<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) October 14, 1998
THE PMI GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-13664 94-3199675
(State of Incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
601 MONTGOMERY STREET, SAN FRANCISCO, CALIFORNIA 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (415) 788-7878
______________________________________________________________________
(Former name or former address, if changed since last report.)
<PAGE>
Item 5. Other Events
On October 14, 1998, The PMI Group, Inc., announced its third quarter earnings
and financial results for the period ended September 30, 1998. A copy of the
Company's press release dated October 14, 1998 announcing such earnings is filed
as Exhibit 99.1 hereto and is incorporated herein by reference.
Item 7. Financial statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
The following exhibits are filed with this report:
Exhibit No. Description
99.1 Press Release dated October 14, 1998
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The PMI Group, Inc.
(Registrant)
October 14, 1998 By: /s/ John M. Lorenzen, Jr.
John M. Lorenzen, Jr.
Executive Vice President,
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
99.1 Press Release dated October 14, 1998
<PAGE>
[PMI NEWS RELEASE LETTERHEAD APPEARS HERE]
EXHIBIT 99.1
FOR IMMEDIATE RELEASE:
THE PMI GROUP, INC. REPORTS RECORD THIRD
QUARTER AND NINE-MONTH NEW INSURANCE WRITTEN
SAN FRANCISCO, OCTOBER 14, 1998 --- The PMI Group, Inc. (NYSE:PMA)
announced today that new insurance written for its mortgage insurance
subsidiary, PMI Mortgage Insurance Co. (PMI), increased 73 percent to $7.7
billion in the third quarter of 1998, compared to $4.5 billion a year ago. PMI
also had record new insurance written for the first nine months of the year of
$19.5 billion, compared to $11.1 billion in the first nine months of 1997.
Both insurance in force and primary risk in force grew to historic levels.
Insurance in force grew by $1.3 billion for the quarter, a 1.6 percent increase
from second quarter 1998, while risk in force grew by $0.8 billion, 2.6
percent during the quarter. Moreover, committed volume trends for the nine
months ending September 30, 1998 remained strong at 74 percent over the same
period a year ago.
Operating earnings per share, excluding capital gains, were $1.43 for the
third quarter of 1998, compared to $1.25 for the third quarter of 1997, an
increase of 14 percent. Net income for the third quarter was $53.7 million or
$1.73 per share, compared with $41.9 million or $1.26 per share for the third
quarter of 1997. For the first nine months of 1998, net income totaled $146.3
million or $4.58 per share, compared to $133.4 million or $3.95 per share in the
first nine months of 1997.
"Our third quarter results with its record volume of new insurance written,
continued growth in our insurance in force, and strong profits is a powerful
affirmation of PMI's quality growth strategy," said W. Roger Haughton,
chairman and chief executive officer of The PMI Group, Inc. and PMI. "The
business we have written this year is high quality with low interest rates
that we expect will generate solid earnings for the next several years. I
believe PMI's strong market
<PAGE>
share performance in the first half of 1998, which exceeded our share of
insurance in force, will persist for the rest of the year. A continuation of
that trend should create growth in insurance in force in the fourth quarter,
even with relatively high levels of refinance activity."
"We continually review the impact of high levels of mortgage refinance
activity on the company in the context of PMI's and the mortgage insurance
industry's historical experience," Mr. Haughton continued. "Industry
estimates for the size of 1999's mortgage market vary from $1.0 to $1.4
trillion, a relatively wide band. With a market in the higher end of the
estimate range PMI believes it will have the opportunity to write a book of new
insurance written that resembles the 1998 book, with low mortgage rates and
sound credit quality. With a market in the lower range of estimates, PMI
believes persistency should increase, which should provide an added impetus to
insurance in force, and earnings growth."
Total revenue growth for the third quarter was led by net premiums earned
of $127.3 million, an increase of 8 percent over the third quarter of 1997,
and net investment income of $20.7 million, compared to $21.4 million a year
ago. Realized capital gains were $14.2 million for the third quarter, compared
to $0.3 million for the prior year period, and other revenue was $5.1 million,
compared to $1.9 million a year ago. Total revenues for the Company were $167.4
million in the third quarter, compared to $141.2 million for the prior year
period.
Another component of PMI's growth strategy, CMG, PMI's joint venture with
CUNA Mutual, reported $1.77 billion new insurance written year-to-date, and
insurance in force of $3.77 billion, a 59 percent increase since December 31,
1997. CMG has earned $4.17 million year-to-date. As of October 1, 1998 PMI has
acquired an additional 5 percent of CMG Mortgage Insurance Company bringing our
ownership stake to 50 percent.
The Company repurchased 1,103,500 shares of its common stock during the
third quarter of 1998 and completed the stock repurchase plan announced on
November 19, 1997. As of September 30, 1998, the Company had 30,341,545 common
shares outstanding.
<PAGE>
Reserves for the quarter increased $6.9 million to $208.7 million. The
percentage of PMI's primary loans in default at September 30, 1998 was 2.20
percent, compared to 2.29 percent at September 30, 1997. Primary direct claims
paid by PMI totaled $93.8 million through September 30, 1998, compared to $110.9
million as of September 30, 1997, led by a quarter over quarter decrease of 22
percent. PMI'S average claim size year-to-date was $23,795 compared to $26,521
FOR 1997. Direct claims paid for California were $46.9 million year-to-date in
the third quarter, compared to $72.2 million a year ago, a decrease of 35
percent. Average claim size for California year-to-date was $27,288 compared to
$30,437 for 1997.
PMI's risk in force increased to $18.8 billion at September 30, 1998 from
$18.0 billion at September 30, 1997. PMI's primary insurance in force was $78.9
billion at September 30, 1998, compared to $77.8 billion at September 30, 1997.
Persistency, or the percentage of insurance remaining in force compared to one
year prior, was 71.0 percent at September 30, 1998, compared with 82.5 percent
at September 30, 1997.
<PAGE>
In order to assist our shareholders and stock analysts in their evaluation
of our company, we have expanded our disclosure of financial and operating
information with this earnings release. In our income statement we have
replaced an expense line item, "Underwriting and other expenses" with two new
expense line items, "Policy acquisition costs" and "Other operating expenses."
In Other Statistical Information we have added two line items, "Direct primary
claims paid number (year-to-date)" and "Average Claim Size." We have also added
those same line items in the portion of Other Statistical Information that deals
with PMI's California Portfolio. Finally we have added to Other Statistical
Information a section that sets forth an Analysis of Deferred Acquisition Costs
for the quarter and the first nine months of 1998 with comparative information
for the same time periods in 1997. A chart that shows the relationship
between PMI's persistency rate, the size of the mortgage origination market and
the percentage of refinance mortgages in the market is available upon request.
The PMI Group, Inc. is headquartered in San Francisco and through its
subsidiary, PMI, is the third largest private mortgage insurer in the United
States based on 1997 year-end insurance in force. In addition to private
mortgage insurance, The PMI Group, Inc., through its subsidiaries, is a leader
in risk management technology, and provides various products and services for
the home mortgage finance industry, as well as title insurance. This release
can be accessed through the World Wide Web at www.pmigroup.com or a copy can be
obtained by dialing (800) 758-5804, entering The PMI Group, Inc. company code
no. 706963 when prompted, and following the automated prompts.
The statements in this press release relating to 1998 or 1999 (or
assumptions underlying such matters) that are not historical facts, and that
relate to future plans, events or performance, or are preceded by, followed by
or that include the words "believes," "expects," "anticipates," "estimates", or
similar expressions, including, without limitation (i) statements relating to
low interest rates and the quality of 1998 business and how such business is
expected to generate solid earnings for the next several years; (ii) statements
<PAGE>
relating to market share performance for the remainder of 1998 and 1999, (iii)
statements relating to growth in insurance in force for the remainder of 1998
and 1999; (iv) statements relating to levels of persistency and new insurance
written for the remainder of 1998 and 1999, and (v) statements relating to
levels of insurance in force and risk in force for the remainder of 1998 and
1999 are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve a number
of risks or uncertainties including, but not limited to, the factors listed
below that could cause the Company's actual results to differ materially from
those expressed. A number of factors affecting PMI and the mortgage industry in
general could cause claims on policies issued by PMI to increase and this could
materially adversely affect The PMI Group's financial condition and results of
operations. The management of The PMI Group believes that the loss experience of
PMI could be materially and adversely affected by economic recessions, declining
housing values, higher unemployment rates, deteriorating borrower credit, rising
interest rates, legislation impacting borrower's rights or a combination of such
factors, which might have nationwide impact or a disproportionate impact on
regional economic conditions and demand for housing generally. In addition,
contract underwriting is now the principal means by which the Company sells
mortgage insurance and is subject to numerous risks and uncertainties, including
availability of qualified personnel, price competition, and timely development
of computer systems needed to process the increased volume of contract
underwriting activity. The inability of the Company to remain competitive in
providing contract underwriting may materially and adversely impact the
Company's results of operations and financial condition. A decrease in
persistency, resulting from policy cancellations of older books of business
affected by refinancings (which are affected, among other things by decreases in
interest rates), may materially and adversely impact the level or rate of growth
of insurance in force or risk in force and consequently have similar impacts on
the Company's results of operations and financial condition. Changes in
legislation which affects the ability of the Federal National Mortgage
Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation
("Freddie Mac") to offer a substitute for mortgage insurance, including self-
insurance and alternative forms of credit support, or for the Federal Housing
Administration ("FHA") or the
<PAGE>
Veterans Administration ("VA") to increase statutory lending limits or other
expansion eligibility for the FHA and VA would likely have an adverse effect on
the competitive position of PMI and consequently could materially and adversely
affect the Company's financial condition and results of operations. Finally,
other factors that may materially and adversely impact the Company's results of
operations and financial condition include the size of the mortgage origination
market, mortgage insurance industry volumes of new business, greater than
anticipated policy cancellations or lower than projected persistency resulting
in declines in insurance in force, the failure of mortgage insurance commitments
to convert into new insurance written, the impact of competitive underwriting
criteria and products including pool insurance and risk sharing structured
transactions, regulatory responses to the Company's product offerings, changes
in the performance of financial markets, the demand for and the acceptance of
the Company's products, decreased profit margin on the Company's products, the
impact of expanded financial remedies provided to contract underwriting
customers, changes in government regulations or interpretations regarding the
Real Estate Settlement Procedures Act, changes in statutory charters,
regulations and coverage requirements of the government sponsored enterprises,
banks and savings institutions, customer consolidation and other risk factors
listed from time to time in the Company's Securities and Exchange Commission
filings.
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1998 1997 1998 1997
--------- --------- ---------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net premiums written ..................... $129,300 $115,337 $352,076 $316,817
======== ======== ======== ========
REVENUES
Premiums earned ....................... $127,300 $117,544 $362,473 $335,541
Investment income, net ................ 20,736 21,434 63,452 62,181
Realized gains, net ................... 14,243 292 24,434 19,106
Other income .......................... 5,130 1,934 15,153 4,831
-------- -------- -------- --------
TOTAL REVENUES ............. 167,409 141,204 465,512 421,659
-------- -------- -------- --------
LOSSES AND EXPENSES
Losses and loss adjustment expenses ... 34,329 39,512 103,004 113,262
Policy acquisition costs .............. 15,564 11,303 40,582 29,683
Other operating expenses .............. 37,446 30,216 104,924 82,210
Interest expense ...................... 1,756 1,693 5,259 5,068
Distributions on capital securities (1) 2,077 2,078 6,234 5,542
-------- -------- -------- --------
TOTAL LOSSES AND EXPENSES .. 91,172 84,802 260,003 235,765
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES ............... 76,237 56,402 205,509 185,894
INCOME TAX EXPENSE ....................... 22,509 14,489 59,226 52,530
-------- -------- -------- --------
NET INCOME ............................... $ 53,728 $ 41,913 $146,283 $133,364
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ........................... 31,034 33,299 31,910 33,783
======== ======== ======== ========
NET INCOME PER SHARE (2) ................. $ 1.73 $ 1.26 $ 4.58 $ 3.95
======== ======== ======== ========
</TABLE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS ................................................. (In thousands, except per share data)
Investments (at market) ................................ $1,479,066 $1,490,601 $1,454,573
Cash ................................................... 8,651 11,101 7,737
Reinsurance recoverable and prepaid premiums ........... 36,803 31,676 28,306
Deferred policy acquisition costs ...................... 53,509 37,864 35,794
Other assets ........................................... 131,088 115,361 122,431
---------- ---------- ----------
TOTAL ASSETS ............................. $1,709,117 $1,686,603 $1,648,841
========== ========== ==========
LIABILITIES
Reserve for losses and loss adjustment expenses ........ $ 208,663 $ 202,387 $ 199,798
Unearned premiums ...................................... 82,899 94,150 97,594
Long-term debt ......................................... 101,312 99,409 99,547
Other liabilities ...................................... 162,327 130,471 124,475
---------- ---------- ----------
TOTAL LIABILITIES ........................ 555,201 526,417 521,414
REDEEMABLE PREFERRED CAPITAL SECURITIES (1) ............. 99,032 99,006 99,022
SHAREHOLDERS' EQUITY ................................... 1,054,884 1,061,180 1,028,405
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,709,117 $1,686,603 $1,648,841
========== ========== ==========
BOOK VALUE PER SHARE ................................... $ 34.77 $ 32.69 $ 31.38
========== ========== ==========
</TABLE>
7
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
MORTGAGE INSURANCE RESULTS OF OPERATIONS (3)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Net premiums written .................. $107,096 $ 98,510 $295,522 $274,023
======== ======== ======== ========
REVENUES
Premiums earned .................... $105,706 $100,717 $306,529 $292,747
Investment income, net ............. 18,463 17,957 55,693 53,481
Realized gains, net ................ 13,398 287 23,488 19,993
Other income ....................... 85 45 140 121
-------- -------- -------- --------
TOTAL REVENUES .......... 137,652 119,006 385,850 366,342
-------- -------- -------- --------
LOSSES AND EXPENSES
Losses and loss adjustment expenses 34,221 39,093 102,724 112,196
Policy acquisition costs ........... 15,564 11,303 40,582 29,683
Other operating expenses ........... 11,020 10,899 36,224 33,226
-------- -------- -------- --------
TOTAL LOSSES AND EXPENSES 60,805 61,295 179,530 175,105
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES ............ 76,847 57,711 206,320 191,237
INCOME TAX EXPENSE .................... 22,577 15,405 59,651 54,417
-------- -------- -------- --------
NET INCOME ............................ $ 54,270 $ 42,306 $146,669 $136,820
======== ======== ======== ========
EXPENSE RATIO ......................... 24.8% 22.5% 26.0% 23.0%
LOSS RATIO ............................ 32.4% 38.8% 33.5% 38.3%
-------- -------- -------- --------
COMBINED RATIO ........................ 57.2% 61.3% 59.5% 61.3%
======== ======== ======== ========
TITLE INSURANCE RESULTS OF OPERATIONS
Net premiums written .................. $ 21,587 $ 16,827 $ 55,937 $ 42,794
======== ======== ======== ========
REVENUES
Premiums earned .................... $ 21,587 $ 16,827 $ 55,937 $ 42,794
Investment income, net ............. 391 308 1,041 885
Other income ....................... 7 6 23 17
-------- -------- -------- --------
TOTAL REVENUES .......... 21,985 17,141 57,001 43,696
-------- -------- -------- --------
LOSSES AND EXPENSES
Losses and loss adjustment expenses 108 419 280 1,066
Underwriting and other expenses .... 18,667 14,610 49,168 38,117
-------- -------- -------- --------
TOTAL LOSSES AND EXPENSES 18,775 15,029 49,448 39,183
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES ............ 3,210 2,112 7,553 4,513
INCOME TAX EXPENSE .................... 1,194 756 2,774 1,577
-------- -------- -------- --------
NET INCOME ............................ $ 2,016 $ 1,356 $ 4,779 $ 2,936
======== ======== ======== ========
EXPENSE RATIO ......................... 86.5% 86.8% 87.9% 89.1%
LOSS RATIO ............................ 0.5% 2.5% 0.5% 2.5%
-------- -------- -------- --------
COMBINED RATIO ........................ 87.0% 89.3% 88.4% 91.6%
======== ======== ======== ========
</TABLE>
8
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
MORTGAGE INSURANCE OPERATIONS (3)
OTHER STATISTICAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
New primary insurance
written ("NIW") (in millions) ......... $ 7,716 $ 4,450 $ 19,454 $ 11,134
========= ========= ========= =========
New primary risk written (in millions)...... $ 1,960 $ 1,170 $ 4,882 $ 2,921
========= ========= ========= =========
New pool risk written (in millions) ........ $ 201 $ -- $ 369 $ --
========= ========= ========= =========
Product mix as a % of NIW:
95% LTV's ............................... 39% 46% 37% 45%
95% LTV's/30% coverage .................. 38% 43% 36% 43%
90% LTV's/25% coverage .................. 40% 40% 41% 40%
ARMs .................................... 3% 12% 4% 13%
Monthlies ............................... 97% 98% 98% 97%
Refinances .............................. 24% 11% 29% 12%
========= ========= ========= =========
Net premiums written (in thousands):
Monthlies ............................... $ 77,143 $ 60,729 $ 217,054 $ 171,995
Annuals and singles ..................... 38,273 41,557 102,843 116,623
Refunds and ceded premiums .............. (8,320) (3,776) (24,375) (14,595)
--------- --------- --------- ---------
Net premiums written ................. $ 107,096 $ 98,510 $ 295,522 $ 274,023
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
------------- ------------ -------------
<S> <C> <C> <C>
Direct primary insurance in force (in millions) ......... $ 78,887 $ 77,787 $ 77,826
Direct primary risk in force (in millions) .............. $ 18,806 $ 18,092 $ 17,972
Direct pool risk in force (in millions) ................. $ 369 $ -- $ --
Risk-to-capital ratio ................................... 15.2 to 1 14.6 to 1 15.1 to 1
Insured primary loans ................................... 701,982 698,831 699,347
Persistency ............................................. 71.0% 80.8% 82.5%
Loans in default ........................................ 15,455 16,638 16,029
Default rate ............................................ 2.20% 2.38% 2.29%
Direct primary claims paid (year-to-date in millions).... $ 93.8 $ 147.1 $ 110.9
Direct primary claims paid number (year-to-date) ........ 3,942 5,574 4,182
Average Claim Size ...................................... $ 23,795 $ 26,390 $ 26,518
</TABLE>
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
MORTGAGE INSURANCE OPERATIONS(3)
OTHER STATISTICAL INFORMATION
(Dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997 SEPTEMBER 30, 1997
--------------------------- --------------------------- ---------------------------
LOANS IN RESERVE FOR LOANS IN RESERVE FOR LOANS IN RESERVE FOR
DEFAULT LOSSES DEFAULT LOSSES DEFAULT LOSSES
------------- ------------ ------------- ------------ ------------- ------------
Primary insurance:
<S> <C> <C> <C> <C> <C> <C>
New book (4) .......... 14,608 $193,171 15,554 $185,335 14,823 $182,573
Old book (5) .......... 847 5,227 1,084 6,876 1,206 7,806
------------- ------------ ------------- ------------ ------------- ------------
Total primary ..... 15,455 198,398 16,638 192,211 16,029 190,379
Pool insurance ............ 177 $ 1,000 -- -- -- --
------------- ------------ ------------- ------------ ------------- ------------
Total ............. 15,632 $199,398 16,638 $192,211 16,029 $190,379
============= ============ ============= ============ ============= ============
Primary insurance:
California ............ 3,110 $ 72,621 3,987 $ 90,156 4,075 $ 94,675
Other states .......... 12,345 125,777 12,651 102,055 11,954 95,704
------------- ------------ ------------- ------------ ------------- ------------
Total ............. 15,455 $198,398 16,638 $192,211 16,029 $190,379
============= ============ ============= ============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
RESERVE FOR LOSSES AND LOSS 1998 1997 1997
ADJUSTMENT EXPENSES: --------------- ----------------- ----------------
<S> <C> <C> <C>
Mortgage insurance operations ........... $198,398 $192,211 $190,379
Title insurance ......................... 9,265 10,176 9,419
--------------- ----------------- ----------------
Total reserve for losses .......... $207,663 $202,387 $199,798
=============== ================= ================
CALIFORNIA PORTFOLIO:
Direct claims paid (year-to-date in millions) $ 46.9 $ 94.8 $ 73.2
Direct claims paid as a percent of total .... 49.8% 64.4% 66.0%
Direct claims paid number (year-to-date) .... 1,721 3,131 2,404
Average claim size .......................... 27,228 30,283 30,437
Loans in default ............................ 3,110 3,987 4,075
Loans in default as a percent of total ...... 20.1% 24.0% 25.4%
Default rate ................................ 3.15% 3.73% 3.74%
</TABLE>
(1) Company obligated mandatorily redeemable preferred capital securities of
subsidiary trust holding solely junior subordinated deferrable interest
debentures of the Company.
(2) Diluted earnings per share per Statement of Financial Accounting Standard
No. 128, Earnings per Share.
(3) The Mortgage Insurance operations include the operating results of PMI
Mortgage Insurance Co. ("PMI"), Residential Guaranty Co., PMI Mortgage
Guaranty Co., and contract underwriting costs incurred by PMI Mortgage
Services Co. ("MSC") in connection with mortgage insurance written for
PMI. MSC provides contract underwriting services to lenders who are
mortgage insurance customers of PMI.
(4) The new book consists of insurance written in the mortgage insurance
operations since January 1, 1985.
(5) The old book consists of insurance written in the mortgage insurance
operations prior to January 1, 1985.
(6) New pool risk as of September 30, 1998 includes $115 million of pool risk
relating to the first and second quarters that was not previously reported
in the second quarter figures.
Certain prior year amounts have been reclassified to conform to current year
presentation.
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES ("TPG") AND
CMG MORTGAGE INSURANCE COMPANY ("CMG")
SUPPLEMENTAL COMBINED OPERATING RESULTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------ --------------
TPG AND CMG TPG AND CMG
INSURANCE CMG COMBINED COMBINED
OPERATIONS OPERATIONS (a) OPERATIONS (b) OPERATIONS
-------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Net premiums written ................. $ 107,096 $ 4,612 $ 111,708 $ 101,191
============== ============== ============== ==============
REVENUES
Net premiums earned ............... $ 105,706 $ 4,308 $ 110,014 $ 103,190
Investment income ................. 18,463 725 19,188 18,461
Realized gains .................... 13,398 39 13,437 1,619
Other revenue ..................... 85 1 86 45
-------------- -------------- -------------- --------------
TOTAL REVENUES .......... 137,652 5,073 142,725 123,315
-------------- -------------- -------------- --------------
LOSSES AND EXPENSES
Losses and loss adjustment expenses 34,221 396 34,617 37,841
Underwriting and other expenses ... 26,584 2,262 28,846 23,925
-------------- -------------- -------------- --------------
TOTAL LOSSES AND EXPENSES 60,805 2,658 63,463 61,766
-------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES ........... 76,847 2,415 79,262 61,549
INCOME TAX EXPENSE ................... 22,577 774 23,093 15,823
-------------- -------------- -------------- --------------
NET INCOME ........................... $ 54,270 1,641 $ 56,169 $ 45,726
============== ============== ==============
NON-TPG SHARE OF CMG NET INCOME (c) .. (903)
--------------
TPG SHARE OF CMG NET INCOME (c) ...... $ 738
==============
EXPENSE RATIO ........................ 24.8% 49.0% 25.8% 23.6%
LOSS RATIO ........................... 32.4% 9.2% 31.5% 36.7%
-------------- -------------- -------------- --------------
COMBINED RATIO ....................... 57.2% 58.2% 57.3% 60.3%
============== ============== ============== ==============
</TABLE>
TPG AND CMG COMBINED STATISTICAL INFORMATION (a)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Direct primary NIW (year-to-date in millions) ....... $ 21,226 $ 16,681 $ 12,057
Direct primary insurance in force (in millions) ..... $ 82,657 $ 80,164 $ 79,801
Direct primary risk in force (in millions) .......... $ 19,743 $ 18,697 $ 18,474
Risk-to-capital ratio ............................... 15.2 to 1 14.7 to 1 15.1 to 1
Insured primary loans ............................... 736,514 720,906 717,815
Persistency ......................................... 71.2% 80.9% 82.7%
Loans in default .................................... 16,029 16,662 16,042
Default rate ........................................ 2.11% 2.31% 2.23%
Direct primary claims paid (year-to-date in millions) $ 94.1 $ 147.3 $ 111.1
Direct primary claims paid number (year-to-date) .... 3,954 $ 5,581 4,187
Average Claims size ................................. $ 23,791 $ 26,399 $ 26,526
</TABLE>
(a) CMG amounts are included at 100%.
(b) Includes adjustments to eliminate income taxes related to CMG equity
earnings. Accordingly, the TPG and CMG income tax expense and net
income column amounts do not add together to total the combined column
amounts.
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
MORTGAGE INSURANCE OPERATIONS
SUPPLEMENTAL FINANCIAL INFORMATION
ANALYSIS OF DEFERRED ACQUISITION COST ("DAC")
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------------
1998 1997 1998 1997
------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Beginning DAC balance $ 47,966 $ 33,789 $ 37,864 $ 31,633
Less amortized to date (15,564) (11,303) (40,582) (29,683)
Plus additional deferral $ 21,107 $ 13,308 $ 56,227 $ 33,844
------------------- -------------------- -------------------- --------------------
Ending DAC balance $ 53,509 $ 35,794 $ 53,509 $ 35,794
=================== ==================== ==================== ====================
$ -
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
New Insurance written (NIW) 7,716,658 4,450,336 19,453,516 11,133,625
</TABLE>
EXPLANATION OF DEFERRED ACQUISITION COSTS
- -----------------------------------------
The PMI Group, Inc. (PMI) defers certain costs related to the acquisition of
primary mortgage insurance and amortizes these costs against related premium
revenue, in order to match costs and revenues in accordance with Generally
Accepted Accounting Principles (GAAP). These acquisition costs "vary with and
are primarily related" to the acquisition of new business. Specific costs PMI
defers include field underwriting, field sales, and national accounts. To the
extent PMI's wholly owned subsidiary, PMI Mortgage Services Co. (MSC) is
compensated by customers for contract underwriting, those underwriting costs are
not deferred.
PMI's DAC methodology was consistently applied for almost 20 years, until the
introduction of a monthly Premium Payment Policy ("monthlies"). This methodology
would not give a result consistent with GAAP for monthlies, so a monthly
methodology was developed. Under the monthly methodology, DAC is amortized by
PMI on an accelerated basis over 24 months rather than the 6-8 year average
policy life. PMI believes this amortization method is appropriately
conservative, and was selected so that deferred costs will have been fully
amortized prior to the peak claims paying period.
The DAC asset is affected by: (a) acquisition costs deferred in a period and (b)
amortization of previously deferred costs in such period. In periods where there
is growth in premiums (and therefore acquisition costs), the DAC asset will
increase because the amount of acquisition costs being deferred exceeds the
amount being amortized to expense.
Acquisition costs deferred by PMI over recent quarters have increased due to a
combination of the increase in NIW plus the increased cost of acquiring business
(i.e., contract underwriting).
<PAGE>
<TABLE>
<CAPTION>
Year to Date Year-to-Date Year-to-Date
September 30, June 30, March 31,
---------------------- --------------------- -----------------------
1998 1997 1998 1997 1998 1997
---------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Net premiums written $ 352,076 $ 316,817 $222,776 $201,480 $105,761 $ 95,844
========== ========== ========= ========= ========= =========
REVENUES
Net premiums earned $ 362,473 $ 335,541 $235,173 $217,997 $116,846 $108,091
Investment income 63,452 62,181 42,716 40,671 21,577 19,995
Realized gains 24,434 19,106 10,191 18,814 7,965 18,268
Other revenue 15,831 4,831 10,023 2,897 4,246 1,192
---------- ---------- --------- --------- --------- ---------
Total revenues 466,190 421,659 298,103 280,379 150,634 147,546
---------- ---------- --------- --------- --------- ---------
LOSSES AND EXPENSES
Losses and loss adjustment expenses 103,004 113,262 68,675 73,750 38,087 39,515
Underwriting and other expenses 146,184 111,893 92,496 70,298 44,177 34,415
Interest expense 5,259 5,068 3,503 3,375 1,706 1,688
Minority interest (1) 6,234 5,542 4,157 3,464 2,079 1,385
---------- ---------- --------- --------- --------- ---------
Total losses and expenses 260,681 235,765 168,831 150,887 86,049 77,003
---------- ---------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 205,509 185,894 129,272 129,492 64,585 70,543
INCOME TAX EXPENSE 59,226 52,530 36,717 38,041 18,817 21,371
---------- ---------- --------- --------- --------- ---------
NET INCOME $ 146,283 $ 133,364 $ 92,555 $ 91,451 $ 45,768 $ 49,172
========== ========== ========= ========= ========= =========
31,910 33,783
========== ==========
EXPENSE RATIO 1.9% 1.7% 2.0% 1.4%
$ 4.58 $ 3.95
========== ==========
LOSS RATIO 29.2% 33.8% 32.6% 36.6%
COMBINED RATIO 31.1% 35.6% 34.6% 38.0% 27.6% 33.1%
========== ========== ========= ========= ========= =========
<CAPTION>
Three Months Ended Three Months Ended
June 30, September 30,
---------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Net premiums written $ 117,015 $ 105,636 $ 129,300 $ 115,337
========== ========== ========== ==========
REVENUES
Net premiums earned $ 118,327 $ 109,906 $ 127,300 $ 117,544
Investment income 21,139 20,676 20,736 21,510
Realized gains 2,226 546 14,243 292
Other revenue 5,777 1,705 5,808 1,934
---------- ---------- ---------- ----------
Total revenues 147,469 132,833 168,087 141,280
---------- ---------- ---------- ----------
LOSSES AND EXPENSES
Losses and loss adjustment expenses 30,588 34,235 34,329 39,512
Underwriting and other expenses 48,319 35,883 53,688 41,595
Interest expense 1,797 1,687 1,756 1,693
Minority interest (1) 2,078 2,079 2,077 2,078
---------- ---------- ---------- ----------
Total losses and expenses 82,782 73,884 91,850 84,878
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 64,687 58,949 76,237 56,402
INCOME TAX EXPENSE 17,900 16,670 22,509 14,489
---------- ---------- ---------- ----------
NET INCOME $ 46,787 $ 42,279 $ 53,728 $ 41,913
========== ========== ========== ==========
EXPENSE RATIO 1.8% 2.0% 1.6% 1.8%
LOSS RATIO 25.9% 31.1% 27.0% 33.6%
COMBINED RATIO
</TABLE>
<PAGE>
Refinance Activity and PMI Persistency
1992-1998E
[Combined Bar chart/line chart apprears here]
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997 1998 E
<S> <C> <C> <C> <C> <C> <C> <C>
Total Originations $ 893,700 $1,019,900 $ 768,700 $ 638,400 $ 785,300 $ 857,000 $1,440,000E
(in millions)
% Refinance 48% 55% 32% 25% 29% 31% 50%
% Purchase 52% 45% 68% 75% 71% 69% 50%
PMI Persistency 74.6% 70.0% 83.6% 86.4% 83.3% 80.8% 71.0%
Average Mortgage Rate 8.40% 7.33% 8.36% 7.96% 7.81% 7.60% 6.90%
1992 1993 1994 1995 1996 1997 1998 E
$ Refinance $ 428,976 $ 560,945 $ 245,984 $ 159,600 $ 227,737 $ 265,670 $ 540,000
$ Purchase $ 464,724 $ 458,955 $ 522,716 $ 478,800 $ 557,563 $ 591,330 $ 660,000
</TABLE>
Notes: Average mortgage rates based on 30 year fixed rate mortgages. PMI
persistency as of September 30, 1998.
Source: Average mortgage rates, total originations and refinance share,
Mortgage Bankers Association.
