<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 June 30, 1999
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 06/30/99 29,837,640
<PAGE>
THE PMI GROUP, INC.
Index to Quarterly Report on Form 10-Q
June 30, 1999
<TABLE>
<CAPTION>
Part I - Financial Information Page
----
<S> <C>
Item 1. Interim Consolidated Financial Statements and Notes
Consolidated Statements of Operations for the Three Months and Six
Months Ended June 30, 1999 and 1998 3
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1999 and 1998 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12-28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Part II - Other Information
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
Index to Exhibits 32
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMAITON
ITEM 1. INTERIM FINANCIAL STATEMENTS
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
(In thousands except for per share amounts) 1999 1998 1999 1998
--------- --------- --------- ---------
Revenues
<S> <C> <C> <C> <C>
Premiums earned $ 131,330 $ 118,327 $ 260,099 $ 235,173
Investment income, less investment expense 21,827 21,139 43,528 42,716
Realized capital gains 327 2,226 344 10,191
Other income 2,689 5,777 7,453 10,023
--------- --------- --------- ---------
Total revenues 156,173 147,469 311,424 298,103
--------- --------- --------- ---------
Losses and expenses
Losses and loss adjustment expenses 22,847 30,588 52,717 68,675
Policy acquisition costs 21,144 12,790 41,967 25,018
Underwriting and other operating expenses 38,902 35,529 77,805 67,478
Interest expense 1,804 1,797 3,593 3,503
Distributions on preferred capital securities 2,077 2,078 4,155 4,157
--------- --------- --------- ---------
Total losses and expenses 86,774 82,782 180,237 168,831
--------- --------- --------- ---------
Income before income taxes 69,399 64,687 131,187 129,272
Income tax expense 19,940 17,900 38,076 36,717
--------- --------- --------- ---------
Net income $ 49,459 $ 46,787 $ 93,111 $ 92,555
========= ========= ========= =========
Basic net income per common share $ 1.65 $ 1.47 $ 3.10 $ 2.88
========= ========= ========= =========
Diluted net income per common share $ 1.64 $ 1.46 $ 3.09 $ 2.86
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in thousands) 1999 1998
-------------- -------------
<S> <C> <C> <C> <C>
Assets
Investments
Available for sale, at market
Fixed income securities
(amortized cost $1,277,592 and $1,268,625) $ 1,320,173 $ 1,356,869
Equity securities
Common stock (cost $34,702 and $34,129) 63,579 58,785
Preferred stock (cost $17,203 and $17,240) 17,285 17,706
Common stock of affiliates, at underlying book value 63,426 60,450
Short-term investments (at cost, which approximates market) 56,462 38,414
-------------- -------------
Total investments 1,520,925 1,532,224
Cash 10,412 9,757
Accrued investment income 19,609 20,150
Reinsurance recoverable and prepaid premiums 45,657 42,102
Premiums receivable 29,936 24,367
Receivable from affiliates 946 2,229
Receivable from Allstate 25,713 23,657
Deferred policy acquisition costs 69,230 61,605
Property and equipment, net 39,292 37,630
Other assets 51,518 24,149
-------------- -------------
Total assets $ 1,813,238 $ 1,777,870
============== =============
Liabilities
Reserve for losses and loss adjustment expenses $ 224,082 $ 215,259
Unearned premiums 94,496 94,886
Long-term debt 99,508 99,476
Reinsurance balances payable 18,916 14,764
Deferred income taxes 85,388 96,730
Other liabilities and accrued expenses 53,009 60,200
-------------- -------------
Total liabilities 575,399 581,315
-------------- -------------
Company-obligated mandatorily redeemable preferred capital
securities of subsidiary trust holding solely junior subordinated
deferrable interest debenture of the Company 99,058 99,040
Shareholders' equity
Preferred stock -- $.01 par value; 5,000,000 shares authorized - -
Common stock -- $.01 par value; 125,000,000 shares
authorized; and 35,196,002 and 35,196,002 issued 352 352
Additional paid-in capital 265,366 265,040
Accumulated other comprehensive income 46,084 74,462
Retained earnings 1,150,839 1,060,724
Treasury stock (5,358,362 and 4,917,401 shares at cost) (323,860) (303,063)
-------------- -------------
Total shareholders' equity 1,138,781 1,097,515
-------------- -------------
Total liabilities and shareholders' equity $ 1,813,238 $ 1,777,870
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------------
(In thousands) 1999 1998
------------ ----------
Cash flows from operating activities
<S> <C> <C>
Net income $ 93,111 $ 92,555
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized capital gains, net (344) (10,191)
Equity in earnings of affiliates (3,127) (1,119)
Depreciation and amortization 3,325 3,093
Changes in:
Reserve for losses and loss adjustment expenses 8,823 (661)
Unearned premiums (390) (13,079)
Deferred policy acquisition costs (7,625) (10,102)
Accrued investment income 541 894
Reinsurance balances payable 4,152 1,604
Reinsurance recoverable and prepaid premiums (3,555) (3,345)
Premiums receivable (5,569) (1,349)
Income taxes 2,999 2,879
Receivable from affiliates 1,283 2,639
Receivable from Allstate (2,056) (4,778)
Other (26,742) 19,803
------------ ----------
Net cash provided by operating activities 64,826 78,843
------------ ----------
Cash flows from investing activities
Proceeds from sales of equity securities 16,085 25,688
Investment collections of fixed income securities - 17,672
Proceeds from sales of fixed income securities 132,888 58,538
Investment purchases
Fixed income securities (141,700) (81,096)
Equity securities (16,239) (37,333)
Net (increase) decrease in short-term investments (18,049) 49,834
Investment in affiliates (740) (24,953)
Purchase of MGICA, Ltd. (7,799) -
Purchase of property and equipment (5,129) (5,736)
------------ ----------
Net cash provided by (used in) investing activities (40,683) 2,614
------------ ----------
Cash flows from financing activities
Proceeds from exercise of stock grants and options 327 1,875
Dividends paid to shareholders (3,018) (3,244)
Purchase of The PMI Group, Inc. common stock (20,797) (82,327)
------------ ----------
Net cash used in financing activities (23,488) (83,696)
------------ ----------
Net increase (decrease) in cash 655 (2,239)
Cash at beginning of period 9,757 11,101
------------ ----------
Cash at end of period $ 10,412 $ 8,862
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
Note 1 - Basis of presentation
The accompanying unaudited consolidated financial statements include the
accounts of The PMI Group, Inc. ("TPG"), a Delaware corporation; its wholly-
owned subsidiaries, PMI Mortgage Insurance Co. ("PMI"), an Arizona corporation;
Residential Guaranty Co. ("RGC"), an Arizona Corporation; American Pioneer Title
Insurance Company ("APTIC"), a Florida corporation; PMI Mortgage Guaranty Co.
("PMG"), an Arizona corporation; Residential Insurance Co. ("RIC"), an Arizona
corporation; PMI Capital I ("PCI"), a Delaware trust; TPG Insurance Co. ("TIC"),
a Vermont corporation; TPG Segregated Portfolio Co. (Cayman) ("TSPC"), a Cayman
Islands corporation; and PMI's wholly-owned subsidiaries, PMI Mortgage Services
Co. ("MSC"), a California corporation which is engaged in the business of
contract underwriting, and PMI Securities Co. ("SEC"), a Delaware corporation,
which is an inactive broker-dealer. PMI is licensed in all 50 states of the
United States and the District of Columbia. TPG and its subsidiaries are
collectively referred to as the "Company". All material intercompany
transactions and balances have been eliminated in consolidation. In addition,
PMI owns 50% (45% at June 30, 1998) of CMG Mortgage Insurance Company ("CMG"), a
Wisconsin corporation, which also conducts a residential mortgage insurance
business and TPG owns 22.3% of RAM Holdings Ltd. and RAM Holdings II Ltd.
(collectively referred to as "RAM Re"), a financial guaranty reinsurance company
based in Bermuda. CMG and Ram Re are accounted for on the equity method in the
Company's consolidated financial statements.
The Company's unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) 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 June 30, 1999, and its consolidated statements of
operations and cash flows for the periods ended June 30, 1999 and 1998, have
been included. Interim results for the periods ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. The financial statements should be read in conjunction with
the audited consolidated financial statements and footnotes included in The PMI
Group, Inc. 1998 Annual Report to Shareholders.
Note 2 - Earnings per Share
The weighted average common shares outstanding for computing basic earnings per
share ("EPS") were 29,924,828 and 31,918,220 for the three months ended June 30,
1999 and 1998, respectively and 30,038,999 and 32,173,226 for the six months
ended June 30, 1999 and 1998, respectively. 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 30,113,398 and 32,119,224
for the three months ended June 30, 1999 and 1998, respectively and 30,164,738
and 32,361,101 for the six months ended June 30, 1999 and 1998, respectively.
Net income available to common shareholders does not change for computing
diluted EPS.
6
<PAGE>
Note 3 -- Comprehensive Income
The reconciliation of net income to comprehensive income for the three months
and six months ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- -----------------------------
(In thousands) 1999 1998 1999 1998
------------ --------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 49,459 $ 46,787 $ 93,111 $ 92,555
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period (22,844) 3,213 (28,153) 8,766
Less: reclassification adjustment for gains
included in net income (213) (1,447) (224) (6,624)
------------ --------- ------------- -------------
Other comprehensive income (loss), net of tax (23,057) 1,766 (28,377) 2,142
------------ --------- ------------- -------------
Comprehensive income $ 26,402 $ 48,553 $ 64,734 $ 94,697
============ ========= ============= =============
</TABLE>
Note 4 -- New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
established accounting and reporting standards for derivative instruments. The
statement, which is effective for fiscal quarters beginning after June 15, 2000,
is not expected to have a significant effect on PMI's financial position or
results of operations based on current operating activities.
7
<PAGE>
Note 5 -- Deferred Acquisition Costs ("DAC")
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 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 or any of its subsidiaries are compensated by customers for
contract underwriting, those underwriting costs are not deferred.
DAC is amortized on an accelerated basis over 24 months rather than the 5-7 year
average policy life. This method is used 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. The following table reconciles beginning and
ending DAC for the periods indicated.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- ----------------------------
(In thousands) 1999 1998 1999 1998
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Beginning DAC balance $ 65,682 $ 40,690 $ 61,605 $ 37,864
Acquisition costs incurred and deferred 24,692 20,066 49,592 35,120
Amortization of deferred costs (21,144) (12,790) (41,967) (25,018)
-------------- ------------- ------------ -------------
Ending DAC balance $ 69,230 $ 47,966 $ 69,230 $ 47,966
============== ============= ============ =============
</TABLE>
8
<PAGE>
Note 6 -- Business Segments
The Company's reportable operating segments include Mortgage Guaranty Insurance
and Title Insurance. The Mortgage Guaranty Insurance segment includes PMI, PMG,
RGC, RIC, TIC and TSPC. The Title Insurance segment consists of the results for
APTIC. The Other segment includes TPG, MSC, PCI, and SEC. The Other segment
includes the income and expenses of the holding company, the results from the
business of contract underwriting and software licensing, and the activity of an
inactive broker-dealer. Intersegment transactions are not significant. The
Company evaluates performance primarily based on segment net income.
The following tables present information about reported segment income (loss)
and segment assets for the periods indicated:
<TABLE>
<CAPTION>
Mortgage
Quarter Ended June 30, 1999 Guaranty Title Intersegment Consolidated
(In thousands) Insurance Insurance Other Adjustments Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums earned $ 107,339 $ 23,991 $ - $ - $ 131,330
============== ============ ============= ================ =================
Net underwriting income (expenses)
before tax-external customers $ 49,956 $ 2,715 $ (1,545) $ - $ 51,126
Investment and other income 19,390 380 790 20,560
Equity in earnings of affiliates - - 289 1,305 1,594
Interest expense - - (1,804) (1,804)
Distributions on preferred capital securities - - (2,077) (2,077)
-------------- ------------ ------------- ---------------- -----------------
Income (loss) before income tax expense 69,346 3,095 (4,347) 1,305 69,399
Income tax expense (benefit) 20,272 1,134 (1,466) - 19,940
-------------- ------------ ------------- ---------------- -----------------
Net income (loss) $ 49,074 $ 1,961 $ (2,881) $ 1,305 $ 49,459
============== ============ ============= ================ =================
Total assets $1,680,790 $ 41,776 $ 90,672 $ - $ 1,813,238
============== ============ ============= ================ =================
Mortgage
Quarter Ended June 30, 1998 Guaranty Title Intersegment Consolidated
(In thousands) Insurance Insurance Other Adjustments Total
- -------------------------------------------------------------------------------------------------------------------------------
Premiums earned $ 100,679 $ 17,648 $ - $ - $ 118,327
============== ============ ============= ================ =================
Net underwriting income (expenses)
before tax-external customers $ 43,778 $ 2,077 $ (658) $ - $ 45,197
Investment and other income 20,625 328 1,804 - 22,757
Equity in earnings of affiliates - - - 608 608
Interest expense - - (1,797) - (1,797)
Distributions on preferred capital securities - - (2,078) - (2,078)
-------------- ------------ ------------- ---------------- -----------------
Income (loss) before income tax expense 64,403 2,405 (2,729) 608 64,687
Income tax expense (benefit) 18,052 881 (1,033) - 17,900
-------------- ------------ ------------- ---------------- -----------------
Net income (loss) $ 46,351 $ 1,524 $ (1,696) $ 608 $ 46,787
============== ============ ============= ================ =================
Total assets $1,555,576 $ 35,587 $ 114,668 $ - $ 1,705,831
============== ============ ============= ================ =================
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Mortgage
Six Months Ended June 30, 1999 Guaranty Title Intersegment Consolidated
(In thousands) Insurance Insurance Other Adjustments Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums earned $ 212,577 $ 47,522 $ - $ - $ 260,099
============== ============ ============= ================ =================
Net underwriting income (expenses)
before tax-external customers $ 93,296 $ 4,940 $ (3,173) $ - $ 95,063
Investment and other income 38,541 748 1,457 - 40,746
Equity in earnings of affiliates - - 578 2,548 3,126
Interest expense - - (3,593) - (3,593)
Distributions on preferred capital securities - - (4,155) - (4,155)
-------------- ------------ ------------- ---------------- -----------------
Income (loss) before income tax expense 131,837 5,688 (8,886) 2,548 131,187
Income tax expense (benefit) 38,919 2,071 (2,914) - 38,076
-------------- ------------ ------------- ---------------- -----------------
Net income (loss) $ 92,918 $ 3,617 $ (5,972) $ 2,548 $ 93,111
============== ============ ============= ================ =================
Total assets $1,680,790 $ 41,776 $ 90,672 $ - $ 1,813,238
============== ============ ============= ================ =================
Mortgage
Six Months Ended June 30, 1998 Guaranty Title Intersegment Consolidated
(In thousands) Insurance Insurance Other Adjustments Total
- -------------------------------------------------------------------------------------------------------------------------------
Premiums earned $ 200,823 $ 34,350 $ - $ - $ 235,173
============== ============ ============= ================ =================
Net underwriting income (expenses)
before tax-external customers $ 82,151 $ 3,694 $ (1,820) $ - $ 84,025
Investment and other income 47,379 650 3,759 - 51,788
Equity in earnings of affiliates - - - 1,119 1,119
Interest expense - - (3,503) - (3,503)
Distributions on preferred capital securities - - (4,157) - (4,157)
-------------- ------------ ------------- ---------------- -----------------
Income (loss) before income tax expense 129,530 4,344 (5,721) 1,119 129,272
Income tax expense (benefit) 37,079 1,580 (1,942) - 36,717
-------------- ------------ ------------- ---------------- -----------------
Net income $ 92,451 $ 2,764 $ (3,779) $ 1,119 $ 92,555
============== ============ ============= ================ =================
Total assets $1,555,576 $ 35,587 $ 114,668 $ - $ 1,705,831
============== ============ ============= ================ =================
</TABLE>
The Company did not have any major customers that accounted for more than 10% of
its consolidated revenues for any of the periods presented. The Company does not
have any material revenues or assets attributed to or located outside the United
States.
Note 7 -- Subsequent Events
On August 6, 1999, TPG announced it had completed the acquisition of MGICA, Ltd.
("MGICA"), Australia's second largest mortgage insurance company. MGICA is now
an indirect wholly owned subsidiary of PMI. The transaction purchase price was
US$77.6 million. TPG has also agreed to guarantee repayment of the debt incurred
to finance a portion of the purchase price. MGICA has a Standard and Poor's
("S&P") claim paying ability rating of AA- and a Moody's Investor Services
("Moody's") financial strength rating of A1. S&P and Moody's have affirmed both
PMI's and MGICA's ratings following the acquisition based upon PMI's execution
of a Support agreement to maintain MGICA's capital at certain minimum levels.
10
<PAGE>
On July 29, 1999, the California Department of Insurance approved the Recapture
Agreement between PMI and Forestview Mortgage Insurance Company. Closing of the
transactions that are the subject of the Recapture Agreement is subject to
additional regulatory approvals, which are expected to be received in 1999.
On July 27, 1999, the Company received $30.2 million from Allstate Insurance Co.
as payment of a tax refund due to the Company under a tax sharing agreement
executed by TPG, The Allstate Corporation, The Allstate Insurance Company and
Sears, Roebuck and Co., in connection with the Company's initial public offering
in April 1995. (See Note 7 "Income Taxes" in the 1998 Annual Report to
Shareholders.)
On July 21, 1999, TPG announced that its Board of Directors declared a 3-for-2
stock split in the form of a 50 percent stock dividend, and increased its cash
dividend level to 6 cents per share on a pre-split basis. The stock split will
be payable on August 16, 1999 to shareholders of record on July 30, 1999.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, or are preceded by, followed by or
that include the words "believes," "expects," "anticipates," "estimates," or
similar expressions, and that relate to future plans, events or performance are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements include the
following: (i) management anticipates that the decrease in refinancing activity
will continue in 1999; (ii) during 1999, management expects the percentage of
PMI's risk related to risk-share programs to continue to increase as a
percentage of total risk; (iii) management believes the Fannie Mae and Freddie
Mac reduction in mortgage insurance coverage requirements is expected to have a
negative impact on the growth rate of direct risk in force; (iv) management
anticipates that the percentage of NIW subject to captive mortgage reinsurance
agreements will continue to increase in 1999 and beyond. In addition, the
anticipated continued growth of captive reinsurance arrangements is expected to
have a negative effect on the Company's net premiums written and net premiums
earned for such customers with captive arrangements; (v) management anticipates
ceded premiums will continue to increase substantially as a result of the
expected increase in risk-share programs; (vi) management anticipates the
percentage of insurance in force with higher coverage percentages will decrease
in 1999 and this decreases should accelerate in the years following due to a
reduction in required mortgage insurance by Fannie Mae and Freddie Mac; (vii)
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 efforts and improved default reinstatement rates, California claims
paid as a percentage of total claims paid should continue to decline; (viii)
management believes that PMI's total default rate could increase in 1999 due to
the continued maturation of its 1995 and 1996 books of business; (ix) management
anticipates that contract underwriting will continue to generate a significant
percentage of PMI's new insurance written ("NIW"); and (x) management is
uncertain about the amount of new pool risk which will be written in 1999, but
believes total new 1999 pool risk will be less than in 1998. When a forward-
looking statement includes a statement of the assumptions or bases underlying
the forward-looking statement, the Company cautions that, while it believes such
assumptions or bases to be reasonable and makes them in good faith, assumed
facts or bases almost always vary from actual results, and the difference
between assumed facts or bases and actual results can be material, depending on
the circumstances. Where, in any forward-looking statement, the Company or its
management expresses an expectation or belief as to future results, such
expectations or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. 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 items
addressed in the section titled "Cautionary Statements and Investment
Considerations" ("IC# 1-15") set forth below and other risks detailed from time
to time in the Company's periodic filings with the Securities and Exchange
Commission.
All forward-looking statements of the Company are qualified by and should be
read in conjunction with such risk disclosure. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
12
<PAGE>
RESULTS OF CONSOLIDATED OPERATIONS:
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Consolidated net income was $49.5 million in the three months ended June 30,
1999, a 5.8% increase over the corresponding period of 1998. The increase can be
attributed to an increase in premiums earned of 11.0% and a decrease in losses
and loss adjustment expenses of 25.3%, partially offset by a 53.5% decrease in
other income, a 85.3% decrease in realized capital gains and a 65.3% increase in
policy acquisition costs, and a 9.5% increase in underwriting and other
operating expenses. Including capital gains, diluted earnings per share
increased 12.3% to $1.64 for the second quarter of 1999. Excluding capital
gains, diluted operating earnings per share increased by 16.3% to $1.64.
Revenues in the second quarter of 1999 increased by 5.9% to $156.2 million,
compared with the same period in 1998.
MORTGAGE INSURANCE OPERATIONS
PMI's new primary insurance written ("NIW") increased by 10.1% to $7.6 billion
in the second quarter of 1999 compared with the second quarter of 1998,
primarily as a result of the growth in volume of the private mortgage insurance
industry as well as the increase in PMI's market share.
The members of the private mortgage insurance industry, as reported by the
industry's trade association, Mortgage Insurance Companies of America ("MICA"),
experienced an increase in total new insurance written of 6.9% to $49.6 billion
in the second quarter of 1999 from the corresponding period of 1998 primarily
due to strong home purchase activity partially offset by a decrease in
refinancing activity. Refinancing as a percentage of PMI's NIW decreased to
25.6% in the second quarter of 1999 from 31.5% in the second quarter of 1998 and
from 37.2% in the first quarter of 1999. Management anticipates that the
decrease in refinancing activity will continue in 1999. (See IC4) The private
mortgage insurance companies' market share in the three months ended June 30,
1999 decreased to 50.9%, of the total low down-payment market (insurable loans)
from 58.3% in the second quarter of 1998 and from 51.1% in the three months
ended March 31, 1999. Management believes the private mortgage insurance
companies' decline in the low down-payment market share was the result of an
increase in the maximum individual loan amount that the FHA/VA can insure. (See
IC2)
PMI's market share of NIW was 15.3% in the second quarter of 1999, an increase
from 14.6% in the first quarter of 1999, and an increase from 14.9% in the three
months ended June 30, 1998. On a combined basis with CMG, market share increased
to 16.5% in the second quarter of 1999 compared with 16.3% in the second quarter
of 1998, and 15.9% in the first quarter of 1999. The increases in market share
were primarily due to contract underwriting services, pool insurance products,
and risk sharing programs offered by PMI. Pool risk written totaled $61.0
million for the second quarter of 1999 compared with $38.0 million in the second
quarter of 1998. Risk in force under risk-share programs with PMI's customers,
excluding pool insurance, represented approximately 14.9% of the $19.8 billion
total primary risk in force at June 30, 1999. Risk in force under pool insurance
arrangements represented 2.8% of total risk in force at June 30, 1999, compared
with less than one percent at June 30, 1998. During 1999, management expects the
percentage of PMI's risk related to risk-share programs to continue to increase
as a percent of total risk. The Fannie Mae and Freddie Mac reduction in mortgage
insurance coverage requirements is expected to have a negative impact on the
growth rate of direct risk in force. (See IC10)
PMI's cancellations of insurance in force remained unchanged at $6.7 billion in
the second quarter of 1999 compared to the corresponding period of 1998.
However, PMI's persistency rate of 66.1% as of June 30, 1999 increased compared
with 66.0% as of March 31, 1999 but decreased compared with 73.9% as of June 30,
1998 .
Insurance in force increased by 6.1% to $82.3 billion at June 30, 1999 compared
with June 30, 1998 and when on a combined basis with CMG, insurance in force
grew by 8.0% to $87.4 billion compared with June 30, 1998. PMI's market share of
insurance in force increased by 0.1 percentage points to 14.4% and when combined
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with CMG increased by 0.4 percentage points to 15.3% for the second quarter of
1999 compared with the second quarter of 1998. PMI's risk in force increased by
8.2% to $19.8 billion at June 30, 1999 and when combined with CMG grew by 10.5%
to $21.1 billion compared with June 30, 1998. The growth rate of risk in force
is greater than insurance in force due to terminating policies being replaced by
new policies with higher coverage percentages.
Mortgage insurance net premiums written (which includes net cessions and
refunds) grew by 14.2% to $113.5 million in the second quarter of 1999 compared
with the same period in 1998 primarily due to the growth of risk in force of
both primary and pool insurance, the continued shift to deeper coverage for
primary insurance and a decrease in refunded premiums of 34.8% to $5.3 million
as a result of a greater percentage of monthly policies, which are non-
refundable, being cancelled. Approximately 15.8% of new insurance written in the
second quarter of 1999 was subject to captive mortgage reinsurance agreements.
Management anticipates that the percent of NIW subject to captive mortgage
reinsurance agreements will continue to increase in 1999 and beyond. In
addition, the anticipated continued growth of captive reinsurance arrangements
is expected to have a negative effect on the Company's net premiums written and
net premiums earned for such customers with captive arrangements. (See IC15)
Mortgage insurance premiums earned increased 6.6% to $107.3 million in the
second quarter of 1999 compared with the same period in 1998 primarily due to
the increase in premiums written. Ceded premiums, which include third-party
reinsurance arrangements as well as captive reinsurance agreements, were $8.0
million in the second quarter of 1999, increasing 77.8% from the second quarter
of 1998. Management anticipates ceded premiums will continue to increase
substantially as a result of the expected increase in risk-share programs. (See
IC7 and IC15)
PMI's monthly product represented 76.8% of risk in force at June 30, 1999,
compared with 64.7% at June 30, 1998. Mortgages with original loan-to-value
ratios greater than 90% and equal to or less than 95% ("95s") with 30% insurance
coverage increased to 35.9% of risk in force as of June 30, 1999, from 31.6% as
of June 30, 1998. Mortgages with original loan-to-value ratios greater than 85%
and equal to or less than 90% ("90s") with 25% insurance coverage increased to
31.2% of risk in force as of June 30, 1999, compared with 26.4% as of June 30,
1998. Management anticipates the percentage of insurance in force with higher
coverage percentages will decrease in 1999 and this decrease should accelerate
in the years following due to a reduction in required mortgage insurance by
Fannie Mae and Freddie Mac. (See IC3)
Mortgage insurance losses and loss adjustment expenses decreased 26.4% to $22.6
million in the second quarter of 1999 compared with the second quarter of 1998
primarily due to the continuing improvement of the nationwide housing markets,
particularly California, and the corresponding decrease in claim payments. Loans
in default decreased by 4.2% to 14,338 at June 30, 1999 compared with June 30,
1998. PMI's national default rate decreased by 0.17 percentage points to 1.99%
at June 30, 1999 compared with the same period in 1998, primarily due to a
decrease in the loans in default inventory and secondarily to an increase in
policies in force.
Direct primary claims paid in the second quarter of 1999 decreased by 45.8% to
$18.6 million when compared with the same period in 1998 due to a 14.8% decrease
in the average claim size to approximately $20,900 and a 31.7% decline in the
number of claims paid to 965 for the second quarter of 1999. The reduction in
claims paid is the result of a smaller percentage of claims originating from the
California book of business and to increased loss mitigation efforts by PMI and
lenders.
Default rates on PMI's California policies decreased to 2.59% (representing
2,414 loans in default) at June 30, 1999, from 3.20% (representing 3,252 loans
in default) at June 30, 1998. Policies written in California accounted for 34.1%
and 52.2% of the total dollar amount of claims paid in the second quarter 1999
and 1998, respectively. Although management expects that California will
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 efforts and improved default reinstatement rates,
California claims paid as a percentage of total claims paid should continue to
decline. (See IC13) Management believes that PMI's total default rate could
increase in 1999 due to the continued maturation of its 1995 and 1996 books of
business. (See IC11)
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Mortgage insurance policy acquisition costs incurred and deferred (including,
among other field expenses, contract underwriting expenses) increased by 22.9%
to $24.7 million in the second quarter of 1999 compared with the same period in
1998 as a result of the 10.1% increase in NIW. Amortization of policy
acquisition costs increased 64.8% to $21.1 million during the same period. (See
Note 5 "Deferred Acquisition Costs" of Notes to Consolidated Financial
Statements) New policies processed by contract underwriters represented 37.1% of
PMI's second quarter NIW in 1999 compared with 33.6% in 1998. Contract
underwriting is the preferred method among many mortgage lenders for processing
loan applications. Management anticipates that contract underwriting will
continue to generate a significant percentage of PMI's NIW. (See IC7)
Underwriting and other mortgage insurance operating expenses increased by 1.5%
to $13.7 million in the second quarter of 1999 compared with the second quarter
of 1998. Included in operating expenses were Year 2000 remediation costs of $0.2
million in the second quarter of 1999, compared with $0.5 million of such costs
in the second quarter of 1998. The mortgage insurance loss ratio declined by 9.3
percentage points to 21.1% in the period ended June 30, 1999 compared with the
same period in 1998. The decrease can be attributed to the growth in premiums
earned coupled with the decrease in losses and loss adjustment expenses, as
discussed above. The expense ratio increased by 4.3 percentage points to 30.7%
primarily due to the increase in policy acquisition costs resulting from the
growth in NIW. In addition, a reduction in pool premiums and an increase in
captive reinsurance premium cessions negatively affected premiums written. The
combined ratio decreased by 5.0 percentage points to 51.8% in the second quarter
of 1999 compared with the same period in 1998.
TITLE INSURANCE OPERATIONS
Title insurance premiums earned increased 36.4% to $24.0 million in the three
months ended June 30, 1999 compared with the same period in 1998 primarily due
to the record residential mortgage origination volumes, as discussed above, and
secondarily to APTIC's expansion into new states. APTIC was writing business in
31 states at June 30, 1999, up from 29 states at June 30, 1998. In the second
quarter of 1999, approximately 74.0% of APTIC's premiums earned came from its
Florida operations, compared with approximately 76.0% in 1998. Underwriting and
other expenses increased 34.6% to $21.0 million in the second quarter of 1999
compared with the same period in 1998 due to an increase in agency fees and
commissions related to the increase in premiums earned. The title insurance
combined ratio increased by 0.4 percentage points to 88.7%.
OTHER
Other income generated by other subsidiaries decreased by 53.4% to $2.7 million
in the second quarter of 1999 compared with the second quarter of 1998 primarily
due to a decrease in MSC's contract underwriting revenues as a result of the
decline in refinancing activity. Underwriting and other expenses generated by
other subsidiaries decreased by 34.4% to $4.2 million, primarily due to a $1.4
million decrease in expenses incurred by MSC resulting from contract
underwriting services provided to the Company's mortgage insurance customers.
(See IC7)
In the period ended June 30, 1999, the Company's net investment income
(including realized capital gains) decreased by 5.1% to $22.2 million when
compared with the second quarter of 1998 primarily due to a $1.9 million
decrease in realized gains on investments. In addition, the yield decreased to
5.9% at June 30, 1999 from 6.1% at June 30, 1998 primarily as a result of the
declining interest rate environment for the same period.
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The Company's effective tax rate increased to 28.7% in the second quarter of
1999 from 27.7% in the second quarter of 1998 as a result of a decrease in the
proportion of tax-exempt investment income relative to total income.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Consolidated net income was $93.1 million in the six months ended June 30, 1999,
a 0.5% increase over the corresponding period of 1998. The increase can be
attributed to an increase in premiums earned of 10.6% and a decrease in losses
and loss adjustment expenses of 23.3%, partially offset by a 96.6% decrease in
net realized gains, a 67.7% increase in policy acquisition costs and a 15.3%
increase in underwriting and other expenses. Including capital gains, diluted
earnings per share increased by 8.0% to $3.09 in 1999. Excluding capital gains,
diluted operating earnings per share increased by 15.8% to $3.08. Revenues in
the first half of 1999 increased by 4.5% to $311.4 million.
MORTGAGE INSURANCE OPERATIONS
PMI's NIW increased by 27.4% to $14.9 billion in the first six months of 1999
compared with the corresponding period of 1998, primarily as a result of the
growth in volume of the private mortgage insurance industry as well as the
increase in PMI's market share.
The members of the private mortgage insurance industry, as reported by the
industry's trade association, Mortgage Insurance Companies of America ("MICA"),
experienced an increase in total new insurance written of 22.1% to $99.5 billion
for the period ended June 30, 1999 from the corresponding period of 1998
primarily due to strong home purchase activity partially offset by a decrease in
refinancing activity. Refinancing as a percentage of PMI's NIW decreased to
31.3% for the six months ended June 30, 1999 from 32.8% for the same period of
1998. Management anticipates that the decrease in refinancing activity will
continue in 1999. The private mortgage insurance companies' market share
decreased to 51.8% for the six months ended June 30, 1999, of the total low
down-payment market (insurable loans) from 56.4% for the same period of 1998.
Management believes the private mortgage insurance companies' decline in the low
down-payment market share was the result of an increase in the maximum
individual loan amount that the FHA/VA can insure. (See IC2)
PMI's market share of NIW was 14.9% in the first six months of 1999, an increase
from 14.4% in the first six months of 1998. On a combined basis with CMG, market
share increased to 16.2% in the first half of 1999 compared with 15.8% in the
first half of 1998. The increases in market share were primarily due to contract
underwriting services, pool insurance products, and risk sharing programs
offered by PMI. Pool risk written totaled $103.0 million for the first six
months of 1999 compared with $52.0 million in the period ended June 30, 1998.
The Fannie Mae and Freddie Mac reduction in mortgage insurance coverage
requirements is expected to have a negative impact on the growth rate of direct
risk in force. (See IC10)
Mortgage insurance net premiums written (which includes net cessions and
refunds) grew by 12.5% to $211.9 million in the first six months of 1999
compared with the same period in 1998 primarily due to the growth of risk in
force of both primary and pool insurance, the continued shift to deeper coverage
for primary insurance, and a decrease in refunded premiums of 17.0% to $9.3
million as a result of a greater percentage of monthly policies, which are non-
refundable, being cancelled. Mortgage insurance premiums earned increased 5.9%
to $212.6 million in the first half of 1999 compared with the same period in
1998 primarily due to the increase in premiums written. Ceded premiums were
$15.6 million in the first six months of 1999, increasing 69.6% from the
corresponding period in 1998. Management anticipates ceded premiums will
continue to increase substantially as a result of the expected increase in risk-
share programs. (See IC7 and IC15)
Mortgage insurance losses and loss adjustment expenses decreased 23.8% to $52.2
million in the first half of 1999 compared with the first half of 1998 primarily
due to the continuing improvement of the nationwide housing markets,
particularly California, and the corresponding decrease in claim payments.
Direct primary claims paid in the six months ended June 30, 1999 decreased by
38.2% to $41.6 million when compared with the same period in 1998 due to a 14.8%
decrease in the average claim size to approximately $20,900 and a 27.4% decline
in the number of claims paid to 1,993. The reduction in claims paid is the
result of a smaller percentage of claims originating from the California book of
business and to increased loss mitigation efforts by PMI and lenders.
Mortgage insurance policy acquisition costs incurred and deferred (including,
among other field expenses, contract underwriting expenses) increased by 41.3%
to $49.6 million for the first six months of 1999 compared with the same period
in 1998 as a result of the 27.4% increase in NIW. Amortization of policy
acquisition costs increased 68.0% to $42.0 million for the same period. (See
Note 5 "Deferred Acquisition Costs" of Notes to Consolidated Financial
Statements) New policies processed by contract underwriters represented 38.7% of
PMI's NIW in 1999 compared with 32.1% in 1998. Contract underwriting is the
preferred method among many mortgage lenders for processing loan applications.
Management anticipates that contract underwriting will continue to generate a
significant percentage of PMI's NIW. (See IC7)
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Underwriting and other mortgage insurance operating expenses remained virtually
unchanged at $25.1 million in the first six months of 1999 compared with the
same period of 1998. Included in operating expenses were Year 2000 remediation
costs of $0.8 million in the first half of 1999, compared with $1.0 million of
such costs in the first half of 1998. The mortgage insurance loss ratio declined
by 9.5 percentage points to 24.6% in the period ended June 30, 1999 compared
with the same period in 1998. The decrease can be attributed to the growth in
premiums earned coupled with the decrease in losses and loss adjustment
expenses, as discussed above. The expense ratio increased by 5.0 percentage
points to 31.7% primarily due to the increase in policy acquisition costs
resulting from the growth in NIW. In addition, a reduction in pool premiums and
an increase in captive reinsurance premium cessions negatively affected premiums
written. The combined ratio decreased by 4.5 percentage points to 56.3% in the
first six months of 1999 compared with the same period in 1998.
TITLE INSURANCE OPERATIONS
Title insurance premiums earned increased 38.1% to $47.5 million in the six
months ended June 30, 1999 compared with the same period in 1998 primarily due
to the record residential mortgage origination volumes, as discussed above, and
secondarily to APTIC's expansion into new states. APTIC was writing business in
31 states at June 30, 1999, up from 29 states at June 30, 1998. In the first six
months of 1999, approximately 71% of APTIC's premiums earned came from its
Florida operations, compared with approximately 76% in 1998. Underwriting and
other expenses increased 38.0% to $42.1 million in the first half of 1999
compared with the same period in 1998 due to an increase in agency fees and
commissions related to the increase in premiums earned. The title insurance
combined ratio increased by 0.3 percentage points to 89.6%.
OTHER
Other income generated by other subsidiaries decreased by 26.0% to $7.4 million
in the period ended June 30, 1999 compared with the same period of 1998
primarily due to a decrease in MSC's contract underwriting revenues
as a result of the decrease in refinancing activity. Underwriting and
other expenses generated by other subsidiaries decreased by 10.2% to $10.6
million, primarily due to expenses of $10.3 million incurred by MSC resulting
from contract underwriting services provided to the Company's mortgage insurance
customers. (See IC7)
In the period ended June 30, 1999, the Company's net investment income
(including realized capital gains) decreased 1.9% to $43.5 million when
compared with the first half of 1998 primarily due to a $9.8 million decrease in
realized gains on investments. In addition, the yield decreased to 5.9% at June
30, 1999 from 6.1% at June 30, 1998 primarily as a result of the declining
interest rate environment for the same period.
The Company's effective tax rate increased to 29.0% in the first half of 1999
from 28.4% in the first half of 1998 as a result of a decrease in the proportion
of tax-exempt investment income relative to total income.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Liquidity and capital resource considerations are different for TPG and PMI, its
principal insurance operating subsidiary. TPG's principal sources of funds are
dividends from PMI and APTIC, investment income and funds that may be raised
from time to time in the capital markets.
PMI's ability to pay dividends to TPG is limited, among other restrictions,
under the insurance laws of Arizona. Such laws provide that: (i) PMI may pay
dividends out of available surplus and (ii) without prior approval of the
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Arizona Insurance Director, such dividends during any 12-month period may not
exceed the lesser of 10% of policyholders' surplus as of the preceding year end,
or the last calendar year's investment income.
The laws of Florida limit the payment of dividends by APTIC to TPG in any one
year to 10% of available and accumulated surplus derived from realized net
operating profits and net realized capital gains.
The terms of the A$70.5 million credit agreement dated August 3, 1999 executed
among TPG, MGICA, and Bank of America, N.A., in connection with the Company's
acquisition of MGICA, provide in part that: (i) TPG's consolidated net worth
shall not be less than $600 million; (ii) PMI's statutory capital shall not be
less than $675 million; (iii) the risk to capital ratio shall not exceed 23 to
1; and (iv) TPG's consolidated debt to capital ratio shall not exceed 0.40 to
1.0. In addition, PMI's and MGICA's ability to pay dividends or incur additional
indebtedness are restricted. Failure to maintain such financial covenants or
debt restrictions may be deemed an event of default. Pursuant to the guarantee
executed by TPG in connection with the credit agreement, if an event of default
occurs under the credit agreement or under any other indebtedness, all
outstanding amounts under the credit agreement may be accelerated and become
immediately payable by TPG.
In addition to the dividend restrictions described above, the Company's other
credit agreements also limit the payment of dividends by PMI, and various credit
rating agencies and insurance regulatory authorities have broad discretion to
limit the payment of dividends to TPG by PMI or APTIC. During the first half of
1999, APTIC declared and paid a cash dividend of $3.0 million to TPG,
substantially the full amount of a dividend that can be paid by APTIC in 1999
without prior permission from the Florida Department of Insurance. On June 16,
1999, the Arizona Department of Insurance also authorized a dividend of $25
million to TPG, which was paid in cash on June 23, 1999. TPG has two bank credit
lines available totaling $50.0 million. At June 30, 1999, 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. The
Company announced a stock repurchase program in the amount of $100.0 million
authorized by the TPG Board of Directors in November 1998. During the first half
of 1999, TPG purchased $20.8 million of the Company's common stock.
As of June 30, 1999, TPG had approximately $52.5 million of available funds.
This amount has decreased from the December 31, 1998 balance of $56.1 million
due to the common stock repurchases in 1999, offset by dividends received from
APTIC.
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, policy
acquisition costs and other operating expenses, investment in subsidiaries, and
dividends to TPG. PMI generates 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 $53.1 million and $66.8
million in the six months ended June 30, 1999 and 1998, respectively. The
decrease is primarily due to the decrease in net realized capital gains for the
same period.
The Company's invested assets decreased by $11.3 million at June 30, 1999
compared with December 31, 1998 partially due a decrease in net unrealized gains
on investments of $28.4 million, stock repurchases of $20.8 million and
dividends paid of $3.0 million.
Consolidated reserves for losses and loss adjustment expenses increased by 4.1%
in the first half of 1999 compared with December 31, 1998 primarily due to the
increase in pool loss reserves.
Consolidated shareholders' equity increased by $41.3 million in the first half
of 1999, consisting of increases of $93.1 million from net income and $0.4
million from exercises of stock options, offset by a $28.4 million decrease in
net unrealized gains on investments included in other comprehensive income,
common stock repurchases of $20.8 million, and dividends declared of $3.0
million.
PMI's statutory risk-to-capital ratio at June 30, 1999 was 14.5 to 1, compared
with 14.9 to 1 at December 31, 1998. (See IC9)
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YEAR 2000 ISSUES
Impact of the Year 2000 Issue. The Company's business processes are highly
automated and dependent upon the consistent and accurate functioning of its
computer systems and the computer systems of its customers. As a result, the
Company is directing significant resources toward mitigating its exposure to the
so-called "Year 2000 issue." The Company has in place a Year 2000 project plan
to address the Year 2000 issue. The plan consists of three phases, all of which
have been completed or substantially completed as more fully discussed in the
Company's prior SEC filings. To date, PMI and CMG have met all readiness
deadlines or targets established by Fannie Mae, Freddie Mac and their
regulators.
Costs to Address the Year 2000 Issue. The Company is utilizing both internal
and external personnel and resources to implement its Year 2000 project plan.
Currently, no planned material projects involving information or non-information
technology systems have been delayed or are anticipated to be delayed as a
result of the redirection of resources to the Year 2000 remediation effort. The
Company plans to complete its Year 2000 issue remediation project at a total
external cost of approximately $5.0 million, which will be funded from operating
cash flow and is being expensed as incurred. For the three-month period ended
June 30, 1999, the Company incurred and expensed approximately $200,000 in
external costs related to its Year 2000 project plan and remediation efforts,
out of a total of $4.7 million incurred and expensed since commencement of the
Year 2000 project. The estimated costs do not include any potential costs
related to customer or other claims, or potential amounts related to executing
contingency plans. The Company does not separately track the internal costs
incurred in connection with the Year 2000 project plan, which are principally
payroll costs for employees working on the project. (See IC1 and Item 5 - Other
Information, below).
The discussion above and all prior discussions in the Company's SEC filings are
designated as Year 2000 Readiness Disclosures as defined by the Year 2000
Information and Readiness Disclosure Act of 1998.
CAUTIONARY STATEMENTS AND INVESTMENT CONSIDERATIONS
GENERAL CONDITIONS (IC1)
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, changes in
legislation affecting the mortgage insurance industry, 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; PMI's claims-paying ability rating; general economic conditions that
affect the demand
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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 and customer consolidation. PMI's financial
condition and results of operations may materially and adversely be impacted by
changes in legislation which affects the ability of Fannie Mae or Freddie Mac to
offer a substitute for mortgage insurance, including self-insurance and
alternative forms of credit support, or for the FHA or the VA to increase
statutory lending limits or other expansion of eligibility for the FHA and VA.
PMI's financial condition and results of operations may materially and adversely
be impacted by changes in legislation, statutory charters and regulations
governing banks and savings institutions to form reinsurance subsidiaries or
permit the offering of other products which do not require mortgage insurance.
In addition, PMI's financial condition and results of operations may materially
and adversely be impacted by a reduction in the amount of mortgage insurance
coverage required by Fannie Mae and Freddie Mac.
The costs of Year 2000 remediation, the correctness of the Company's assessment
that it has completed one or more phases of its remediation, the dates on which
the Company estimates that it will complete such remediation and possible risks
associated with the Year 2000 issue are based upon the Company's current
estimates and are subject to various uncertainties that could cause the actual
results to differ materially from the Company's expectations. Such uncertainties
include, among others, the success of the Company in identifying systems that
are not Year 2000 compliant, the nature and amount of programming required to
remediate each affected system, the nature and adequacy of testing performed by
the Company, the availability of qualified personnel, consultants and other
resources, and the success of the Year 2000 remediation efforts of others. If
the Company's recently completed remediation of its mission critical mortgage
insurance origination and application processing process is faulty or fails for
any reason to be Year 2000 compliant, this circumstance could adversely impact
its business operations and could have a material adverse affect on the
Company's financial condition, liquidity and results of operations. See
Management Discussion and Analysis - Year 2000 Issues, above and Item 5 - Other
Information, below.
MARKET SHARE AND COMPETITION (IC2)
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 (see IC3) 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 captive reinsurance arrangements, 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. The Office of
the Comptroller of the Currency has granted permission to certain national banks
to form a reinsurance company as a wholly-owned operating subsidiary for the
purpose of reinsuring mortgage insurance written on loans originated or
purchased by such bank. The Office of Thrift Supervision has also granted
permission for subsidiaries of thrift institutions to reinsure private mortgage
insurance coverage on loans originated or purchased by affiliates of such
thrift's parent organization. The Federal Reserve Board is in the process of
considering whether similar activities are permitted for bank holding companies.
The capitive 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
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competition in the mortgage insurance industry and may materially and adversely
impact PMI's market share (See IC15).
In July 1999, the Federal Housing Finance Board ("FHFB") issued proposed
regulations which would permit the Federal Home Loan Banks ("FHLBs") to provide
mortgage insurance or substitutes for mortgage insurance, such as credit
enhancements, to its members for non-conforming mortgages. The proposal would
permit the FHLBs to buy mortgages originated by its members if the member took
some of the credit risk. In addition, the proposed regulation would introduce
risk-based capital requirements and expand the FHLBs' investment powers to
permit the FHLBs to make equity investments in enterprises that focused on low-
or moderate-income community development and housing in small business
investment corporations. The proposed regulations will be subject to a 90-day
public comment period once published in the Federal Register.
As a result of key aspects of the FHFB proposal which require clarification and
which are likely to be revised during the public comment period, management is
presently not able to ascertain the full impact of the proposed regulations on
the Company's financial condition and results of operations in 1999 and beyond.
Management believes any expansion of the FHLBs ability issue mortgage insurance
or use alternatives to mortgage insurance could materially and adversely affect
the Company's financial condition and results of operations.
Certain lenders originate a first mortgage lien with an 80% LTV ratio, a 10%
second mortgage lien, and 10% 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. The
Federal Deposit Insurance Corporation and other banking regulators approved
rules to be effective April 1, 1999 that would require national banks to hold
almost twice as much risk-based capital to cover possible defaults on the
80/10/10 products when the lender holds the first and second mortgage. State-
chartered banks already are subject to the higher capital requirement. 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 have affected demand for
private mortgage insurance. Effective January 1, 1999, the Department of Housing
and Urban Development announced an increase in the maximum individual loan
amount that FHA can insure to $208,800 from $197,620. The maximum individual
loan amount that the VA can insure is $203,150. The Omnibus Spending Bill of
1999, signed into law on October 21, 1998, among other items, streamlined the
FHA down-payment formula by eliminating tiered minimum cash investment
requirements and establishing maximum loan-to-value ratios based on loan size
and closing costs, making FHA insurance more competitive with private mortgage
insurance in areas with higher home prices.
Management believes the decline in the MICA members' share of the mortgage
insurance business from 56.3% at December 31, 1998 to approximately 50.9% at
June 30, 1999 results in part from the increase in the maximum individual loan
amount the FHA can insure. Any increase in the maximum FHA loan amount 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.
FANNIE MAE AND FREDDIE MAC (IC3)
The GSEs are permitted by charter to purchase conventional high-LTV mortgages
from lenders who obtain mortgage insurance on those loans. Fannie Mae and
Freddie Mac have some discretion to increase or decrease the amount of private
mortgage insurance coverage they require on loans, provided the minimum
insurance coverage requirement is met. During 1999, Fannie Mae and Freddie Mac
separately announced programs where reduced mortgage insurance coverage will be
made available for lenders that deliver loans approved by the GSEs' automated
underwriting services, Desktop Underwriter and Loan ProspectorSM, respectively.
Generally, Fannie Mae's and Freddie Mac's reduced mortgage insurance coverage
options provide for: (i) across-the-board reductions in required MI coverage on
30-year fixed-rate loans recommended for approval by GSE's automated
underwriting services to the levels in effect in 1994; (ii) reduction in
required MI coverage, for loans with only a 5 percent down payment (a 95 percent
LTV), from 30 percent to 25 percent of the mortgage loan covered by MI; (iii)
reduction in required MI coverage, for loans with a 10 percent down payment (a
90 percent LTV loan), from 25 percent to 17 percent of the mortgage loan covered
by MI. In addition, the GSE's announced programs to further reduce MI coverage
upon the payment of an additional fee by the lender. Under this option, a 95
percent LTV loan will require 18 percent of the mortgage loan have mortgage
insurance coverage. Similarly, a 90 percent LTV loan will require 12 percent of
the mortgage loan have mortgage insurance. In order for the home buyer to have
MI at these levels, such loans would require a payment at closing or a higher
note rate.
Management believes it is too early to assess the impact of the GSEs' reduction
of required levels of mortgage insurance on the Company's financial condition
and results of operation. If the reduction in required levels of
21
<PAGE>
mortgage insurance were to become widely accepted by mortgage lenders and their
customers, however, such reduction could have a materially adverse impact on the
Company's financial condition and results of operation.
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992,
requires the Office of Federal Housing Enterprise Oversight ("OFHEO") to develop
a risk-based capital regulation for the GSEs. On April 13, 1999 a notice of
proposed rulemaking was published in the Federal Register announcing OFHEO's
development of proposed risk-based capital regulations. Public comments
regarding the proposed regulations were due on August 11, 1999, however, OFHEO
recently extended the due date until December 11, 1999, to allow interested
parties adequate time to analyze and review the rule and submit constructive
comments. After consideration of the comments received on the proposal, OFHEO
will determine whether to issue a final rule or to issue a revised proposal.
OFHEO is not authorized to enforce the risk-based standard until one year after
the final rule is published. The regulation specifies a risk-based capital
stress test that, when applied to the GSEs, determines the amount of capital
that a GSE must hold to maintain positive capital throughout a 10-year period of
economic stress. The stress test is designed to simulate the financial
performance, including cash flows of the GSEs under severe economic conditions.
Such conditions would include high levels of mortgage defaults and associated
losses, and large interest rate shocks. The proposed regulations could require a
GSE to hold more than double the capital it presently maintains for loans with
loan-to-value ratios ("LTV") of 95 percent or higher. Further the proposed
capital regulations could treat more favorably credit enhancements issued by
private mortgage insurance companies with a claims-paying ability rating of AAA
or higher compared with those companies with a AA or lower rating.
Because of the numerous aspects of the OFHEO proposal which require
clarification and which are likely to be revised during the public comment
period, management is presently not able to ascertain the full impact of the
proposed risk-based capital regulations on the Company's financial condition and
results of operations in 1999 and beyond. Although management believes that it
is too early to ascertain the impact of the risk-based capital regulations as
proposed, management believes any shifts in the GSE's preferences for private
mortgage insurance to other forms of credit enhancement, including a tiering of
mortgage insurers based on their credit rating, could materially and adversely
affect the Company's financial condition and results of operations.
During October 1998, Freddie Mac sought to amend its charter to allow it to use
any method of default loss protection that is financially equal or superior, on
an individual or pooled basis, to the protection provided by private mortgage
insurance companies. The legislation containing the proposed charter amendment
was subsequently rescinded. Currently, Freddie Mac can purchase loans with down-
payments of less than 20%, only if the loans are insured or use other limited
methods to protect against default.
Subsequent to the withdrawal of the legislation, Freddie Mac announced that it
would pursue a permanent charter amendment that would allow Freddie Mac to
utilize alternative forms of default loss protection, such as spread accounts,
or otherwise forego the use of private mortgage insurance on higher loan-to-
value mortgages. In addition, Fannie Mae announced it is interested in pursuing
new risk management options and is working with mortgage insurers and lenders on
appropriate risk management and dispersion of risk, which may include a
reduction in the use of mortgage insurance.
In June 1999, a coalition of financial industry trade associations was formed
under the name "FM Watch". FM Watch works with affordable housing and consumer
advocates, taxpayer groups and financial institutions, and is dedicated to
monitoring the activities of Fannie Mae and Freddie Mac. FM Watch's efforts are
designed to support HUD's efforts to strengthen the affordable housing goals for
the GSEs, and to promote policies that do not allow the GSEs to move beyond
their unique charters into markets and services already provided by the private
sector. Current members of FM Watch include: the American Financial Services
Association, the Appraisal Institute, the Association of Financial Guaranty
Insurors, the Consumer Bankers Association, the Consumer Mortgage Coalition, the
Financial Services Roundtable, the Home Equity
22
<PAGE>
Lender Leadership Organization, the Mortgage Insurance Companies of America, and
the National Home Equity Mortgage Association.
In July 1999 HUD announced new affordable housing goals for the GSEs. The
proposed affordable housing goals would raise the target for low- and moderate-
income business from 42 percent of the GSEs' annual volume to 50 percent. The
goal would increase to 48 percent in year 2000 and to 50 percent for year 2001.
In addition, HUD announced proposed increases in two other components of the
GSEs' affordable housing goals. Currently, the GSEs are expected to generate 24
percent of their mortgage business in central cities, rural areas and other
underserved markets. Under the proposal, this target would increase up to 31
percent. The special affordable housing goal, which measures funding for
families with very-low household income or living in low-income areas, would
increase from 14 percent to 20 percent. The proposed goals are subject to
review by the Office of Management and Budget and would be subject to a public
comment period prior to final revisions or enactment by HUD.
Fannie Mae's and Freddie Mac's current guidelines regarding cancellation of
mortgage insurance generally provide that a borrower's written request to cancel
mortgage insurance should be honored if: (a) the borrower has a satisfactory
payment record, no payment more than 30 days delinquent in the 12-month period
preceding the request for cancellation; and (b) the unpaid principal balance of
the mortgage is not greater than 80% of the original value of the property. (See
IC4 for a discussion of Federal legislation providing for guidelines for
automatic mortgage insurance cancellation)
In January, Fannie Mae and Freddie Mac announced increases in the maximum
principal balance of loans eligible for purchase for purchase by Fannie Mae and
Freddie Mac to $240,000. Although management believes that it is too early to
ascertain the impact of the increase in the maximum individual loan amount the
GSEs can insure, management believes any increase in the maximum loan amount
would likely increase the number of loans eligible for mortgage insurance and
may have the effect of increasing the size of the mortgage insurance market, and
have a positive effect on the competitive position of PMI and consequently could
materially 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. (See IC2)
INSURANCE IN FORCE (IC4)
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 six to eight years. The
policy owner or servicer of the loan may cancel insurance coverage 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
23
<PAGE>
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.
Upon request by an insured, PMI must cancel the mortgage insurance for a
mortgage loan. In addition, The Home Owners Protection Act of 1998 (the "Act"),
which is effective on July 29, 1999, provides for the automatic termination, or
cancellation upon a borrower's request, of private mortgage insurance upon
satisfaction of certain conditions. The Act applies to owner-occupied
residential mortgage loans regardless of lien priority, with borrower-paid
mortgage insurance, which closed after the effective date of the Act. FHA loans
are not covered by the Act. Under the Act, automatic termination of mortgage
insurance would generally occur once the loan-to-value ratio ("LTV") reaches
78%. A borrower may generally request cancellation of mortgage insurance once
the LTV reaches 80% of the home's original value, or when actual payments reduce
the loan balance to 80% of the home's original value, whichever occurs earlier.
For borrower initiated cancellation of mortgage insurance, the borrower must
have a good payment history. Good payment history generally requires that there
have been no payments during the 12-month period preceding the loan's
cancellation date 30 days or more past due, or 60 days or more past due during
the 12-month period beginning 24 months before the loan's cancellation date.
Loans that are deemed "high risk" by the GSEs, require automatic termination of
mortgage insurance coverage once the LTV is first scheduled to reach 77% of the
original value of the property without regard to the actual outstanding balance.
The Act preempts all but more protective, preexisting state laws. Protected
state laws are preempted if inconsistent with the Act. Protected state laws are
consistent with the Act if they require: (i) termination of mortgage insurance
at an earlier date or higher mortgage principal balance than required by the
Act, or (ii) disclosure of more, earlier, or more frequent information. States
that enacted mortgage insurance cancellation laws on or before January 2, 1998,
have until July 29, 2000 to make their statutes consistent with the Act. States
that currently have mortgage insurance cancellation or notification laws
include: California, Connecticut, Illinois, Maryland, Minnesota, Missouri, New
York, Texas and Washington. Management is uncertain about the impact of the Act
on PMI's insurance in force, but believes any reduction in premiums attributed
to the Act's required cancellation of mortgage insurance, will not have a
significant impact on the Company's financial condition and results of operation
for the foreseeable future. (See IC10)
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 with
higher rates of interest. 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. During the first half of 1999, mortgage
loan refinancings continued at a higher than expected rate. Management
anticipates that the refinancing trend will decrease in the second half of 1999.
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 financial condition and results of operations.
RATING AGENCIES (IC5)
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, principally PMI's capital
resources as computed by the rating agencies, and are not applicable to the
Company's common stock or outstanding debt. During June 1999, Standard & Poor's
and Moody's affirmed the AA+
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<PAGE>
and Aa2, respectively, financial strength rating and claims-paying ability
rating of PMI. During March 1999, Moody's announced that it changed PMI's and
TPG's rating outlook from stable to negative, stating such action was based on
TPG's stock repurchases, PMI's writing of GSE pool and diversification into new
sectors.
Rating agencies generally assess capital charges on pool insurance policies
based on price and structure. One published methodology for assessing the
capital requirement for pool insurance is based on the real estate depression
that occurred in oil producing states during the mid-1980's. Management believes
the current capital charge that could be levied on pool insurance risk by one
rating agency is approximately $1.00 of capital for each $1.40 of pool insurance
risk. In comparison, primary mortgage insurance regulators specifically limit
the amount of insurance risk that may be written by PMI according to a number of
financial tests, including limiting risk, to a multiple of 25 times PMI's
statutory capital (which includes the contingency reserve). The rating agencies
could change their view as to the capital charges that are assessed on pool
insurance products at any time. (See IC10)
Management believes that a reduction in PMI's claims-paying ratings below AA-
could have a material, adverse effect on the Company's financial condition and
results of operations. (See IC3 and IC6)
LIQUIDITY (IC6)
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. The level and severity of claims significantly
influence liquidity requirements.
TPG's principal sources of funds are dividends from PMI and APTIC, investment
income and funds that may be raised from time to time in the capital markets.
Numerous factors bear on the Company's ability to maintain and meet its capital
and liquidity needs, including the performance of the financial markets,
standards and factors used by various credit rating agencies, financial
covenants in credit agreements, and standards imposed by state insurance
regulators relating to the payment of dividends by insurance companies. Any
significant change in the performance of the financial markets negatively
affecting the Company's ability to secure sources of capital, or changes in the
standards used by credit rating agencies which adversely impact PMI's claims-
paying ability rating, or changes in the insurance laws of Arizona, Florida or
Wisconsin that restrict the ability of PMI, APTIC or CMG to pay dividends at
currently permissible levels, could adversely affect the Company's ability to
maintain capital resources to meet its business needs, and thereby have a
material, adverse affect on the Company's financial condition, liquidity and
results of operations.
CONTRACT UNDERWRITING SERVICES; NEW PRODUCTS (IC7)
The Company provides contract underwriting services for a fee that enable
customers to improve the efficiency and quality of their operations by
outsourcing all or part of their mortgage loan underwriting. As a part of its
contract underwriting services, PMI provides remedies that may include the
assumption of some of the costs of repurchasing insured and uninsured loans from
the GSEs and other investors. Generally, the scopes of these remedies are in
addition to those contained in PMI's master primary insurance policies. 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, or any significant increase in the cost PMI incurs to
satisfy remedy obligations
25
<PAGE>
for underwriting services, 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.
NEW YORK DEPARTMENT OF INSURANCE (IC8)
In February 1999, the New York Department of Insurance stated in Circular Letter
No. 2, addressed to all private mortgage insurers licensed in New York that
certain pool risk-share and structured products and programs would be considered
to be illegal under New York law. PMI believes that it complies with the
requirements of Circular Letter No. 2 with respect to transactions that are
governed by it. In the event the New York Department of Insurance determined PMI
was not in compliance with Circular Letter No. 2, it could materially and
adversely affect the Company's financial condition and results of operations.
RISK-TO-CAPITAL RATIO (IC9)
The State of Arizona, PMI's state of domicile for insurance regulatory purposes,
and other regulators specifically limit the amount of insurance risk that may be
written by PMI, by a variety of financial factors. For example, Arizona law
provides that if a mortgage guaranty insurer domiciled in Arizona does not have
the amount of minimum policyholders position required, it must cease transacting
new business until its minimum policyholders position meets the requirements.
Under Arizona law, minimum policyholders position is calculated based on the
face amount of the mortgage, the percentage coverage or claim settlement option
and the loan to value ratio category, net of reinsurance ceded, but including
reinsurance assumed. For example, under Arizona law, a mortgage guaranty insurer
would have to maintain minimum policyholders position equal to $1.00 per each
one hundred dollars of the face amount of the mortgage, provided the LTV was
greater than seventy-five percent and the coverage percent was twenty-five
percent. The amount of minimum policyholders position would generally increase
if the mortgage amount remained constant, but the coverage percentages and/or
LTV amounts increased.
Other factors affecting PMI's risk-to-capital ratio include: (i) 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; (ii) TPG's credit agreements and the terms
of its guaranty of the debt incurred to purchase MGICA; and (iii) TPG's and
PMI's credit or claims-paying ability ratings which generally require that the
rating agencies' 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 (IC10)
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 June 30,
1999, 45.9% of PMI's risk in force consisted of 95s, which, in
26
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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 June 30, 1999, 4.1% of PMI's risk in force consisted of 97s that 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. Since the
fourth quarter of 1997, PMI has offered a new pool insurance product. 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 that did not
require primary insurance, in each case up to a stated aggregate loss limit. New
pool risk written was $61.0 million for the quarter ended June 30, 1999 and
$103.0 million for the six months ended June 30, 1999. Management is uncertain
about the amount of new pool risk that will be written in 1999, but believes
total new 1999 pool risk will be less than in 1998. 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. (See IC5)
POTENTIAL INCREASE IN CLAIMS (IC11)
Mortgage insurance coverage generally cannot be canceled by PMI and remains
renewable at the option of the insured until required to be canceled under
applicable Federal or state laws 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. (See
IC5)
LOSS RESERVES (IC12)
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 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 (IC13)
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 16.6%, 7.5% and 7.3% of its risk in force concentrated and where the default
rate on all PMI policies in force is 2.59%, 2.66% and 1.87% compared with 1.99%
nationwide as of June 30, 1999.
27
<PAGE>
CONTINUING RELATIONSHIPS WITH ALLSTATE AND AFFILIATE (IC14)
In December 1993, PMI entered into a Mortgage Pool Mortgage Guaranty Insurance
Reinsurance Treaty ("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. The Reinsurance Treaty was amended in October 1994 to add a cut-
through provision and to provide that Forestview would assume PMI's obligations
under the run-off mortgage pool insurance policies after receipt of all
regulatory and policyholder approvals. The majority of Forestview's business is
currently comprised of the run-off mortgage pool business ceded by PMI pursuant
to the Reinsurance Treaty.
Pursuant to the Recapture Agreement, PMI and Forestview have agreed to commute
the Reinsurance Treaty and to recapture liabilities ceded by PMI to Forestview
under both the Reinsurance Treaty and a Mortgage Guaranty Insurance Reinsurance
Treaty ("Deep Cover Treaty") effective December 31, 1991, and terminated as of
October 27, 1994, pursuant to a Termination Agreement. Closing of the
transactions that are the subject of the Recapture Agreement is subject to
regulatory approvals, which are expected to be received in 1999.
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. No payment
obligations have arisen under the Runoff Support Agreement.
CAPTIVE REINSURANCE ARRANGEMENTS; RISK-SHARING TRANSACTIONS (IC15)
PMI offers various risk-sharing structured transactions, including a captive
reinsurance arrangement as part of its strategic relationships with its
customers. PMI's customers have indicated an increasing demand for captive
reinsurance arrangements. Such arrangements allow a reinsurance company,
generally an affiliate of the lender, to assume a portion of the mortgage
insurance default risk in exchange for a portion of the insurance premiums. An
increasing percentage of PMI's NIW is being generated by customers with captive
reinsurance companies, and it is expected that this trend will increase,
resulting in a decrease in net premiums written which may negatively impact the
yield obtained in the Company's net premiums earned for such customers with
captive reinsurance arrangements. There can be no assurance that PMI's risk-
sharing structured transactions, including captive reinsurance arrangements,
will continue to be accepted by its customers. The inability of the Company to
provide its customers with acceptable risk-sharing structured transactions,
including potentially increasing levels of premium cessions in captive
reinsurance arrangements, would likely have an adverse effect on the competitive
position of PMI and consequently could materially and adversely affect the
Company's financial condition, liquidity and results of operations.
28
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THE PMI GROUP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
June 30, 1999
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
At June 30, 1999, the average duration of the Company's fixed income investment
portfolio was 5.6 years, and the Company had no derivative financial instruments
in its investment portfolio. The result of a 1% increase in interest rates would
be a 5.8% decrease in the value of the Company's investment portfolio, while the
result of a 1% decrease in interest rates would be a 5.0% increase in the value
of the Company's investment portfolio.
Item 4 - Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 20, 1999, the
following individuals were elected to the Board of Directors:
<TABLE>
<CAPTION>
1. Election of Directors
Votes For Votes Withheld
---------- --------------
<S> <C> <C>
Dr. James C. Castle 25,118,855 6,599
Donald C. Clark 25,118,620 6,834
W. Roger Haughton 25,119,195 6,259
Wayne E. Hedien 25,119,255 6,199
Raymond L. Ocampo Jr. 25,118,955 6,499
John D. Roach 25,119,060 6,394
Dr. Kenneth T. Rosen 25,119,020 6,434
Richard L. Thomas 25,119,295 6,159
Mary Lee Widener 25,118,855 6,599
Ronald H. Zech 25,118,920 6,534
</TABLE>
The following proposals were approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
Votes for Votes against Votes withheld Broker Non-Vote
-------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
2. Appointment of Deloitte & Touche LLP
as independent auditors of the Company
for 1999 25,119,861 2,508 3,085 0
3. Approval of amendment and restatement
of the Company's Equity Incentive Plan 19,008,169 5,101,893 23,670 991,722
4. Approval of the Company's
Employee Stock Purchase Plan 23,903,678 213,188 16,866 991,722
5. Approval of the Company's
Bonus Incentive Plan 24,761,395 342,356 21,703 0
</TABLE>
Item 5 - Other Information
New federal legislation relating to the year 2000 issue (the "Y2K Act") was
adopted on July 20, 1999. The purpose of the Y2K Act is to restructure how
litigation associated with the year 2000 date change will proceed.
29
<PAGE>
The Y2K Act does not create any new causes of action or expand any liability
otherwise imposed or limit any defense otherwise available under Federal or
State law. The Y2K Act applies to all types of civil litigation brought after
January 1, 1999 for a Y2K failure occurring before January 1, 2003, excluding
actions filed in foreign courts, personal injury or wrongful death claims,
arbitration claims before an arbitration panel, claims arising under securities
law, and actions brought by a government entity acting in a regulatory or
supervisory or enforcement capacity. Major provisions of the Y2K Act include a
requirement that: (1) plaintiffs give potential defendants notice of their
damages and an opportunity to fix the problem; (2) plaintiffs specify damages
with particularity; (3) limits parties suffering economic losses to contract
damages only; (4) strict enforcement of the terms of contracts, including
disclaimers of warranties; (5) assessment of liability on a proportional basis;
(6) limitation on punitive damages; and (7) a requirement that in a class
action, any product defect be material as to a majority of the class.
Generally, the Y2K Act supersedes state law to the extent such law is
inconsistent with the Federal statute. The Y2K Act, however, does grant
deference to any State law that provides stricter limits on damages and
liabilities or affords greater protection to defendants in Y2K actions (e.g.,
cap on damages and liabilities at a lower amount, greater burden of proof, or
limits on types of damages available than provided under the federal statute).
States that currently have legislation that reallocate liability for Y2K
failures or alter procedures used to adjudicate Y2K disputes include: Alaska,
Arizona, California, Colorado, Connecticut, Florida, Hawaii, Minnesota,
Nebraska, North Carolina, North Dakota, Oklahoma, South Carolina, South Dakota,
Tennessee, Texas, Virginia, and Washington.
The Y2K Act also precludes foreclosures on any residential mortgage against a
consumer as a result of an actual Y2K failure that results in an inability
accurately or timely to process any mortgage payment. Generally, a consumer
must take action, by notifying in writing the person receiving mortgage
payments, within seven business days of learning of the Y2K failure and of their
inability to fulfill their payment obligations. Unless the servicer of the
mortgage has granted a longer extension, a consumer may obtain an extension of
the foreclosure action until the later of (1) four weeks after January 1 2000,
or (2) fours weeks after the consumer provided notification, provided the
notification was provided before March 15, 2000. The limited protections from
foreclosure do not apply to any mortgage upon which a default has occurred
before December 15, 1999, or with respect to which an imminent default was
foreseeable before such date.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Form 10-Q
(b) Reports on Form 8-K:
(i) On June 10, 1999, TPG filed a report on Form 8-K
announcing that it agreed to acquire MGICA, Ltd., the
second largest mortgage insurance company in Australia.
(ii) On July 21, 1999, TPG filed a report on Form 8-K
announcing that its Board of Directors declared a 3-for-2
stock split and increased its quarterly cash dividend
rate, effective for the third quarter, to six (6) cents
pre-split per share. The record date for the stock split
is July 30, 1999. The payment date for the stock split is
August 16, 1999.
30
<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 August 16, 1999.
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
31
<PAGE>
INDEX TO EXHIBITS
(Part II, Item 6)
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ----------------- --------------------------------------------------------------------------------------
<S> <C>
4.1 Credit Agreement, dated as of August 3, 1999 by and among PMI Mortgage Insurance
Australia (Holdings) Pty Limited, The PMI Group, Inc., and Bank of America, N.A. The
Company agrees to furnish to the Securities and Exchange Commission, upon request,
copies of all instruments defining the rights of holders of long-term debt of the
Company where the total amount of securities authorized under each issue does not
exceed ten percent of the Company's total assets.
4.2 Credit Agreement, dated as of February 1, 1996, between The PMI Group, Inc., and The
Chase Manhattan Bank, as amended. The Company agrees to furnish to the Securities
and Exchange Commission, upon request, copies of all instruments defining the rights
of holders of long-term debt of the Company where the total amount of securities
authorized under each issue does not exceed ten percent of the Company's total assets.
4.3 Credit Agreement, dated as of February 13, 1996, between The PMI Group, Inc., and
Bank of America National Trust and Savings Association, as amended. The Company
agrees to furnish to the Securities and Exchange Commission, upon request, copies of
all instruments defining the rights of holders of long-term debt of the Company where
the total amount of securities authorized under each issue does not exceed ten
percent of the Company's total assets.
10.1 The PMI Group, Inc., Employee Stock Purchase Plan (amended and restated as of May 20,
1999)
10.2 The PMI Group, Inc., Stock Plan For Non-employee Directors (amended and restated as
of May 20, 1999)
10.3 The PMI Group, Inc., Supplemental Employee Retirement Plan (amended and restated as
of May 20, 1999)
10.4 The PMI Group, Inc., Additional Benefit Plan dated as of February 18, 1999
10.5 The PMI Group, Inc., Directors' Deferred Compensation Plan (amended and restated as
of July 21, 1999)
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule
</TABLE>
32
<PAGE>
THE PMI GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
(Amended and Restated as of May 20, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1 PURPOSE....................................................... 1
SECTION 2 DEFINITIONS................................................... 1
2.1 "1934 Act"........................................................ 1
2.2 "Board"........................................................... 1
2.3 "Code"............................................................ 1
2.4 "Committee"....................................................... 1
2.5 "Common Stock".................................................... 1
2.6 "Company"......................................................... 1
2.7 "Compensation".................................................... 1
2.8 "Eligible Employee"............................................... 1
2.9 "Employee"........................................................ 2
2.10 "Employer" or "Employers"......................................... 2
2.11 "Enrollment Date"................................................. 2
2.12 "Grant Date"...................................................... 2
2.13 "Participant"..................................................... 2
2.14 "Plan"............................................................ 2
2.15 "Purchase Date"................................................... 2
2.16 "Subsidiary"...................................................... 2
SECTION 3 SHARES SUBJECT TO THE PLAN.................................... 2
3.1 Number Available.................................................. 2
3.2 Adjustments....................................................... 2
SECTION 4 ENROLLMENT.................................................... 2
4.1 Participation..................................................... 2
4.2 Payroll Withholding............................................... 3
SECTION 5 OPTIONS TO PURCHASE COMMON STOCK.............................. 3
5.1 Grant of Option................................................... 3
5.2 Duration of Option................................................ 3
5.3 Number of Shares Subject to Option................................ 3
5.4 Other Terms and Conditions........................................ 3
SECTION 6 PURCHASE OF SHARES............................................ 4
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE> Page
<S> <C>
6.1 Exercise of Option................................................ 4
6.2 Delivery of Shares................................................ 4
6.3 Exhaustion of Shares.............................................. 4
SECTION 7 WITHDRAWAL.................................................... 4
7.1 Withdrawal........................................................ 4
SECTION 8 CESSATION OF PARTICIPATION........ ........................... 4
8.1 Termination of Status as Eligible Employee........................ 4
SECTION 9 DESIGNATION OF BENEFICIARY.................................... 5
9.1 Designation....................................................... 5
9.2 Changes........................................................... 5
9.3 Failed Designations............................................... 5
SECTION 10 ADMINISTRATION................................................ 5
10.1 Plan Administrator................................................ 5
10.2 Actions by Committee.............................................. 5
10.3 Powers of Committee............................................... 5
10.4 Decisions of Committee............................................ 6
10.5 Administrative Expenses........................................... 6
10.6 Eligibility to Participate........................................ 6
10.7 Indemnification................................................... 6
SECTION 11 AMENDMENT, TERMINATION, AND DURATION.......................... 7
11.1 Amendment, Suspension, or Termination............................. 7
11.2 Duration of the Plan.............................................. 7
SECTION 12 GENERAL PROVISIONS............................................ 7
12.1 Participation by Subsidiaries..................................... 7
12.2 Inalienability.................................................... 7
12.3 Severability...................................................... 7
12.4 Requirements of Law............................................... 7
12.5 Compliance with Rule 16b-3........................................ 7
12.6 No Enlargement of Employment Rights............................... 8
12.7 Apportionment of Costs and Duties................................. 8
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE> Page
<S> <C>
12.8 Construction and Applicable Law................................... 8
12.9 Captions.......................................................... 8
12.10 EXECUTION......................................................... 8
</TABLE>
-iii-
<PAGE>
THE PMI GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
SECTION 1
PURPOSE
The PMI Group, Inc. hereby establishes The PMI Group, Inc. Employee
Stock Purchase Plan, effective as of July 23, 1998, in order to provide eligible
employees of the Company and its participating Subsidiaries with the opportunity
to purchase Common Stock through payroll deductions. The Plan is intended to
qualify as an employee stock purchase plan under Section 423(b) of the Code.
SECTION 2
DEFINITIONS
2.1 "1934 Act" means the Securities Exchange Act of 1934, as amended.
--------
Reference to a specific Section of the 1934 Act or regulation thereunder shall
include such Section or regulation, any valid regulation promulgated under such
Section, and any comparable provision of any future legislation or regulation
amending, supplementing or superseding such Section or regulation.
2.2 "Board" means the Board of Directors of the Company.
-----
2.3 "Code" means the Internal Revenue Code of 1986, as amended.
----
Reference to a specific Section of the Code or regulation thereunder shall
include such Section or regulation, any valid regulation promulgated under such
Section, and any comparable provision of any future legislation or regulation
amending, supplementing or superseding such Section or regulation.
2.4 "Committee" shall mean the committee appointed by the Board to
---------
administer the Plan. Any member of the Committee may resign at any time by
notice in writing mailed or delivered to the Secretary of the Company. As of
the effective date of the Plan, the Plan shall be administered by the
Compensation and Nominating Committee of the Board.
2.5 "Common Stock" means the common stock of the Company.
------------
2.6 "Company" means The PMI Group, Inc., a Delaware corporation.
-------
2.7 "Compensation" means a Participant's base salary or regular wages
------------
(including sick pay and vacation pay). The Committee, in its discretion, may
(on a uniform and nondiscriminatory basis) establish a different definition of
Compensation prior to an Enrollment Date for all options to be granted on such
Enrollment Date.
2.8 "Eligible Employee" means every Employee of an Employer, except
-----------------
(a) any Employee who immediately after the grant of an option under the Plan,
would own stock and/or hold outstanding options to purchase stock possessing
five percent (5%) or more of the total combined voting power or value of all
classes of stock of the Company or of any Subsidiary of the Company (including
stock attributed to such Employee pursuant to Section 424(d) of the Code), or
(b) as provided in the following sentence. The Committee, in its discretion,
from time to time may, prior to an Enrollment Date for all options to be granted
on such Enrollment Date, determine (on a uniform and nondiscriminatory basis)
that an Employee shall not be an Eligible Employee if he or she: (1) has not
completed at least one year of service since his or her last hire date (or such
lesser period of time as may be determined by the Committee in its discretion),
1
<PAGE>
(2) customarily works not more than 20 hours per week (or such lesser period of
time as may be determined by the Committee in its discretion), (3) customarily
works not more than 5 months per calendar year (or such lesser period of time as
may be determined by the Committee in its discretion), or (4) is an officer or
other manager.
2.9 "Employee" means an individual who is a common-law employee of
--------
any Employer, whether such employee is so employed at the time the Plan is
adopted or becomes so employed subsequent to the adoption of the Plan.
2.10 "Employer" or "Employers" means any one or all of the Company
-------- ---------
and those Subsidiaries which, with the consent of the Board, have adopted the
Plan.
2.11 "Enrollment Date" means such dates as may be determined by the
---------------
Committee (in its discretion and on a uniform and nondiscriminatory basis) from
time to time.
2.12 "Grant Date" means any date on which a Participant is granted an
----------
option under the Plan.
2.13 "Participant" means an Eligible Employee who (a) has become a
-----------
Participant in the Plan pursuant to Section 4.1 and (b) has not ceased to be a
Participant pursuant to Section 8 or Section 9.
2.14 "Plan" means The PMI Group, Inc. Employee Stock Purchase Plan,
----
as set forth in this instrument and as hereafter amended from time to time.
2.15 "Purchase Date" means such dates as may be determined by the
-------------
Committee (in its discretion and on a uniform and nondiscriminatory basis) from
time to time prior to an Enrollment Date for all options to be granted on such
Enrollment Date.
2.16 "Subsidiary" means any corporation in an unbroken chain of
----------
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
SECTION 3
SHARES SUBJECT TO THE PLAN
3.1 Number Available. A maximum of 200,000 shares of Common Stock
----------------
shall be available for issuance pursuant to the Plan. Shares sold under the
Plan may be newly issued shares or treasury shares.
3.2 Adjustments. In the event of any reorganization,
-----------
recapitalization, stock split, reverse stock split, stock dividend, combination
of shares, merger, consolidation, offering of rights or other similar change in
the capital structure of the Company, the Board may make such adjustment, if
any, as it deems appropriate in the number, kind and purchase price of the
shares available for purchase under the Plan and in the maximum number of shares
subject to any option under the Plan.
SECTION 4
ENROLLMENT
4.1 Participation. Each Eligible Employee may elect to become a
-------------
Participant by enrolling or re-enrolling in the Plan effective as of any
Enrollment Date. In order to enroll, an Eligible Employee must complete, sign
and submit to the Company an enrollment form in such
2
<PAGE>
form, manner and by such deadline as may be specified by the Committee from time
to time (in its discretion and on a nondiscriminatory basis). Any Participant
whose option expires and who has not withdrawn from the Plan automatically will
be re-enrolled in the Plan on the Enrollment Date immediately following the
Purchase Date on which his or her option expires.
4.2 Payroll Withholding. On his or her enrollment form, each
-------------------
Participant must elect to make Plan contributions via payroll withholding from
his or her Compensation. Pursuant to such procedures as the Committee may
specify from time to time, a Participant may elect to have withholding equal to
any whole percentage (or such other percentage that the Committee may establish
from time to time for all options to be granted on any Enrollment Date). A
Participant may elect to increase or decrease his or her rate of payroll
withholding by submitting a new enrollment form in accordance with such
procedures as may be established by the Committee from time to time. A
Participant may stop his or her payroll withholding by submitting a new
enrollment form in accordance with such procedures as may be established by the
Committee from time to time. In order to be effective as of a specific date, an
enrollment form must be received by the Company no later than the deadline
specified by the Committee, in its discretion and on a nondiscriminatory basis,
from time to time. Any Participant who is automatically re-enrolled in the Plan
will be deemed to have elected to continue his or her contributions at the
percentage last elected by the Participant.
SECTION 5
OPTIONS TO PURCHASE COMMON STOCK
5.1 Grant of Option. On each Enrollment Date on which the
---------------
Participant enrolls or re-enrolls in the Plan, he or she shall be granted an
option to purchase shares of Common Stock.
5.2 Duration of Option. Each option granted under the Plan shall
------------------
expire on the earliest to occur of (a) the completion of the purchase of shares
on the last Purchase Date occurring within 27 months of the Grant Date of such
option, (b) such shorter option period as may be established by the Committee
from time to time prior to an Enrollment Date for all options to be granted on
such Enrollment Date, or (c) the date on which the Participant ceases to be such
for any reason. Until otherwise determined by the Committee for all options to
be granted on an Enrollment Date, the period referred to in clause (b) in the
preceding sentence shall mean the period from the applicable Enrollment Date
through the last business day prior to the immediately following Enrollment
Date.
5.3 Number of Shares Subject to Option. The number of shares
----------------------------------
available for purchase by each Participant under the option will be established
by the Committee from time to time prior to an Enrollment Date for all options
to be granted on such Enrollment Date. In addition and notwithstanding the
preceding, an option (taken together with all other options then outstanding
under this Plan and under all other similar employee stock purchase plans of the
Employers) shall not give the Participant the right to purchase shares at a rate
which accrues in excess of $25,000 of fair market value at the applicable Grant
Dates of such shares in any calendar year during which such Participant is
enrolled in the Plan at any time.
5.4 Other Terms and Conditions. Each option shall be subject to the
--------------------------
following additional terms and conditions:
(a) payment for shares purchased under the option shall be made only
through payroll withholding under Section 4.2;
(b) purchase of shares upon exercise of the option will be
accomplished only in accordance with Section 6.1;
3
<PAGE>
(c) the price per share under the option will be determined as
provided in Section 6.1; and
(d) the option in all respects shall be subject to such other terms
and conditions (applied on a uniform and nondiscriminatory basis), as the
Committee shall determine from time to time in its discretion.
SECTION 6
PURCHASE OF SHARES
6.1 Exercise of Option. Subject to Section 6.2, on each Purchase
------------------
Date, the funds then credited to each Participant's account shall be used to
purchase whole shares of Common Stock. Any cash remaining after whole shares of
Common Stock have been purchased shall be used to purchase fractional shares of
Common Stock. The price per Share of the Shares purchased under any option
granted under the Plan shall be eighty-five percent (85%) of the lower of:
(a) the average of the high and low price per Share on the Grant Date
for such option on the New York Stock Exchange; or
(b) the average of the high and low price per Share on the Purchase
Date on the New York Stock Exchange.
6.2 Delivery of Shares. As directed by the Committee in its sole
------------------
discretion, shares purchased on any Purchase Date shall be delivered directly to
the Participant or to a custodian or broker (if any) designated by the Committee
to hold shares for the benefit of the Participants. As determined by the
Committee from time to time, such shares shall be delivered as physical
certificates or by means of a book entry system.
6.3 Exhaustion of Shares. If at any time the shares available under
--------------------
the Plan are over-enrolled, enrollments shall be reduced proportionately to
eliminate the over-enrollment. Such reduction method shall be "bottom up", with
the result that all option exercises for one share shall be satisfied first,
followed by all exercises for two shares, and so on, until all available shares
have been exhausted. Any funds that, due to over-enrollment, cannot be applied
to the purchase of whole shares shall be refunded to the Participants (without
interest thereon).
SECTION 7
WITHDRAWAL
7.1 Withdrawal. A Participant may withdraw from the Plan by
----------
submitting a completed enrollment form to the Company. A withdrawal will be
effective only if it is received by the Company by the deadline specified by the
Committee (in its discretion and on a uniform and nondiscriminatory basis) from
time to time. When a withdrawal becomes effective, the Participant's payroll
contributions shall cease and all amounts then credited to the Participant's
account shall be distributed to him or her (without interest thereon).
SECTION 8
CESSATION OF PARTICIPATION
8.1 Termination of Status as Eligible Employee. A Participant shall
------------------------------------------
cease to be a Participant immediately upon the cessation of his or her status as
an Eligible Employee (for example, because of his or her termination of
employment from all Employers for any reason). As soon as practicable after
such cessation, the Participant's payroll contributions shall cease and all
amounts then credited to the Participant's account shall be distributed to him
or her (without
4
<PAGE>
interest thereon). If a Participant is on a Company-approved leave of absence,
his or her participation in the Plan shall continue for so long as he or she
remains an Eligible Employee and has not withdrawn from the Plan pursuant to
Section 7.1.
SECTION 9
DESIGNATION OF BENEFICIARY
9.1 Designation. Each Participant may, pursuant to such uniform and
-----------
nondiscriminatory procedures as the Committee may specify from time to time,
designate one or more Beneficiaries to receive any amounts credited to the
Participant's account at the time of his or her death. Notwithstanding any
contrary provision of this Section 9, Sections 9.1 and 9.2 shall be operative
only after (and for so long as) the Committee determines (on a uniform and
nondiscriminatory basis) to permit the designation of Beneficiaries.
9.2 Changes. A Participant may designate different Beneficiaries
-------
(or may revoke a prior Beneficiary designation) at any time by delivering a new
designation (or revocation of a prior designation) in like manner. Any
designation or revocation shall be effective only if it is received by the
Committee. However, when so received, the designation or revocation shall be
effective as of the date the designation or revocation is executed (whether or
not the Participant still is living), but without prejudice to the Committee on
account of any payment made before the change is recorded. The last effective
designation received by the Committee shall supersede all prior designations.
9.3 Failed Designations. If a Participant dies without having
-------------------
effectively designated a Beneficiary, or if no Beneficiary survives the
Participant, the Participant's Account shall be payable to his or her estate.
SECTION 10
ADMINISTRATION
10.1 Plan Administrator. The Plan shall be administered by the
------------------
Committee. The Committee shall have the authority to control and manage the
operation and administration of the Plan.
10.2 Actions by Committee. Each decision of a majority of the
--------------------
members of the Committee then in office shall constitute the final and binding
act of the Committee. The Committee may act with or without a meeting being
called or held and shall keep minutes of all meetings held and a record of all
actions taken by written consent.
10.3 Powers of Committee. The Committee shall have all powers and
-------------------
discretion necessary or appropriate to supervise the administration of the Plan
and to control its operation in accordance with its terms, including, but not by
way of limitation, the following discretionary powers:
(a) To interpret and determine the meaning and validity of the
provisions of the Plan and the options and to determine any question
arising under, or in connection with, the administration, operation or
validity of the Plan or the options;
(b) To determine any and all considerations affecting the
eligibility of any employee to become a Participant or to remain a
Participant in the Plan;
(c) To cause an account or accounts to be maintained for each
Participant;
5
<PAGE>
(d) To determine the time or times when, and the number of shares
for which, options shall be granted;
(e) To establish and revise an accounting method or formula for the
Plan;
(f) To designate a custodian or broker to receive shares purchased
under the Plan and to determine the manner and form in which shares are to
be delivered to the designated custodian or broker;
(g) To determine the status and rights of Participants and their
Beneficiaries or estates;
(h) To employ such brokers, counsel, agents and advisers, and to
obtain such broker, legal, clerical and other services, as it may deem
necessary or appropriate in carrying out the provisions of the Plan;
(i) To establish, from time to time, rules for the performance of
its powers and duties and for the administration of the Plan;
(j) To adopt such procedures and subplans as are necessary or
appropriate to permit participation in the Plan by employees who are
foreign nationals or employed outside of the United States; and
(k) To delegate to any one or more of its members or to any other
person, severally or jointly, the authority to perform for and on behalf of
the Committee one or more of the functions of the Committee under the Plan.
10.4 Decisions of Committee. All actions, interpretations, and
----------------------
decisions of the Committee shall be conclusive and binding on all persons, and
shall be given the maximum possible deference allowed by law.
10.5 Administrative Expenses. All expenses incurred in the
-----------------------
administration of the Plan by the Committee, or otherwise, including legal fees
and expenses, shall be paid and borne by the Employers, except any stamp duties
or transfer taxes applicable to the purchase of shares may be charged to the
account of each Participant. Any brokerage fees for the purchase of shares by a
Participant shall be paid by the Company, but fees and taxes (including
brokerage fees) for the transfer, sale or resale of shares by a Participant, or
the issuance of physical share certificates, shall be borne solely by the
Participant.
10.6 Eligibility to Participate. No member of the Committee who is
--------------------------
also an employee of an Employer shall be excluded from participating in the Plan
if otherwise eligible, but he or she shall not be entitled, as a member of the
Committee, to act or pass upon any matters pertaining specifically to his or her
own account under the Plan.
10.7 Indemnification. Each of the Employers shall, and hereby does,
---------------
indemnify and hold harmless the members of the Committee and the Board, from and
against any and all losses, claims, damages or liabilities (including attorneys'
fees and amounts paid, with the approval of the Board, in settlement of any
claim) arising out of or resulting from the implementation of a duty, act or
decision with respect to the Plan, so long as such duty, act or decision does
not involve gross negligence or willful misconduct on the part of any such
individual.
6
<PAGE>
SECTION 11
AMENDMENT, TERMINATION, AND DURATION
11.1 Amendment, Suspension, or Termination. The Board, in its sole
-------------------------------------
discretion, may amend or terminate the Plan, or any part thereof, at any time
and for any reason. If the Plan is terminated, the Board, in its discretion,
may elect to terminate all outstanding options either immediately or upon
completion of the purchase of shares on the next Purchase Date, or may elect to
permit options to expire in accordance with their terms (and participation to
continue through such expiration dates). If the options are terminated prior to
expiration, all amounts then credited to Participants' accounts which have not
been used to purchase shares shall be returned to the Participants (without
interest thereon) as soon as administratively practicable.
11.2 Duration of the Plan. The Plan shall commence on the date
--------------------
specified herein, and subject to Section 11.1 (regarding the Board's right to
amend or terminate the Plan), shall remain in effect thereafter.
SECTION 12
GENERAL PROVISIONS
12.1 Participation by Subsidiaries. One or more Subsidiaries of the
-----------------------------
Company may become participating Employers by adopting the Plan and obtaining
approval for such adoption from the Board. By adopting the Plan, a Subsidiary
shall be deemed to agree to all of its terms, including (but not limited to) the
provisions granting exclusive authority (a) to the Board to amend the Plan, and
(b) to the Committee to administer and interpret the Plan. An Employer may
terminate its participation in the Plan at any time. The liabilities incurred
under the Plan to the Participants employed by each Employer shall be solely the
liabilities of that Employer, and no other Employer shall be liable for benefits
accrued by a Participant during any period when he or she was not employed by
such Employer.
12.2 Inalienability. In no event may either a Participant, a former
--------------
Participant or his or her Beneficiary, spouse or estate sell, transfer,
anticipate, assign, hypothecate, or otherwise dispose of any right or interest
under the Plan; and such rights and interests shall not at any time be subject
to the claims of creditors nor be liable to attachment, execution or other legal
process. Accordingly, for example, a Participant's interest in the Plan is not
transferable pursuant to a domestic relations order.
12.3 Severability. In the event any provision of the Plan shall be
------------
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
12.4 Requirements of Law. The granting of options and the issuance
-------------------
of shares shall be subject to all applicable laws, rules, and regulations, and
to such approvals by any governmental agencies or securities exchanges as the
Committee may determine are necessary or appropriate.
12.5 Compliance with Rule 16b-3. Any transactions under this Plan
--------------------------
with respect to officers (as defined in Rule 16a-1 promulgated under the 1934
Act) are intended to comply with all applicable conditions of Rule 16b-3. To
the extent any provision of the Plan or action by the Committee fails to so
comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Committee. Notwithstanding any contrary provision of
the Plan, if the Committee specifically determines that compliance with Rule
16b-3 no longer is required, all references in the Plan to Rule 16b-3 shall be
null and void.
7
<PAGE>
12.6 No Enlargement of Employment Rights. Neither the establishment
-----------------------------------
or maintenance of the Plan, the granting of options, the purchase of shares, nor
any action of any Employer or the Committee, shall be held or construed to
confer upon any individual any right to be continued as an employee of the
Employer nor, upon dismissal, any right or interest in any specific assets of
the Employers other than as provided in the Plan. Each Employer expressly
reserves the right to discharge any employee at any time, with or without cause.
12.7 Apportionment of Costs and Duties. All acts required of the
---------------------------------
Employers under the Plan may be performed by the Company for itself and its
Subsidiaries, and the costs of the Plan may be equitably apportioned by the
Committee among the Company and the other Employers. Whenever an Employer is
permitted or required under the terms of the Plan to do or perform any act,
matter or thing, it shall be done and performed by any officer or employee of
the Employers who is thereunto duly authorized by the Employers.
12.8 Construction and Applicable Law. The Plan is intended to
-------------------------------
qualify as an "employee stock purchase plan" within the meaning of Section
423(b) of the Code. Any provision of the Plan which is inconsistent with
Section 423(b) of the Code shall, without further act or amendment by the
Company or the Committee, be reformed to comply with the requirements of Section
423(b). The provisions of the Plan shall be construed, administered and
enforced in accordance with such Section and with the laws of the State of
California (excluding California's conflict of laws provisions).
12.9 Captions. The captions contained in and the table of contents
--------
prefixed to the Plan are inserted only as a matter of convenience, and in no way
define, limit, enlarge or describe the scope or intent of the Plan nor in any
way shall affect the construction of any provision of the Plan.
EXECUTION
IN WITNESS WHEREOF, The PMI Group, Inc., by its duly authorized
officer, has executed this Plan on the date indicated below.
THE PMI GROUP, INC.
Dated: __________, 1999 By ________________________________
Title:
8
<PAGE>
THE PMI GROUP, INC.
STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
(Amended and Restated as of May 20, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1 PURPOSE........................................................................... 1
1.1 Purpose of the Plan............................................................... 1
SECTION 2 DEFINITIONS....................................................................... 1
SECTION 3 ADMINISTRATION.................................................................... 2
3.1 The Committee..................................................................... 2
3.2 Authority of the Committee........................................................ 2
3.3 Decisions Binding................................................................. 3
SECTION 4 SHARES SUBJECT TO THE PLAN........................................................ 3
4.1 Number of Shares.................................................................. 3
4.2 Lapsed Awards..................................................................... 3
4.3 Adjustments in Awards and Authorized Shares....................................... 3
SECTION 5 STOCK OPTIONS..................................................................... 3
5.1 Granting of Options............................................................... 3
5.2 Terms of Options.................................................................. 4
5.3 Payment........................................................................... 4
5.4 Deferral of Option Proceeds....................................................... 5
5.5 Options are not Incentive Stock Options........................................... 6
SECTION 6 RESTRICTED STOCK.................................................................. 6
6.1 Grant of Restricted Stock to Directors Serving on the 1996 Grant Date............. 6
6.2 Grant of Restricted Stock for Directors first elected after the 1996 Grant Date... 6
6.3 Restricted Stock Escrow........................................................... 6
6.4 Voting and other Rights........................................................... 7
6.5 Cash Payment for Income Taxes..................................................... 7
SECTION 7 MISCELLANEOUS..................................................................... 7
7.1 No Effect on Service.............................................................. 7
7.2 Indemnification................................................................... 7
7.3 Successors........................................................................ 7
7.4 Beneficiary Designations.......................................................... 7
7.5 Nontransferability of Awards...................................................... 8
7.6 No Rights as Stockholder.......................................................... 8
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
7.7 Withholding Requirements......................................................... 8
SECTION 8 AMENDMENT, TERMINATION, AND DURATION............................................. 8
8.1 Amendment or Termination......................................................... 8
8.2 Duration of the Plan............................................................. 8
SECTION 9 LEGAL CONSTRUCTION............................................................... 8
9.1 Gender and Number................................................................ 8
9.2 Severability..................................................................... 8
9.3 Requirements of Law.............................................................. 8
9.4 Compliance with Rule 16b-3....................................................... 9
9.5 Governing Law.................................................................... 9
9.6 Captions......................................................................... 9
</TABLE>
-ii-
<PAGE>
THE PMI GROUP, INC.
STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
THE PMI GROUP, INC., hereby amends and restates The PMI Group, Inc. Stock
Plan for Non-Employee Directors, as of May 20, 1999.
SECTION 1
PURPOSE
1.1 Purpose of the Plan. The Plan is intended to closely align the
-------------------
interests of the Non-Employee Directors with the interests of the Company's
stockholders. This is achieved by making a significant portion of Non-Employee
Director compensation directly related to the total return performance of the
Shares. The Plan also is intended to encourage Share ownership on the part of
Non-Employee Directors.
SECTION 2
DEFINITIONS
The following words and phrases shall have the following meanings unless a
different meaning is plainly required by the context:
2.1 "Award" means, individually or collectively, a grant under the Plan of
Options, Restricted Stock, or cash.
2.2 "Board" means the Board of Directors of the Company.
2.3 "Committee" means the committee appointed pursuant to Section 3.1 to
administer the Plan.
2.4 "Company" means The PMI Group, Inc., a Delaware corporation, or any
successor thereto.
2.5 "Director" means any individual who is a member of the Board.
2.6 "Disability" means a permanent and total disability, as determined by
the Committee (in its discretion) in accordance with uniform and non-
discriminatory standards adopted by the Committee from time to time.
2.7 "Exercise Price" means the price at which a Share may be purchased by
a Participant pursuant to the exercise of an Option.
2.8 "Fair Market Value" means the arithmetic mean of the highest and
lowest per share selling prices of the Shares, as quoted in the New York Stock
Exchange Composite Transactions Index for the date in question.
2.9 "Grant Date" means, with respect to 1996 and each subsequent calendar
year, the first business day in June of each such year. For example, for 1996,
the Grant Date is June 3,
<PAGE>
1996 (i.e., the first business day in June 1996). With respect to a particular
Award, "Grant Date" means the particular Grant Date on which the Award was
granted. Notwithstanding the preceding, a Non-Employee Director who is first
elected or appointed on other than the first business day in June, shall have an
initial Grant Date coincident with the date of their commencement of service on
the Board.
2.10 "Non-Employee Director" means a Director who is an employee of
neither the Company nor of any Subsidiary.
2.11 "Option" means an option to purchase Shares granted pursuant to
Section 5.
2.12 "Option Agreement" means the written agreement setting forth the
terms and provisions applicable to each Option granted under the Plan.
2.13 "Participant" means a Non-Employee Director who has an outstanding
Award.
2.14 "Plan" means The PMI Group, Inc. Stock Plan for Non-Employee
Directors, as set forth in this instrument and as hereafter amended from time to
time.
2.15 "Restricted Stock" means an Award of Shares granted pursuant to
Section 6.
2.16 "Shares" means the shares of the Company's common stock, $0.01 par
value.
2.17 "Subsidiary" means any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
2.18 "Termination of Service" means a cessation of the Participant's
service on the Board for any reason.
SECTION 3
ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the Committee. The
-------------
Committee shall consist of one or more Directors who shall be appointed by, and
serve at the pleasure of, the Company's Chief Executive Officer. The Committee
shall be comprised solely of a Director or Directors who are not eligible to
receive Awards under the Plan.
3.2 Authority of the Committee. It shall be the duty of the Committee to
--------------------------
administer the Plan in accordance with the Plan's provisions. The Committee
shall have all powers and discretion necessary or appropriate to administer the
Plan and to control its operation, including, but not limited to, the power to
(a) interpret the Plan and the Awards, (b) adopt rules for the administration,
interpretation and application of the Plan as are consistent therewith, (c)
interpret, amend or revoke any such rules, and (d) adopt such procedures and
subplans as are necessary or appropriate to permit participation in the Plan by
Non-Employee Directors who are foreign nationals or employed outside of the
United States.
2
<PAGE>
3.3 Decisions Binding. All determinations and decisions made by the
-----------------
Committee shall be final, conclusive, and binding on all persons, and shall be
given the maximum deference permitted by law.
SECTION 4
SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to adjustment as provided in Section 4.3,
----------------
the total number of Shares available for grant under the Plan shall not exceed
100,000. Shares issued under the Plan may be either authorized but unissued
Shares or treasury Shares, provided, however, that only treasury Shares may be
issued upon exercise of the portion of each Option granted on or after May 20,
1999 that pertains to the additional 1,000 Shares covered by Options granted on
or after such date.
4.2 Lapsed Awards. If an Award terminates or expires for any reason, any
-------------
Shares subject to such Award again shall be available to be the subject of an
Award.
4.3 Adjustments in Awards and Authorized Shares. In the event of any
-------------------------------------------
merger, reorganization, consolidation, recapitalization, separation,
liquidation, stock dividend, split-up, Share combination, or other change in the
corporate structure of the Company affecting the Shares, the Committee shall
adjust the number and class of Shares which may be delivered under the Plan, and
the number, class, and Exercise Price of Shares subject to outstanding Awards
and future grants, in such manner as the Committee (in its sole discretion)
shall determine to be appropriate to prevent the dilution or diminution of such
Awards. Notwithstanding the preceding, the number of Shares subject to any
Award always shall be a whole number.
SECTION 5
STOCK OPTIONS
5.1 Granting of Options.
-------------------
5.1.1 Directors serving on the 1996 Grant Date. Each Non-Employee
----------------------------------------
Director who is such on the 1996 Grant Date, automatically shall receive, as of
the 1996 Grant Date only, an Option to purchase 3,000 Shares. Each Non-Employee
who has received an Option pursuant to the preceding sentence also automatically
shall receive, as of each subsequent Grant Date, an Option to purchase 1,500
Shares, provided that the individual shall receive an Option on any such Grant
Date only if he or she both (a) is a Non-Employee Director on the Grant Date,
and (b) has served as a Non-Employee Director for the entire period since the
last Grant Date.
5.1.2 Directors first elected or appointed after the 1996 Grant Date.
--------------------------------------------------------------
Each Non-Employee Director who first becomes such after the 1996 Grant Date but
before May 20, 1999, automatically shall receive on his or her initial Grant
Date only (a) an Option to purchase 1,500 Shares, plus (b) an option to purchase
up to an additional 1,500 Shares (prorated based on the number of full months of
service which remain until the next Grant Date). A Director joining the Board on
or before the 15th day of the month will receive credit for service for the full
month. Each Non-Employee Director who first becomes such on or after May 20,
1999 automatically
3
<PAGE>
shall receive on his or her initial Grant Date only an Option to purchase 4,000
Shares. Each Non-Employee Director who first becomes such after the 1996 Grant
Date also shall automatically receive, as of each subsequent Grant Date, an
Option to purchase 1,500 Shares (2,500 Shares for grants made on or after May
20, 1999) annually, provided that the individual shall receive an Option on any
such Grant Date only if he or she both (y) is a Non-Employee Director on the
Grant Date, and (z) has served as a Non-Employee Director for the entire period
since the last Grant Date.
5.2 Terms of Options.
----------------
5.2.1 Option Agreement. Each Option granted pursuant to this Section
----------------
5 shall be evidenced by a written Option Agreement (satisfactory to the
Committee) which shall be executed by the Optionee and the Company.
5.2.2 Exercise Price. The Exercise Price for the Shares subject to
--------------
each Option shall be 100% of the Fair Market Value of such Shares on the
applicable Grant Date.
5.2.3 Exercisability.
--------------
(a) Each Option granted to a Non-Employee Director in his or her
initial year of Board service pursuant to Sections 5.1.2(a) and
(b) (e.g. up to 4,000 shares) shall become exercisable in three
equal annual installments, commencing on the first anniversary
of the applicable Grant Date;
(b) For each Non-Employee Director who automatically receives, as
of each subsequent Grant Date, an Option to purchase 1,500
Shares (2,500 Shares for grants made on or after May 20, 1999)
annually, any such outstanding Option, and such awards granted
on or after July 23, 1998 shall become exercisable as to 100%
of the Shares subject to such Option in full on the first
anniversary of the applicable Grant Date.
Notwithstanding the foregoing, with respect to any outstanding Option, and
awards granted on or after May 21, 1998, upon a Non-Employee Director's death,
disability, retirement, resignation or non-reelection to the Board of Directors,
all unvested options held by such person shall immediately become exercisable.
However, except as specifically set forth above, if a Participant incurs a
Termination of Service prior to his or her Option(s) becoming fully exercisable,
the Option(s) (or portions thereof) which are not exercisable on the date of
Termination of Service shall immediately expire.
5.2.4 Expiration of Options. Subject to the last sentence of Section
---------------------
5.2.3, each Option shall terminate upon the first to occur of the following
events:
(a) The expiration of ten (10) years from the applicable Grant
Date;
(b) The expiration of three (3) months from the date of the
Participant's Termination of Service prior to age 70 for any
reason other than the
4
<PAGE>
Participant's death or Disability, provided that the Committee,
in its discretion, may extend such three-month period to a
maximum of the ten (10) years;
(c) The expiration of two (2) years from the date of the
Participant's Termination of Service by reason of Disability,
or
(d) The expiration of five (5) years from the date of the
Participant's Termination of Service at or after age 70 for any
reason other than the Participant's death or Disability.
5.2.5 Death of Director. Notwithstanding Section 5.2.4, if a
-----------------
Director dies prior to the expiration of his or her Option(s) in accordance with
Section 5.2.4, his or her Option(s) which are exercisable on the date of his or
her death shall terminate two (2) years after the date of death.
5.3 Payment. Options shall be exercised by the Participant's delivery of
-------
a written notice of exercise (satisfactory to the Committee) to the Company in
care of VP Human Resources Department, with a copy to General Counsel, Legal
Department, 601 Montgomery Street, San Francisco, California 94111, or at such
other address as Company may hereafter designate in writing, setting forth the
number of Shares with respect to which the Option is to be exercised, and
accompanied by full payment for the Shares. Upon the exercise of any Option, the
Exercise Price shall be payable to the Company in full in cash or its
equivalent. As soon as practicable after receipt of a written notification of
exercise and full payment for the Shares purchased, the Company shall deliver to
the Participant (or the Participant's designated broker), Share certificates
(which may be in book-entry form) representing such Shares.
5.4 Deferral of Option Proceeds.
---------------------------
(a) Notwithstanding anything herein to the contrary, a Participant
granted an Option hereunder who is eligible to defer income under the Company's
Directors' Deferred Compensation Plan may elect, at the discretion of, and in
accordance with rules which may be established by, the Committee, to defer
delivery of the proceeds of exercise of an Option which is exercised by means of
an exchange of Shares as described in Section 5.4(a)(ii) or (iii), provided, in
either such case, that Shares tendered or applied in exercise of such Option
shall have been held by the Participant for at least six months prior to such
exercise. A Participant's election as provided in the preceding sentence shall
be irrevocable. Notwithstanding any other provision of this Section 5.4, a
deferral election made by a Participant hereunder shall be void and shall not be
given effect unless (i) the Participant's deferral election is made at least six
full calendar months prior to the calendar month in which the option otherwise
would expire, (ii) the Participant's deferral election is made at least six full
calendar months prior to the calendar month in which the option is exercised,
and (iii) the Participant is serving as a Non-Employee Director on the date of
exercise of the Option. For purposes of either or both of clauses (i) or (ii) of
the preceding sentence, rules established by the Committee may require an
election earlier than the six calendar month period described therein. Upon
exercise of an Option to which a
5
<PAGE>
deferral election applies, the Shares covered by such exercise shall not be
issued or transferred to the Participant, and instead, a number of Stock Units,
as defined below, equal to the number of Shares covered by such exercise and in
respect of which the Participant has made a deferral election, shall be credited
to an account in the name of the Participant on the books and records of the
Company (a "Deferred Option Compensation Account") at the date of exercise. A
separate Deferred Option Compensation Account shall be maintained with respect
to each effective deferral election.
(b) For purposes of this Section 5.4, a "Stock Unit" is a bookkeeping
entry initially representing an amount equivalent to the fair market value of
one Share. Stock Units represent an unfunded and unsecured obligation of the
Company, except as otherwise provided for by the Committee. Settlement of Stock
Units shall be made by issuance of Shares on such date or dates or upon the
occurrence of such event or events as the Committee may authorize the
Participant to designate at the time a deferral election is made hereunder,
provided, however, that in no event shall settlement occur more than 60 days
after a Participant's Termination of Service for any reason. The number of
Shares to be so distributed may be increased by dividend equivalents, which may
be valued as if reinvested in Shares. Until a Stock Unit is settled, the number
of Shares represented by a Stock Unit shall be subject to adjustment pursuant to
Section 4.3.
(c) Participants have the status of general unsecured creditors of the
Company with respect to their Deferred Option Compensation Accounts, and such
accounts constitute a mere promise by the Company to make payments with respect
thereto.
(d) A Participant's right to benefit payments with respect to the
Deferred Option Compensation Accounts may not be anticipated, alienated, sold,
transferred, assigned, pledged, encumbered, attached or garnished by creditors
of the Participant or the Participant's beneficiary and any attempt to do so
shall be void and shall not be given effect.
(e) To the extent determined by the Committee, any amount deferred under
this Section 5.4, and any Deferred Option Compensation Account, may be treated
and held as a portion of the Company's Officer Deferred Compensation Plan, in
which event the provisions of said plan shall govern the operation and
administration of deferred amounts hereunder and Deferred Option Compensation
Accounts, to the extent not inconsistent with the provisions of this Section
5.4.
5.5 Options are not Incentive Stock Options. Options are not intended to
---------------------------------------
be incentive stock options within the meaning of Section 422 of the Code.
SECTION 6
RESTRICTED STOCK
6.1 Grant of Restricted Stock to Directors Serving on the 1996 Grant Date.
---------------------------------------------------------------------
Each Non-Employee Director who is such on a Grant Date, automatically shall
receive, as of such Grant Date, an Award of 300 Shares of Restricted Stock.
Notwithstanding the preceding, the number of Shares granted to any Non-Employee
Director on any Grant Date shall be reduced if
6
<PAGE>
and as necessary so that the Fair Market Value of the Shares does not exceed
$30,000 on the Grant Date.
6.2 Grant of Restricted Stock for Directors first elected after the 1996
--------------------------------------------------------------------
Grant Date. Each Non-Employee Director who first becomes such after the 1996
- ----------
Grant Date, automatically shall receive on his or her initial Grant Date only
(a) an Award of 25 Shares of Restricted Stock for each full month of service on
the Board until the next Grant Date and, (b) as of each subsequent Grant Date on
which the Non-Employee Director is such, an Award of 300 Shares of Restricted
Stock. Notwithstanding the preceding, the number of Shares granted to any Non-
Employee Director on any Grant Date shall be reduced if and as necessary so that
the Fair Market Value of the Shares does not exceed $30,000 on the Grant Date. A
Director joining the Board on or before the 15th day of the month will receive
credit for service for the full month.
6.3 Restricted Stock Escrow. For purposes of compliance with Section 9.4,
-----------------------
Shares of Restricted Stock shall not be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated by the Participant until six months after
the applicable Grant Date. Unless the Committee determines otherwise, Shares of
Restricted Stock shall be either (a) held by the Company as escrow agent until
such six-month period expires, or (b) affixed with an appropriate legend
restricting the sale, transfer, pledge, assignment, or other alienation or
hypothecation of such Shares by the Participant until expiration of the six
month period.
6.4 Voting and other Rights. After Shares of Restricted Stock have been
-----------------------
granted, the Participant may exercise full voting rights with respect to such
Shares. A Participant shall be entitled to receive all dividends and other
distributions paid with respect to such Shares. If any such dividends or
distributions are paid in Shares, the Shares shall be subject to the same
restrictions on transferability that are provided in Section 6.2.
6.5 Cash Payment for Income Taxes. As soon as practicable after each
-----------------------------
Grant Date, the Company shall pay to each Non-Employee Director, in cash or its
equivalent, an amount equal to the expected increase in his or her federal,
state and local income tax liability due to the Shares granted to the
Participant on such Grant Date. The formula for determining each such cash
payment shall be adopted by the Committee (in its discretion) from time to time,
but in each case shall assume that the maximum prevailing income tax rates apply
to the Participant.
SECTION 7
MISCELLANEOUS
7.1 No Effect on Service. Nothing in the Plan shall (a) create any
--------------------
obligation on the part of the Board to nominate any Participant for reelection
by the Company's stockholders, or (b) interfere with or limit in any way the
right of the Company to terminate any Participant's service.
7.2 Indemnification. Each person who is or shall have been a member of
---------------
the Committee, or of the Board, shall be indemnified and held harmless by the
Company against and from (a) any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him or her in connection with or
resulting from any claim, action, suit, or proceeding to which he
7
<PAGE>
or she may be a party or in which he or she may be involved by reason of any
action taken or failure to act under the Plan or any Option Agreement, and (b)
from any and all amounts paid by him or her in settlement thereof, with the
Company's approval, or paid by him or her in satisfaction of any judgment in any
such claim, action, suit, or proceeding against him or her, provided he or she
shall give the Company an opportunity, at its own expense, to handle and defend
the same before he or she undertakes to handle and defend it on his or her own
behalf. The foregoing right of indemnification shall not be exclusive of any
other rights of indemnification to which such persons may be entitled under the
Company's Certificate of Incorporation or Bylaws, by contract, as a matter of
law, or otherwise, or under any power that the Company may have to indemnify
them or hold them harmless.
7.3 Successors. All obligations of the Company under the Plan shall be
----------
binding on any successor to the Company, whether the existence of such successor
is the result of a direct or indirect purchase, merger, consolidation, or
otherwise, of all or substantially all of the business or assets of the Company.
7.4 Beneficiary Designations. If permitted by the Committee, a
------------------------
Participant may name a beneficiary or beneficiaries to whom any vested but
unpaid Award shall be paid in the event of the Participant's death. Each such
designation shall revoke all prior designations by the Participant and shall be
effective only if given in a form and manner acceptable to the Committee. In the
absence of any such designation, any vested benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate and, subject to
the terms of the Plan and of the applicable Option Agreement, any unexercised
vested Award may be exercised by the administrator or executor of the
Participant's estate.
7.5 Nontransferability of Awards. No Award granted under the Plan may be
----------------------------
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will, by the laws of descent and distribution, or to the limited
extent provided in Section 7.4. All rights with respect to an Award granted to a
Participant shall be available during his or her lifetime only to the
Participant. Notwithstanding the foregoing, the Participant may, to the extent
provided in the Plan and in a manner specified by the Committee, transfer an
Option by bona fide gift and not for any consideration, to a member of the
Participant's immediate family or to a trust for the exclusive benefit of the
Participant and/or a member or members of the Participant's immediate family.
7.6 No Rights as Stockholder. Except to the limited extent provided in
------------------------
Section 6.4, no Participant (nor any beneficiary) shall have any of the rights
or privileges of a stockholder of the Company with respect to any Shares
issuable pursuant to an Award (or exercise thereof), unless and until
certificates representing such Shares shall have been issued, recorded on the
records of the Company or its transfer agents or registrars, and delivered to
the Participant, beneficiary or Company (as escrow agent).
7.7 Withholding Requirements. Prior to the delivery of any Shares or cash
------------------------
pursuant to an Award (or exercise thereof), the Company shall have the power and
the right to deduct or withhold, or require a Participant to remit to the
Company, an amount sufficient to satisfy
8
<PAGE>
Federal, state, and local taxes (including the Participant's FICA obligation)
required to be withheld with respect to such Award (or exercise thereof).
SECTION 8
AMENDMENT, TERMINATION, AND DURATION
8.1 Amendment or Termination. The Board, in its sole discretion, may
------------------------
amend or terminate the Plan, or any part thereof, at any time and for any
reason. The amendment, suspension, or termination of the Plan shall not, without
the consent of the Participant, alter or impair any rights or obligations under
any Award theretofore granted to such Participant.
8.2 Duration of the Plan. The Plan shall commence on the date specified
--------------------
herein, and subject to Section 8.1 (regarding the Board's right to amend or
terminate the Plan), shall remain in effect thereafter.
SECTION 9
LEGAL CONSTRUCTION
9.1 Gender and Number. Except where otherwise indicated by the context,
-----------------
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
9.2 Severability. In the event any provision of the Plan shall be held
------------
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
9.3 Requirements of Law. The granting of Awards and the issuance of
-------------------
Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
9.4 Compliance with Rule 16b-3. For the purpose of ensuring that
--------------------------
transactions under the Plan do not subject Participants to liability under
Section 16(b) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), all transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3 promulgated under the 1934 Act, and any
future regulation amending, supplementing or superseding such regulation. To the
extent any provision of the Plan, Option Agreement or action by the Committee or
a Participant fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee.
9.5 Governing Law. The Plan and all Option Agreements shall be construed
-------------
in accordance with and governed by the laws of the State of California without
giving effect to any choice or conflict of law provision or rule (whether of the
State of California or otherwise) which would cause the application of the laws
of any jurisdiction other than the State of California.
9.6 Captions. Captions provided herein are for convenience only, and
--------
shall not serve as a basis for interpretation or construction of the Plan.
9
<PAGE>
EXECUTION
IN WITNESS WHEREOF, The PMI Group, Inc., by its duly authorized officer,
has executed the Plan on the date indicated below.
THE PMI GROUP, INC.
Dated: __________, 1999 By__________________________
Title:
10
<PAGE>
THE PMI GROUP, INC.
SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN
EFFECTIVE APRIL 1, 1995
(Amended and Restated as of May 20, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I DEFINITIONS...................................................... 1
1.01 "Committee"..................................................... 1
1.02 "Company"....................................................... 1
1.03 "Covered Compensation".......................................... 1
1.04 "Employer"...................................................... 1
1.05 "Final Average Compensation".................................... 1
1.06 "Participant"................................................... 1
1.07 "Plan".......................................................... 1
1.08 "Retirement Plan Benefits"...................................... 1
1.09 "Retirement Plan"............................................... 1
1.10 "Retired Participant"........................................... 1
1.11 "Spouse"........................................................ 1
1.12 "Trust"......................................................... 1
1.13 "Year of Benefit Accrual Service"............................... 1
ARTICLE II INTRODUCTION.................................................... 2
2.01 Purpose......................................................... 2
2.02 Administration.................................................. 2
ARTICLE III ELIGIBILITY AND AMOUNT OF BENEFITS............................. 2
3.01 Eligibility..................................................... 2
3.02 Amount of Benefit............................................... 2
3.03 Preretirement Surviving Spouse Benefit.......................... 2
3.04 Death Benefits After Retirement................................. 3
ARTICLE IV PAYMENT OF BENEFITS............................................. 3
4.01 Forms and Timing of Benefit Payments............................ 3
4.02 Plan Termination................................................ 3
4.03 Retirement Plan Benefits........................................ 3
4.04 Facility of Payment............................................. 4
4.05 Review of Benefit Determinations................................ 4
4.06 Payment and Funding of Benefits................................. 4
4.07 Contributions to Trust Upon a Change of Control................. 4
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE V MISCELLANEOUS.................................................... 6
5.01 Action by Company............................................... 6
5.02 Amendment and Plan Termination.................................. 6
5.03 No Effect on Employment......................................... 6
5.04 Assignment of Benefits.......................................... 6
5.05 Construction.................................................... 7
5.06 Governing Law; Severability..................................... 7
5.07 Number.......................................................... 7
5.08 Participation of Affiliates..................................... 7
5.09 Indemnification................................................. 7
</TABLE>
-ii-
<PAGE>
ARTICLE I
DEFINITIONS
-----------
1.01 "Committee" means the Committee under the PMI Retirement Plan.
---------
1.02 "Company" means The PMI Group, Inc.
-------
1.03 "Covered Compensation" means Covered Compensation as defined under
---------------------
the Retirement Plan.
1.04 "Employer" means The PMI Group, Inc. as defined under the Retirement
--------
Plan.
1.05 "Final Average Compensation" means, subject to Section 3.02(a)(iii),
--------------------------
Final Average Compensation as defined under the Retirement Plan.
1.06 "Participant" means any employee who: (a) is eligible for benefits
-----------
under the Retirement Plan, (b) retires on or after January 1, 1989, and (c)
meets the eligibility requirements of Section 3.01 of this Plan.
1.07 "Plan" means this plan, The PMI Group, Inc. Supplemental Employee
----
Retirement Plan as set forth in the instrument and as heretofore or hereafter
amended from time to time.
1.08 "Retirement Plan Benefits" is defined in Section 4.03 of this Plan.
------------------------
1.09 "Retirement Plan" means The PMI Group, Inc. Retirement Plan.
---------------
1.10 "Retired Participant" means a Participant who retired in accordance
-------------------
with the provisions of the Retirement Plan as heretofore or hereafter amended.
1.11 "Spouse" means Spouse as defined in the Retirement Plan.
------
1.12 "Trust" shall mean a trust established pursuant to Section 4.07 of
-----
the Plan for the purposes of holding assets for the payment of the Employer's
general creditors, including the Employer's Participants. Such Trust shall be
intended to be a grantor trust, of which the Employer is the grantor, within the
meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Code.
In addition, the Trust, if established, shall be irrevocable and shall conform
to the provisions of Revenue Procedure 92-64.
1.13 "Year of Benefit Accrual Service" shall mean Year of Benefit Accrual
-------------------------------
Service as defined under the Retirement Plan.
<PAGE>
ARTICLE II
----------
INTRODUCTION
------------
2.01 Purpose. The purpose of this Plan is: (1) to restore to employees of
-------
the Company the benefits they lose under the Retirement Plan as a result of the
compensation limit in section 401(a)(17) of the Internal Revenue Code of 1986,
as amended, or any successor provision ("section 401(a)(17)"), and (2) to
restore to employees the benefits they lose as a result of section 415 of the
Internal Revenue Code of 1986, as amended, or any successor provision ("section
415"). The Plan is an unfunded deferred compensation program for a select group
of management and highly compensated employees. Thus, the Plan is subject to
Part 1 of Title I of ERISA, but is exempt from Parts 2, 3 and 4 thereof.
2.02 Administration. The Plan will be administered by the Committee. The
--------------
Committee has all discretionary authority to issue such rules as it deems
appropriate and to interpret the provisions of the Plan and make factual
determinations, including the power to determine the rights or eligibility of
employees or participants and any other persons, and the amounts of their
benefits under the Plan, and to remedy ambiguities, inconsistencies, or
omissions. Any decision by the Committee shall be final, binding, and conclusive
on all participants and all other persons.
ARTICLE III
-----------
ELIGIBILITY AND AMOUNT OF BENEFITS
----------------------------------
3.01 Eligibility. Each employee of an Employer who meets the definition
-----------
of Section 1.06(a) and (b) is eligible to receive a benefit under this Plan if
he or she is vested in benefits under the Retirement Plan and if such vested
benefits have been reduced because of the application of section 401(A)(17) or
415.
3.02 Amount of Benefit. The amount of benefit paid from the Plan will be
-----------------
equal to: (a) minus (b) below:
(a) The benefit which would have been payable to the Participant
under the terms of the Retirement Plan, but for the restrictions of section
401(a)(17) and section 415. Notwithstanding the foregoing, and notwithstanding
any contrary provision of the Retirement Plan, "Compensation," for purposes of
determining a Participant's Final Average Compensation, shall mean Compensation
as defined under the Retirement Plan, but shall include amounts a Participant
defers under any nonqualified deferred compensation sponsored by an Employer.
(b) The amount of benefit payable from the Retirement Plan.
3.03 Preretirement Surviving Spouse Benefit. Preretirement Surviving
--------------------------------------
Spouse Benefits will be payable under this Plan on behalf of a Participant if
such Participant's surviving Spouse is
-2-
<PAGE>
eligible for benefits payable from the Retirement Plan. The benefit payable will
be determined in a manner consistent with similar benefits under the Retirement
Plan.
3.04 Death Benefits After Retirement. Benefits will be payable from this
-------------------------------
Plan to a beneficiary or contingent annuitant designated by a Retired
Participant only if such beneficiary or contingent annuitant will also receive
benefits from the Retirement Plan after such Participant's death. The amount of
the benefit payable will be determined in a manner consistent with similar
benefits under the Retirement Plan.
ARTICLE IV
----------
PAYMENT OF BENEFITS
-------------------
4.01 Forms and Timing of Benefit Payments. Participants who terminate or
------------------------------------
retire on or after February 18, 1999 shall elect the form of payment for
benefits payable under the Plan. A Participant may elect (a) a single lump sum
based on the life annuity at the time the Participant terminates or retires, or
(b) an annuity form of payment permitted under the terms of the Retirement Plan.
A Participant's election as to the form of payment shall be irrevocable and must
be made while the Participant is an employee and at least twelve months prior to
payment under the Plan. The Retirement Plan factors for calculating the
Participant's payment under the Plan in effect at the time of termination or
retirement will be used to calculate such payment.
4.02 Plan Termination. No further benefits may be earned under this Plan
----------------
with respect to the Retirement Plan after the termination of such Retirement
Plan.
4.03 Retirement Plan Benefits. The term "Retirement Plan Benefits"
------------------------
generally means the benefits actually payable to a Participant, Spouse,
beneficiary, or contingent annuitant under the Retirement Plan. However, this
Plan is only intended to remedy pension reductions caused by the operation of
Sections 401(a)(17) and 415 and not reductions caused for any other reason. In
those instances where pension benefits are reduced for some other reason, the
term "Retirement Plan Benefits" shall be deemed to mean the benefits that would
have been actually payable but for such other reason.
Examples of such other reasons include, but are not limited to, the
following:
(a) A reduction in pension benefits as a result of a distress
termination (as described in ERISA (S) 4041(c) or any comparable successor
provision of law) of the Retirement Plan. In such a case, the Retirement Plan
Benefits will be deemed to refer to the payments that would have been made from
the Retirement Plan had it terminated on a fully funded basis as a standard
termination (as described in ERISA (S) 4041(b) or any comparable successor
provision of law).
(b) A reduction of accrued benefits as permitted under Section
412(c)(8) of the Internal Revenue Code of 1986, as amended, or any comparable
successor provision of law.
-3-
<PAGE>
(c) A reduction of pension benefits as a result of payment of all or
a portion of a Participant's benefits to a third party on behalf of or with
respect to a Participant.
4.04 Facility of Payment. Any amount payable under the Plan to a person
-------------------
under legal disability or who, in the judgment of the Committee, is unable to
properly manage his financial affairs, may be paid to such person's legal
representative, or may be applied for the benefit of such person in any manner
selected by the Committee.
4.05 Review of Benefit Determinations. The Committee will provide notice
--------------------------------
in writing to any Participant or Beneficiary whose claim for benefits under the
Plan is denied and the Committee shall afford such Participant or Beneficiary a
review of its decision if so requested.
4.06 Payment and Funding of Benefits. Amounts payable under the Plan to
-------------------------------
or on account of a Participant shall be paid directly by the Employers, and
shall be provided solely from the general assets of the Employers. Benefits
under the Plan are not funded, the Employers' obligation to pay such benefits is
merely an unsecured contractual obligation, and a Participant or Beneficiary
shall be treated as a general creditor of the Employers with respect to any
benefits payable under the Plan. Except as provided in Section 4.07, nothing in
this Plan shall be deemed to create a trust of any kind for the benefit of the
Participant or any beneficiary, or create any fiduciary relationship between the
Company and the Participant or any beneficiary with respect to any assets of the
Company.
4.07 Contributions to Trust Upon a Change of Control. Upon a "Change of
-----------------------------------------------
Control" (as defined below) and by the fifteenth business day following the end
of each calendar month of each Plan year thereafter, the Employer shall
irrevocably deposit cash (or its equivalent) to a Trust for the investment of
benefits payable under the Plan to or on account of each Participant. However,
any contributions made to the Trust in respect of each Participant shall remain
subject to the claims of the general creditors of the Employers. Nothing
contained in this Section 4.07 shall give any Participant or beneficiary any
interest in or claim against any specific assets of the Company. For purposes of
this Plan, "Change of Control" shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following shall
not constitute a Change of Control: (i) any acquisition directly from the
Company, (ii) any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company, (iv) any beneficial ownership
maintained by (but not additional acquisitions by), The Allstate Corporation and
its subsidiaries, and their respective successors ("Allstate"), pending such
time that Allstate distributes or transfers its current ownership interest in
the Outstanding
-4-
<PAGE>
Company Common Stock and Outstanding Company Voting Securities as contemplated
by the Prospectus dated April 10, 1995, relating to the initial public offering
of the common stock of the Company, or (v) any acquisition pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of
this Section 4.07. Notwithstanding the foregoing, in its sole discretion, the
Board may increase the 20% threshold set forth above in this subsection (a)
prior to any acquisition of 20% or more beneficial ownership of the Outstanding
Company Common Stock or the Outstanding Company Voting Securities; provided,
that (i) such increased threshold shall apply only to the acquisition and
maintenance of beneficial ownership by any Person eligible to report such
beneficial ownership at the time of such acquisition on Schedule 13G under the
Exchange Act, and (ii) in the event that any Person initially eligible to so
report on Schedule 13G thereafter ceases to be eligible to so report on Schedule
13G, the occurrence of the event causing such Person no longer to be eligible to
so report shall be deemed an acquisition by such Person of all of the
Outstanding Company Common Stock and Outstanding Company Voting Securities
beneficially owned by such Person immediately prior to such occurrence; or
(b) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation by the Company of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of the
assets of the Company or the acquisition of assets of another entity (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any employee benefit plan (or related trust) of the Company or
such corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination and (iii) at least a majority of the members
of
-5-
<PAGE>
the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
Notwithstanding the foregoing, a Change of Control shall not be deemed to
occur solely because any Person acquires beneficial ownership of 20% or more of
the Outstanding Company Voting Securities or Outstanding Company Common Stock as
a result of the acquisition of such securities or stock by the Company, which
acquisition reduces the number of the Outstanding Company Voting Securities or
Outstanding Company Common Stock; provided, that if after such acquisition by
the Company such Person (while such Person remains the beneficial owner of 20%
or more of the Outstanding Company Voting Securities or Outstanding Company
Common Stock) becomes the beneficial owner of additional shares of such
Outstanding Company Voting Securities or Outstanding Company Common Stock (as
the case may be), a Change of Control shall then occur. Capitalized terms used
in this Section 4.07, not otherwise defined, shall have the meaning set forth in
the form of change of control employment agreement approved at the February 12,
1998 meeting of the Board of Directors.
ARTICLE V
---------
MISCELLANEOUS
-------------
5.01 Action by Company. Any action required or permitted to be taken by
-----------------
the Company under the Plan shall be by resolution of its Board of Directors, by
resolution of a duly authorized committee of its Board of Directors, or by a
person or persons authorized by resolution of its Board of Directors or such
committee.
5.02 Amendment and Plan Termination. The Company may, in its sole
------------------------------
discretion, terminate, suspend, or amend this Plan at any time or from time to
time, in whole or in part, but no amendment, suspension, or termination of the
Plan shall, without the consent of a Participant, reduce the accrued benefit of
the Participant or any Spouse; provided, however, that this Section 5.02 shall
not prevent reductions on account of the Participant's (or Spouse's) benefit
ceasing to be affected (or becoming affected to a lesser degree) by the
limitations of section 401(a)(17) and section 415.
5.03 No Effect on Employment. Nothing in the Plan shall interfere with or
-----------------------
limit in any way the right of the Company or the Employer directly employing the
Participant to terminate any Participant's employment at any time, with or
without cause. Employment with the Company and its affiliates is on an at-will
basis only.
5.04 Assignment of Benefits. A Participant, Retired Participant,
----------------------
surviving Spouse, or beneficiary may not, either voluntarily or involuntarily,
assign, anticipate, alienate, commute, pledge,
-6-
<PAGE>
or encumber any benefits to which he or she is or may become entitled under the
Plan, nor may the same be subject to attachment or garnishment by any creditor's
claim or to legal process.
5.05 Construction. The Committee shall have full discretionary authority
------------
to determine eligibility and to construe and interpret the terms of the Plan,
including the power to remedy possible ambiguities, inconsistencies, or
omissions.
5.06 Governing Law; Severability. The Plan shall be construed,
---------------------------
administered and governed in all respects in accordance with the laws of the
State of California (but without giving effect to any choice or conflict of law,
provision or rule which would cause the application of the laws of any
jurisdiction other than the State of California), and, to the extent applicable,
ERISA and the Code. If any provision of the Plan shall be held invalid or
unenforceable by a court of competent jurisdiction, the remaining provisions
hereof shall continue to be fully effective.
5.07 Number. The singular, where appearing in this Plan, will be deemed
------
to include the plural, unless the context clearly indicates the contrary.
5.08 Participation of Affiliates. One or more affiliates of the Company
---------------------------
may become participating employers by adopting the Plan. By adopting the Plan,
an affiliate is deemed to agree to all of its terms, including (but not limited
to) the provisions granting exclusive authority to the Company to amend the Plan
and the provisions granting exclusive authority to the Committee to administer
and interpret the Plan. Any affiliate may terminate its participation in the
Plan at any time subject, in each case, to the approval of the Company. The
liabilities incurred under the Plan to the Participants employed by each
employer shall be solely the liabilities of that employer, and no other employer
shall be liable for benefits accrued by a Participant during any period when he
or she was not employed by such employer.
5.09 Indemnification. The Company shall, and hereby does, indemnify and
---------------
hold harmless the members of the Committee, from and against any and all losses,
claims, damages or liabilities (including attorneys' fees and amounts paid, with
the approval of the Company's Board of Directors, in settlement of any claim)
arising out of or resulting from the implementation of a duty, act or decision
with respect to the Plan, so long as such duty, act or decision does not involve
gross negligence or willful misconduct on the part of any such individual.
IN WITNESS WHEREOF, The PMI Group, Inc., by it duly authorized officer, has
executed the amended and restated Plan on the date indicated below, such
amendments shall be effective as of January 1, 1998.
THE PMI GROUP, INC.
Dated: __________, 1999 By: ________________________________________
Title: _____________________________________
-7-
<PAGE>
THE PMI GROUP, INC.
ADDITIONAL BENEFIT PLAN
Effective February 18, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS........................................................ 1
1.01 "Committee"...................................................... 1
1.02 "Company"........................................................ 1
1.03 "Employer"....................................................... 1
1.04 "Final Average Compensation"..................................... 1
1.05 "Participant".................................................... 1
1.06 "Plan"........................................................... 1
1.07 "Retirement Plan"................................................ 1
1.08 "Retired Participant"............................................ 1
1.09 "Spouse"......................................................... 1
1.10 "Trust".......................................................... 1
ARTICLE II INTRODUCTION...................................................... 1
2.01 Purpose.......................................................... 1
2.02 Administration................................................... 2
ARTICLE III ELIGIBILITY AND AMOUNT OF BENEFITS............................... 2
3.01 Eligibility...................................................... 2
3.02 Amount of Benefit................................................ 2
3.03 Preretirement Surviving Spouse Benefit........................... 3
3.04 Death Benefits After Retirement.................................. 3
ARTICLE IV PAYMENT OF BENEFITS............................................... 4
4.01 Forms and Timing of Benefit Payments............................. 4
4.02 Plan Termination................................................. 4
4.03 Facility of Payment.............................................. 4
4.04 Review of Benefit Determinations................................. 4
4.05 Payment and Funding of Benefits.................................. 4
4.06 Contributions to Trust Upon a Change of Control.................. 4
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
<TABLE>
<S> <C>
ARTICLE V MISCELLANEOUS...................................................... 6
5.01 Action by Company................................................ 6
5.02 Amendment and Plan Termination................................... 6
5.03 No Effect on Employment.......................................... 7
5.04 Assignment of Benefits........................................... 7
5.05 Construction..................................................... 7
5.06 Governing Law; Severability...................................... 7
5.07 Number........................................................... 7
5.08 Participation of Affiliates...................................... 7
5.09 Indemnification.................................................. 7
</TABLE>
-ii-
<PAGE>
ARTICLE I
---------
DEFINITIONS
-----------
1.01 "Committee" means the Committee under the PMI Retirement Plan.
---------
1.02 "Company" means The PMI Group, Inc.
-------
1.03 "Employer" means The PMI Group, Inc. as defined under the Retirement
--------
Plan.
1.04 "Final Average Compensation" means Final Average Compensation as
--------------------------
defined under the Retirement Plan.
1.05 "Participant" means any employee who: (a) is eligible for benefits
-----------
under the Retirement Plan, (b) retires on or after January 1, 1989, and (c)
meets the eligibility requirements of Section 3.01 of this Plan.
1.06 "Plan" means this plan, The PMI Group, Inc. Additional Benefit Plan
----
as set forth in the instrument and as heretofore or hereafter amended from time
to time.
1.07 "Retirement Plan" means The PMI Group, Inc. Retirement Plan.
---------------
1.08 "Retired Participant" means a Participant who retired in accordance
-------------------
with the provisions of the Retirement Plan as heretofore or hereafter amended.
1.09 "Spouse" means Spouse as defined in the Retirement Plan.
------
1.10 "Trust" shall mean a trust established pursuant to Section 4.06 of
-----
the Plan for the purposes of holding assets for the payment of the Employer's
general creditors, including the Employer's Participants. Such Trust shall be
intended to be a grantor trust, of which the Employer is the grantor, within the
meaning of subpart E, part I, subchapter J, subtitle A of the Code. In addition,
the Trust, if established, shall be irrevocable and shall conform to the
provisions of Revenue Procedure 92-64.
ARTICLE II
----------
INTRODUCTION
------------
2.01 Purpose. The purpose of this Plan is (1) to provide the "Beef-up"
-------
benefit for eligible employees as described in Section 3.02(b), and (2) to make
up lost early retirement payments for individuals who failed to reach their 20th
anniversary with Allstate as described in Section 3.01(b). The Plan is an
unfunded deferred compensation program for a select group of management and
<PAGE>
highly compensated employees. Thus, the Plan is subject to Part 1 of Title I of
ERISA, but is exempt from Parts 2, 3 and 4 thereof.
2.02 Administration. The Plan will be administered by the Committee. The
--------------
Committee has all discretionary authority to issue such rules as it deems
appropriate and to interpret the provisions of the Plan and make factual
determinations, including the power to determine the rights or eligibility of
employees or participants and any other persons, and the amounts of their
benefits under the Plan, and to remedy ambiguities, inconsistencies, or
omissions. Any decision by the Committee shall be final, binding, and conclusive
on all participants and all other persons.
ARTICLE III
-----------
ELIGIBILITY AND AMOUNT OF BENEFITS
----------------------------------
3.01 Eligibility. Each employee of an Employer who meets the definition
-----------
of Section 1.04(a) and 1.04(b) is eligible to receive a benefit under this Plan
if he or she is vested in benefits under the Retirement Plan and if:
(a) he or she is eligible for the "Beef-up" as described in the
Allstate Retirement Plan Document in effect on April 1, 1995; or
(b) he or she (i) has less than 20 years of service with Allstate on
April 1, 1995, (ii) retires from the Company with at least 20 years of total
service with the Company and Allstate combined, and (iii) has reached his or her
55th birthday but has not reached his or her normal retirement date as defined
by the Allstate Retirement Plan.
3.02 Amount of Benefit. The amount of benefit paid from the Plan will be
-----------------
equal to: (a) plus (b) minus (c) below:
(a) For Participants who retire from the Retirement Plan before
December 31, 1999 and who are at least age 55 but less than age 60, the
Company will enhance their benefit as described in (i) and (ii) below:
(i) The Participant's Final Average Compensation will be
calculated as if he or she had continued to work until the earlier of
December 31, 1999 or age 60 at their current pensionable earnings. If the
Final Average Compensation is greater when calculated in this manner, it
will be used in place of the Final Average Compensation calculated in the
normal manner at termination.
(ii) For Participants who were hired at Allstate before 1978,
his or her benefit will be first decreased by (A) below and then increased
by (B) below:
-2-
<PAGE>
(A) The number of years from termination to the latter of
December 31, 1999 or age 60 divided by the number of years of Allstate service
prior to January 1, 1978 times the Allstate pre-1978 benefit.
(B) The number of years from termination to the latter of
December 31, 1999 or age 60 divided by the number of years of service from
January 1, 1988 to April 1, 1995 times the Allstate post-1988 benefit.
(b) For Participants who retire from the Retirement Plan with at
least 55 years of age and 20 years of combined service with the Company and
Allstate and who did not have 20 years of service with Allstate on April 1,
1995, the Company will provide a temporary annuity equal to: (i) as reduced in
(ii) payable for the period described in (iii) below:
(i) The monthly life annuity payable from the Allstate
Retirement Plan starting at the Participant's Normal Retirement Date as
described by the Allstate Retirement Plan. This is the accrued Allstate benefit
at the Company spin-off date as communicated by Allstate.
(ii) The monthly life annuity will be reduced by one half
percent per month (6% per year) for each month the Participant's retirement
precedes his or her Normal Retirement as described by the Allstate Retirement
Plan.
(iii) The monthly life annuity will be paid starting on the
first day of the month following retirement until the earlier of the
Participant's death or the date which the Participant becomes eligible to
receive his or her benefit from the Allstate Retirement Plan. Alternatively, the
Participant may elect to have, in the event of his or her death, the monthly
life annuity continue to his or her surviving Spouse but not beyond the date
when the Participant would have become eligible to receive his or her benefit
from the Allstate Retirement Plan. If the Participant elects to have the full
benefit continue to his or her Spouse, then the benefit in 3.02(b)(ii) above
will be further reduced two percent. If the Participant elects to have half of
the benefit continue to his or her Spouse, then the benefit in 3.02(b)(ii) above
will be further reduced one percent.
(c) The amount of benefit payable from the Retirement Plan.
3.03 Preretirement Surviving Spouse Benefit. Preretirement Surviving
--------------------------------------
Spouse Benefits will be payable under this Plan on behalf of a Participant if
such Participant's surviving Spouse is eligible for benefits payable from the
Retirement Plan. The benefit payable will be determined in a manner consistent
with similar benefits under the Retirement Plan.
3.04 Death Benefits After Retirement. Benefits will be payable from this
-------------------------------
Plan to a beneficiary or contingent annuitant designated by a Retired
Participant only if such beneficiary or contingent annuitant will also receive
benefits from the Retirement Plan after such Participant's death. The amount of
the benefit payable will be determined in a manner consistent with similar
benefits under the Retirement Plan.
-3-
<PAGE>
ARTICLE IV
----------
PAYMENT OF BENEFITS
-------------------
4.01 Forms and Timing of Benefit Payments. All benefits except those
------------------------------------
described in 3.02(b) above, at the Participant's election (a) will be paid as a
single lump sum based on the life annuity at the time the Participant terminates
or retires, or (b) an annuity form of payment permitted under the terms of the
Retirement Plan. A Participant's election as to the form of payment shall be
irrevocable and must be made while the Participant is an employee and at least
twelve months prior to payment under the Plan. The Retirement Plan factors for
calculating the Participant's payment under the Plan in effect at the time of
termination or retirement will be used to calculate such payment .
4.02 Plan Termination. No further benefits may be earned under this Plan
----------------
with respect to the Retirement Plan after the termination of the Retirement
Plan.
4.03 Facility of Payment. Any amount payable under the Plan to a person
-------------------
under legal disability or who, in the judgment of the Committee, is unable to
properly manage his financial affairs, may be paid to such person's legal
representative, or may be applied for the benefit of such person in any manner
selected by the Committee.
4.04 Review of Benefit Determinations. The Committee will provide notice
--------------------------------
in writing to any Participant or Beneficiary whose claim for benefits under the
Plan is denied and the Committee shall afford such Participant or Beneficiary a
review of its decision if so requested.
4.05 Payment and Funding of Benefits. Amounts payable under the Plan to
-------------------------------
or on account of a Participant shall be paid directly by the Employers, and
shall be provided solely from the general assets of the Employers. Benefits
under the Plan are not funded, the Employers' obligation to pay such benefits is
merely an unsecured contractual obligation, and a Participant or Beneficiary
shall be treated as a general creditor of the Employers with respect to any
benefits payable under the Plan. Except as provided in Section 4.06, nothing in
this Plan shall be deemed to create a trust of any kind for the benefit of the
Participant or any beneficiary, or create any fiduciary relationship between the
Company and the Participant or any beneficiary with respect to any assets of the
Company.
4.06 Contributions to Trust Upon a Change of Control. Upon a "Change of
-----------------------------------------------
Control" (as defined below) and by the fifteenth business day following the end
of each calendar month of each Plan year thereafter, the Employer shall
irrevocably deposit cash (or its equivalent) to a Trust for the investment of
benefits payable under the Plan to or on account of each Participant. However,
any contributions made to the Trust in respect of each Participant shall remain
subject to the claims of the general creditors of the Employers. Nothing
contained in this Section 4.06 shall give any Participant or beneficiary any
interest in or claim against any specific assets of the Company. For purposes of
this Plan, "Change of Control" shall mean:
-4-
<PAGE>
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following shall
not constitute a Change of Control: (i) any acquisition directly from the
Company, (ii) any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company, (iv) any beneficial ownership
maintained by (but not additional acquisitions by), The Allstate Corporation and
its subsidiaries, and their respective successors ("Allstate"), pending such
time that Allstate distributes or transfers its current ownership interest in
the Outstanding Company Common Stock and Outstanding Company Voting Securities
as contemplated by the Prospectus dated April 10, 1995, relating to the initial
public offering of the common stock of the Company, or (v) any acquisition
pursuant to a transaction which complies with clauses (i), (ii) and (iii) of
subsection (c) of this Section 4.06. Notwithstanding the foregoing, in its sole
discretion, the Board may increase the 20% threshold set forth above in this
subsection (a) prior to any acquisition of 20% or more beneficial ownership of
the Outstanding Company Common Stock or the Outstanding Company Voting
Securities; provided, that (i) such increased threshold shall apply only to the
acquisition and maintenance of beneficial ownership by any Person eligible to
report such beneficial ownership at the time of such acquisition on Schedule 13G
under the Exchange Act, and (ii) in the event that any Person initially eligible
to so report on Schedule 13G thereafter ceases to be eligible to so report on
Schedule 13G, the occurrence of the event causing such Person no longer to be
eligible to so report shall be deemed an acquisition by such Person of all of
the Outstanding Company Common Stock and Outstanding Company Voting Securities
beneficially owned by such Person immediately prior to such occurrence; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation by the Company of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of the
assets of the Company or the acquisition of assets of another entity (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or
-5-
<PAGE>
indirectly, more than 60% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction owns the
Company or all or substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, as the case may
be, (ii) no Person (excluding any employee benefit plan (or related trust) of
the Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
Business Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination and (iii) at least a majority of the members
of the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
Notwithstanding the foregoing, a Change of Control shall not be deemed to
occur solely because any Person acquires beneficial ownership of 20% or more of
the Outstanding Company Voting Securities or Outstanding Company Common Stock as
a result of the acquisition of such securities or stock by the Company, which
acquisition reduces the number of the Outstanding Company Voting Securities or
Outstanding Company Common Stock; provided, that if after such acquisition by
the Company such Person (while such Person remains the beneficial owner of 20%
or more of the Outstanding Company Voting Securities or Outstanding Company
Common Stock) becomes the beneficial owner of additional shares of such
Outstanding Company Voting Securities or Outstanding Company Common Stock (as
the case may be), a Change of Control shall then occur. Capitalized terms used
in this Section 4.06, not otherwise defined, shall have the meaning set forth in
the form of change of control employment agreement approved at the February 12,
1998 meeting of the Board of Directors.
ARTICLE V
---------
MISCELLANEOUS
-------------
5.01 Action by Company. Any action required or permitted to be taken by
-----------------
the Company under the Plan shall be by resolution of its Board of Directors, by
resolution of a duly authorized committee of its Board of Directors, or by a
person or persons authorized by resolution of its Board of Directors or such
committee.
5.02 Amendment and Plan Termination. The Company may, in its sole
------------------------------
discretion, terminate, suspend, or amend this Plan at any time or from time to
time, in whole or in part, but no
-6-
<PAGE>
amendment, suspension, or termination of the Plan shall, without the consent of
a Participant, reduce the accrued benefit of the Participant or any Spouse.
5.03 No Effect on Employment. Nothing in the Plan shall interfere with or
-----------------------
limit in any way the right of the Company or the Employer directly employing the
Participant to terminate any Participant's employment at any time, with or
without cause. Employment with the Company and its affiliates is on an at- will
basis only.
5.04 Assignment of Benefits. A Participant, Retired Participant,
----------------------
surviving Spouse, or beneficiary may not, either voluntarily or involuntarily,
assign, anticipate, alienate, commute, pledge, or encumber any benefits to which
he or she is or may become entitled under the Plan, nor may the same be subject
to attachment or garnishment by any creditor's claim or to legal process.
5.05 Construction. The Committee shall have full discretionary authority
------------
to determine eligibility and to construe and interpret the terms of the Plan,
including the power to remedy possible ambiguities, inconsistencies, or
omissions.
5.06 Governing Law; Severability. The Plan shall be construed,
---------------------------
administered and governed in all respects in accordance with the laws of the
State of California (but without giving effect to any choice or conflict of law,
provision or rule which would cause the application of the laws of any
jurisdiction other than the State of California), and, to the extent applicable,
ERISA and the Code. If any provision of the Plan shall be held invalid or
unenforceable by a court of competent jurisdiction, the remaining provisions
hereof shall continue to be fully effective.
5.07 Number. The singular, where appearing in this Plan, will be deemed
------
to include the plural, unless the context clearly indicates the contrary.
5.08 Participation of Affiliates. One or more affiliates of the Company
---------------------------
may become participating employers by adopting the Plan. By adopting the Plan,
an affiliate is deemed to agree to all of its terms, including (but not limited
to) the provisions granting exclusive authority to the Company to amend the Plan
and the provisions granting exclusive authority to the Committee to administer
and interpret the Plan. Any affiliate may terminate its participation in the
Plan at any time subject, in each case, to the approval of the Company. The
liabilities incurred under the Plan to the Participants employed by each
employer shall be solely the liabilities of that employer, and no other employer
shall be liable for benefits accrued by a Participant during any period when he
or she was not employed by such employer.
5.09 Indemnification. The Company shall, and hereby does, indemnify and
---------------
hold harmless the members of the Committee, from and against any and all losses,
claims, damages or liabilities (including attorneys' fees and amounts paid, with
the approval of the Company's Board of Directors, in settlement of any claim)
arising out of or resulting from the implementation of a duty, act or decision
with respect to the Plan, so long as such duty, act or decision does not involve
gross negligence or willful misconduct on the part of any such individual.
-7-
<PAGE>
IN WITNESS WHEREOF, The PMI Group, Inc., by it duly authorized officer, has
executed the Plan on the date indicated below.
THE PMI GROUP, INC.
Dated: __________, 1999 By:________________________________
Title:_____________________________
-8-
<PAGE>
THE PMI GROUP, INC.
DIRECTORS' DEFERRED COMPENSATION PLAN
(Amended and Restated as of July 21, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1 DEFINITIONS.............................................................................. 1
1.1 "Affiliate"...................................................................... 1
1.2 "Beneficiary".................................................................... 1
1.3 "Board of Directors"............................................................. 1
1.4 "Change of Control".............................................................. 1
1.5 "Code"........................................................................... 3
1.6 "Committee"...................................................................... 3
1.7 "Company"........................................................................ 3
1.8 "Compensation"................................................................... 4
1.9 "Compensation Deferrals"......................................................... 4
1.10 "Disability" or "Disabled"....................................................... 4
1.11 "Financial Hardship"............................................................. 4
1.12 "Participant".................................................................... 4
1.13 "Participant's Account" or "Account"............................................. 4
1.14 "Plan"........................................................................... 4
1.15 "Plan Year"...................................................................... 4
1.16 "Nonemployee Director"........................................................... 4
SECTION 2 PARTICIPATION............................................................................ 5
2.1 Participation.................................................................... 5
2.2 Suspension of Compensation Deferrals............................................. 5
2.3 Termination of Participation..................................................... 6
SECTION 3 COMPENSATION DEFERRAL ELECTIONS.......................................................... 6
3.1 Compensation Deferrals........................................................... 6
3.2 Crediting of Compensation Deferrals.............................................. 6
3.3 Deemed Investment Return on Accounts............................................. 6
3.4 Form of Payment.................................................................. 7
3.5 Term of Deferral................................................................. 7
3.6 Changes in Elections as to Term and Form for Payment............................. 7
SECTION 4 ACCOUNTING............................................................................... 7
4.1 Participants' Accounts........................................................... 7
4.2 Participants Remain Unsecured Creditors.......................................... 8
4.3 Accounting Methods............................................................... 8
4.4 Reports.......................................................................... 8
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 5 DISTRIBUTIONS............................................................................ 8
5.1 Normal Time for Distribution..................................................... 8
5.2 Change of Control................................................................ 8
5.3 Special Rule for Death or Disability............................................. 8
5.4 Special Rule re Deductibility.................................................... 9
5.5 Latest Permissible Distribution Date............................................. 9
5.6 Beneficiary Designations......................................................... 9
5.7 Financial Hardship............................................................... 10
5.8 Payments to Incompetents......................................................... 10
5.9 Undistributable Accounts......................................................... 10
5.10 Committee Discretion............................................................. 10
SECTION 6 PARTICIPANT'S INTEREST IN ACCOUNT........................................................ 11
6.1 Compensation Deferral Contributions.............................................. 11
SECTION 7 ADMINISTRATION OF THE PLAN............................................................... 11
7.1 Committee........................................................................ 11
7.2 Actions by Committee............................................................. 11
7.3 Powers of Committee.............................................................. 11
7.4 Decisions of Committee........................................................... 12
7.5 Administrative Expenses.......................................................... 12
7.6 Eligibility to Participate....................................................... 12
7.7 Indemnification.................................................................. 12
SECTION 8 FUNDING.................................................................................. 13
8.1 Unfunded Plan.................................................................... 13
SECTION 9 MODIFICATION OR TERMINATION OF PLAN...................................................... 13
9.1 Company's Obligation is Limited.................................................. 13
9.2 Right to Amend or Terminate...................................................... 13
9.3 Effect of Termination............................................................ 13
SECTION 10 GENERAL PROVISIONS...................................................................... 13
10.1 Inalienability................................................................... 13
10.2 Rights and Duties................................................................ 14
10.3 No Enlargement of Rights......................................................... 14
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
10.4 Compliance with Rule 16b-3....................................................... 14
10.5 Compensation Deferrals Not Counted Under Other Employee Benefit Plans............ 14
10.6 Applicable Law................................................................... 14
10.7 Severability..................................................................... 14
10.8 Captions......................................................................... 14
</TABLE>
-iii-
<PAGE>
THE PMI GROUP, INC.
DIRECTORS' DEFERRED COMPENSATION PLAN
(Amended and Restated as of July 21, 1999)
THE PMI GROUP, INC., a Delaware corporation, having established The PMI
Group, Inc. Directors' Deferred Compensation Plan, hereby amends and restates
the Plan effective as of July 23, 1998, for the benefit of members of the Board
of Directors who are employees of neither the Company nor its Affiliates, in
order to provide such directors with certain deferred compensation benefits. The
Plan is an unfunded deferred compensation plan which is exempt from the
provisions of the Employee Retirement Income Security Act of 1974, as amended.
SECTION 1
DEFINITIONS
The following words and phrases shall have the following meanings unless a
different meaning is plainly required by the context:
1.1 "Affiliate" shall mean (a) the Company, and (b) each corporation,
trade or business which is, together with the Company, a member of a controlled
group of corporations or an affiliated service group or under common control
(within the meaning of Section 414(b), (c) or (m) of the Code), but only for the
period during which such other entity is so affiliated with the Company.
1.2 "Beneficiary" shall mean the person or persons entitled to receive the
balance credited to a Participant's Account under the Plan upon the death of a
Participant, as provided in Section 5.4.
1.3 "Board of Directors" shall mean the Board of Directors of the Company,
as constituted from time to time.
1.4 "Change of Control" means the occurrence of any of the following:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (i) the then outstanding shares
of common stock of the Company (the "Outstanding Company Common
Stock") or (ii) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the
following shall not constitute a Change of Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the
Company, (iii) any acquisition by any employee benefit plan
1
<PAGE>
(or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, (iv) any beneficial ownership
maintained by (but not additional acquisitions by), The Allstate
Corporation and its subsidiaries, and their respective successors
("Allstate"), pending such time that Allstate distributes or transfers
its current ownership interest in the Outstanding Company Common Stock
and Outstanding Company Voting Securities as contemplated by the
Prospectus dated April 10, 1995, relating to the initial public
offering of the common stock of the Company, or (v) any acquisition
pursuant to a transaction which complies with clauses (i), (ii) and
(iii) of subsection (c) of this Section 1.4. Notwithstanding the
foregoing, in its sole discretion, the Board may increase the 20%
threshold set forth above in this subsection (a) prior to any
acquisition of 20% or more beneficial ownership of the Outstanding
Company Common Stock or the Outstanding Company Voting Securities;
provided, that (i) such increased threshold shall apply only to the
acquisition and maintenance of beneficial ownership by any Person
eligible to report such beneficial ownership at the time of such
acquisition on Schedule 13G under the Exchange Act, and (ii) in the
event that any Person initially eligible to so report on Schedule 13G
thereafter ceases to be eligible to so report on Schedule 13G, the
occurrence of the event causing such Person no longer to be eligible
to so report shall be deemed an acquisition by such Person of all of
the Outstanding Company Common Stock and Outstanding Company Voting
Securities beneficially owned by such Person immediately prior to such
occurrence; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming
a director subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or
removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board;
or
(c) Consummation by the Company of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all
of the assets of the Company or the acquisition of assets of another
entity (a "Business Combination"), in each case, unless, following
such Business Combination, (i) all or substantially all of the
individuals and entities who were the beneficial owners, respectively,
of the Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote generally in
the election of directors,
2
<PAGE>
as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a
result of such transaction owns the Company or all or substantially
all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (ii) no Person (excluding any employee
benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly
or indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding
voting securities of such corporation except to the extent that such
ownership existed prior to the Business Combination and (iii) at least
a majority of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent
Board at the time of the execution of the initial agreement, or of the
action of the Board, providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
Notwithstanding the foregoing, a Change of Control shall not be deemed to occur
solely because any Person acquires beneficial ownership of 20% or more of the
Outstanding Company Voting Securities or Outstanding Company Common Stock as a
result of the acquisition of such securities or stock by the Company, which
acquisition reduces the number of the Outstanding Company Voting Securities or
Outstanding Company Common Stock; provided, that if after such acquisition by
the Company such Person (while such Person remains the beneficial owner of 20%
or more of the Outstanding Company Voting Securities or Outstanding Company
Common Stock) becomes the beneficial owner of additional shares of such
Outstanding Company Voting Securities or Outstanding Company Common Stock (as
the case may be), a Change of Control shall then occur. Capitalized terms used
in this Section 1.4, not otherwise defined, shall have the meaning set forth in
the form of change of control employment agreement approved at the February 12,
1998 meeting of the Board of Directors.
1.5 "Code" shall mean the Internal Revenue Code of 1986, as amended.
Reference to a specific section of the Code shall include such section, any
valid regulation promulgated thereunder, and any comparable provision of any
future legislation amending, supplementing or superseding such section.
1.6 "Committee" shall mean the committee appointed by (and serving at the
pleasure of) the Board of Directors to administer the Plan. As of the effective
date of the Plan, the members of the Committee shall be the Compensation
Committee of the Board of Directors.
1.7 "Company" shall mean The PMI Group, Inc., a Delaware corporation.
3
<PAGE>
1.8 "Compensation" shall mean the annual cash retainer, retainer for
serving as a committee chairperson (if any), and meeting fees (if any) of a
Participant. A Participant's Compensation shall not include any other type of
remuneration.
1.9 "Compensation Deferrals" shall mean the amounts credited to
Participants' Accounts under the Plan pursuant to their deferral elections made
in accordance with Section 2.1.
1.10 "Disability" or "Disabled" shall mean the mental or physical
inability of a Participant to perform the regularly assigned duties of a member
of the Board of Directors, provided that such inability (a) has continued or is
expected to continue for a period of at least six months and (b) is evidenced by
the certificate of a physician satisfactory to the Committee stating that such
inability exists and is likely to be permanent.
1.11 "Financial Hardship" shall mean a severe financial emergency which is
caused by a sudden and unexpected accident, illness or other event beyond the
control of the Participant which, absent a suspension of deferrals under Section
2.2 or accelerated distribution under Section 5.5, would result in severe
financial burden to the Participant or a member of his or her immediate family.
A Financial Hardship does not exist to the extent that the hardship may be
relieved by (a) reimbursement or compensation by insurance, (b) by liquidation
of the Participant's other assets (to the extent such liquidation would not
itself cause severe financial hardship), or (c) any loan available to the
Participant (to the extent the payments on such loan would not themselves cause
severe financial hardship.
1.12 "Participant" shall mean a Nonemployee Director who (a) has become a
Participant in the Plan pursuant to Section 2.1 and (b) has not ceased to be a
Participant pursuant to Section 2.3.
1.13 "Participant's Account" or "Account" shall mean, as to any
Participant, the separate account maintained on the books of the Company in
order to reflect his or her interest under the Plan.
1.14 "Plan" shall mean The PMI Group, Inc. Directors' Deferred
Compensation Plan, as set forth in this instrument and as hereafter amended from
time to time.
1.15 "Plan Year" shall mean the twelve month period beginning June 1 and
ending May 31.
1.16 "Nonemployee Director" means a member of the Board of Directors who
is an employee of neither the Company nor of any Affiliate.
4
<PAGE>
SECTION 2
PARTICIPATION
2.1 Participation. Each Nonemployee Director's decision to become a
Participant shall be entirely voluntary.
2.1.1 Current Nonemployee Directors. Each Nonemployee Director
who both (a) is such on July 1, 1997, and (b) previously elected to make
Compensation Deferrals under the Plan for the 1997 Plan Year, shall have his or
her Compensation Deferral election continue in effect for the remainder of the
1997 Plan Year only (and subject to the other provisions of the Plan).
2.1.2 Initial Elections by New Nonemployee Directors. Each
individual who first becomes a Nonemployee Director after July 1, 1997 may elect
to become a Participant in the Plan by electing, within thirty days of the date
of his or her hire or promotion (as the case may be), to make Compensation
Deferrals under the Plan. An election under this Section 2.1.2 to make
Compensation Deferrals shall be effective only for the remainder of the Plan
Year with respect to which the election is made.
2.1.3 Elections for Subsequent Plan Years. A Nonemployee Director
may elect to become a Participant (or to continue or reinstate his or her active
participation) in the Plan for any subsequent Plan Year by electing, no later
than January 30 of the preceding Plan Year, to make Compensation Deferrals under
the Plan. An election under this Section 2.1.3 to make Compensation Deferrals
shall be effective only for the Plan Year with respect to which the election is
made.
2.1.4 No Election Changes During Plan Year. After the beginning
of a Plan Year, a Participant shall not be permitted to change or revoke his or
her deferral election for such Plan Year, except to the limited extent provided
in Section 2.2.
2.1.5 Specific Timing and Method of Election. Notwithstanding any
contrary provision of this Section 2.1, the Committee, in its sole discretion,
shall determine the manner and deadlines for Participants to make Compensation
Deferral elections. The deadlines prescribed by the Committee may be earlier
than the deadlines specified in this Section 2.1, but shall not be later than
such specified deadlines.
2.2 Suspension of Compensation Deferrals.
2.2.1 Automatic Suspension. In the event that a Participant
receives a financial hardship withdrawal from The PMI Group, Inc. Savings and
Profit-Sharing Plan or any other plan (maintained by the Company or an
Affiliate) which contains a qualified cash or deferred arrangement under section
401(k) of the Internal Revenue Code of 1986, as amended (collectively, the
"401(k) Plans"), the Participant's Compensation Deferrals under the Plan (if
any) shall be suspended for a period of twelve (12) months from the date that
the Participant
5
<PAGE>
received such hardship withdrawal. Notwithstanding the preceding, the
Participant's Compensation Deferrals shall be not be so suspended if the
Committee determines that such suspension is not required in order to preserve
the tax-qualification of the 401(k) Plans.
2.2.2 Permissible Suspension. In the event that a Participant
incurs a Financial Hardship, the Committee, in its sole discretion, may suspend
the Participant's Compensation Deferrals for the remainder of the Plan Year.
However, an election to make Compensation Deferrals under Section 2.1 shall be
irrevocable as to amounts deferred as of the effective date of any suspension in
accordance with this Section 2.2.2.
2.3 Termination of Participation. A Nonemployee Director who has become a
Participant shall remain a Participant until his or her entire vested Account
balance is distributed. However, a Nonemployee Director who has become a
Participant may or may not be an active Participant making Compensation
Deferrals for a particular Plan Year, depending upon whether he or she has
elected to make Compensation Deferrals for such Plan Year.
SECTION 3
COMPENSATION DEFERRAL ELECTIONS
3.1 Compensation Deferrals. At the times and in the manner prescribed in
Section 2.1, each Nonemployee Director may elect to defer portions of his or her
Compensation and to have the amounts of such deferrals credited to his or her
Account. For each Plan Year, a Nonemployee Director may elect to defer an amount
equal to any percentage or any specific dollar amount of his or her
Compensation, provided that the percentage or dollar amount elected by the
Participant shall result in an expected deferral of not less than $5,000 of his
or her Compensation. Notwithstanding any contrary provision of the Plan, the
Committee may reduce a Participant's Compensation Deferrals to the extent
necessary to satisfy any deductions required by law.
3.2 Crediting of Compensation Deferrals. The amounts deferred pursuant to
Section 3.1 shall reduce the Participant's Compensation for the Plan Year and
shall be credited to the Participant's Account as of the date on which the
amounts (but for the deferral) otherwise would have been paid to the
Participant. For each Plan Year, the exact dollar amount to be deferred from
each Compensation payment shall be determined by the Committee under such
formulae as it shall adopt from time to time.
3.3 Deemed Investment Return on Accounts. Although no assets will be
segregated or otherwise set aside with respect to a Participant's Account, the
amount that is ultimately payable to the Participant with respect to his or her
Account shall be determined as if such Account had been invested in common stock
of the Company (including reinvestment of any deemed dividends). The Committee,
in its sole discretion, shall adopt (and may modify from time to time) such
rules and procedures as it deems necessary or appropriate to implement the
deemed investment of the Participants' Accounts. However, such procedures may
differ among Participants or classes of Participants, as determined by the
Committee in its discretion.
6
<PAGE>
3.4 Form of Payment. Each Participant shall indicate on his or her
deferral election (made pursuant to Section 3.1) the form of payment for the
Compensation Deferrals made pursuant to such election. A Participant may elect
(a) a lump sum payment, or (b) a fixed number of annual installment payments
(not to exceed ten). A Participant's election as to the form of payment shall
apply to all amounts credited to the Participant's Account for the Plan Year
with respect to which the election is made, and except to the limited extent
provided in Section 3.6, shall be irrevocable.
3.5 Term of Deferral. Each Participant shall indicate on his or her
deferral election made pursuant to Section 3.1 the time for payment for
Compensation Deferrals (and deemed investment returns, gains and losses thereon)
made pursuant to such election. A Participant may elect a term of deferral equal
to any whole number (not less than one) of calendar years specified in his or
her deferral election. In addition, pursuant to such procedures as the Committee
(in its discretion) may adopt from time to time, a Participant may elect a term
of deferral which ends upon the later (or earlier) of the expiration of a
specified period or the occurrence of a specific event (for example, the later
of ten years or termination of service on the Board of Directors). A
Participant's election as to the term of deferral shall apply to all amounts
credited to the Participant's Account for the Plan Year with respect to which
the election is made, and except to the limited extent provided in Section 3.6,
shall be irrevocable.
3.6 Changes in Elections as to Term and Form for Payment. A Participant
may change his or her election under Section 3.4 and/or Section 3.5 for amounts
credited to the Participant's Account for any Plan Year, provided that any such
election will be effective only if (a) such election is made at least two Plan
Years prior to the Plan Year in which payment of such amounts is scheduled to
commence (without giving effect to such election), (b) the newly elected
scheduled payment commencement date is not earlier than the second Plan Year
after the Plan Year in which such election is made, and (c) payment of such
amounts has not actually commenced. For example, if a Participant initially
elected to receive his or 1999 Plan Year deferrals in a lump sum to be paid
during the 2003 Plan Year, the Participant instead may elect to receive payment
in the form of ten annual installments commencing during the 2004 Plan Year,
provided that such election is made on or before December 31, 2001. (i.e., not
----
less than two Plan Years prior to the Plan Year in which payment of such amounts
previously was scheduled to commence, and with a newly elected scheduled payment
commencement date which is not earlier than the second Plan Year after the Plan
Year in which such election is made).
SECTION 4
ACCOUNTING
4.1 Participants' Accounts. For each Plan Year, at the direction of the
Committee, there shall be established and maintained on the books of the
Company, a separate Account or Accounts for each Participant to which shall be
credited all Compensation Deferrals made by the Participant during such Plan
Year, and deemed investment returns, gains and losses on such Compensation
Deferrals.
7
<PAGE>
4.2 Participants Remain Unsecured Creditors. All amounts credited to a
Participant's Account under the Plan shall continue for all purposes to be a
part of the general assets of the Company. Each Participant's interest in the
Plan shall make him or her only a general, unsecured creditor of the Company.
4.3 Accounting Methods. The accounting methods or formulae to be used
under the Plan for the purpose of maintaining the Participants' Accounts,
including the calculation and crediting (or debiting) of deemed returns, gains
and losses, shall be determined by the Committee, in its sole discretion. The
accounting methods or formulae selected by the Committee may be revised from
time to time.
4.4 Reports. Each Participant shall be furnished with periodic statements
of his or her Account, reflecting the status of his or her interest in the Plan,
at least annually.
SECTION 5
DISTRIBUTIONS
5.1 Normal Time for Distribution. Subject to Sections 5.2 through 5.5 and
Section 5.10, distribution of the balance credited to a Participant's Account
shall commence as soon as administratively practicable after the end of the
term(s) of deferral elected by the Participant under Section 3.5, in accordance
with the following rules. If, pursuant to Section 3.4, the Participant elected
to receive annual installment payments, his or her first installment shall be
equal to the balance then credited to his or her Account, divided by the number
of installments to be made. Each subsequent annual installment shall be paid to
the Participant as near as administratively practicable to each anniversary of
the first installment payment. The amount of each subsequent installment shall
be equal to the balance then credited to the Participant's Account, divided by
the number of installments remaining to be made. While a Participant's Account
is in installment payout status, the unpaid balance credited to the
Participant's Account shall continue to be credited (or debited) with deemed
investment returns, gains and losses under Section 3.3.
5.2 Change of Control. If there is a Change of Control, the balance then
credited to a Participant's Account shall be distributed to him or her in a lump
sum as soon as administratively practicable after the date of the Change of
Control. Deemed investment returns, gains and losses shall be credited (or
debited) prior to any such accelerated distribution in accordance with Section
3.3. The amount of any such accelerated lump sum distribution shall also include
any amount that the Participant deferred but which has not yet been credited to
his or her Account.
5.3 Special Rule for Death or Disability. If a Participant dies or
becomes Disabled, the balance then credited to his or her Account shall be
distributed to the Participant (or his or her Beneficiary) at the time and in
the form elected by the Participant pursuant to Sections 3.4 and 3.5; provided,
however, that the Committee, in its sole discretion, may elect to distribute
such amount in a lump sum as soon as administratively practicable after the date
of death or
8
<PAGE>
Disability. In accordance with Section 3.3, deemed investment returns, gains and
losses shall be credited (or debited) prior to any such accelerated
distribution.
5.4 Special Rule re Deductibility. Notwithstanding any contrary provision
of Section 5.1, any payment scheduled for a particular Plan Year shall not be
made in such Plan Year to the extent necessary to avoid application of the
deductibility limitation of section 162(m) of the Code. (For this purpose,
deductibility shall be determined by adding such payment to all other
compensation paid by the Company and its Affiliates to the Participant during
the Plan Year.) If, pursuant to the foregoing sentences, any amounts are not
paid when originally scheduled, such amounts shall be paid in the first
subsequent taxable year in which such payments would not be subject to the
deductibility limitation of section 162(m) of the Code. During any such delay in
payment, unpaid amounts shall continue to be credited (or debited) with deemed
investment returns, gains and losses under Section 3.3. Notwithstanding the
foregoing, distribution of a Participant's Account shall be made without regard
to the deductibility limitation of section 162(m) of the Code if the time for
distribution is accelerated pursuant to Section 5.2 or Section 5.3.
5.5 Latest Permissible Distribution Date. Notwithstanding any contrary
provision of this Section 5, any amount which is credited to a Participant's
Account on January 15 of the second calendar year following the year in which
the Participant terminates service on the Board of Directors shall be
distributed to the Participant (or his or her Beneficiary) in a single lump sum
as soon as administratively practicable after such January 15. Any such amount
shall continue to be credited (or debited) with deemed investment returns, gains
and losses until the date of payment. For example, if a Participant terminates
service on the Board of Directors during July 2000, and an amount remains
credited to his or her Account on January 15, 2002 (after application of the
other provisions of Section 5), then such amount (as increased or decreased by
deemed investment returns, gains and losses) shall be distributed to the
Participant (or his or her Beneficiary) in a lump sum as soon as
administratively practicable after January 15, 2002.
5.6 Beneficiary Designations. Each Participant may, pursuant to such
procedures as the Committee may specify, designate one or more Beneficiaries.
5.6.1 Spousal Consent. If a Participant designates a person other
than or in addition to his or her spouse as a primary Beneficiary, the
designation shall be ineffective unless the Participant's spouse consents to the
designation. Any spousal consent required under this Section 5.6 shall be
ineffective unless it (a) is set forth in writing in a form specified in the
discretion of the Committee, (b) acknowledges the effect of the Participant's
designation of another person as his or her Beneficiary under the Plan, and (c)
is signed by the spouse and witnessed by an authorized agent of the Committee or
a notary public. Notwithstanding this consent requirement, if the Participant
establishes to the satisfaction of the Committee that written spousal consent
may not be obtained because the spouse cannot be located, his or her designation
shall be effective without a spousal consent. Any spousal consent required under
this Section 5.6 shall be valid only with respect to the spouse who signs the
consent. A Participant may revoke his or her Beneficiary designation at any
time, provided that such revocation is in writing.
9
<PAGE>
5.6.2 Changes and Failed Designations. A Participant may
designate different Beneficiaries (or may revoke a prior Beneficiary
designation) at any time by delivering a new designation (or revocation of a
prior designation) in accordance with Section 5.6.1. Any designation or
revocation shall be effective only if it is received by the Committee. However,
when so received, the designation or revocation shall be effective as of the
date the notice is executed (whether or not the Participant still is living),
but without prejudice to the Committee on account of any payment made before the
change is recorded. The last effective designation received by the Committee
shall supersede all prior designations. If a Participant dies without having
effectively designated a Beneficiary, or if no Beneficiary survives the
Participant, the Participant's Account shall be payable to his or her surviving
spouse, or, if the Participant is not survived by his or her spouse, the Account
shall be paid to his or her estate.
5.7 Financial Hardship. In the event that a Participant incurs a
Financial Hardship, the Committee, in its sole discretion and notwithstanding
any contrary provision of the Plan, may determine that all or part of the
Participant's Account shall be paid to him or her immediately; provided,
however, that the amount paid to the Participant pursuant to this Section 5.7
shall be limited to the amount reasonably necessary to alleviate the
Participant's Financial Hardship. Also, payment under this Section 5.7 may not
be made to the extent that the hardship may be relieved by suspension of the
Participant's Compensation Deferrals in accordance with Section 2.2.
5.8 Payments to Incompetents. If any individual to whom a benefit is
payable under the Plan is a minor or legally incompetent, the Committee shall
determine whether payment shall be made directly to the individual, any person
acting as his or her custodian or legal guardian under the California Uniform
Transfers to Minors Act, his or her legal representative or a near relative, or
directly for his or her support, maintenance or education.
5.9 Undistributable Accounts. Each Participant and (in the event of
death) his or her Beneficiary shall keep the Committee advised of his or her
current address. If the Committee is unable to locate the Participant or
Beneficiary to whom a Participant's Account is payable under this Section 5, the
Participant's Account shall continue to be credited (or debited) with deemed
investment returns, gains and losses in accordance with Section 3.3. Accounts
that, in accordance with the preceding sentence, have been undistributable for a
period of thirty-five months shall be forfeited as of the end of the thirty-
fifth month. If a Participant whose Account was forfeited under this Section 5.9
(or his or her Beneficiary) files a claim for distribution of the Account after
the date on which it was forfeited, and if the Committee determines that such
claim is valid, then the forfeited balance shall be paid by the Company in a
lump sum cash payment as soon as practicable thereafter (without interest or any
deemed investment returns, gains or losses after the date of forfeiture).
5.10 Committee Discretion. Within the specific time periods described in
this Section 5, the Committee shall have sole discretion to determine the
specific timing of the payment of any Account balance under the Plan. In
addition and notwithstanding any contrary provision of the Plan, the Committee,
in its sole discretion, may cause the balance credited to a
10
<PAGE>
Participant's Account to be paid to him or her in a lump sum at any time
following the Participant's cessation of service on the Board of Directors.
SECTION 6
PARTICIPANT'S INTEREST IN ACCOUNT
6.1 Compensation Deferral Contributions. Subject to Sections 8.1
(relating to creditor status) and 9.2 (relating to amendment and/or termination
of the Plan), a Participant's interest in the balance credited to his or her
Account at all times shall be 100% vested and nonforfeitable.
SECTION 7
ADMINISTRATION OF THE PLAN
7.1 Committee. The Plan shall be administered by the Committee. The
Committee shall have the authority to control and manage the operation and
administration of the Plan. Any member of the Committee may resign at any time
by notice in writing mailed or delivered to the Secretary of the Company.
7.2 Actions by Committee. Each decision of a majority of the members of
the Committee then in office shall constitute the final and binding act of the
Committee. The Committee may act with or without a meeting being called or held
and shall keep minutes of all meetings held and a record of all actions taken by
written consent.
7.3 Powers of Committee. The Committee shall have all powers and
discretion necessary or appropriate to supervise the administration of the Plan
and to control its operation in accordance with its terms, including, but not by
way of limitation, the following powers:
(a) to interpret and determine the meaning and validity of the
provisions of the Plan and to determine any question arising under, or
in connection with, the administration, operation or validity of the
Plan or any amendment thereto;
(b) to determine any and all considerations affecting the eligibility
of any Nonemployee Director to become a Participant or remain a
Participant in the Plan;
(c) to cause one or more separate Accounts to be maintained for each
Participant;
(d) to cause Compensation Deferrals and deemed investment returns,
gains and losses to be credited to Participants' Accounts;
(e) to establish and revise a method or procedure for the deemed
investment of Participants' Accounts, as provided in Section 3.3;
11
<PAGE>
(f) to establish and revise an accounting method or formula for the
Plan, as provided in Section 4.3;
(g) to determine the manner and form in which any distribution is to
be made under the Plan;
(h) to determine the manner and form for making elections under the
Plan;
(i) to determine the status and rights of Participants and their
spouses, Beneficiaries or estates;
(j) to employ such counsel, agents and advisers, and to obtain such
legal, clerical and other services, as it may deem necessary or
appropriate in carrying out the provisions of the Plan;
(k) to establish, from time to time, rules for the performance of its
powers and duties and for the administration of the Plan;
(l) to arrange for annual distribution to each Participant of a
statement of benefits accrued under the Plan;
(m) to publish a claims and appeal procedure pursuant to which
individuals or estates may claim Plan benefits and appeal denials of
such claims;
(n) to delegate to any one or more of its members or to any other
person, severally or jointly, the authority to perform for and on
behalf of the Committee one or more of the functions of the Committee
under the Plan; and
(o) to decide all issues and questions regarding Account balances,
and the time, form, manner and amount of distributions to
Participants.
7.4 Decisions of Committee. All actions, interpretations, and decisions
of the Committee shall be conclusive and binding on all persons, and shall be
given the maximum possible deference allowed by law.
7.5 Administrative Expenses. All expenses incurred in the administration
of the Plan by the Committee, or otherwise, including legal fees and expenses,
shall be paid and borne by the Company.
7.6 Eligibility to Participate. No member of the Committee who is also a
Nonemployee Director shall be excluded from participating in the Plan if
otherwise eligible, but he or she shall not be entitled, as a member of the
Committee, to act or pass upon any matters pertaining specifically to his or her
own Account under the Plan.
7.7 Indemnification. The Company shall, and hereby does, indemnify and
hold harmless the members of the Committee, from and against any and all losses,
claims, damages or liabilities (including attorneys' fees and amounts paid, with
the approval of the Board of
12
<PAGE>
Directors, in settlement of any claim) arising out of or resulting from the
implementation of a duty, act or decision with respect to the Plan, so long as
such duty, act or decision does not involve gross negligence or willful
misconduct on the part of any such individual.
SECTION 8
FUNDING
8.1 Unfunded Plan. All amounts credited to a Participant's Account under
the Plan shall continue for all purposes to be a part of the general assets of
the Company. The interest of the Participant in his or her Account, including
his or her right to distribution thereof, shall be an unsecured claim against
the general assets of the Company. Nothing contained in the Plan shall give any
Participant or beneficiary any interest in or claim against any specific assets
of the Company.
SECTION 9
MODIFICATION OR TERMINATION OF PLAN
9.1 Company's Obligation is Limited. The Company intends to continue the
Plan indefinitely, and to maintain each Participant's Account until it is
scheduled to be paid to him or her in accordance with the provisions of the
Plan. However, the Plan is voluntary on the part of the Company, and the Company
does not guarantee to continue the Plan. The Company at any time may, by
amendment of the Plan, suspend Compensation Deferrals or may discontinue
Compensation Deferrals, with or without cause. Complete discontinuance of all
Compensation Deferrals shall be deemed a termination of the Plan.
9.2 Right to Amend or Terminate. The Board of Directors, in its sole
discretion, may amend or terminate the Plan, or any part thereof, at any time
and for any reason, provided that no amendment or termination of the Plan shall,
without the consent of the Participant, reduce the balance then credited to the
Participant's Account.
9.3 Effect of Termination. If the Plan is terminated pursuant to this
Section 9, the balances credited to the Accounts of the affected Participants
shall be distributed to them at the time and in the manner set forth in Section
5; provided, however, that the Committee, in its sole discretion, may authorize
accelerated distribution of Participants' Accounts as of any earlier date.
SECTION 10
GENERAL PROVISIONS
10.1 Inalienability. In no event may any Participant, Beneficiary, spouse
or estate sell, transfer, anticipate, assign, hypothecate, or otherwise dispose
of any right or interest under the Plan; and such rights and interests shall not
at any time be subject to the claims of creditors nor be liable to attachment,
execution or other legal process. Accordingly, for example, a Participant's
interest in the Plan is not transferable pursuant to a domestic relations order.
13
<PAGE>
10.2 Rights and Duties. Neither the Company nor the Committee shall be
subject to any liability or duty under the Plan except as expressly provided in
the Plan, or for any action taken, omitted or suffered in good faith.
10.3 No Enlargement of Rights. Neither the establishment or maintenance
of the Plan, the making of any Compensation Deferrals nor any action of the
Company or the Committee, shall be held or construed to confer upon any
individual any right to be continue as a member of the Board of Directors.
10.4 Compliance with Rule 16b-3. All transactions under the Plan are
intended to be exempt from liability under section 16(b) of the Securities
Exchange Act of 1934, as amended ("section 16(b)"). To the extent deemed
necessary or advisable by the Committee, any election, payment, distribution or
other transaction by or on behalf of any Nonemployee Director may be canceled or
delayed in order to ensure that such payment will not result in any liability
under section 16(b) to such individual.
10.5 Compensation Deferrals Not Counted Under Other Employee Benefit
Plans. Compensation Deferrals under the Plan will not be considered for
purposes of contributions or benefits under any other employee benefit plan
sponsored by the Company or any Affiliate, except to the extent specifically
provided in any such plan.
10.6 Applicable Law. The provisions of the Plan shall be construed,
administered and enforced in accordance with the laws of the State of California
(other than its conflict of laws provisions).
10.7 Severability. If any provision of the Plan is held invalid or
unenforceable, its invalidity or unenforceability shall not affect any other
provisions of the Plan, and in lieu of each provision which is held invalid or
unenforceable, there shall be added as part of the Plan a provision that shall
be as similar in terms to such invalid or unenforceable provision as may be
possible and be valid, legal, and enforceable.
10.8 Captions. The captions contained in and the table of contents
prefixed to the Plan are inserted only as a matter of convenience and for
reference and in no way define, limit, enlarge or describe the scope or intent
of the Plan nor in any way shall affect the construction of any provision of the
Plan.
14
<PAGE>
EXECUTION
IN WITNESS WHEREOF, The PMI Group, Inc., by its duly authorized
officer, has executed this Plan on the date indicated below.
THE PMI GROUP, INC.
Dated: __________, 1999 By _________________________________
Title:
15
<PAGE>
EXHIBIT 11.1
THE PMI GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF RESTATED NET INCOME PER SHARE (1)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except for per share data) 1999 1998 1999 1998
------- ------- ------- -------
Basic net income per common share:
<S> <C> <C> <C> <C>
Net income $49,459 $46,787 $93,111 $92,555
Average common shares outstanding 29,925 31,918 30,039 32,173
------- ------- ------- -------
Basic net income per common share $ 1.65 $ 1.47 $ 3.10 $ 2.88
======= ======= ======= =======
Diluted net income per common share:
Net income $49,459 $46,787 $93,111 $92,555
------- ------- ------- -------
Average common shares outstanding 29,925 31,918 30,039 32,173
Net shares to be issued upon exercise of dilutive
stock options after applying treasury stock method 188 201 126 188
------- ------- ------- -------
Average shares outstanding 30,113 32,119 30,165 32,361
------- ------- ------- -------
Diluted net income per common share $ 1.64 $ 1.46 $ 3.09 $ 2.86
======= ======= ======= =======
</TABLE>
(1) Restated to conform with Statement of Financial Accounting Standards
No. 128, Earnings per Share.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 1,320,173
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 144,290
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,520,925
<CASH> 10,412
<RECOVER-REINSURE> 45,657
<DEFERRED-ACQUISITION> 69,230
<TOTAL-ASSETS> 1,813,238
<POLICY-LOSSES> 224,082
<UNEARNED-PREMIUMS> 94,496
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 99,508
0
0
<COMMON> 352
<OTHER-SE> 1,138,429
<TOTAL-LIABILITY-AND-EQUITY> 1,813,238
260,099
<INVESTMENT-INCOME> 43,528
<INVESTMENT-GAINS> 344
<OTHER-INCOME> 7,453
<BENEFITS> 52,717
<UNDERWRITING-AMORTIZATION> 41,967
<UNDERWRITING-OTHER> 77,805
<INCOME-PRETAX> 131,187
<INCOME-TAX> 38,076
<INCOME-CONTINUING> 93,111
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 93,111
<EPS-BASIC> 3.10
<EPS-DILUTED> 3.09
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
