage loan upon the request of the
insured. Fannie Mae and Freddie Mac have recently adopted guidelines which give
borrowers the right to request cancellation of mortgage insurance when specified
conditions are met. In addition, federal legislation has been introduced that
also addresses these issues and various states have enacted or proposed similar
legislation. Proposals concerning borrower notification of their cancellation
rights, cancellation criteria, or the point at which mortgage insurance premiums
may no longer be charged to borrowers, are still being formulated and remain
uncertain. Although it is expected that certain of these proposals will
eventually be enacted, the Company believes it is too early to ascertain their
impact.
Risk-to-Capital Ratio
Regulators specifically limit the amount of insurance risk that may be written
by PMI to a multiple of 25 times PMI's statutory capital (which includes the
contingency reserve). Other factors affecting PMI's risk-to-capital ratio
include: (i) regulatory review and oversight by the State of Arizona, PMI's
state of domicile for insurance regulatory purposes; (ii) limitations under the
Runoff Support Agreement discussed below, which prohibit PMI from paying any
dividends if, after the payment of any such dividend, PMI's risk-to-capital
ratio would equal or exceed 23 to 1, (iii) TPG's credit agreements, and (iv)
TPG's and PMI's credit or claims-paying ability ratings.
Significant losses could cause a material reduction in statutory capital,
causing an increase in the risk-to-capital ratio and thereby limit PMI's ability
to write new business. The inability to write new business could materially
adversely affect the Company's financial condition and results of operations.
Continuing Relationships with Allstate and Affiliates
Historically, Allstate provided capital and other business support services to
PMI pursuant to a variety of contractual arrangements with PMI and TPG. Pursuant
to the Runoff Support Agreement with Allstate, if PMI's risk-to-capital ratio
exceeds 23 to 1, Allstate will have certain limited rights and obligations to
pay amounts with respect to claims under PMI policies in effect prior to the
effective date of the Runoff Support Agreement (or to contribute capital to TPG
or to PMI for such purpose). In 1993, PMI entered into a reinsurance agreement
with Forestview, a wholly-owned subsidiary of Allstate, whereby Forestview
agreed to reinsure all liabilities (net of amounts collected from third party
reinsurers) in connection with PMI's mortgage pool insurance business in
exchange for premiums received. In 1994, Forestview also agreed to assume PMI's
mortgage pool insurance business upon receipt of all required regulatory
approvals. Significant claims have been paid on the policies covered by the
reinsurance agreement which amounts have been reimbursed by Forestview to PMI.
It is anticipated that additional significant claims will be paid in 1997 and
beyond.
34
Due to the complex nature of numerous arrangements between Allstate and the
Company, Allstate has the ability to influence the policies and affairs of the
Company. The failure of Allstate to maintain its contractual commitments to the
Company could have a material adverse impact on the Company's financial
condition and results of operations.
ITEM 2. PROPERTIES
TPG leases its home office in San Francisco, California, which consists of
approximately 98,450 square feet of office space. The San Francisco lease
expires on December 31,1999. In addition, TPG leases space for 19 PMI and MSC
field offices. Such field office leases cover an average of 4,283 square feet
and have terms of not more than five years.
TPG believes its existing properties are well utilized and are suitable and
adequate for its present circumstances.
ITEM 3. LEGAL PROCEEDINGS
APTIC has been named as a defendant in a purported class action complaint filed
in the United States District Court for the Southern District of Florida. The
complaint alleges, among other things, violations of the Real Estate Settlement
Procedures Act ("RESPA"), intentional and negligent misrepresentations and
unfair trade practices in connection with payments and other consideration
purportedly paid to title agents. The complaint seeks damages under RESPA of
three times the amount of any charges for title insurance paid to APTIC by
purported class members, unspecified compensatory and punitive damages under
state law, attorneys' fees, court costs and injunctive relief. Based on
information presently available to the Company, management believes that the
ultimate outcome of this matter will not have a material adverse effect on the
Company's financial position or results of operations.
Various other legal actions and regulatory reviews are currently pending that
involve the Company and specific aspects of its conduct of business. In the
opinion of management, the ultimate liability or resolution in one or more of
the foregoing actions is not expected to have a material effect on the financial
condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1996 to a vote of
shareholders through the solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF REGISTRANT
Set forth below is certain information regarding TPG's executive officers as of
December 31, 1996, including age as of April 1, 1997, and business experience
for at least the past five years.
W. Roger Haughton, 49, has been President and Chief Executive Officer of PMI
Mortgage Insurance Co. ("PMI"), TPG's principal subsidiary, since January 1993
and was elected to the same position with TPG in January 1995. Haughton came to
PMI in 1985 as Vice President of Underwriting, after 16 years with Allstate
Insurance Company ("Allstate"). In 1987, he was promoted to Vice
President/General Manager for PMI's Central Zone, responsible for all sales and
field office operations in that region. In 1989, he became Group Vice President
of Insurance Operations, where
35
he assumed responsibility for management of PMI's Administration, Systems,
Underwriting, Claims and Actuarial Services departments. Effective March 1997,
Mr. Haughton is scheduled to commence a two-year term as President of the
Mortgage Insurance Companies of America ("MICA"), the industry trade
association. He is presently serving on the Fannie Mae National Advisory Council
for a two-year term. He also has a long history of active volunteerism with
various affordable housing organizations, including Habitat for Humanity, and
serves on the board of Social Impact. Mr. Haughton has been a Director of TPG
since January 1995 and a Director of PMI since May 1990.
L. Stephen Smith, 47, has been Executive Vice President of Field Operations of
PMI since May 1994 and was elected to the same position with TPG in January
1995. Prior thereto, he was PMI's Senior Vice President of Field Operations from
September 1993 to May 1994, Senior Vice President of Marketing and Customer
Technology from December 1991 to September 1993 and Vice President, General
Manager of PMI's eastern zone from September 1985 to December 1991.
John M. Lorenzen, Jr., 52, has been Executive Vice President of PMI since May
1994 and Chief Financial Officer of PMI since April 1989, and was elected to the
same position with TPG in January 1995. Prior thereto, he was PMI's Senior Vice
President from April 1989 to May 1994 and Vice President -- Finance from April
1985 to April 1989.
Claude J. Seaman, 50, has been Executive Vice President of Insurance Operations
and Assistant Secretary of PMI since May 1994, and was elected to the same
position with TPG in January 1995. Prior thereto, he was PMI's Senior Vice
President of Insurance Operations from March 1993 to May 1994, Vice President of
Claims from December 1991 to March 1993 and Vice President of Underwriting from
January 1987 to December 1991.
Victor J. Bacigalupi, 53, has been Senior Vice President, General Counsel and
Secretary of TPG and PMI since November 1996. Prior to joining TPG, he was a
partner of Bronson, Bronson & McKinnon LLP, since February 1992.
Richard D. Bryan, 51, has been Senior Vice President, and Chief Information
Officer of TPG and PMI since August 1996. Prior to joining TPG, he was Executive
Vice President, Servicing at Freddie Mac from 1994 to 1995. He first joined
Freddie Mac in 1984, serving as Senior Vice President, Information Services and
previously held the positions of Executive Vice President, Operations and Acting
National Sales Director from 1991 to 1994.
Bradley M. Shuster, 42, has been Senior Vice President, Treasurer and Chief
Investment Officer of PMI since August 1995, and was elected to the same
position with TPG, in September, 1995. Prior thereto, he was an audit partner
with the accounting firm of Deloitte & Touche LLP from May 1988 to July 1995.
36
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
COMMON STOCK
- ------------
TPG is listed on the New York Stock Exchange and the Pacific Exchange under the
trading symbol PMA. As of December 31, 1996 there were 34,509,819 shares issued
and outstanding. As of February 28, 1997 there were 34,134,084 shares issued and
outstanding held by approximately 30 shareholders of record and approximately
8,511 beneficial owners of shares held by brokers and fiduciaries.
The following table shows the high, low and closing common stock prices by
quarter from the New York Stock Exchange Composite Listing for the two years
ended December 31, 1996 and 1995:
1996 1995
----------------------------------------------------------
High Low Close High Low Close
----------------------------------------------------------
First quarter 51 3/4 41 1/2 43 5/8 * * *
Second quarter 46 1/4 40 42 1/2 45 36 43 3/8
Third quarter 54 3/8 39 7/8 53 1/8 48 1/8 42 1/4 47 3/8
Fourth quarter 60 52 1/8 55 3/8 53 1/2 40 3/4 45 1/4
______________
*Prior to Initial Public Offering
PREFERRED STOCK
- ---------------
TPG's Board of Directors is authorized to issue up to 5,000,000 shares of
preferred stock of TPG in classes or series and to fix the designations,
preferences, qualifications, limitations or restrictions of any class or series
with respect to the rate and nature of dividends, the price and terms and
conditions on which shares may be reedemmed, the amount payable in the event of
voluntary or involuntary liquidation, the terms and conditions for conversion or
exchange into any other class or series of the stock, voting rights and other
terms. The Company may issue, without the approval of the holders of common
stock, preferred stock which has voting, dividend or liquidation rights superior
to the common stock and which may adversely affect the rights of the holders of
common stock.
PAYMENT OF DIVIDENDS AND POLICY
- -------------------------------
Payment of future dividends is subject to a declaration by TPG's Board of
Directors. The dividend policy is also dependent on the ability of PMI to pay
dividends to TPG, which is influenced by, among other factors, regulatory
restrictions by the Arizona Department of Insurance. (See Part I."N. Regulation"
and Part II, Item VIII, Financial Statement Note 11 - "Dividends and
Shareholders' Equity".)
During the second quarter of 1995, TPG's Board of Directors declared its first
dividend on common stock of $0.05 per share, and has declared and paid a
quarterly dividend of $0.05 per share through the first quarter of 1997.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference from portions
of The PMI Group, Inc. 1996 Annual Report to Shareholders as filed under Exhibit
13.1.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference from portions
of The PMI Group, Inc. 1996 Annual Report to Shareholders as filed under Exhibit
13.1.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference from portions
of The PMI Group, Inc. 1996 Annual Report to Shareholders as filed under Exhibit
13.1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning TPG's Directors and Executive Officers as required by
this Item is incorporated by reference from TPG's 1997 Proxy Statement under the
captions "Nominees For Director of TPG" and "Section 16(a) Beneficial Ownership
Reporting Compliance". Information regarding Executive Officers of TPG is
included in a separate item captioned "Executive Officers of Registrant" in Part
I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from TPG's
1997 Proxy Statement under the captions "Directors Compensation and Benefits"
and "Executive Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from TPG's
1997 Proxy Statement under the caption "Security Ownership of Certain Beneficial
Owners and Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from TPG's
1997 Proxy Statement under the captions "Transactions with Allstate" and
"Compensation Committee Interlocks and Insider Participation".
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements: The financial statements listed in the accompanying
Index to Consolidated Financial Statements and Financial Statement Schedules are
filed as part of this Form 10-K.
2. Financial Statement Schedules: The financial statement schedules listed in
the accompanying Index to Consolidated Financial Statements and Financial
Statement Schedules are filed as part of the Form 10-K. All other schedules are
omitted because of the absence of conditions under which they are required or
because the required information is included in the consolidated financial
statements or notes thereto.
3. Exhibits: The 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 November 25, 1996, TPG filed a report on Form
8-K to file an Indenture dated November 19, 1996 in connection with the sale by
TPG of 6 3/4% notes in the amount of $100 million due November 15, 2006. (ii) On
February 21, 1997, TPG filed a report on Form 8-K to file a news release dated
January 31, 1997 in connection with an agreement to sell $100 million 8.309%
Capital Securities, Series A, representing beneficial interest in PMI Capital I,
a trust created under the laws of Delaware.
39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[Item 14(A) 1 and 2]
Page
-------------------------------------
Annual Report to
Consolidated Financial Statements Form 10-K Shareholders
- --------------------------------- --------- -----------------
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 N/A 42
Consolidated Balance Sheets as of December 31, 1996 and
1995 N/A 43
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, N/A 44
1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 N/A 45
Notes to Consolidated Financial Statements N/A 47
Report of Independent Auditors N/A 61
Financial Statement Schedules
- -----------------------------
Report of Independent Auditors on Financial
Statement Schedules 42 N/A
Schedules at and for the specified years in the three-year period
ended December 31, 1996:
Schedule I -- Summary of investments
other than investments in 43 N/A
related parties
Schedule II -- Condensed financial
information of Registrant 44 N/A
Schedule III -- Supplementary insurance
information 48 N/A
Schedule IV -- Reinsurance 49 N/A
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, State of California, on the 28th day of March, 1997.
The PMI Group, Inc.
BY: /S/ W. Roger Haughton
---------------------
W. Roger Haughton
President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 28, 1997 by the following persons on behalf of
the registrant and in the capacities indicated.
/S/ W. Roger Haughton President, Chief
- --------------------- Executive Officer,
W. Roger Haughton Director March 28, 1997
/S/ John M. Lorenzen, Jr.Executive Vice President, March 28, 1997
- -------------------------Chief Financial Officer,
John M. Lorenzen and Assistant Secretary
(Principal Financial Officer)
/S/ William A. Seymore Vice President, March 28, 1997
- ---------------------- Controller
William A. Seymore (and Principal Accounting Officer)
/S/ Edward M. Liddy Chairman and Director March 28, 1997
- -------------------
Edward M. Liddy
/S/ Donald C. Clark Director March 28, 1997
- -------------------
Donald C. Clark
/S/ Wayne E. Hedien Director March 28, 1997
- -------------------
Wayne E. Hedien
/S/ Kenneth T. Rosen Director March 28, 1997
- --------------------
Kenneth T. Rosen
/S/ Richard L. Thomas Director March 28, 1997
- ---------------------
Richard L. Thomas
/S/ Mary Lee Widener Director March 28, 1997
- --------------------
Mary Lee Widener
41
INDEPENDENT AUDITORS' REPORT
To The PMI Group, Inc.:
We have audited the consolidated financial statements of The PMI Group, Inc. and
subsidiaries as of December 31, 1996 and 1995, and for each of the three years
in the period ended December 31, 1996, and have issued our report thereon dated
January 22, 1997 (February 4, 1997 as to Note 16); such consolidated financial
statements and report are included in your 1996 Annual Report to Shareholders
and are incorporated herein by reference. Our audits also included the
consolidated financial statement schedules of The PMI Group, Inc. and
subsidiaries, listed in Item 14(a)2. These consolidated financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/S/ Deloitte & Touche LLP
- -------------------------
San Francisco, California
January 22, 1997
42
THE PMI GROUP, INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1996
Cost/ Amount at
Amortized Market which shown in
Type of Investment Cost Value the balance sheet
(In thousands) ---------- ---------- -----------------
Fixed maturities:
Bonds:
United States government and
government agencies and authorities ... $ 89,131 $ 88,590 $ 88,590
States, municipalities and
political subdivisions................. 831,213 875,001 875,001
All other corporate...................... 121,990 121,665 121,665
Redeemable preferred stocks................. 236 258 258
---------- ---------- ----------
Total fixed maturities.............. 1,042,570 $1,085,514 1,085,514
---------- ========== ----------
Equity securities:
Common stocks:
Banks, trust and insurance companies..... 1,705 $ 2,080 2,080
Industrial, miscellaneous and all other 76,070 110,503 110,503
Non-redeemable preferred stocks............. 305 388 388
------- ---------- --------
Total equity securities............. 78,080 $ 112,971 112,971
------ ========== --------
Short-term investments......................... 81,876 81,876
------- --------
Total investments, other than
related party................... $1,202,526 $1,280,361
========== ==========
43
THE PMI GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
PARENT COMPANY ONLY
December 31, 1996 and 1995
(Dollars in thousands) 1996 1995
---------- --------
ASSETS
Investment portfolio, at market value:
Fixed income securities (cost - $56,157)..................... $ 55,881 $ --
Short-term investments....................................... 49,377 30,230
---------- ---------
Total investment portfolio.................................. 105,258 30,230
Cash........................................................... 83 241
Investment in subsidiaries, at equity in net assets............ 987,105 846,177
Other assets................................................... 2,741 419
--------- --------
Total assets................................................ $1,095,187 $877,067
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term debt............................................... $ 99,342 $ --
Accounts payable - affiliates................................ 5,359 4,232
Other liabilities............................................ 3,624 2,332
--------- --------
Total liabilities............................................. 108,325 6,564
--------- -------
Commitments and contingent liabilities (Note A) -- --
Shareholders' equity:
Preferred stock-$.01 par value; 5,000,000 shares authorized.. -- --
Common stock -- $.01 par value; 125,000,000 shares
authorized, 35,047,619 and 35,011,494 shares issued........ 350 350
Additional paid-in capital................................... 258,059 256,507
Unrealized gains............................................. 50,709 56,761
Retained earnings............................................ 707,885 556,969
--------- ---------
1,017,003 870,587
Less cost of treasury shares
(537,800 and 2,000 shares at cost).......................... 30,141 84
---------- --------
Total shareholders' equity................................. 986,862 870,503
---------- --------
Total liabilities and shareholders' equity................. $1,095,187 $877,067
========== ========
See accompanying supplementary notes to Parent company
condensed financial statements.
44
THE PMI GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
PARENT COMPANY ONLY
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
-------- -------- --------
(In thousands)
Revenue:
Equity in undistributed net income of subsidiaries $158,418 $134,642 $104,551
Investment income, net.............................. 2,532 1,651 1,937
Capital gains, net.................................. 113 -- --
--------- ------- -------
Total revenue.................................... 161,063 136,293 106,488
--------- ------- -------
Expenses:
Operating expenses.................................. 437 519 --
Interest expense.................................... 907 -- --
-------- -------- --------
Total expenses................................... 1,344 519 --
-------- -------- --------
Income before tax..................................... 159,719 135,774 106,488
Provision for income tax.............................. 1,801 543 356
-------- -------- --------
Net income............................................ $157,918 $135,231 $106,132
======== ======== ========
See accompanying supplementary notes to Parent company
condensed financial statements.
45
THE PMI GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
PARENT COMPANY ONLY
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
--------- --------- ---------
(In thousands)
Cash flows from operating activities:
Net income.............................................. $ 157,918 $ 135,231 $ 106,132
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization........................................ 185 80 (26)
Equity in undistributed net income of subsidiaries (158,418) (134,642) (104,551)
Capital gains, net.................................. (113) -- --
Increase in payable to affiliates................... 1,127 4,232 --
Other............................................... (551) (43) 299
--------- --------- ---------
Net cash provided by operating activities................... 148 4,858 1,854
--------- --------- ---------
Cash flows from investing activities:
Dividends from subsidiaries............................... 26,300 10,000 --
Investment in subsidiaries................................ (14,683) -- (40,853)
Purchase of fixed income securities....................... (77,037) -- (35,185)
Investment collections of fixed income securities......... 20,848 -- 35,211
Net increase in short-term investments.................... (19,147) (11,253) (18,977)
--------- --------- ---------
Net cash used in investing activities....................... (63,719) (1,253) (59,804)
--------- --------- ---------
Cash flows from financing activities:
Issuance of long-term debt................................ 99,337 -- --
Dividends paid to shareholders............................ (7,002) (3,500) --
Proceeds from exercise of stock options................... 1,135 170 --
Purchase of The PMI Group, Inc. common stock.............. (30,057) (84) --
Capital contributions from Allstate....................... -- -- 58,000
--------- --------- ---------
Net cash provided by (used in) financing activities......... 63,413 (3,414) 58,000
--------- --------- ---------
Net increase (decrease) in cash and equivalents............. (158) 191 50
Cash at beginning of year................................... 241 50 --
--------- --------- ---------
Cash at end of year......................................... $ 83 $ 241 $ 50
========= ========= =========
See accompanying notes to Parent Company condensed
financial statements.
46
THE PMI GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
SUPPLEMENTARY NOTES
Note A
The accompanying Parent Company ("TPG") financial statements should be read
in conjunction with the Consolidated Financial Statements and Notes to
Consolidated Financial Statements (including Notes 9 and 10 related to Long-term
obligations and Commitments and contingent liabilities) appearing on pages 42
through 59 of The PMI Group, Inc. 1996 Annual Report to Shareholders.
Note B
During 1996, TPG received $21.4 million of non-cash dividends from a
subsidiary.
47
THE PMI GROUP, INC. AND SUBSIDIARIES
SCHEDULE III -
SUPPLEMENTARY INSURANCE
INFORMATION as of and for
the Years Ended December 31,
1996, 1995 and 1994
Reserve for
Losses and Losses and Amortization
Deferred Loss Net Loss of Deferred Other
Acquisition Adjustment Unearned Premiums Investment Adjustment Acquisition Operating Premiums
Segment Costs Expenses Premiums Earned Income Expenses Costs Expenses * Written
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
1996:
Mortgage Guaranty $31,633 $190,425 $116,951 $359,527 $66,280 $150,642 $48,302 $29,688 $349,809
Title.............. -- 9,349 -- 53,211 1,162 1,767 -- 48,012 53,211
------- -------- ------- -------- ------- -------- ------- ------- --------
Total $31,633 $199,774 $116,951 $412,738 $67,442 $152,409 $48,302 $77,700 $403,020
======= ======== ======== ======== ======= ======== ======= ======= ========
1995:
Mortgage Guaranty $22,986 $183,615 $140,322 $288,453 $61,022 $110,962 $52,881 $22,234 $273,718
Title.............. -- 8,472 -- 40,303 1,019 1,875 -- 36,547 40,303
------- -------- -------- -------- ------- -------- ------- ------- --------
Total $22,986 $192,087 $140,322 $328,756 $62,041 $112,837 $52,881 $58,781 $314,021
======= ======== ======== ======== ======= ======== ======= ======= ========
1994:
Mortgage Guaranty $25,602 $166,390 $157,021 $250,943 $55,895 $101,642 $48,147 $28,922 $232,345
Title.............. -- 7,495 -- 45,402 879 2,265 -- 40,458 45,402
------- --------- -------- -------- ------- ------- ------- ------- --------
Total $25,602 $173,885 $157,021 $296,345 $56,774 $103,907 $48,147 $69,380 $277,747
======= ======== ======== ======== ======= ======== ======= ======= ========
* Includes ancillary services.
48
THE PMI GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
Years Ended December 31, 1996, 1995 and 1994
Percentage
Ceded Assumed of Amount
Gross To Other From Other Net Assumed to
Amount Companies Companies Amount Net
-------- ---------- ---------- ------ ------------
(In thousands)
Premiums earned for the
year ended December 31,
1996:
Mortgage Guaranty $372,439 $ 13,546 $ 634 $359,527 0.2%
Title ........... 53,392 181 -- 53,211 0.0%
-------- -------- -------- -------- ----
Total ........ $425,831 $ 13,727 $ 634 $412,738 0.2%
======== ======== ======== ======== ====
1995:
Mortgage Guaranty $312,020 $ 26,979 $ 3,412 $288,453 1.2%
Title ........... 40,439 136 -- 40,303 0.0%
-------- -------- -------- -------- ----
Total ........ $352,459 $ 27,115 $ 3,412 $328,756 1.0%
======== ======== ======== ======== ====
1994:
Mortgage Guaranty $276,092 $ 29,133 $ 3,984 $250,943 1.6%
Title ........... 45,385 -- 17 45,402 0.0%
-------- -------- ------- -------- ----
Total ........ $321,477 $ 29,133 $ 4,001 $296,345 1.4%
======== ======== ======== ======== ====
49
INDEX TO EXHIBITS
-----------------
[Item 14(a)3]
Exhibit
Number Description of Exhibits
- ------- -----------------------
3.1(b) Restated Certificate of Incorporation of the Registrant.
3.2(e) By-laws of the Registrant as amended November 15, 1995.
4.1(b) Specimen common stock Certificate.
4.2(h) Indenture dated as of November 19, 1996 between The PMI
Group, Inc. and the Bank of New York Trustee in connection
with sale of $100,000,000 aggregate principal amount of 6
3/4% Notes due November 15, 2006.
4.3 The Junior Subordinated Indenture dated February 4, 1997
between The PMI Group, Inc. and The Bank of New York, Inc.
10.1(b)* PMI Mortgage Insurance Co. Annual Incentive Plan.
10.2* The PMI Group, Inc. Equity Incentive Plan. (Amended &
Restated).
10.3(g)* The PMI Group, Inc. Stock Plan for Non-Employee Directors.
(Amended & Restated).
10.4(a) Form of 1984 Master Policy of PMI Mortgage Insurance Co.
10.5(a) Form of 1994 Master Policy of PMI Mortgage Insurance Co.
10.6(a) CMG Shareholders Agreement dated September 8, 1994 between
CUNA Mutual Investment Corporation and PMI Mortgage Insurance
Co.
10.7(b) Runoff Support Agreement dated October 28, 1994 between
Allstate Insurance Company, the Registrant and PMI Mortgage
Insurance Co.
10.8(a) Mortgage Pool Guaranty Insurance Reinsurance Treaty effective
February 14, 1994 ceded by PMI Mortgage Insurance Co. to
Forestview Mortgage Insurance Co. (formerly PMI Insurance
Co.).
10.9(a) First Amendment Agreement made as of October 27, 1994 between
PMI Mortgage Insurance Co. and Forestview Mortgage Insurance
Co. (formerly PMI Insurance Co.).
10.10(a) Mortgage Guaranty Insurance Reinsurance Treaty effective
December 31, 1991 ceded by PMI Mortgage Insurance Co. to
Forestview Mortgage Insurance Co. (formerly PMI Insurance
Co.).
10.11(a) Termination Agreement made as of October 27, 1994 between PMI
Mortgage Insurance Co. and Forestview Mortgage Insurance Co.
(formerly PMI Insurance Co.).
10.12(c) Form of Separation Agreement between the Registrant, PMI
Mortgage Insurance Co., The Allstate Corporation and Allstate
Insurance Company.
50
10.13(a) Agreement dated June 23, 1994 between PMI Mortgage Insurance
Co. and Allstate Insurance Company regarding cash/remittance
processing.
10.14(b) Form of Services Agreement between the Registrant, PMI
Mortgage Insurance Co., and Forestview Mortgage Insurance Co.
10.15(d) Form of Research Center Services Agreement between PMI
Mortgage Insurance Co. and Allstate Insurance Company.
10.16(b) Form of Tax Sharing Agreement among the Registrant, the
Registrant's subsidiaries, The Allstate Corporation, Allstate
Insurance Company and Sears, Roebuck and Co.
10.17(a) Mortgage Insurance Variable Quota Share Reinsurance Treaty
effective January 1, 1991 issued to PMI Mortgage Insurance
Co. by Hannover Ruckversicherungs-Aktiengesellschaft
("Hannover").
10.18(a) First Amendment to Mortgage Insurance Variable Quota Share
Reinsurance Treaty made as of January 1, 1992 between
Hannover and PMI Mortgage Insurance Co.
10.19(a) Primary Mortgage Insurance Policy Year Quota Share
Reinsurance Agreement effective January 1, 1992 issued to PMI
Mortgage Insurance Co. by Centre Reinsurance Company of New
York and Centre Reinsurance International Company, with
Endorsement No. I effective January 1, 1992, Endorsement No.
II effective January 1, 1992, Endorsement No. III effective
January 1, 1994 and Endorsement No. IV effective December 29,
1994.
10.20(a) Quota Share Primary Reinsurance Agreement No. 15031-940
effective January 1, 1994 issued to PMI Mortgage Insurance
Co. by Capital Mortgage Reinsurance Company.
10.21(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.
10.22(a) Form of Indemnification Agreement between the Registrant and
its officers and directors.
10.23(a) Form of Human Resources Allocation Agreement among the
Registrant, PMI Mortgage Insurance Co., Sears, Roebuck and
Co., The Allstate Corporation and Allstate Insurance Company.
10.24(a) Per Mortgage Excess of Loss Reinsurance Treaty effective
January 1, 1994 issued to PMI Mortgage Insurance Co. by
Hannover.
10.25(f) Form of Investment Services Agreement among the Registrant,
PMI Mortgage Insurance Co., PMI Mortgage Services Co., PMI
Reinsurance Co., PMI Securities Co. and Scudder, Stevens &
Clark, Inc.
10.26(c)* The PMI Group, Inc. Retirement Plan.
10.27* The PMI Group, Inc. Long Term Incentive Plan.
51
10.28 Exchange and Registration Rights Agreement made as of
February 4,1997 among The PMI Group Inc., PMI Capital I and
Goldman Sachs & Co.
10.29 The Guarantee Agreement, dated February 4, 1997 between The
PMI Group, Inc. (As Guarantor) and The Bank of New York (As
Trustee).
10.30 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.
11.1 Statement re: computation of per share earnings.
13.1 Selected Financial Data, Management's Discussion and
Analysis of Financial Condition and Results of Operations and
Financial Statements Supplementary Data portions of The PMI
Group, Inc.'s 1996 Annual Report to Shareholders.
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule.
99.1(i) News Release.
_________________________
(a) Previously filed with the Company's Form S-1 Registration Statement
(No. 33-88542), which became effective in April 1995 ("Form S-1").
(b) Previously filed with Amendment No. 1 to Form S-1, filed with the SEC
on March 2, 1995.
(c) Previously filed with Amendment No. 2 to Form S-1, filed with the SEC
on March 13, 1995.
(d) Previously filed with Amendment No. 3 to Form S-1, filed with the SEC
on April 5, 1995.
(e) Previously filed with Form 8-K, filed with the SEC on November 29,
1995.
(f) Previously filed with Form 10-K for the year ended December
31, 1995, filed with the SEC on March 28, 1996.
(g) Previously filed with Form 10-Q, filed with the SEC on September 30,
1996.
(h) Previously filed with Form 8-K, filed with the SEC on November 25,
1996.
(i) Previously filed with Form 8-K, filed with the SEC on February 21,
1997.
* Compensatory or benefit plan in which certain executive officers or
Directors of The PMI Group, Inc., or its subsidiaries are eligible to
participate.
52