<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from.................to..............................
Commission file number 1-13664
THE PMI GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3199675
(State of Incorporation) (IRS Employer Identification No.)
601 MONTGOMERY STREET,
SAN FRANCISCO, CALIFORNIA 94111
(Address of principal executive offices) (Zip Code)
(415) 788-7878
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OF STOCK PAR VALUE DATE NUMBER OF SHARES
- -------------- --------- ---- ----------------
Common Stock $0.01 4/30/98 32,111,169
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THE PMI GROUP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 1998
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Interim Consolidated Financial Statements and Notes.
<S> <C>
Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997. 3
Consolidated Balance Sheets as of March 31, 1998 and December 31,
1997. 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997. 5
Notes to Consolidated Financial Statements. 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 8-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 18
SIGNATURES 19
INDEX TO EXHIBITS 20
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------------------
(In thousands except for per share amounts) 1998 1997
-------------------------------
REVENUES
<S> <C> <C>
Premiums earned $116,846 $108,091
Investment income, less investment expense 21,577 19,995
Realized capital gains, net 7,965 18,268
Other income 4,246 1,192
-------- --------
TOTAL REVENUES 150,634 147,546
-------- --------
LOSSES AND EXPENSES
Losses and loss adjustment expenses 38,087 39,515
Underwriting and other expenses 44,177 34,415
Interest expense 1,706 1,688
Distributions on redeemable preferred capital securities 2,079 1,385
-------- --------
TOTAL LOSSES AND EXPENSES 86,049 77,003
-------- --------
INCOME BEFORE INCOME TAXES 64,585 70,543
INCOME TAX EXPENSE 18,817 21,371
-------- --------
NET INCOME $ 45,768 $ 49,172
======== ========
BASIC NET INCOME PER SHARE $1.41 $1.44
======== ========
DILUTED NET INCOME PER SHARE $1.40 $1.43
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
3
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THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(Dollars in thousands) 1998 1997
------------------ ------------------
<S> <C> <C>
ASSETS
Investments:
Available for sale, at market:
Fixed income securities
(amortized cost $1,257,199 and $1,234,178) $1,331,619 $1,308,768
Equity securities:
Common stock (cost $43,433 and $38,221) 81,423 73,596
Preferred stock (cost $22,224 and $12,049) 22,599 12,360
Common stock of affiliates, at underlying book value 41,352 16,987
Short-term investments (at cost, which approximates market) 78,714 78,890
---------- ----------
TOTAL INVESTMENTS 1,555,707 1,490,601
Cash 8,842 11,101
Accrued investment income 20,959 20,794
Reinsurance recoverable and prepaid premiums 33,600 31,676
Premiums receivable 21,106 19,756
Receivable from affiliates 7,853 8,605
Receivable from Allstate 16,822 16,822
Deferred policy acquisition costs 40,690 37,864
Property and equipment, net 32,395 31,393
Other assets 16,622 17,991
---------- ----------
TOTAL ASSETS $1,754,596 $1,686,603
========== ==========
LIABILITIES
Reserve for losses and loss adjustment expenses $ 207,897 $ 202,387
Unearned premiums 82,692 94,150
Long-term debt 99,426 99,409
Reinsurance balances payable 12,749 11,828
Deferred income taxes 77,972 76,395
Other liabilities and accrued expenses 72,382 42,248
---------- ----------
TOTAL LIABILITIES 553,118 526,417
---------- ----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURE OF THE COMPANY 99,015 99,006
SHAREHOLDERS' EQUITY
Preferred stock -- $.01 par value; 5,000,000 shares authorized - -
Common stock -- $.01 par value; 125,000,000 shares
authorized; 35,171,738 and 35,145,247 issued 352 351
Additional paid-in capital 263,392 262,448
Accumulated other comprehensive income 72,312 71,936
Retained earnings 920,734 876,588
Treasury stock (2,745,700 and 2,684,000 shares at cost) (154,327) (150,143)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 1,102,463 1,061,180
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,754,596 $1,686,603
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
4
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THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------------------------
(In thousands) 1998 1997
---------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 45,768 $ 49,172
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized capital gains, net (7,965) (18,268)
Equity in earnings of affiliate (511) (352)
Depreciation and amortization 1,583 961
Changes in:
Reserve for losses and loss adjustment expenses 5,510 1,422
Unearned premiums (11,458) (12,657)
Deferred policy acquisition costs (2,826) (1,124)
Accrued investment income (165) (1,793)
Reinsurance balances payable 921 (4,282)
Reinsurance recoverable and prepaid premiums (1,924) 61,348
Premiums receivable (1,350) (16,644)
Income taxes 1,375 227
Receivable from affiliates 752 (2,821)
Other 31,489 17,459
-------- ---------
Net cash provided by operating activities 61,199 72,648
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of equity securities 15,774 64,769
Investment collections of fixed income securities 13,636 6,520
Proceeds from sales of fixed income securities 21,269 162,892
Investment purchases:
Fixed income securities (57,988) (304,168)
Equity securities (25,088) (10,559)
Net (increase) decrease in short-term investments 175 (56,982)
Investment in affiliates (23,868) --
Purchases of property and equipment (2,504) (2,416)
-------- ---------
Net cash used in investing activities (58,594) (139,944)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of redeemable capital securities -- 99,000
Proceeds from exercise of stock options 943 168
Dividends paid to shareholders (1,623) (1,725)
Purchases of The PMI Group, Inc. common stock (4,184) (30,222)
-------- ---------
Net cash provided by (used in) financing activities (4,864) 67,221
-------- ---------
NET DECREASE IN CASH (2,259) (75)
CASH AT BEGINNING OF PERIOD 11,101 6,592
-------- ---------
CASH AT END OF PERIOD $ 8,842 $ 6,517
======== =========
See accompanying notes to consolidated financial statements.
</TABLE>
5
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THE PMI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of The PMI Group, Inc. ("TPG"), its wholly-owned subsidiaries, PMI
Mortgage Insurance Co. ("PMI"), Residential Guaranty Co., American Pioneer Title
Insurance Company ("APTIC"), PMI Mortgage Guaranty Co., PMI Reinsurance Co. and
PMI Capital I, and PMI's wholly-owned subsidiaries, PMI Mortgage Services Co.
("MSC") and PMI Securities Co., collectively referred to as the "Company". All
material intercompany transactions and balances have been eliminated in
consolidation.
The Company's unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the requirements of Form 10-Q. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of the Company's consolidated
financial condition at March 31, 1998, and its consolidated statements of
operations and cash flows for the periods ended March 31, 1998 and 1997, have
been included. Interim results for the period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. The financial statements should be read in conjunction with
the audited consolidated financial statements and footnotes included in The PMI
Group, Inc. 1997 Annual Report to Shareholders.
NOTE 2 - INVESTMENTS
In February 1998, TPG purchased 200,000 shares of RAM Holdings Ltd. and RAM
Holdings II Ltd. (collectively referred to as "RAM Re"), representing 22.3% of
RAM Re's outstanding shares. RAM Re is accounted for on the equity method in the
Company's consolidated financial statements. Ram Re is a financial guaranty
reinsurance holding company domiciled in Bermuda.
In addition, PMI owns 45% of CMG Mortgage Insurance Company ("CMG"). CMG is
accounted for on the equity method in the Company's consolidated financial
statements.
NOTE 3 - EARNINGS PER SHARE
The weighted average common shares outstanding for computing basic earnings per
share ("EPS") were 32,431,065 for the three months ended March 31, 1998 and
34,231,775 for the three months ended March 31, 1997. The weighted average
common shares outstanding for computing diluted EPS includes only stock options
issued by the Company that have a dilutive impact and are outstanding for the
period, and had the potential effect of increasing common shares to 32,607,864
for the three months ended March 31, 1998 and 34,341,954 for the three months
ended March 31, 1997. Net income available to common shareholders does not
change for computing diluted EPS.
NOTE 4 - COMPREHENSIVE INCOME
In 1998, the Company adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires that an enterprise report, by major
component and as a single total, the change in its net assets during the period
from non-owner sources.
6
<PAGE>
The reconciliation of net income to comprehensive income for the three months
ended March 31, 1998 and March 31, 1997 is as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31
(In thousands) 1998 1997
------------------- --------------------
COMPREHENSIVE INCOME
<S> <C> <C>
Net Income $45,768 $ 49,172
------------------- --------------------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period 5,554 (12,393)
Less: reclassification adjustment for gains
included in net income (5,178) (11,874)
------------------- --------------------
Other comprehensive income (loss), net of tax 376 (24,267)
------------------- --------------------
COMPREHENSIVE INCOME $46,144 $ 24,905
=================== ====================
</TABLE>
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of SFAS No. 131 will not impact the Company's financial condition,
results of operations or cash flows, and any effect will be limited to the form
and content of its disclosures. The statement is effective for the fiscal years
beginning after December 15, 1997, and is not required for interim financial
statements in the initial year of application.
NOTE 6 - SUBSEQUENT EVENTS
On April 15 1998, The Allstate Corporation ("Allstate Corp.") delivered
8,602,650 shares of TPG's common stock to redeem the 6.76% exchangeable notes
due April 15, 1998 which Allstate Corp. issued to the public concurrently with
TPG's initial public offering in April 1995. Upon completion of the exchange,
Allstate Corp.'s direct and indirect equity ownership of TPG was reduced to
1,897,350 shares, or approximately 6% of the Company's outstanding common stock.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONSOLIDATED OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Consolidated net income in the three months ended March 31, 1998 was $45.8
million, a 6.9% decrease over net income of $49.2 million in the corresponding
period of 1997. The decrease was attributable primarily to a decrease in
realized capital gains of $10.3 million, and secondarily to an increase in
underwriting and other expenses of $9.8 million, partially offset by increases
primarily in premiums earned of $8.8 million and secondarily in other income of
$3.0 million. Diluted earnings per share were $1.40 in the three months ended
March 31, 1998 compared with $1.43 in the corresponding period of 1997, a 2.1%
decrease. Excluding capital gains, diluted earnings per share were $1.24 in the
first quarter of 1998 compared with $1.09 in the first quarter of 1997, a 13.8%
increase. Revenues in the first quarter of 1998 were $150.6 million, a 2.1%
increase over revenues of $147.5 million in the first quarter of 1997.
MORTGAGE INSURANCE OPERATIONS
PMI's new insurance written ("NIW") totaled $4.8 billion in the first quarter of
1998 compared with $3.1 billion in the first quarter of 1997, a 54.8% increase.
The increase in NIW resulted primarily from the number of new mortgage insurance
policies issued increasing by 51.9%, to 36,600 policies in the first quarter of
1998 from 24,100 policies in the first quarter of 1997, and secondarily from an
increase in the average loan size to $131,500 from $127,200.
The primary factor contributing to the increase in new policies issued was the
growth in the total number of loan originations in the private mortgage
insurance industry in the first quarter of 1998 compared with the corresponding
period of 1997. The private mortgage insurance industry experienced an increase
in total new insurance written of 39.4% to $35.0 billion in the first quarter of
1998 from $25.1 billion in the corresponding period of 1997, which was caused
primarily by an increase in refinancing activity brought on by lower interest
rates coupled with a strong home purchase activity. Refinancing as a percentage
of PMI's NIW increased to 34.7% in the three months ended March 31, 1998 from
16.7% in the corresponding period of 1997.
The secondary factor contributing to the increase in PMI's new policies issued
was the growth in PMI's market share in the first quarter of 1998. PMI's market
share of NIW increased to 13.7% in the first quarter of 1998 compared with 12.2%
in the corresponding period of 1997, 12.4% in the fourth quarter of 1997 and
12.7% for the year ended December 31, 1997. On a combined basis with CMG, market
share was 15.0% in the first quarter of 1998 compared with 13.0% in the
corresponding period of 1997, 13.7% in the fourth quarter of 1997 and 13.8% for
the year ended December 31, 1997. The increase in market share was primarily due
to the expansion of PMI's contract underwriting resources, the expansion of
other value-added products offered to mortgage lenders during 1997 and the
first quarter of 1998, and the introduction of a government sponsored
enterprises ("GSE") pool insurance product to selected lenders commencing in
the fourth quarter of 1997. New pool risk written was $14 million in the first
quarter of 1998, while insurance in force under risk-share programs
represented 2.7% of total insurance in force at March 31, 1998. Management
expects new pool risk written and the percent of risk share programs to
increase in 1998. See Cautionary Statement.
8
<PAGE>
PMI's cancellations of insurance in force were $5.2 billion in the first quarter
of 1998 compared with $2.7 billion in the first quarter of 1997. This increase
was primarily due to the increase in refinancing activity as discussed above. As
a result of the higher cancellation activity, insurance in force declined to
$77.4 billion at March 31, 1998 compared with $77.8 billion at December 31, 1997
and $77.7 billion at March 31, 1997. The decrease in insurance in force caused
PMI's persistency rate (percentage of insurance remaining in force from one year
prior) to decrease to 77.6% as of March 31, 1998 compared with 80.8% as of
December 31, 1997. However, risk in force remained flat at $18.1 billion as of
March 31, 1998 and December 31, 1997 and grew by $0.5 billion compared with
$17.6 billion as of March 31, 1997. In addition, PMI experienced increased
termination activity in April 1998 over the March level resulting in a decrease
in insurance in force at April 30, 1998. Risk in force remained constant at
April 30, 1998, compared to March 31, 1998.
Mortgage insurance net premiums written were $89.1 million in the first quarter
of 1998 compared with $83.4 million in the corresponding period of 1997, an
increase of 6.8%. The increase was attributable to higher average premium rates
and higher average loan sizes, the growth of risk in force from one year prior,
and the growth in NIW, partially offset by the policy cancellations discussed
above. The decrease in insurance in force will have an adverse impact on PMI's
future renewal premiums.
PMI is currently experiencing a shift in the composition of policies in force to
deeper-coverage loans with higher premium rates along with higher average loan
sizes. Mortgages with original loan-to-value ratios greater than 90% and equal
to or less than 95% ("95s") with 30% insurance coverage increased to 30.0% of
risk in force as of March 31, 1998 from 23.5% as of March 31, 1997. Similarly,
mortgages with original loan-to-value ratios greater than 85% and equal to or
less than 90% ("90s") with 25% insurance coverage increased to 24.9% of risk in
force as of March 31, 1998 compared with 20.6% as of March 31, 1997.
Mortgage insurance premiums earned were $100.1 million in the first quarter of
1998 compared with $95.7 million in the first quarter of 1997, an increase of
4.6%. This increase is due primarily to higher premium rates and higher average
loan sizes, secondarily to the growth of risk in force from one year prior and
also to the increase in NIW, partially offset by the insurance cancellations as
discussed above.
Mortgage insurance losses and loss adjustment expenses decreased slightly to
$37.8 million in the first quarter of 1998 from $39.2 million in the
corresponding period of 1997 due primarily to the strengthening of the
California housing markets and the corresponding decrease in claims. Primary
direct claims paid by PMI decreased to $32.9 million in the first quarter of
1998 from $37.2 million in the first quarter of 1997, a decrease of 11.6%. This
decrease is attributable to a decrease in the average claim size in the first
quarter of 1998 compared to the corresponding period of 1997 and a decrease in
the number of claims filed. The improved claim results are due primarily to a
smaller percentage of claims originating from the California book of business,
and also to increased loss mitigation.
PMI's default rate decreased to 2.36% at March 31, 1998 from 2.38% at December
31, 1997 due primarily to the continuing improvements in the California real
estate market. Management believes that PMI's total default rate could increase
in 1998 due to the continued maturation of its 1994 and 1995 books of business.
See Cautionary Statement.
The default rates on PMI's California policies decreased to 3.58% at March 31,
1998, from 3.73% at December 31, 1997 primarily due to a decrease in the number
of loans in default to 3,742 at March 31, 1998 from 3,987 at December 31, 1997.
However, PMI has been experiencing increases on the default rates on its New
Jersey, New York, and Florida books of business. Policies written in California
accounted for approximately 55% and 71% of the total dollar amount of claims
paid in the first quarter of 1998 and 1997, respectively. Although management
expects that California should continue to account for a significant portion of
total claims paid, management
9
<PAGE>
anticipates that with continued improvement in the California economy, increased
benefits of loss mitigation and improved default reinstatement rates, California
claims paid as a percentage of total claims paid should continue to decline. See
Cautionary Statement.
Mortgage insurance underwriting and other expenses increased 19.5% to $23.9
million in the first quarter of 1998 from $20.0 million in the corresponding
period of 1997. This increase was primarily attributable to the growth in NIW
which caused increases in sales and contract underwriting expenses. New policies
processed by contract underwriters represented 29.9% of PMI's NIW in the first
quarter of 1998 compared with 16.7% in the first quarter of 1997. Contract
underwriting is generally more expensive for the Company on a per-application
basis than underwriting a loan in-house, and has become the preferred method
among many mortgage lenders for processing loan applications. PMI has
established a new Certificate Priority Center in Dallas, Texas to centralize the
processing of underwriting documentation. Management anticipates that contract
underwriting will continue to generate a significant percentage of PMI's NIW and
that demand for contract underwriting will increase. In addition, management
anticipates that the rate of growth of sales and contract underwriting expenses
will exceed the growth rate of premiums, if any, for the remainder of the year.
See Cautionary Statement.
The mortgage insurance loss ratio decreased to 37.8% in the first quarter of
1998 from 41.0% in the corresponding period of 1997. This decrease was due to
the growth in premiums earned and the decrease in losses and loss adjustment
expenses discussed above. The expense ratio increased to 26.9% in the first
quarter of 1998 from 24.0% in the first quarter of 1997 due primarily to the
increase in sales and contract underwriting expenses, resulting in a combined
ratio of 64.7% in the first quarter of 1998, 0.3 percentage points lower than
the first quarter of 1997 ratio of 65.0%.
TITLE INSURANCE OPERATIONS
Title insurance premiums earned increased to $16.7 million in the three months
ended March 31, 1998 compared with $12.4 million in the corresponding period of
1997. This improvement was due to the increase in residential mortgage
originations, including both new home sales and refinancings, in the states
where APTIC operates. Underwriting and other expenses increased to $14.9
million in the first quarter of 1998 compared with $11.4 million in the first
quarter of 1997. This increase was attributable to the increase in fees and
commissions payable to third parties based on premiums earned. The title
insurance combined ratio decreased to 90.3% in the first quarter of 1998 from
94.4% in the first quarter of 1997 due to the increase in premiums earned.
OTHER
The Company's net investment income in the first quarter of 1998 was $21.6
million compared with $20.0 million in the first quarter of 1997, an increase of
8.0%. 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, and secondarily to a slight increase in the average
investment yield (pretax) to 6.1% in the first quarter of 1998 from 6.0% in the
first quarter of 1997. Realized capital gains (net of losses) reported a
decrease of 56.3% to $8.0 million in the first quarter of 1998 from $18.3
million in the first quarter of 1997.
Other income, primarily revenues generated by MSC, increased to $4.2 million in
the first quarter of 1998 from $1.2 million in the first quarter of 1997. Other
expenses, primarily expenses incurred by MSC, increased to $5.4 million in the
first quarter of 1998 from $3.0 million in the first quarter of 1997. These
increases are primarily due to contract underwriting activities provided to the
Company's mortgage insurance customers. See discussions above and Cautionary
Statement.
The Company's effective tax rate decreased to 29.1% in the first quarter of 1998
compared to 30.3% in the first quarter of 1997 due to an increase in the
percentage of tax-exempt income included in income before taxes during the first
quarter of 1998.
10
<PAGE>
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. There are no
material liquidity requirements for the remaining subsidiaries of the Company.
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. During the first quarter of 1998, APTIC declared and paid a
cash dividend of $3.2 million to TPG, substantially the full amount of a
dividend that can be paid by APTIC in 1998 without prior permission from the
Florida Department of Insurance. On March 24, 1998, the Arizona Department of
Insurance authorized PMI to declare and pay an extraordinary dividend of $50
million to TPG, which was paid in cash on April 3, 1998. In addition, the
Arizona Department of Insurance also authorized an extraordinary dividend of $50
million payable after the Department has reviewed the operating results of PMI
for the six months ended June 30, 1998. It is not expected that PMI will
declare and pay any dividends in 1998 in addition to those already authorized by
the Arizona Department of Insurance. TPG has two bank credit lines available
totaling $50.0 million. At March 31, 1998, there were no outstanding borrowings
under the credit lines.
TPG's principal uses of funds are common stock repurchases, the payment of
dividends to shareholders, funding of acquisitions, additions to its investment
portfolio, investments in subsidiaries, and the payment of interest. In November
1997, an additional $150 million stock buy-back program was authorized by the
TPG Board of Directors. During the first quarter, TPG purchased $4.2 million of
the Company's common stock.
As of March 31, 1998, TPG had available funds of approximately $128 million.
This amount decreased from the December 31, 1997 balance of $134 million due
primarily to the investment in RAM Re and the common stock repurchases in the
first quarter of 1998. On April 3, 1998, PMI declared and paid ordinary and
extraordinary dividends to TPG totaling $50.0 million, which significantly
increased TPG's available funds.
The principal sources of funds for PMI are premiums received on new and renewal
business and amounts earned from the investment of this cash flow. The principal
uses of funds by PMI are the payment of claims and related expenses,
underwriting and other operating expenses, and dividends to TPG. PMI generates
substantial positive cash flows from operations as a result of premiums being
received in advance of the payment of claims. Cash flows generated from PMI's
operating activities totaled $52.8 million and $73.0 million in the first
quarter of 1998 and 1997, respectively. The first quarter of 1997 included the
collection of $53.6 million as a result of a termination and commutation of a
reinsurance treaty.
PMI has commenced a project to prepare the Company's operating and insurance
systems for the year 2000 (see Factors That May Affect Future Results and Market
Price of Stock - Year 2000 Issues). Management expects to complete this project
in the first quarter of 1999 at a total cost of $3 million, which will be funded
through operating cash flows. These costs are being expensed as they are
incurred.
Consolidated shareholders' equity increased from $1,061.2 million at December
31, 1997, to $1,102.5 million at March 31, 1998. The change in shareholders'
equity consisted of increases of $45.8 million from net income, $0.9 million
from stock option activity, and an increase of $0.4 million in net unrealized
gains on investments available for sale (net of tax), offset by common stock
repurchases of $4.2 million, and dividends declared of $1.6 million.
11
<PAGE>
PMI's risk-to-capital ratio at March 31, 1998 was 14.1:1, compared to 14.6:1 at
December 31, 1997. If the April dividend declaration occurred on or prior to
March 31, 1998, PMI's risk to capital ratio would have been 14.7:1 on March 31,
1998.
CAUTIONARY STATEMENT
Certain written and oral statements made or incorporated by reference from time
to time by the Company or its representatives in this document, other documents
filed with the Securities and Exchange Commission, press releases, conferences,
or otherwise that are not historical facts, and that relate to future plans,
events or performance are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include the following: (i) management expects new pool risk written
and the percent of risk share programs to increase in 1998; (ii) management
believes that PMI's total default rate could increase in 1998 due to the
continued maturation of its 1994 and 1995 books of business; (iii) although
management expects that California should continue to account for a significant
portion of total claims paid, management anticipates that with continued
improvement in the California economy, increased benefits of loss mitigation and
improved default reinstatement rates, California claims paid as a percentage of
total claims paid should continue to decline; (iv) Management anticipates that
contract underwriting will continue to generate a significant percentage of
PMI's NIW and that demand for contract underwriting will increase. In addition,
management anticipates that the rate of growth of sales and contract
underwriting expenses will exceed the growth rate of premiums, if any, for the
remainder of the year; and (v) management presently believes that the current
statutes will not have a material impact on the Company's financial condition or
results of operations. 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 and in the Company's periodic
filings with the Securities and Exchange Commission.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
General Conditions
Several factors such as economic recessions, declining housing values, higher
unemployment rates, deteriorating borrower credit, rising interest rates,
increases in refinance activity caused by declining interest rates, legislation
impacting borrowers' rights, or combinations of such factors might affect the
mortgage insurance industry and demand for housing 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.
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 product offerings and services, including mortgage
pool insurance and contract underwriting services; the ability to recruit and
maintain a sufficient number of qualified underwriters; 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
government regulations or interpretations regarding the Real Estate Settlement
Procedures Act ("RESPA"); changes in the statutory charters, regulations, powers
and coverage requirements of government sponsored enterprises ("GSEs"), banks
and savings institutions; and customer consolidation.
12
<PAGE>
MARKET SHARE AND COMPETITION
The Company's financial condition and results of operations could be materially
and adversely affected by a decline in its market share, or a decline in market
share of the private mortgage insurance industry as a whole. Numerous factors
bear on the relative position of the private mortgage insurance industry versus
government and quasi-governmental competition as well as the competition of
lending institutions that choose to remain uninsured, self-insure through
affiliates, or offer residential mortgage products that do not require mortgage
insurance. The impact of competitive underwriting criteria and product
offerings, including mortgage pool insurance and contract underwriting, has a
direct impact on the Company's market share. Further, several of the Company's
competitors have greater direct or indirect capital reserves that provide them
with potentially greater flexibility than the Company in addressing competitive
issues.
PMI competes directly with federal and state governmental and quasi-governmental
agencies, principally the FHA and, to a lesser degree, the VA. Further, the
Office of the Comptroller of the Currency has granted permission to certain
national banks to form reinsurance companies as wholly-owned operating
subsidiaries for the purpose of reinsuring mortgage insurance written on loans
originated or purchased by such banks. In addition, the Federal Reserve Board
and the Office of Thrift Supervision are in the process of considering whether
similar activities are permitted for bank holding companies and savings
institutions, respectively. The reinsurance subsidiaries of national banks,
savings institutions, or bank holding companies could become significant
competitors of the Company in the future. Mortgage lenders, other than banks,
thrifts or their affiliates, are forming reinsurance affiliates that are
typically regulated solely by the insurance authority of their state of
domicile. Management believes that such reinsurance affiliates will increase
competition in the mortgage insurance industry and may materially and adversely
impact PMI's market share.
Certain lenders originate a first mortgage lien with an 80 percent LTV ratio, a
10 percent second mortgage lien, and 10 percent of the purchase price from
borrower's funds ("80/10/10"). This 80/10/10 product competes with mortgage
insurance as an alternative for lenders selling loans in the secondary mortgage
market. If the 80/10/10 product becomes a widely accepted alternative to
mortgage insurance, it could have a material and adverse impact on the Company's
financial condition and results of operations.
Legislation and regulatory changes affecting the FHA and certain commercial
banks that forego insurance have affected demand for private mortgage insurance.
The maximum individual loan amount that the FHA can insure is currently $170,362
and the maximum individual loan amount that the VA can insure is $203,150. The
Clinton administration and Congress are considering increasing the single-family
loan limit which FHA could purchase to $227,150. The Company believes that any
increase in the FHA loan limit, or other expansion of eligibility for the FHA
and VA would likely have an adverse affect on the competitive position of PMI
and consequently could materially and adversely affect the Company's financial
condition and results of operations.
INSURANCE IN FORCE
A significant percentage of PMI's premiums earned is generated from its existing
insurance in force and not from new insurance written. PMI's policies for
insurance coverage typically have a policy duration of five to seven years.
Insurance coverage may be canceled by the policy owner or servicer of the loan
at any time. PMI has no control over the owner's or servicer's decision to
cancel insurance coverage and self-insure or place coverage with another
mortgage insurance company. There can be no assurance that policies for
insurance coverage originated in a particular year or for a particular customer
will not be canceled at a later time or that the Company will be able to regain
such insurance coverage at a later time. As a result, the Company's financial
condition and results of operation could be materially and adversely affected by
greater than anticipated policy cancellations or lower than projected
persistency resulting in declines in insurance in force.
13
<PAGE>
During an environment of falling interest rates, an increasing number of
borrowers refinance their mortgage loans. PMI and other mortgage insurance
companies generally experience an increase in the prepayment rate of insurance
in force, resulting from policy cancellations of older books of business.
Although PMI has a history of expanding business during low interest rate
environments, the resulting increase of NIW may ultimately prove to be
inadequate to compensate for the loss of insurance in force arising from policy
cancellations. Any significant decrease in PMI's insurance in force could
materially and adversely affect the Company's financial condition and results of
operations.
Insurance in force as of March 31, 1998 was $77.4 billion compared with $77.8
billion as of December 31, 1997. The decrease in insurance in force is
primarily due to higher policy cancellations caused by the refinancing activity
in the first quarter of 1998. The decline in insurance in force will have an
adverse impact on PMI's future renewal premiums.
FANNIE MAE, FREDDIE MAC AND FHA; STATE AND FEDERAL MORTGAGE CANCELLATION
LEGISLATION
PMI and other private mortgage insurers are affected by Fannie Mae and Freddie
Mac. These GSEs are permitted by statute to purchase conventional high-LTV
mortgages from lenders who obtain mortgage insurance on those loans. Fannie Mae
and Freddie Mac have the discretion to reduce the amount of private mortgage
insurance they require on loans. Any reduction in the amount of private
mortgage insurance coverage could materially and adversely affect the Company's
financial condition and results of operations.
Fannie Mae and Freddie Mac impose requirements on private mortgage insurers for
such insurers to be eligible to insure loans sold to such agencies. Under Fannie
Mae and Freddie Mac regulations, PMI needs to maintain at least an "AA-" or
equivalent claims-paying ability rating in order to provide mortgage insurance
on loans purchased by the GSEs. Failure to maintain such a rating would
effectively cause PMI to be ineligible to provide mortgage insurance. A loss of
PMI's existing eligibility status, either due to a failure to maintain a minimum
claims-paying ability rating from the various rating agencies or non-compliance
with other eligibility requirements, would have a material, adverse effect on
the Company's financial condition and results of operations.
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 significantly influenced by
the level and severity of claims. PMI's claims-paying ability is currently
rated "AA+" (Excellent) by Standard and Poor's Rating Services, "Aa2"
(Excellent) by Moody's Investors Service, Inc., "AA+" (Very Strong) by Fitch
IBCA, and "AA+" (Very High) by Duff & Phelps Credit Rating Co. These ratings
are subject to revisions or withdrawal at any time by the assigning rating
organization. The ratings by the organizations are based upon factors relevant
to PMI's policyholders and are not applicable to the Company's common stock or
outstanding debt. However, any decrease in PMI's claims-paying ratings could
have a material, adverse effect on the Company's financial condition and results
of operations.
Although PMI cannot generally cancel its mortgage insurance policies once
issued, PMI must cancel mortgage insurance for a mortgage loan upon the request
of the insured. Fannie Mae and Freddie Mac have guidelines which give borrowers
the right to request cancellation of mortgage insurance when specified
conditions are met. In addition, federal legislation and legislation in
approximately a dozen states has been introduced that also addresses this issue.
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 their enactment
remains uncertain. Statutes giving borrowers cancellation rights and/or
preventing premiums from being charged to borrowers presently exist in five
states, including California. Management presently believes that the existing
statutes will not have a material impact on the Company's
14
<PAGE>
financial condition or results of operations. Management believes it is too
early to ascertain the impact of the enactment of any additional mortgage
cancellation proposals.
CONTRACT UNDERWRITING SERVICES; NEW PRODUCTS
The Company 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. Contract underwriting services have
become increasingly important to mortgage lenders as they seek to reduce costs,
including the cost of repurchasing loans from the GSEs and other investors which
are not underwritten to relevant guidelines. As a part of its contract
underwriting services, PMI provides remedies which may include the assumption of
some of the costs of repurchasing insured and uninsured loans from the GSEs and
other investors. Generally, the scope of these remedies exceed those contained
in PMI's master primary insurance policies. Contract underwriting currently
generates a significant percentage of PMI's NIW. Management anticipates that
contract underwriting will continue to generate a significant percentage of
PMI's NIW. Due to the increasing demand of contract underwriting services, the
limited number of underwriting personnel available, and heavy price competition
among mortgage insurance companies, PMI's inability to recruit and maintain a
sufficient number of qualified underwriters could materially and adversely
affect its market share and materially and adversely affect the Company's
financial condition and results of operations.
TPG and PMI, from time to time, introduce new mortgage insurance products or
programs. The Company's financial condition and results of operations could be
materially and adversely affected if PMI or the Company experiences delays in
introducing competitive new products and programs. In addition, for any
introduced product, there can be no assurance that such products, including any
mortgage pool type products, or programs will be as profitable as the Company's
existing products and programs.
YEAR 2000 ISSUES
The Company is heavily dependent upon complex computer systems for all phases of
its operations, including customer service, servicing the insurance portfolio,
risk analysis, underwriting, and loss reserves. Since many of the Company's
older computer software programs recognize only the last two digits of the year
in any date (e.g., "97" for 1997), some software may fail to operate properly in
1999 or 2000 if the software is not reprogrammed or replaced (the "Year 2000
Issue"). The Company believes that many of its suppliers and customers may have
Year 2000 Issues that could adversely affect the Company; however, it is
uncertain what impact, if any, such Year 2000 Issues would have on the Company.
The Company has commenced a plan intended to mitigate and/or prevent the adverse
effects of internal Year 2000 Issues and estimates the cost of this work at
approximately $3 million. The Company presently believes that it will be able
to resolve its internal Year 2000 Issues in a timely manner and that the cost of
addressing such matters will not have a material effect on the Company's current
financial condition, liquidity or results of operations. Management believes
its failure or its customers or suppliers failure to resolve the Year 2000
Issues in a timely manner could materially and adversely affect the Company's
financial condition and results of operations.
NEW YORK DEPARTMENT OF INSURANCE
The Company offers a number of risk-share and structured products and programs
that are designed to encourage quality originations and loss mitigation by its
customers. To date, these products and programs do not represent a significant
portion of the Company's revenues or a significant percent of PMI's NIW. In
March 1997, the New York Department of Insurance stated in a letter addressed to
all private mortgage insurers that certain risk-share and structured products
and programs would be considered to be illegal under New York law.
Representatives of the mortgage insurance industry have been in discussions with
the New York Department of Insurance regarding its March 1997 letter.
Management is unable to predict at this time the results of these discussions.
15
<PAGE>
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 with Allstate, which prohibit PMI from paying any
dividends if, after the payment of any such dividend, PMI's risk-to-capital
ratio would equal or exceed 23 to 1; (iii) TPG's credit agreements; and (iv)
TPG's and PMI's credit or claims-paying ability ratings which require that the
risk-to-capital ratio not exceed 20 to 1.
Significant losses could cause a material reduction in statutory capital,
causing an increase in the risk-to-capital ratio and thereby limit PMI's ability
to write new business. The inability to write new business could materially and
adversely affect the Company's financial condition and results of operations.
CHANGES IN COMPOSITION OF INSURANCE WRITTEN; POOL INSURANCE
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 March 31,
1998, 46.2% 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"). At March 31, 1998,
2.0% of PMI's risk in force consisted of 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. During the fourth quarter of
1997, PMI began offering a pool insurance product to state housing finance
authorities and certain lenders. This product is similar in structure to the
pool insurance product previously offered by PMI during 1990 through 1993, but
has different risk characteristics, including limits on total exposure,
diversification and loan to value ratios. Pool insurance is generally used as
an additional credit enhancement for certain secondary market mortgage
transactions and generally covers the loss on a defaulted mortgage loan that
exceeds the claim payment under the primary coverage, if primary insurance is
required on that mortgage loan. Pool insurance also generally covers the total
loss on a defaulted mortgage loan which did not require primary insurance, in
each case up to a stated aggregate loss limit. New pool risk written was $14
million in the first quarter of 1998. Management expects new pool risk written
to increase significantly throughout the year and into 1999. Although PMI
charges higher premium rates for loans that have higher risk characteristics,
including ARMs, 95s, 97s and pool insurance products, the premiums earned on
such products, and the associated investment income, may ultimately prove to be
inadequate to compensate for future losses from such products. Such losses
could materially and adversely affect the Company's financial condition and
results of operations.
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.
LOSS RESERVES
PMI establishes loss reserves based upon estimates of the claim rate and average
claim amounts, as well as the estimated costs, including legal and other fees,
of settling claims. Such reserves are based on estimates, which
16
<PAGE>
are regularly reviewed and updated. There can be no assurance that PMI's
reserves will prove to be adequate to cover ultimate loss development on
incurred defaults. The Company's financial condition and results of operations
could be materially and adversely affected if PMI's reserve estimates are
insufficient to cover the actual related claims paid and expenses incurred.
REGIONAL CONCENTRATION
In addition to nationwide economic conditions, PMI could be particularly
affected by economic downturns in specific regions where a large portion of its
business is concentrated, particularly California, Florida, and Texas, where PMI
has 20.1%, 7.1%, and 6.6% of its risk in force concentrated and where the
default rate on all PMI policies in force is 3.58%, 2.95% and 2.16% compared
with 2.36% nationwide as of March 31, 1998.
CONTINUING RELATIONSHIPS WITH ALLSTATE AND AFFILIATE
In December 1993, PMI entered into a Reinsurance Treaty with Forestview Mortgage
Insurance Company ("Forestview") whereby Forestview agreed to reinsure all
liabilities (net of amounts collected from third party reinsurers and
indemnitors) in connection with PMI's mortgage pool insurance business in
exchange for premiums received. In 1994, Forestview also agreed that as soon as
practicable after November 1, 1994, Forestview and PMI would seek regulatory
approval for the Reinsurance Treaty to be deemed to be an assumption agreement
and that, upon receipt of the requisite approvals, Forestview would assume such
liabilities. The parties are in the process of seeking regulatory approval to
complete the assumption of the mortgage pool insurance policies. Until
Forestview has assumed directly such mortgage pool insurance policies, PMI will
remain primarily liable on the unassumed policies. Forestview's previous
claims-paying ability rating of "AA" (Excellent) was withdrawn by Standard and
Poor's Rating Services ("S&P"). Management is uncertain at this time what
impact the withdrawal of the claims-paying ability rating will have on the
parties' ability to timely consummate the assumption transaction. Pursuant to
this agreement, PMI ceded $2.4 million of pool premiums to Forestview and
Forestview reimbursed PMI for pool claims on the covered policies in the amount
of $7.9 million in the first quarter of 1998. It is anticipated that additional
pool claims significantly in excess of pool premiums will be paid in 1998 and
beyond. As of March 31, 1997, the Company has a $72.9 million reinsurance
recoverable from Forestview. The failure of Forestview to meet its contractual
commitments would materially and adversely affect the Company's financial
condition and results of operations.
On October 28, 1994, TPG entered into a Runoff Support Agreement (the "Runoff
Support Agreement") with Allstate Insurance Company ("Allstate") 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. Alternatively,
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. During 1997, no
payment obligation arose under the Runoff Support Agreement.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
17
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
MARCH 31, 1998
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits listed in the accompanying Index
to Exhibits on page 21 are filed as part of
this Form 10-Q
(b) Reports on Form 8-K: On January 15, 1998, TPG filed a
report on Form 8-K to announce that
its Board of Directors authorized
the adoption of a Shareholder
Rights Plan.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on May 14, 1998.
THE PMI GROUP, INC.
/s/ John M. Lorenzen, Jr.
--------------------------
John M. Lorenzen, Jr.
Executive Vice President and
Chief Financial Officer
/s/ William A. Seymore
-----------------------
William A. Seymore
Vice President and Chief
Accounting Officer
19
<PAGE>
INDEX TO EXHIBITS
(PART II, ITEM 6)
<TABLE>
<CAPTION>
Exhibit
Number DESCRIPTION OF EXHIBIT
- --------------------------------- -----------------------------------------------------------------
<S> <C>
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule
</TABLE>
20
<PAGE>
EXHIBIT 11.1
THE PMI GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
(In thousands, except per share data) ------------------- ---------------
<S> <C> <C>
BASIC NET INCOME PER COMMON SHARE:
Net income $ 45,768 $ 49,172
Average common shares outstanding 32,431 34,232
------------------- ---------------
BASIC NET INCOME PER COMMON SHARE $ 1.41 $ 1.44
=================== ===============
DILUTED NET INCOME PER COMMON
SHARE:
Net income $ 45,768 $ 49,172
------------------- ---------------
Average common shares outstanding 32,431 34,232
Net shares to be issued upon exercise of dilutive
stock options after applying treasury stock method 177 110
------------------- ---------------
Average shares outstanding 32,608 34,342
------------------- ---------------
DILUTED NET INCOME PER COMMON SHARE $ 1.40 $ 1.43
=================== ===============
</TABLE>
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 1,331,619
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 145,374
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,555,707
<CASH> 8,842
<RECOVER-REINSURE> 33,600
<DEFERRED-ACQUISITION> 40,690
<TOTAL-ASSETS> 1,754,597
<POLICY-LOSSES> 207,897
<UNEARNED-PREMIUMS> 82,692
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 99,426
0
0
<COMMON> 352
<OTHER-SE> 1,102,111
<TOTAL-LIABILITY-AND-EQUITY> 1,754,597
116,846
<INVESTMENT-INCOME> 21,577
<INVESTMENT-GAINS> 7,965
<OTHER-INCOME> 4,246
<BENEFITS> 38,087
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 44,177
<INCOME-PRETAX> 64,585
<INCOME-TAX> 18,817
<INCOME-CONTINUING> 45,768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,768
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.40
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
