<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
under the Securities Act of 1933
Registration Statement No. 333-15543
(LOGO)
$100,000,000
THE PMI GROUP, INC.
6 3/4% NOTES DUE NOVEMBER 15, 2006
------------------------
Interest on the Notes is payable on May 15 and November 15 of each year,
commencing May 15, 1997. No sinking fund is provided for the Notes, and the
Notes are not redeemable prior to maturity. The Company is a holding company
which conducts its operations through its subsidiaries. Accordingly, the Notes
will effectively be subordinated to the present and future liabilities of the
Company's subsidiaries and the Company will be dependent on dividends from its
subsidiaries to meet its obligations with respect to the Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Dividend Limitations".
The Notes initially will be represented by one or more Global Notes
registered in the name of the nominee of The Depository Trust Company.
Beneficial interests in the Global Notes will be shown on, and transfers thereof
will be effected only through, records maintained by DTC and its participants.
Except as described herein, Notes in definitive form will not be issued. The
Notes will be issued only in registered form in denominations of $1,000 and
integral multiples thereof. The Notes will trade in DTC's Same-Day Funds
Settlement System until maturity, and secondary market trading activity in the
Notes will therefore settle in immediately available funds. All payments of
principal and interest will be made by the Company in immediately available
funds so long as the Notes are represented by Global Notes. See "Description of
Notes".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC
OFFERING UNDERWRITING PROCEEDS TO
PRICE(1) DISCOUNT(2) COMPANY(1)(3)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Note............................... 99.984% 0.650% 99.334%
Total.................................. $99,984,000 $650,000 $99,334,000
</TABLE>
- ---------------
(1) Plus accrued interest from November 15, 1996.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting estimated expenses of $310,000 payable by the Company.
------------------------
The Notes offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that the Notes
will be ready for delivery in book-entry form only through the facilities of DTC
in New York, New York, on or about November 19, 1996, against payment therefor
in immediately available funds.
GOLDMAN, SACHS & CO. MORGAN STANLEY & CO. INCORPORATED
------------------------
The date of this Prospectus is November 14, 1996.
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
FOR NORTH CAROLINA RESIDENTS: THE COMMISSIONER OF INSURANCE OF THE STATE OF
NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING, NOR HAS THE
COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
------------------------
AVAILABLE INFORMATION
The PMI Group, Inc. ("TPG", and on a consolidated basis, the "Company") has
filed with the Securities and Exchange Commission (the "Commission") a
Registration Statement on Form S-3 (of which this Prospectus is a part)
(together with all amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Notes offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
regarding the Company and the Notes, reference is hereby made to the
Registration Statement and the exhibits and schedules thereto which may be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
TPG is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Commission. The
Registration Statement, the exhibits and schedules forming a part thereof and
the reports, proxy statements and other information filed by TPG with the
Commission in accordance with the Exchange Act can be inspected and copied at
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington D.C. 20549, and at the following regional offices of the Commission:
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information that are filed through the Commission's
Electronic Data Gathering, Analysis and Retrieval System. This Web site can be
accessed at http://www.sec.gov. In addition, TPG's common stock is listed on the
New York Stock Exchange and similar information concerning the Company can be
inspected and copied at the New York Stock Exchange, 20 Broad Street, New York,
New York 10005.
2
<PAGE> 3
INCORPORATION BY REFERENCE
The following documents filed by TPG with the Commission are incorporated
by reference in this Prospectus:
(a) Annual Report on Form 10-K for the year ended December 31, 1995;
and
(b) Quarterly Reports on Form 10-Q for the quarters ended March 31,
1996, June 30, 1996 and September 30, 1996.
All documents filed by TPG pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act after the date of this Prospectus and prior to the termination
of the offering of the Notes shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the respective dates of filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or so superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner of Notes, to whom this Prospectus is delivered, upon written or
oral request of such person, a copy of any or all of the documents that have
been incorporated by reference in this Prospectus (not including exhibits to
such documents unless such exhibits are specifically incorporated by reference
into such documents). Requests should be directed to The PMI Group, Inc., 601
Montgomery Street, San Francisco, CA 94111, Attention: Corporate Relations;
telephone: (800) 876-4764.
THE COMPANY
TPG is a holding company which conducts its business through its direct
wholly-owned subsidiaries, PMI Mortgage Insurance Co. ("PMI"), an Arizona
corporation, and American Pioneer Title Insurance Company ("APTIC"), a Florida
insurance company, and various other direct or indirect reinsurance and service
subsidiaries. PMI also owns 45% of the outstanding shares of common stock of CMG
Mortgage Insurance Company, a Wisconsin insurance company.
The Company, through PMI, is the third largest private mortgage insurer in
the United States with new primary insurance written of $13.9 billion and $14.5
billion for the first nine months of 1996 and for the year ended December 31,
1995, respectively, and direct primary insurance in force of $76.0 billion at
September 30, 1996. In addition to primary mortgage insurance, the Company,
through its subsidiaries, provides title insurance 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. Allstate continues to own approximately 30% of the
outstanding capital stock of TPG. The principal executive offices of TPG are
located at 601 Montgomery Street, San Francisco, California 94111, telephone
(415) 788-7878.
3
<PAGE> 4
USE OF PROCEEDS
The net proceeds from the sale of the Notes offered hereby, after deducting
the underwriting discount and estimated offering expenses, will be approximately
$99,024,000. Such proceeds will be used for general corporate purposes, which
may include repurchase of TPG's outstanding common stock, repayment of
outstanding indebtedness under one of TPG's credit agreements used to finance
such repurchases and investments in debt and equity securities. On July 25,
1996, TPG authorized the repurchase of up to $150 million of its outstanding
common stock. Outstanding borrowings under the credit agreement totaled $15
million as of October 31, 1996. These borrowings are due on or before December
31, 2001 unless extended as provided in the agreement, and currently bear
interest at 5.6975% per annum.
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
September 30, 1996, and the capitalization as adjusted to give effect to the
issuance of the Notes offered hereby.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
AS
ACTUAL ADJUSTED
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (6 3/4% Notes due November 15, 2006)................ $ -- $ 100,000
-------- ----------
Shareholders' equity:
Preferred stock, par value $0.01 per share -- 5,000,000 shares
authorized, no shares issued and outstanding.................. -- --
Common stock, par value $0.01 per share -- 125,000,000 shares
authorized, 35,035,039 shares issued.......................... 350 350
Additional paid-in capital....................................... 257,329 257,329
Unrealized net gains on investments.............................. 41,075 41,075
Retained earnings................................................ 671,209 671,209
Treasury stock, 81,800 shares.................................... (4,252) (4,252)
-------- ----------
Total shareholders' equity.................................... 965,711 965,711
-------- ----------
Total capitalization..................................... $965,711 $1,065,711
======== ==========
</TABLE>
4
<PAGE> 5
INDUSTRY OVERVIEW
Private mortgage insurance is typically used by mortgage lenders to reduce
their credit risk in low down payment, high loan-to-value mortgage loans as well
as to enhance their ability to sell the loans into the secondary mortgage
market, principally to the Federal National Mortgage Association ("Fannie Mae")
and the Federal Home Loan Mortgage Corporation ("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.
Mortgage insurance is purchased by mortgage bankers, savings institutions,
commercial banks and other mortgage lenders. Home purchasers who make down
payments of less than 20% of the value of their home are usually required by the
mortgage lender to qualify and pay for primary mortgage insurance on their
mortgage loans. If the homeowner defaults on the mortgage loan, mortgage
insurance reduces and, in some cases, eliminates any loss to the insured lender.
The role of Fannie Mae and Freddie Mac has increased in part because
risk-based capital regulations, adopted in recent years by the various federal
bank and savings institution regulatory agencies, assign lower asset risk
weights to mortgage-related securities issued or guaranteed by Fannie Mae or
Freddie Mac than to the underlying mortgage loans themselves. Consequently,
banks and savings institutions have a financial incentive to sell mortgage loans
to Fannie Mae and Freddie Mac and to acquire such mortgage-related securities as
portfolio investments. Fannie Mae's and Freddie Mac's importance has also
increased due to the increase in the level of mortgage loans being originated by
mortgage bankers, which sell substantially all of their mortgage loan production
into the secondary market. Loans insured by PMI are eligible for purchase by
Fannie Mae and Freddie Mac. In 1995, Fannie Mae and Freddie Mac purchased
approximately 60% of the loans insured by PMI, compared to approximately 63%
purchased by these agencies in 1994.
BUSINESS
The Company, through PMI, is the third largest private mortgage insurer in
the United States with new primary insurance written of $13.9 billion and $14.5
billion for the first nine months of 1996 and for the year ended December 31,
1995, respectively, and direct primary insurance in force of $76.0 billion at
September 30, 1996. At September 30, 1996, PMI had over 690,000 policies in
force. In addition to mortgage insurance, the Company, through APTIC and PMI
Mortgage Services Co. ("MSC"), provides title insurance and various services and
products for the home mortgage finance industry. Management believes PMI is a
leader in the mortgage insurance industry due to its focus on customer service,
value-added products and services, disciplined risk management techniques,
experienced sales and management teams, as well as its financial strength. PMI
pioneered the use of automated underwriting systems in the mortgage insurance
industry, having implemented its proprietary automated underwriting model in
1987. The Company has also used its proprietary automated residential appraisal
analysis system since late 1991.
PMI is licensed in all 50 states of the United States and the District of
Columbia. At September 30, 1996 the Company's total assets were $1,389 million
and its shareholders' equity was $966 million. At September 30, 1996, 87.6% of
the Company's $1,168 million investment portfolio was invested in fixed income
securities, 98.4% of which were investment grade. PMI's claims-paying ability is
currently rated "AA+" (Very Strong) by Fitch Investors Service, Inc. ("Fitch"),
"Aa2" (Excellent) by Moody's Investors Service, Inc. ("Moody's") and "AA+"
(Excellent) by Standard & Poor's Ratings Services ("S&P"). The claims-paying
ratings assigned by Fitch, Moody's and S&P are based upon factors relevant to
policyholders and are not applicable to the Notes.
5
<PAGE> 6
PRODUCTS
Primary mortgage insurance provides mortgage default protection to lenders
or investors on individual loans. Mortgage insurance does not cover losses that
result from casualty damage to the property. PMI's obligation to an insured with
respect to a claim is determined by applying the appropriate coverage percentage
to the claim amount (the outstanding loan principal, plus delinquent interest
and certain expenses). 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 mortgage 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.
PMI issues primary insurance for first mortgage loans on owner occupied,
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. PMI
offers coverage generally ranging from 6% to 35% of the claim amount, with new
coverage having been predominantly in the 25% to 30% range as of September 30,
1996. The coverage percentage insured by PMI is determined by the lender,
usually in order to comply with Fannie Mae's and Freddie Mac's requirements to
reduce the loss exposure on loans purchased by them. At September 30, 1996,
PMI's average coverage percentage on insurance in force was 22.1%.
PMI's premium rates are based upon the expected risk of a claim on the
insured loan and take into account the loan-to-value ratio, 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, as well as company profit and
capital needs, and the prices offered by competitors. 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 all of the foregoing factors are generally considered in
determining rates, there can be no assurance that the premiums charged will be
adequate to compensate PMI for the risks and costs associated with the coverage
provided to its customers.
Mortgage insurance coverage cannot be canceled by PMI, except for
nonpayment of premiums or certain material violations of PMI's master policy
(the contract of primary insurance issued to a lender) and 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 increased 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.
CUSTOMERS
PMI's customers are mortgage originators. Mortgage originators include (i)
mortgage bankers, savings institutions, commercial banks and other mortgage
lenders and (ii) mortgage brokers, who originate loans on behalf of mortgage
lenders but do not themselves permanently fund the loans. The mortgage
origination industry continues to experience significant consolidation,
resulting in the market share for mortgage originators being concentrated among
a smaller number of higher volume financial institutions. For the nine months
ended September 30, 1996, mortgage bankers, savings institutions, commercial
banks and other mortgage lenders accounted for 53.9%, 21.8%, 14.4% and 9.9%,
respectively, of PMI's new insurance written.
6
<PAGE> 7
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating data for
the periods indicated. The selected consolidated statement of operations and
balance sheet data, at or for each of the years presented below, was derived
from consolidated financial statements of the Company, which were audited by
Deloitte & Touche LLP, independent auditors. The selected financial information
for the nine month periods ended and as of September 30, 1996 and 1995 has been
derived from unaudited consolidated financial statements, which financial
statements, in the opinion of management of the Company, have been prepared on
the same basis as the annual financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the results for the interim periods. Certain PMI operating and statutory
data, which has been derived from PMI's statutory financial statements, is also
presented.
The selected financial and operating data set forth below should be read in
conjunction with the Company's consolidated financial statements and the related
notes thereto incorporated by reference in this Prospectus. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
7
<PAGE> 8
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net premiums written................... $ 274,519 $ 228,828 $ 314,021 $ 277,747 $291,089 $208,602 $143,305
========== ========== ========== ========== ======== ======== ========
Premiums earned........................ $ 293,237 $ 241,285 $ 328,756 $ 296,345 $268,554 $173,039 $120,195
Investment income, less investment
expense.............................. 49,937 46,442 62,041 56,774 45,733 40,847 40,402
Realized capital gains, net............ 14,174 10,164 11,934 3,064 1,229 686 1,335
Other income........................... 5,064 1,744 2,309 3,802 -- -- --
---------- ---------- ---------- ---------- -------- -------- --------
Total revenues......................... 362,412 299,635 405,040 359,985 315,516 214,572 161,932
Total losses and expenses(1)........... 194,370 164,785 224,499 221,434 202,543 119,912 39,879
---------- ---------- ---------- ---------- -------- -------- --------
Income from continuing operations
before income taxes.................. 168,042 134,850 180,541 138,551 112,973 94,660 122,053
Income tax expense (benefit)(2)........ 48,552 33,459 45,310 32,419 24,305 (10,911) 69,661
---------- ---------- ---------- ---------- -------- -------- --------
Income from continuing
operations(1)(2)..................... 119,490 101,391 135,231 106,132 88,668 105,571 52,392
Income (loss) from discontinued
operations........................... -- -- -- -- (28,863) 6,726 3,709
---------- ---------- ---------- ---------- -------- -------- --------
Net income............................. $ 119,490 $ 101,391 $ 135,231 $ 106,132 $ 59,805 $112,297 $ 56,101
========== ========== ========== ========== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES(3).... 98.0x 91.4x 89.3x 88.5x 73.5x 73.4x 119.2x
========== ========== ========== ========== ======== ======== ========
MORTGAGE INSURANCE OPERATING RATIOS:
Loss ratio(1).......................... 38.8% 38.6% 38.5% 40.5% 41.4% 33.2% 3.1%
Expense ratio.......................... 21.2 25.0 24.9 30.1 28.2 27.0 25.3
---------- ---------- ---------- ---------- -------- -------- --------
Combined ratio......................... 60.0% 63.6% 63.4% 70.6% 69.6% 60.2% 28.4%
========== ========== ========== ========== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA (AT
PERIOD END):
Total assets........................... $1,389,146 $1,228,378 $1,304,440 $1,097,421 $985,129 $815,136 $663,215
Reserve for losses and loss adjustment
expenses............................. 199,497 185,001 192,087 173,885 135,471 94,002 78,045
Long-term obligations.................. -- -- -- -- -- -- --
Shareholders' equity................... 965,711 818,530 870,503 687,178 575,300 513,583 399,489
PMI OPERATING AND STATUTORY DATA (AT
PERIOD END):
Number of policies in force............ 690,480 647,074 657,800 612,806 543,924 428,745 347,232
Default rate........................... 2.03% 1.88% 1.98% 1.88% 1.81% 2.03% 2.38%
Persistency............................ 82.8 87.2 86.4 83.6 70.0 74.6 85.2
Direct primary insurance in force (in
millions)............................ $ 75,988 $ 70,120 $ 71,430 $ 65,982 $ 56,991 $ 43,698 $ 31,982
Direct primary risk in force
(in millions)........................ 16,828 14,626 15,130 13,243 11,267 8,676 6,481
Statutory capital...................... 934,208 770,045 824,156 659,402 494,621 456,931 372,568
Risk-to-capital ratio.................. 15.0:1 16.4:1 15.8:1 17.7:1 20.8:1 19.0:1 18.8:1
</TABLE>
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(1) In 1991, the Company significantly revised its estimate of the reserve for
losses and loss adjustment expenses. The effect of this re-estimate
significantly decreased 1991 losses and, therefore, improved the loss ratio.
The reserve re-estimate decreased the loss ratio of 1991 by approximately 34
percentage points more than the largest such re-estimate in any of the other
years in the five year period ended December 31, 1995. This 34 percentage
point decrease in the loss ratio represented $40.9 million of losses and
loss adjustment expenses and $26.6 million of income from continuing
operations.
(2) During 1991, the Company increased its tax liabilities and income tax
expense by $40.9 million in light of an unfavorable judgment by the U.S. Tax
Court. In 1992, the 1991 judgment was overturned, and the Company
reevaluated its tax balances and reduced its tax liabilities and income tax
expense by $30.9 million.
(3) For purposes of computing the ratio of earnings to fixed charges, "earnings"
represent consolidated earnings from continuing operations before income
taxes, cumulative effect adjustments and extraordinary items plus fixed
charges. "Fixed charges" consist of interest (and the portion of rental
expense deemed representative of the interest factor).
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONSOLIDATED OPERATIONS
Nine months ended September 30, 1996 and 1995
Net income in the nine months ended September 30, 1996 was $119.5 million,
a 17.9% increase over net income of $101.4 million in the nine months ended
September 30, 1995. The increase was primarily attributable to increases in
premiums earned and investment income (including capital gains) of 21.5% and
13.3%, respectively, partially offset by increases in losses and loss adjustment
expenses and operating expenses of 20.7% and 15.2%, respectively. Revenues in
the nine months ended September 30, 1996 were $362.4 million, a 21.0% increase
over revenues of $299.6 million in the corresponding period of 1995.
New mortgage insurance written totaled $13.9 billion in the nine months
ended September 30, 1996, compared with $10.4 billion in the corresponding
period of 1995, a 33.7% increase. The increase in new insurance written resulted
from the number of new mortgage insurance policies issued increasing by 28.7%,
to 111,350 policies in the nine months ended September 30, 1996, from 86,550
policies in the corresponding period in 1995, and an increase in the average
loan size to $125,000 from $120,000. Net mortgage insurance written (after quota
share reinsurance) increased by 50.0% to $13.2 billion in the nine months ended
September 30, 1996 from $8.8 billion in the nine months ended September 30,
1995. A contributing factor in this increase was the reduction in certain quota
share reinsurance on new insurance writings. Effective for new policies written
in 1996, PMI reduced its percentage of quota share cessions from approximately
15% in 1995 to 5% in 1996.
One of the factors contributing to the increase in new policies issued was
the growth in market share in the nine months ended September 30, 1996 compared
with the nine months ended September 30, 1995. PMI's market share of new
insurance written increased to 14.2% in the first nine months of 1996 from 13.2%
in the corresponding period of 1995 (as reported in Inside Mortgage Finance). A
second factor contributing to the increase in new policies issued was the growth
in the total number of loan originations in the mortgage insurance industry in
1996 compared with the corresponding period of 1995, which was caused in part by
increased refinancing activity in the first half of 1996. Refinancing as a
percentage of PMI's new insurance written increased by 9.5 percentage points, to
18.6% in the nine months ended September 30, 1996 from 9.1% in the corresponding
period of 1995.
PMI's persistency rate (percentage of insurance remaining in force from one
year prior) decreased 4.4 percentage points as of September 30, 1996 from the
September 30, 1995 rate, to 82.8% from 87.2%. This decrease is primarily
attributable to the increase in policy cancellations from mortgage refinancing
activity. The decreased persistency contributed to a slower growth of insurance
in force, to a total of $76.0 billion at September 30, 1996, from $70.1 billion
at September 30, 1995. The growth rate of insurance in force from one year prior
decreased to 8.4% at September 30, 1996 from 10.1% at September 30, 1995.
Mortgage insurance net premiums written were $236.7 million in the nine
months ended September 30, 1996, compared with $199.6 million in the
corresponding period of 1995, an increase of 18.6%. The increase is attributable
to the increase in new insurance written over the 1995 level, higher average
premiums resulting from the increasing shift to deeper coverage loans, higher
average loan sizes and the growth of insurance in force. New premiums written
decreased by 25.2% to $15.1 million in the nine months ended September 30, 1996
from $20.2 million in the corresponding period of 1995, while renewal premiums
increased by 22.0% to $251.4 million in the nine months ended September 30, 1996
from $206.1 million in the corresponding period of 1995. The decrease in new
premiums written during 1996 resulted primarily from the continuing shift to the
monthly premium product.
9
<PAGE> 10
The increase in average premiums was caused by an increasing shift to
policies with deeper coverage, partially offset by a decline in the use of
adjustable rate mortgages ("ARMs"). 95s (mortgages with loan-to-value ratios
greater than 90% and equal to or less than 95%) with 30% coverage increased to
41.0% of new insurance written in the nine months ended September 30, 1996
compared with 32.4% in the corresponding period of 1995. Similarly, 90s
(mortgages with loan-to-value ratios greater than 85% and equal to or less than
90%) with 25% coverage increased to 42.1% in the nine months ended September 30,
1996 compared with 30.0% in the corresponding period of 1995. ARMs decreased to
12.5% of new insurance written in the nine months ended September 30, 1996
compared with 24.9% in the corresponding period of 1995.
PMI's monthly premium plan has experienced significant growth since its
inception in March of 1994, which is a principal factor in the continuing
decline in new premiums written. The monthly plan represented 94.7% of new
insurance written in the nine months ended September 30, 1996, up 11.8
percentage points from 82.9% in the corresponding period of 1995. This trend
toward the monthly premium product has significantly shifted PMI's premium mix
from new to renewals. The monthly product spreads the receipt of premiums over
12 equal monthly payments (which initially reduces the amount of premiums
written), compared to the annual prepayment method (where the entire annual
premium is recorded as written at the effective date of the policy). For the
monthly premium plan, PMI recognizes only the first month's premium as new
premium written while subsequent monthly premium payments are recognized as
renewal premiums. The monthly premium products have been priced to compensate
for the different timing of cash flows (as compared to annual premium products)
and the related impact on investment income and, accordingly, have not had a
significant effect on the Company's results of operations.
Refunded premiums increased in the nine months ended September 30, 1996 to
$12.3 million from $8.7 million in the nine months ended September 30, 1995 due
primarily to the increase in policy cancellations related to the increase in
mortgage refinancing volume during the first half of 1996. Ceded premiums
written as a percentage of net new, renewal and refunded premiums decreased to
7.0% in the nine months ended September 30, 1996 compared with 10.2% in the
corresponding period of 1995, primarily due to the increased amount of new
insurance written in 1996 falling under the 5% quota share treaty, rather than
the 15% quota share treaty in effect in 1995.
Mortgage insurance premiums earned increased 20.5% to $255.4 million in the
nine months ended September 30, 1996 from $212.0 million in the nine months
ended September 30, 1995. This increase is due primarily to the growth in
insurance in force in 1996 over 1995, the impact of higher premium rates
resulting from the shift to deeper coverage products and the reduction in quota
share cessions during 1996.
The Company's net investment income in the nine months ended September 30,
1996 was $49.9 million compared with $46.4 million in the corresponding period
of 1995, an increase of 7.5%. The increase was primarily attributable to the
growth in the average amount of invested assets, which resulted from positive
cash flows generated by operating activities, partially offset by a decrease in
the average investment yield (pretax) to 6.2% in the nine months ended September
30, 1996 from 6.4% in the corresponding period of 1995. Realized capital gains
(net of losses) reported a significant increase over 1995, up 39.2% to $14.2
million in the nine months ended September 30, 1996 from $10.2 million in the
corresponding period of 1995.
Mortgage insurance losses and loss adjustment expenses increased to $99.0
million in the nine months ended September 30, 1996 from $81.7 million in the
corresponding period of 1995, an increase of 21.2%. This increase was primarily
the result of the growth in insurance in force in recent years, increased claim
amounts associated with the higher loan sizes and increased default rates in
certain areas of the country.
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 since January 1, 1993,
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represented 76.0% of PMI's insurance in force at September 30, 1996, with the
1993 book of business alone representing 24.0%. This substantial volume of PMI's
business is beginning to reach its expected peak claim period. Consistent with
increasing mortgage principal amounts, claim amounts have risen in recent years.
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 claims. Management believes
that this is only an acceleration of the timing of payments, and will not
increase the number of claims ultimately paid by PMI. In addition to claim
increases, PMI's default rate has increased to 2.03% at September 30, 1996 from
the September 30, 1995 rate of 1.88%.
Default rates on PMI's California policies decreased to 3.63% at September
30, 1996, from 3.81% at September 30, 1995. Policies written in southern
California in the years 1989 through 1993, which are in the historically highest
claim period, are also generally believed to have been written at the high point
of southern California real estate prices. The California economy continues to
recover more slowly than anticipated when those policies were issued, and, as a
result, California defaults for each of the policy years since 1989 may continue
to experience an average default rate higher than the national average default
rate.
Mortgage insurance underwriting and other expenses increased slightly to
$50.3 million in the nine months ended September 30, 1996, from $50.0 million in
the nine months ended September 30, 1995, or 0.6%. This marginal increase, in
contrast to the higher growth rate in new insurance written, is primarily the
result of management's focus on controlling expenses.
The mortgage insurance loss ratio (ratio of incurred losses to net premiums
earned) increased to 38.8% in the nine months ended September 30, 1996, compared
with 38.6% in the corresponding period of 1995 due, in part, to the increase in
losses and loss adjustment expenses as discussed above. The expense ratio (ratio
of underwriting expenses to net premiums written) reported an improvement over
1995, dropping to 21.2% in the nine months ended September 30, 1996 from 25.0%
in the corresponding period of 1995, resulting in a combined ratio of 60.0% in
1996, 3.6 percentage points better than the 1995 ratio of 63.6%.
Title insurance premiums earned increased 29.0% to $37.8 million in the
nine months ended September 30, 1996, compared with $29.3 million in the
corresponding period of 1995. This improvement was due to expansion efforts of
the title business, as well as the overall improvement in the volume of
residential mortgage originations. Underwriting and other expenses increased
26.7% to $33.7 million in the nine months ended September 30, 1996, compared to
$26.6 million in the corresponding period of 1995. This increase is directly
attributable to the increase in premiums earned. The title insurance combined
ratio decreased to 92.5% in 1996 from 95.6% in 1995. The title insurance
industry expense ratios are much higher than those experienced in the mortgage
insurance industry primarily because the commission rates paid to title agencies
and attorneys are substantially higher than those paid to mortgage insurance
sales personnel, and because of the lack of renewal business to help absorb
underwriting costs.
Other income, primarily revenues generated by MSC, increased to $5.1
million in the nine months ended September 30, 1996 from $1.7 million in the
corresponding period of 1995. This growth is primarily due to increased mortgage
services operations resulting from higher refinancing activity and expansion of
its contract underwriting services.
The Company's effective tax rate increased to 28.9% in the nine months
ended September 30, 1996, compared to 24.8% in the corresponding period of 1995.
The benefits of tax-preference investment income and other permanent differences
reduced the effective rates below the statutory rate of 35% during both periods.
The increase in the effective rate in 1996 over 1995 was due to a greater
portion of operating income generated from insurance operations rather than
tax-free bond income, the state tax effect of PMI's $25.0 million dividend and
transfer of APTIC to TPG, and a shift in the mix of the investment portfolio to
a greater portion of taxable fixed income bonds.
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Years ended December 31, 1995 and 1994
Net income in 1995 was $135.2 million, a 27.4% increase over 1994 net
income of $106.1 million. The increase was primarily attributable to increases
in premiums earned and investment income (including capital gains) of 10.9% and
23.6%, respectively, and a decrease in operating expenses of 5.0%, partially
offset by an increase in losses and loss adjustment expenses of 8.6%. Revenues
in 1995 were $405.0 million, a 12.5% increase over revenues of $360.0 million in
1994.
New mortgage insurance written totaled $14.5 billion in 1995, compared with
$18.4 billion in 1994, a 21.2% decrease. The decrease in new insurance written
resulted from the number of new mortgage insurance policies written declining by
23.3%, to 119,600 policies in 1995 from 156,000 policies in 1994. One of the
factors contributing to this decrease was the drop in refinancing activity in
1995 versus 1994. Refinancings showed a significant decrease of 56.4% to 12,300
policies in 1995 from 28,200 policies in 1994. Refinancing as a percentage of
new insurance written decreased by 6.8 percentage points, to 11.5% in 1995 from
18.3% in 1994. The number of policies written for new purchases also dropped in
1995 from the 1994 level, to 107,300 from 127,800, a 16.0% decline. Management
believes that a second contributing factor to the decline in total new insurance
written was PMI's reluctance to aggressively participate in a market which
displayed a deteriorating trend in borrower credit quality beginning in late
1994 and continuing into 1995. PMI's market share of new insurance written in
1995 declined to 13.2%, compared to 14.0% in 1994 (as reported in Inside
Mortgage Finance).
PMI's persistency rate increased 2.8 percentage points in 1995 over the
1994 rate, to 86.4% from 83.6%. This increase is primarily attributable to the
decrease in refinancing activity in 1995. The increased persistency contributed
to the growth of insurance in force to $71.4 billion at December 31, 1995, from
$66.0 billion at December 31, 1994. Growth in insurance in force continued
during 1995 at a slower pace than the 1994 growth level, 8.2% in 1995 versus
15.8% in 1994, primarily due to the decrease in new insurance written.
Mortgage insurance net premiums written in 1995 were $273.7 million,
compared with $232.3 million in 1994, an increase of 17.8%. The increase is
primarily attributable to higher renewal premiums due to improved persistency
and to a decline in ceded and refunded premiums, partially offset by a decline
in new premiums written. The decline in new premiums written in 1994 was due to
the decrease in new insurance written in 1995 from 1994, and the increasing
usage of the monthly premium plan in 1995, which represented 85.2% of new
insurance written in 1995, up 48.2 percentage points from the 1994 level of
37.0%. The increase in net premiums written is also attributable to higher
average premiums for new insurance written during 1995 compared with 1994. The
higher average premiums were caused by an increasing shift to 95s with deeper
coverage, partially offset by a decline in the use of ARMs. 95s with 30%
coverage increased to 34.7% of new insurance written in 1995 compared with 1.2%
in 1994, while ARMs decreased to 21.3% of new insurance written in 1995 compared
with 29.7% in 1994.
Refunded premiums in 1995 decreased by 15.0% to $12.5 million from $14.7
million in 1994 due primarily to the decrease in refinancing volume during 1995.
Ceded premiums written as a percentage of net new, renewal and refunded premiums
has decreased to 9.2% in 1995 compared to 10.4% in 1994, due primarily to
reduced ceding percentages under quota share reinsurance treaties.
Mortgage insurance premiums earned increased 15.0% to $288.5 million in
1995 from $250.9 million in 1994. This increase is due primarily to the growth
in insurance in force in 1995 over 1994 and the impact of higher premium rates
from the shift to deeper coverage products.
The Company's net investment income in 1995 was $62.0 million compared with
$56.8 million in 1994, an increase of 9.2%. The increase was primarily
attributable to the growth in the average amount of invested assets, which
resulted from positive cash flows generated by operating activities, partially
offset by a decrease in the effective yield. The average effective yield
(pretax) on
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the portfolio's invested value during 1995 decreased to 6.5% from 6.9% in 1994,
primarily due to an increasing portion of the portfolio being invested in lower
yielding, tax-exempt municipal bonds. Realized capital gains (net of losses)
reported a significant increase over 1994, up $8.8 million to $11.9 million in
1995 from $3.1 million in 1994. This increase is consistent with the 1995 stock
market performance.
Mortgage insurance losses and loss adjustment expenses increased to $111.0
million in 1995 from $101.6 million in 1994, an increase of 9.3%. This increase
was primarily the result of the growth in insurance in force in recent years and
the increased default rates and claim amounts in certain areas of the country,
particularly California where the default on PMI's California policies increased
to 4.08% at December 31, 1995, from 3.72% at December 31, 1994.
Consistent with increasing mortgage principal amounts, claim amounts have
risen in recent years, while PMI's book of business continues to mature into the
higher-frequency claim period. Insurance written by PMI since January 1, 1993,
represented 69.2% of PMI's insurance in force at December 31, 1995. In addition,
PMI's default rate has increased over the 1994 level by 10 basis points, from
1.88% to 1.98% at December 31, 1995.
Mortgage insurance underwriting and other expenses decreased 2.7% to $68.0
million in 1995 from $69.9 million in 1994. This decrease is primarily the
result of the decrease in new insurance written in 1995.
The mortgage insurance loss ratio decreased to 38.5% in 1995, compared with
40.5% in 1994 due, in part, to a $20.7 million decrease in prior year reserves
recorded in 1995. The expense ratio also reported an improvement over 1994,
dropping to 24.9% in 1995 from 30.1% in 1994, resulting in a combined ratio of
63.4% in 1995, 7.2 percentage points better than the 1994 ratio of 70.6%.
Title insurance premiums earned decreased 11.2% to $40.3 million in 1995,
compared with $45.4 million in 1994. Underwriting and other expenses decreased
9.9% to $36.5 million in 1995, compared to $40.5 million in 1994. These
decreases are attributable to an overall decline in the volume of residential
mortgage originations. The title insurance combined ratio increased slightly to
95.4% in 1995 from 94.1% in 1994.
Other income, primarily revenues generated by MSC, decreased to $2.3
million in 1995 from $3.8 million in 1994, a 39.5% decline. This decrease is
primarily due to reduced mortgage services operations resulting from lower
refinancing activity.
The Company's effective tax rate was 25.1% in 1995, compared to 23.4% in
1994. The benefits of tax-preference investment income and other permanent
differences reduced the effective rates below the statutory rate of 35% during
both periods. The increase in the effective rate in 1995 over 1994 was primarily
due to a greater portion of operating income generated from insurance operations
rather than tax-free bond income.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Liquidity and capital resource considerations are different for TPG and
PMI, its principal insurance operating subsidiary, as discussed below.
TPG's principal sources of funds are dividends from PMI and APTIC, cash and
investment income thereon and funds that may be raised from time to time in the
capital markets. TPG does not expect that Residential Guaranty Co. ("RGC"),
TPG's reinsurance subsidiary, will be in a position to pay dividends to TPG for
at least the foreseeable future. Also, in February 1996, TPG executed two credit
agreements totaling $50.0 million. At September 30, 1996, $5.0 million in
borrowings and at October 31, 1996, $15.0 million in borrowings were outstanding
under one of the credit agreements. On July 1, 1996, PMI transferred its
ownership in APTIC to TPG through a dividend.
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<PAGE> 14
TPG's principal uses of funds are the payment of dividends to shareholders,
payment of operating expenses, repurchase of TPG's common stock and any
additional investments in the Company's current or future subsidiaries.
As of September 30, 1996, TPG had approximately $39.1 million of
unrestricted funds available for the payment of future dividends to
shareholders, corporate expenses and other costs. This amount has increased
substantially from the December 31, 1995 amount due to the receipt of the $25.0
million dividend from PMI, less a $7.0 million capital contribution to RGC. See
"Dividend Limitations" below.
The principal sources of funds for PMI and RGC are premiums received on
new, renewal and assumed business, commissions on ceded business and
reimbursement of losses from reinsurers, and amounts earned from the investment
of this cash flow. The principal uses of funds by PMI and RGC are the payment of
claims and related expenses, reinsurance premiums, other operating expenses and,
for PMI, dividends to TPG.
In the mortgage guaranty insurance industry, liquidity refers to the
ability of an enterprise to generate adequate amounts of cash from its normal
operations, including premiums received and investment income, in order to meet
its financial commitments, which are principally obligations under the insurance
policies it has written. Liquidity requirements are influenced significantly by
the level and severity of claims. The Company's operations generally do not
require significant amounts of capital expenditures.
PMI generates substantial cash flows from operations as a result of
premiums being received in advance of the time when claim payments are required.
Cash flows generated from PMI's operating activities totaled $54.9 million and
$71.1 million in the nine months ended September 30, 1996 and 1995,
respectively. Operating cash flows decreased during 1996 due to the increased
usage of the monthly premium product. These positive operating cash flows, along
with that portion of the investment portfolio that is held in cash and
highly-liquid securities, have historically met the liquidity requirements of
PMI, as evidenced by the growth in its investment portfolio. PMI's investment
portfolio was $1,083.4 million at September 30, 1996, compared with $1,026.7
million at September 30, 1995. Significant increases in claims, which could
result from adverse economic conditions, could create increased liquidity
requirements for PMI. Should PMI experience any temporary cash flow shortfall
due to significantly higher than anticipated claims, or for other reasons,
management anticipates funding such shortfall through sales of investments. In
addition to claim requirements, management has committed approximately $10
million over a three year period for systems development and enhancement. This
cash requirement will be provided by operating activities.
The Company's investment strategy is the result of various interrelated
investment considerations including protection of principal, appreciation
potential, tax consequences, and yield. The Company typically maintains its
investment portfolio with a longer average duration than its anticipated claims
development in order to achieve higher yields. The Company has found this
strategy to be cost effective because any cash mismatch would be met by cash
generated from operations or sales of investments.
Consolidated reserve for losses and loss adjustment expenses increased from
$192.1 million at December 31, 1995, to $199.5 million at September 30, 1996, an
increase of $7.4 million, or 3.9%, primarily due to increasing defaults
resulting from the growth in mortgage insurance in force discussed above.
Consolidated unearned premiums decreased from $140.3 million at December
31, 1995, to $117.7 million at September 30, 1996, a decrease of $22.6 million,
or 16.1%. This decrease was primarily a result of the increase of mortgage
insurance in force written under the monthly premium plan, which does not
generate significant unearned premiums.
Consolidated shareholders' equity increased from $870.5 million at December
31, 1995, to $965.7 million at September 30, 1996, an increase of $95.2 million,
or 10.9%. This increase consisted
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of $119.5 million of net income and stock options exercised of $1.0 million,
offset by a decrease of $15.7 million in net unrealized gains on investments
available for sale (net of tax), dividends declared of $5.3 million and treasury
stock purchases of $4.3 million during the nine months ended September 30, 1996.
PMI's risk-to-capital ratio at September 30, 1996, was 15.0:1, compared to
15.8:1 at December 31, 1995. On October 1, 1996, PMI notified Centre Reinsurance
Company of New York and Centre Reinsurance International Company (collectively,
"Centre Re") that PMI was terminating and commuting its quota share reinsurance
agreement with Centre Re (the "Centre Re Agreement") effective December 31,
1996. Had the Centre Re Agreement not been in effect as of September 30, 1996,
PMI's risk-to-capital ratio at such date would have been 16.3:1.
DIVIDEND LIMITATIONS
TPG is largely dependent on dividends from PMI to meet TPG's debt service
obligations, including its obligations with respect to the Notes. The ability of
PMI to pay dividends to TPG is dependent on business conditions, income, cash
requirements of PMI and other relevant factors. Limitations on PMI's
risk-to-capital ratio imposed by its runoff support agreement and certain state
insurance regulatory authorities also effectively limit PMI's ability to pay
dividends, because the payment of dividends reduces statutory capital. Under the
most restrictive of these risk-to-capital limitations, PMI would be precluded
from paying a dividend if, after the payment of such dividend, its
risk-to-capital ratio would equal or exceed 23:1.
PMI's ability to pay dividends is also limited under Arizona law and, as
PMI is currently commercially domiciled in California, under California law. Due
to a change in California law, effective as of January 1, 1997, PMI will no
longer be deemed to be commercially domiciled in California. The insurance laws
of Arizona provide 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 shall not exceed the lesser of 10% of policyholders'
surplus as of the preceding year-end or the last calendar year's net investment
income. Available surplus includes paid-in surplus and accordingly, at December
31, 1995, the most constraining limitation of Arizona law was the limitation
based on 10% of policyholders' surplus. In accordance with Arizona law, PMI was
permitted to pay ordinary dividends to TPG of $29.3 million in 1996, all of
which has been paid.
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DESCRIPTION OF NOTES
The 6 3/4% Notes Due November 15, 2006 (the "Notes") will be issued under
an Indenture (the "Indenture"), to be entered into by TPG and The Bank of New
York, as trustee (the "Trustee"). The following summaries of certain provisions
of the Indenture do not purport to be complete and are subject to the detailed
provisions of the Indenture, a copy of the form of which is filed as an exhibit
to the Registration Statement and to which reference is hereby made for a full
description of such provisions and for other information regarding the Notes.
Section references below are to the Indenture. Capitalized terms used but not
defined herein have the meanings ascribed to them in the Indenture. Whenever
particular provisions of the Indenture are referred to, such provisions are
incorporated by reference as part of the statements made and the statements are
qualified in their entirety by such reference.
GENERAL
The Notes will be unsecured obligations of TPG, ranking equally with all
other unsecured and unsubordinated indebtedness of TPG, will be limited to an
aggregate principal amount of $100,000,000 and will mature on November 15, 2006.
The Indenture does not limit the amount of additional unsecured indebtedness
that TPG may incur.
Interest will be payable semi-annually on May 15 and November 15 of each
year commencing May 15, 1997, to the registered Holders of Notes on the
preceding May 1 and November 1, respectively. The Notes will bear interest from
November 15, 1996 at the rate per annum set forth on the cover page of this
Prospectus. (Section 301)
Initially, the Notes will be issued in the form of one or more Global Notes
registered in the name of The Depository Trust Company ("DTC" or the
"Depositary") or its nominee. In certain limited circumstances, such Global
Notes may be exchanged for individual certificated Notes in fully registered
form without coupons in denominations of $1,000 and integral multiples thereof.
See "Book-Entry System" below. (Sections 301, 302, 303 and 305)
The principal of and interest on the Notes will be payable, the transfer of
Notes will be registrable and the Notes may be presented for exchange, at the
office of the Trustee in the Borough of Manhattan, The City of New York. If the
Notes are no longer represented by Global Notes, payment of interest may, at the
option of TPG, be made by check mailed to the address of the Person entitled
thereto. No service charge will be made for any transfer or exchange of Notes,
but TPG may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. (Sections 301, 305 and
1002)
No sinking fund is provided for the Notes, and the Notes are not redeemable
prior to maturity. (Section 301)
TPG is a holding company and is dependent upon dividends from its
subsidiaries to provide funds to permit the payment of TPG's obligations under
the Notes. In addition, the claims of creditors of TPG, including the claims of
Holders of Notes, are effectively subordinated to the claims of creditors, who
may include policyholders, of TPG's present and future subsidiaries, including
PMI.
RESTRICTIVE COVENANTS
Limitations on Liens
Under the Indenture, so long as any Notes are outstanding, TPG will not,
and will not permit any Subsidiary to, directly or indirectly, create, issue,
assume, incur or guarantee any indebtedness for money borrowed which is secured
by a lien, mortgage, pledge, security interest or other encumbrance of any
nature ("Lien") on any of the present or future capital stock of any Designated
Subsidiary (or any Subsidiary of TPG having direct or indirect control of any
Designated Subsidiary)
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<PAGE> 17
which capital stock is owned directly or indirectly by TPG unless the Notes
(and, if TPG so elects, any other indebtedness of TPG ranking at least pari
passu with the Notes) shall be secured equally and ratably with or prior to such
other secured debt so long as it is outstanding. The term "Designated
Subsidiary" means PMI, so long as it remains a Subsidiary, or any Subsidiary
which is a successor thereto. (Section 1008(a))
Limitations on Disposition of Stock of a Designated Subsidiary
Under the Indenture, so long as any Notes are Outstanding, TPG will not,
and will not permit any Subsidiary to, sell, transfer or otherwise dispose of
any shares of capital stock of any Designated Subsidiary (or of any corporation
having direct or indirect control of any Designated Subsidiary) except (subject
to the covenant relating to consolidations, mergers, transfers and leases
described in the following paragraph) for (i) a sale, transfer or other
disposition of any capital stock of any Designated Subsidiary to a wholly-owned
Subsidiary of TPG; (ii) a sale, transfer or other disposition of the entire
capital stock of any Designated Subsidiary for at least fair value (as
determined by the Board of Directors of TPG acting in good faith); or (iii) a
sale, transfer or other disposition of the capital stock of any Designated
Subsidiary for at least fair value (as determined by the Board of Directors of
TPG acting in good faith) if, after giving effect thereto, TPG and its
Subsidiaries would own more than 80% of the issued and outstanding voting stock
of such Designated Subsidiary. (Section 1008(b))
Mergers, Consolidations and Certain Sales of Assets
TPG shall not, in a single transaction or a series of related transactions,
consolidate with or merge with or into any other Person or sell, assign,
transfer or lease or otherwise dispose of all or substantially all of its
properties and assets to any Person or group of affiliated Persons, or permit
any of its Subsidiaries to enter into any such transaction or transactions if
such transaction or transactions, in the aggregate, would result in a sale,
assignment, transfer, lease or disposal of all or substantially all of the
properties and assets of TPG and its Subsidiaries on a consolidated basis to any
other Person or group of affiliated Persons, unless: (i) in a transaction in
which TPG does not survive or in which TPG sells, leases or otherwise disposes
of all or substantially all of its assets, the successor entity to TPG is
organized under the laws of the United States of America or any State thereof or
the District of Columbia and shall expressly assume, by a supplemental indenture
executed and delivered to the Trustee in form satisfactory to the Trustee, all
of TPG's obligations under the Indenture; (ii) after giving effect to such
transaction, no Event of Default or event that with the passing of time or the
giving of notice, or both, would constitute an Event of Default shall have
occurred and be continuing; (iii) if, as a result of any such transaction,
capital stock of any Designated Subsidiary (or any Subsidiary of TPG having
direct or indirect control of any Designated Subsidiary) would become subject to
a Lien prohibited by the covenant described under "-- Limitations on Liens"
above, TPG or the successor entity to TPG shall have secured the Notes as
required by such covenant; and (iv) certain other conditions are met. (Section
801)
EVENTS OF DEFAULT AND NOTICE
An Event of Default is defined in the Indenture to be (i) a default for 30
days in the payment of any interest upon any of the Notes when due; (ii) a
default in the payment of the principal of any of the Notes when due; (iii) a
default by the Company in the performance, or breach, of any of its other
covenants in the Indenture which has not been remedied by the end of a period of
60 days after written notice to TPG by the Trustee or to TPG and the Trustee by
the Holders of at least 25% in principal amount of the Outstanding Notes; (iv) a
default under any indebtedness for money borrowed by TPG or any Designated
Subsidiary if (A) such default either (1) results from the failure to pay the
principal of any such indebtedness at its stated maturity or (2) relates to an
obligation other than the obligation to pay the principal of such indebtedness
at its stated maturity and results in such indebtedness becoming or being
declared due and payable prior to the date on
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which it would otherwise have become due and payable, (B) the principal amount
of such indebtedness, together with the principal amount of any other such
indebtedness in default for failure to pay principal at stated maturity or the
maturity of which has been so accelerated, aggregates $15,000,000 or more at any
one time outstanding and (C) such indebtedness is not discharged, or such
acceleration is not rescinded or annulled, within 10 business days after written
notice as provided in the Indenture; and (v) certain events of bankruptcy,
insolvency or reorganization relating to TPG. (Section 501)
If an Event of Default (other than an Event of Default described in clause
(v) of the preceding paragraph) shall occur and be continuing, either the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Outstanding Notes may accelerate the maturity of all Notes; provided, however,
that after such acceleration, but before a judgment or decree based on
acceleration, the Holders of a majority in aggregate principal amount of
Outstanding Notes may, under certain circumstances, rescind and annul such
acceleration if all Events of Default, other than the non-payment of accelerated
principal, have been cured or waived as provided in the Indenture. If an Event
of Default specified in clause (v) of the preceding paragraph occurs, the
Outstanding Notes will ipso facto become immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder. (Section 502)
For more information as to waiver of defaults, see "Modification and Waiver".
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless also the Holders of at least 25% in aggregate principal
amount of the Outstanding Notes shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as Trustee,
and the Trustee shall not have received from the Holders of a majority in
aggregate principal amount of the Outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. (Section 507) However, such limitations do not apply to a suit instituted
by a Holder of a Note for enforcement of payment of the principal of or interest
on such Note on or after the respective due dates expressed in such Note.
(Section 508)
TPG will be required to furnish to the Trustee annually a statement as to
the performance by TPG of its obligations under the Indenture and as to any
default in such performance. (Section 1004)
MODIFICATION AND WAIVER
The Indenture provides that TPG and the Trustee may, without the consent of
any Holders of the Notes, enter into supplemental indentures for the purposes,
among other things, of evidencing the succession of another Person to TPG, of
adding to TPG's covenants, of adding additional Events of Default, or of curing
ambiguities or inconsistencies in the Indenture if such action will not
adversely affect the interests of the Holders of the Outstanding Notes in any
material respect. (Section 901)
The Indenture also contains provisions permitting TPG and the Trustee, with
the consent of the Holders of not less than a majority in principal amount of
the Outstanding Notes, to enter into one or more supplemental indentures for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the Indenture or modifying in any manner the rights of the
Holders of the Notes, except that no such modification or amendment may, without
the consent of the Holders of each of the Outstanding Notes affected thereby,
among other things, (i) change the Stated Maturity of the principal of, or any
installment of interest on, any Note; (ii) reduce the principal amount of, or
the rate of interest on, any Note; (iii) change the place of payment where, or
the coin or currency in which, the principal of any Note or any interest thereon
is payable; (iv) impair the right to institute suit for the enforcement of any
such payment on or after the Stated Maturity thereof; (v) reduce the percentage
in principal amount of the Outstanding Notes, the consent of
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<PAGE> 19
whose Holders is required for any such modification or amendment of the
Indenture or for any waiver of compliance with certain provisions of, or of
certain defaults under, the Indenture; or (vi) modify the foregoing
requirements. (Section 902)
The Holders of a majority in principal amount of the Outstanding Notes may
on behalf of the Holders of all the Notes waive compliance by TPG with certain
restrictive provisions of the Indenture. (Section 1009) The Holders of a
majority in principal amount of the Outstanding Notes may on behalf of the
Holders of all the Notes waive any past default under the Indenture and its
consequences, except a default in the payment of the principal of or any
interest on any Note or in respect of a provision which under the Indenture
cannot be modified or amended without the consent of the Holder of each
Outstanding Note affected. (Section 513)
DEFEASANCE
TPG, at TPG's option, (i) will be discharged from any and all obligations
in respect of the Notes (except for certain obligations to register the transfer
of Notes or the exchange of Notes to replace destroyed, stolen, lost or
mutilated Notes, and to maintain Paying Agents and hold moneys for payment in
trust) or (ii) will be released from its obligations with respect to the Notes
under the covenants described under "Restrictive Covenants", and the occurrence
of an event described in clause (iii) under "Events of Default and Notice" above
with respect to any such covenant shall no longer be an Event of Default if, in
either case, TPG deposits with the Trustee, in trust, money or U.S. Government
Obligations that through the payment of interest thereon and principal thereof
in accordance with their terms will provide money in an amount sufficient to pay
all the principal of and interest on the Outstanding Notes on the dates such
payments are due in accordance with the terms of the Notes. Such a defeasance
under clause (i) or (ii) above may only be effected if, among other things, (a)
no Event of Default or event which with notice or lapse of time or both would
become an Event of Default shall have occurred and be continuing on the date of
such deposit, (b) no Event of Default described under clause (v) under "Events
of Default and Notice" above or event which with the giving of notice or lapse
of time or both would become an Event of Default described under such clause (v)
shall have occurred and be continuing at any time during the period ending on
the 90th day following such date of deposit, (c) TPG shall have delivered to the
Trustee an Opinion of Counsel to the effect that the Holders will not recognize
gain or loss for Federal income tax purposes as a result of such defeasance and
will be subject to Federal income tax on the same amount in the same manner and
at the same times as if such defeasance had not occurred, (d) TPG shall have
delivered to the Trustee an Opinion of Counsel to the effect that such deposit
shall not cause the Trustee or the trust so created to be subject to the
Investment Company Act of 1940, and (e) certain other customary conditions
precedent are satisfied. Such opinion, in the case of a defeasance as described
under clause (i) above, must refer to and be based upon a ruling of the Internal
Revenue Service or a change in applicable federal income tax law occurring after
the date of the Indenture. In the event TPG omits to comply with its remaining
obligations under the Indenture after a defeasance of the Indenture as described
under clause (ii) above and the Notes are declared due and payable because of
the occurrence of any undefeased Event of Default, the amount of money and U.S.
Government Obligations on deposit with the Trustee may be insufficient to pay
amounts due on the Notes at the time of the acceleration resulting from such
Event of Default. However, TPG will remain liable in respect of such payments.
(Article Eleven)
BOOK-ENTRY SYSTEM
The Notes will be issued in the form of one or more registered securities
(each a "Global Note") which will be deposited with, or on behalf of, the
Depositary and registered in the name of the Depositary or the Depositary's
nominee. Except as set forth below, the Global Note may be transferred, in whole
and not in part, only to the Depositary, a nominee of the Depositary, a
successor to the Depositary or a nominee of that successor. (Sections 303, 305)
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<PAGE> 20
The Depositary has advised TPG as follows: The Depositary is a
limited-purpose trust company organized under the laws of the State of New York,
a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depositary was created to hold securities of institutions that have accounts
with the Depositary ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depositary's participants include securities brokers and dealers (including the
Underwriters), banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own the Depositary.
Access to the Depositary's book-entry system is also available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Upon the issuance of the Global Note, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts of
the Notes represented by such Global Note to the accounts of participants. The
accounts to be credited will be designated by the Underwriters of the Notes.
Ownership of beneficial interests in the Global Note will be limited to
participants or persons that may hold beneficial interests through participants.
Ownership of beneficial interests in the Global Note will be shown on, and the
transfer of those ownership interests will be effected only through, records
maintained by the Depositary (with respect to participants' interests) or such
participants (with respect to the owners of beneficial interests in the Global
Note who own such interests through participants). The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such laws may impair the ability
to transfer beneficial interests in the Global Note.
So long as the Depositary, or its nominee, is the registered Holder and
owner of the Global Note, the Depositary or such nominee, as the case may be,
will be considered the sole owner and Holder of the related Notes for all
purposes of such Notes and for all purposes under the Indenture. Except as set
forth below, owners of beneficial interests in the Global Note will not be
entitled to have the Notes represented by such Global Note registered in their
names, will not receive or be entitled to receive physical delivery of
certificated Notes in definitive form and will not be considered to be the
owners or Holders of any Notes under the Indenture or the Global Note.
Accordingly, each person owning a beneficial interest in the Global Note must
rely on the procedures of the Depositary and, if such person is not a
participant, on the procedures of the participant through which such person owns
its beneficial interest, to exercise any rights of a Holder of Notes under the
Indenture or the Global Note. TPG understands that under existing industry
practice in the event TPG requests any action of Holders of Notes or an owner of
a beneficial interest in the Global Note desires to take any action that the
Depositary, as the Holder of the Global Note, is entitled to take, the
Depositary would authorize the participants to take such action, and the
participants would authorize beneficial owners owning through such participants
to take such action or would otherwise act upon the instructions of beneficial
owners owning through them. Payment of principal of and interest on Notes
represented by the Global Note registered in the name of or held by the
Depositary or its nominee will be made to the Depositary or its nominee, as the
case may be, as the registered owner and Holder of the Global Note.
TPG expects that the Depositary, upon receipt of any payment of principal
or interest in respect of the Global Note, will immediately credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of the Global Note as shown on the records of
the Depositary. TPG also expects that payments by participants to owners of
beneficial interests in the Global Note held through such participants will be
governed by standing instructions and customary practices, as is the case with
securities held for the accounts of customers in bearer form or registered in
"street name," and will be the responsibility of such
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participants. Neither TPG nor the Trustee will have any responsibility or
liability for any aspect of the records relating to, or payments made on account
of, beneficial ownership interests in the Global Note or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests or for any other aspect of the relationship between the Depositary and
its participants or the relationships between such participants and the owners
of beneficial interests in the Global Note owning through such participants.
The Notes represented by the Global Note may be exchanged for individual
certificated Notes in definitive form in denominations of $1,000 and any
integral multiple thereof if (i) the Depositary notifies TPG that it is
unwilling or unable to continue as depositary for the Global Note or if at any
time the Depositary ceases to be a clearing agency registered under the Exchange
Act, (ii) TPG in its sole discretion at any time determines not to have all of
the Notes represented by the Global Note and notifies the Trustee thereof, or
(iii) an Event of Default has occurred and is continuing with respect to the
Notes. Any Global Note that is exchangeable pursuant to the preceding sentence
will be exchanged for certificated Notes issued in authorized denominations and
registered in such names as the Depositary shall direct. (Sections 302 and 305)
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made in immediately available funds. All
payments of principal and interest will be made by TPG in immediately available
funds so long as the Notes are represented by Global Notes.
CONCERNING THE TRUSTEE
The Bank of New York will act as Trustee under the Indenture. The Trustee
maintains an office at 101 Barclay Street, New York, New York 10286 for the
transfer and exchange of and the payment of principal of and interest on the
Notes.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, TPG has agreed to sell to each of the Underwriters named below, and
each of the Underwriters has severally agreed to purchase, the principal amount
of Notes set forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
--------------------------------------------------------------------- ----------------
<S> <C>
Goldman, Sachs & Co.................................................. $ 50,000,000
Morgan Stanley & Co. Incorporated.................................... 50,000,000
-----------
Total...................................................... $100,000,000
===========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and to pay for all of the Notes, if any are
taken.
The Underwriters propose to offer the Notes in part directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus and in part to certain securities dealers at such price less a
concession of 0.40% of the principal amount of the Notes. The Underwriters may
allow, and such dealers may reallow, a concession not to exceed 0.25% of the
principal amount of the Notes to certain brokers and dealers. After the Notes
are released for sale to the public, the offering price and other selling terms
may from time to time be varied by the Underwriters.
Settlement for the Notes will be made in immediately available funds, and
secondary trading in the Notes will settle in immediately available funds. See
"Description of Notes -- Same-Day Settlement and Payment".
The Notes are a new issue of securities with no established trading market.
TPG has been advised by the Underwriters that the Underwriters intend to make a
market in the Notes but are not obligated to do so and may discontinue market
making at any time without notice. No assurance can be given as to the liquidity
of the trading market for the Notes.
TPG has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
VALIDITY OF THE NOTES
The validity of the Notes will be passed upon for TPG by Orrick, Herrington
& Sutcliffe LLP, San Francisco, California, and for the underwriters by Sullivan
& Cromwell, New York, New York.
EXPERTS
The financial statements and related financial statement schedules
incorporated in this Prospectus by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are
incorporated herein by reference, and have been so incorporated in reliance upon
the reports of such firm given upon their authority as experts in auditing and
accounting.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... 2
Incorporation by Reference.............. 3
The Company............................. 3
Use of Proceeds......................... 4
Capitalization.......................... 4
Industry Overview....................... 5
Business................................ 5
Selected Financial and Operating Data... 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 9
Description of Notes.................... 16
Underwriting............................ 22
Validity of the Notes................... 22
Experts................................. 22
</TABLE>
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$100,000,000
THE PMI GROUP, INC.
6 3/4% NOTES DUE
NOVEMBER 15, 2006
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(LOGO)
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GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO.
INCORPORATED
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