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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) August 17, 2000
THE PMI GROUP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Delaware 1-13664 94-3199675
(State of Incorporation) (Commission File Number) (I.R.S. Employer Identification No.)
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601 Montgomery Street, San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (415) 788-7878
___________________________________________________________________
(Former name or former address, if changed since last report.)
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Item 5. Other Events
On December 17, 1999, G. Craig Baynham and Linnie Baynham (collectively, the
"Plaintiffs") filed a putative RESPA class action lawsuit against PMI Mortgage
Insurance Co. ("PMI"), the Company's mortgage insurance subsidiary. (See the
Company's Form 8-K filed December 29, 1999.) This action was filed by Plaintiffs
in the U.S. District Court for the Southern District of Georgia (Augusta
Division) ("Court").
On August 14, 2000, the Court issued an order granting PMI's motion for summary
judgment in the above action (the "Order"). The Court's Order dismisses
Plaintiffs' action in its entirety.
In its Order, the Court found that the McCarran-Ferguson Act, 15 U.S.C. sections
1011-1015, bars all of Plaintiffs' RESPA claims. Specifically, the Court held
that the McCarran-Ferguson Act's "anti-preemption rule" bars the application of
RESPA to PMI's "business of insurance." As held by the Court, the McCarran-
Ferguson Act's anti-preemption rule holds that state laws enacted for the
purpose of regulating the "business of insurance" do not yield to conflicting
federal statutes unless a federal statute specifically requires otherwise. In
its Order, the Court did not find it necessary to rule on other factual and
legal arguments advanced by PMI in support of its motion for summary judgment.
Plaintiffs have the right to appeal the Court's Order to the Eleventh Circuit
Court of Appeals or seek reconsideration by the District Court. Should the
Plaintiffs take these or other steps, the Company will continue to contest this
action vigorously. Based upon the information presently available to the
Company, management believes that this matter will not have a material adverse
effect on the Company's financial position or results of operations. However,
the outcome of litigation is inherently uncertain and accordingly there can be
no assurance that the ultimate outcome of this matter will not have a material
adverse effect on the Company's financial position or results of operations.
CAUTIONARY STATEMENT
The Company's statements in this Form 8-K that are not historical facts, and
that relate to future plans, events or performance are "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements in this document include management's belief,
based upon information presently available, that this litigation will not have a
material adverse effect on the Company's financial position or results of
operations. This forward-looking statement, as well as other forward-looking
statements contained in press releases and documents filed by the Company with
the Securities and Exchange Commission, involve a number of risks or
uncertainties including, but not limited to, the following factors that could
cause the Company's actual results to differ materially from those expressed in
this Form 8-K, other documents filed by the Company with the SEC, and other
statements made by the Company:
GENERAL ECONOMIC CONDITIONS
Changes in economic conditions, including economic recessions, declining housing
values, higher unemployment rates, deteriorating borrower credit, rising
interest rates, increases in refinance activity caused by declining interest
rates, or combinations of these factors, could
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reduce the demand for mortgage insurance, cause claims on policies issued by PMI
to increase, and/or increase PMI's loss experience.
MARKET SHARE AND COMPETITION
The Company's financial condition and results of operations could be harmed by a
decline in its market share or a decline in market share of the private mortgage
insurance industry as a whole. Numerous factors bear on the relative position of
the private mortgage insurance industry versus government and quasi-governmental
competition as well as the competition from lending institutions that choose not
to insure against borrower default, self-insure through affiliates, or offer
residential mortgage products that do not require mortgage insurance.
The mortgage insurance industry is highly competitive. Several of the Company's
competitors in the mortgage insurance industry have greater direct or indirect
capital reserves that provide them with potentially greater flexibility than the
Company.
PMI also competes directly with federal and state governmental and quasi-
governmental agencies, principally the FHA and, to a lesser degree, the VA. In
addition, the captive reinsurance subsidiaries of national banks, savings
institutions, or bank holding companies could become significant competitors of
the Company in the future. Other mortgage lenders are also forming reinsurance
affiliates that compete with the Company. The Gramm-Leach-Bliley Act of 1999
could lead to additional significant competitors of the Company in the future.
In October 1999, the Federal Housing Finance Board "FHF Board") adopted
resolutions which authorize each Federal Home Loan Bank ("FHLB") to offer
programs to fund or purchase single-family conforming mortgage loans originated
by participating member institutions under the single-family member mortgage
assets program and in July 2000 the FHF Board gave permanent authority to each
FHLB to purchase such loans from member institutions. Under the FHF Board's
rules, FHLB's and member institutions are also authorized to provide credit
enhancement for eligible loans. Any expansion of the FHLBs' ability to issue
mortgage insurance or use alternatives to mortgage insurance could reduce the
demand for private mortgage insurance and harm 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 require the remaining 10% of the purchase price from a
borrower's funds ("80/10/10"). This 80/10/10 product, as well as similar
products, competes with mortgage insurance as an alternative for lenders selling
loans in the secondary mortgage market. If the 80/10/10 product or a similar
product becomes a widely accepted alternative to mortgage insurance, the
Company's financial condition and results of operations could suffer.
Legislation and regulatory changes affecting the FHA have affected demand for
private mortgage insurance. In particular, increases in the maximum loan amount
that the FHA can insure can reduce the demand for private mortgage insurance.
For example, management believes the decline in the MICA members' share of the
mortgage insurance business from 56.3% at December 31, 1998 to approximately
52.4% at December 31, 1999 resulted in part from an increase in the maximum
individual loan amount the FHA can insure. In January 2000, the maximum
individual loan amount that FHA can insure increased to $219,849 from $208,800.
This increase may cause demand for private mortgage insurance to decrease. In
addition, the Omnibus Spending Bill of 1999 streamlined the FHA down-payment
formula and made FHA insurance more competitive with private mortgage insurance
in areas with higher home prices.
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FANNIE MAE AND FREDDIE MAC
Fannie Mae and Freddie Mac are collectively referred to as government-sponsored
enterprises ("GSEs"). 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. Although management has not seen any
significant movement towards the reduced coverage programs offered by the GSEs
to date, if the reduction in required levels of mortgage insurance becomes
widely accepted by mortgage lenders and their customers, the reduction could
harm the Company's financial condition and results of operations. The GSEs also
have separately introduced new "tiered primary" products pursuant to which the
GSEs, upon receipt from lenders of loans with traditional borrower paid mortgage
insurance, restructure the mortgage insurance coverage with reduced amounts of
primary coverage and deeper pool coverage. Wide acceptance by lenders of the
GSEs' "tiered primary" products could reduce levels of primary coverage
traditionally provided by PMI and, therefore, could have a material adverse
affect upon the Company's financial condition and results of operations.
On April 13, 1999 the Office of Federal Housing Enterprise Oversight ("OFHEO")
announced proposed risk-based capital regulations, which could treat credit
enhancements issued by private mortgage insurance companies with claims-paying
ability ratings of AAA or higher more favorably than those issued by companies
with AA or lower ratings. The director of OFHEO has stated that the agency
expects to draft and publish in the Federal Register final regulations by the
end of the year 2000. Shifts in the GSEs' preference for private mortgage
insurance to other forms of credit enhancement, including a tiering of mortgage
insurers based on their credit rating, could harm the Company's financial
condition and results of operations.
Freddie Mac has made several announcements that it would pursue a permanent
charter amendment that would allow it to utilize alternative forms of default
loss protection 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 approaches, which may include a
reduction in the use of mortgage insurance.
In 1999, a coalition of financial services and housing related trade
associations, including MICA and several large mortgage lenders, formed FM
Watch, a lobbying organization that supports expanded federal oversight and
legislation relating to the role of the GSE's in the secondary mortgage market.
The GSE's have criticized, and lobbied against, FM Watch. In addition, the GSE's
and other organizations are in the process of forming a coalition designed in
part to counter activities of FM Watch. The Company's financial condition and
results of operations could be adversely affected in the event that these
actions polarize the GSE's, members of FM Watch, PMI and PMI's customers.
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. A loss of PMI's existing eligibility
status, either due to a failure to maintain the 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.
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INSURANCE IN FORCE
A significant percentage of PMI's premiums earned is generated from existing
insurance in force and not from new insurance written. The policy owner or
servicer of the loan may cancel insurance coverage at any time. A decline in
insurance in force as a result of a decrease in persistency due to policy
cancellations of older books of business could harm the Company's financial
condition and results of operations.
The Home Owners Protection Act of 1998 ("Act") provides for the automatic
termination or cancellation upon a borrower's request of private mortgage
insurance upon satisfaction of certain conditions. Management is uncertain of
the Act's impact 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 operations.
During a period of falling interest rates, an increasing number of borrowers
refinance their mortgage loans and PMI generally experiences 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 periods of low interest rate, the resulting
increase of NIW may ultimately prove to be inadequate to compensate for the loss
of insurance in force arising from policy cancellations.
RATING AGENCIES
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. On March 10, 2000, Standard & Poor's
affirmed the AA+ financial strength rating and claims-paying ability rating of
PMI. During June 1999, Moody's affirmed the Aa2 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. A reduction in PMI's claims-paying ratings
below AA- could seriously harm the Company's financial condition and results of
operations (See IC3).
LIQUIDITY
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 level and severity of claims experienced by
the Company's insurance subsidiaries, 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 these factors could adversely affect the Company's ability
to maintain capital resources to meet its business needs.
CONTRACT UNDERWRITING SERVICES; NEW PRODUCTS
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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. The Company also
generally agrees to assume the cost of repurchasing underwritten-deficient loans
that have been contract underwritten, a remedy not available under the Company's
master primary insurance policies. Due to the demand of contract underwriting
services, limitations on the number of available underwriting personnel, 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 its underwriting services
obligations could harm 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
suffer if PMI or the Company experiences delays in introducing competitive new
products and programs or if these products or programs are less profitable than
the Company's existing products and programs.
INSURANCE REGULATORY MATTERS
On January 31, 2000, the Illinois Department of Insurance issued a letter
addressed to all mortgage guaranty insurers licensed in Illinois. The letter
states that it may be a violation of Illinois law for mortgage insurers to offer
to Illinois mortgage lenders the opportunity to purchase certain notes issued by
a mortgage insurer or an affiliate, or to participate in loan guaranty programs.
The letter also states that a violation might occur if mortgage insurers offer
lenders coverage on pools of mortgage loans at a discounted or below market
premium in return for the lenders' referral of primary mortgage insurance
business. In addition, the letter stated that, to the extent a performance
guaranty actually transfers risk to the lender in return for a fee, the lender
may be deemed to be doing an insurance business in Illinois without
authorization. The letter announced that any mortgage guaranty insurer that is
participating in the described or similar programs in the State of Illinois
should cease such participation or alternatively, provide the Department with a
description of any similar programs, giving the reason why the provisions of
Illinois are not applicable or not violated. If the Illinois Department of
Insurance were to determine that PMI was not in compliance with Illinois law,
the Company's financial condition and results of operations could be harmed.
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, the Company's financial
condition and results of operations could suffer.
RISK-TO-CAPITAL RATIO
The State of Arizona, PMI's state of domicile for insurance regulatory purposes,
and other regulators 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
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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.
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 PMI LTD; 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 harm the
Company's financial condition and results of operations.
CHANGES IN COMPOSITION OF INSURANCE WRITTEN; POOL INSURANCE
The composition of PMI's NIW has included an increasing percentage of mortgages
with LTV's in excess of 90% and less than or equal to 95% ("95s"). At June 30,
2000, 46.5% of PMI's risk in force consisted of 95s, which, in PMI's experience,
have had a claims frequency approximately twice that of mortgages with LTV's
equal to or less than 90% and over 85% ("90s"). PMI also offers coverage for
mortgages with LTV's in excess of 95% and up to 97% ("97s"). At June 30, 2000,
5.3% of PMI's risk in force consisted of 97s that have even higher risk
characteristics than 95s and greater uncertainty as to pricing adequacy. In June
2000, PMI introduced expanded coverage for certain mortgages with LTV's in
excess of 97%. This expanded coverage has commensurately higher risk
characteristics and pricing uncertainty. 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,
which is generally used as an additional credit enhancement for certain
secondary market mortgage transactions. New pool risk written was $24 million
for the quarter ended June 30, 2000. This new pool insurance product provides
coverage to certain loans with non-conforming, and therefore higher risk,
characteristics. 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 these products, and the associated investment
income, may ultimately prove to be inadequate to compensate for future losses
from these products.
POTENTIAL INCREASE IN CLAIMS
Mortgage insurance coverage and premiums 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.
LOSS RESERVES
PMI establishes loss reserves based upon estimates of the claim rate and average
claim amounts, as well as the estimated costs, including legal and other fees,
of settling claims. Such reserves are
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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 RISKS
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 15.1%, 7.6% and 7.2% of its risk in force concentrated and where the default
rate on all PMI policies in force is 2.21%, 2.49% and 1.77% compared with 1.89%
nationwide as of June 30, 2000.
CAPTIVE REINSURANCE ARRANGEMENTS; RISK-SHARING TRANSACTIONS
PMI's customers have indicated an increasing demand for captive reinsurance
arrangements, which 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
management expects that this trend will continue. An increase in captive
reinsurance arrangements would decrease in net premiums written which may
negatively impact the yield obtained in the Company's net premiums earned for
customers with captive reinsurance arrangements. 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 harm PMI's competitive position.
GRAMM-LEACH-BLILEY ACT
On November 12, 1999, the President signed the Gramm-Leach-Bliley Act of 1999
(the "Act") into law. Among other things, the Act allows bank holding companies
to engage in a substantially broader range of activities, including insurance
underwriting, and allows insurers and other financial service companies to
acquire banks. The Act allows a bank holding company to form an insurance
subsidiary, licensed under state insurance law, to issue insurance products
directly, including mortgage insurance. The Company expects that, over time,
the Act will allow consumers the ability to shop for their insurance, banking
and investment needs at one financial services company. The Company believes
that the Act may lead to increased competition in the mortgage insurance
industry by facilitating the development of new savings and investment products,
resulting in the Company's customers offering mortgage insurance directly rather
than through captive reinsurance arrangements with the Company's insurance
subsidiaries and encouraging large, well-capitalized financial service companies
to enter the mortgage insurance business.
INTERNATIONAL MORTGAGE INSURANCE; STRATEGIC INVESTMENTS
As the Company seeks to expand its business internationally, it increasingly
will be subject to risks associated with international operations, including:
the need for regulatory and third party approvals; challenges retaining key
foreign-based employees and key relationships with customers and business
partners in international markets; the economic strength of the foreign mortgage
origination markets targeted; changes in foreign regulations and laws; foreign
currency exchange; potential increases in the level of defaults and claims on
policies insured by foreign-
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based subsidiaries; and the need to integrate PMI's risk management technology
systems and products with those of its foreign operations. In particular, the
performance of the Company's Australian subsidiary could be materially and
adversely affected by various factors affecting the Australian economy
including, but not limited to, a weakening in the demand for housing, interest
rate volatility, and/or an increase in claims.
The performance of the Company's other strategic investments could materially
and adversely be affected by changes in the real estate, mortgage lending,
mortgage servicing, title and financial guaranty markets; future movements in
interest rates; those operations' future financial condition and performance;
the ability of those entities to execute future business plans; and PMI's
dependence upon management to operate those companies in which PMI does not own
a controlling share.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The PMI Group, Inc.
(Registrant)
August 17, 2000 By: /s/ Victor J. Bacigalupi
Victor J. Bacigalupi
Executive Vice President,
General Counsel and Secretary
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