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UNITED STATES
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13664
THE PMI GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware 601 Montgomery Street 94-3199675
(State of Incorporation) San Francisco, California 94111 (I.R.S. Employer
(Address of principal executive offices) Identification No.)
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(415) 788-7878
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value New York Stock Exchange
Pacific Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __
The aggregate market value of the voting stock (common stock) held by non-
affiliates of the registrant as of the close of business on February 29, 2000
was $1,609,540,560 based on the closing sale price of the common stock on the
New York Stock Exchange consolidated tape on that date.
Number of shares outstanding of the Registrant's common stock, as of the
close of business on February 29, 2000: 44,324,697.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1999 are incorporated by reference into Items 6 through 8 of Part
II. Portions of the Proxy Statement for registrant's 2000 Annual Meeting of
Stockholders to be held on May 18, 2000 are incorporated by reference into Items
10 through 13 of Part III. The Exhibit Index is located on page 67.
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TABLE OF CONTENTS
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PART I.................................................................................................. 3
Cautionary Statement
Item 1. Business......................................................................................... 3
A. General........................................................................................ 3
B. Products....................................................................................... 4
C. Industry Overview.............................................................................. 8
D. Competition and Market Share................................................................... 11
E. Customers...................................................................................... 15
F. U.S. Business Composition...................................................................... 15
G. Sales, Product Development and Underwriting Personnel.......................................... 17
H. Underwriting Practices......................................................................... 18
I. Affordable Housing............................................................................. 23
J. Defaults and Claims............................................................................ 24
K. Reinsurance.................................................................................... 34
L. Claims Paying Ability Ratings.................................................................. 35
M. Investment Portfolio........................................................................... 35
N. Other Business................................................................................. 36
O. Regulation..................................................................................... 38
P. Employees...................................................................................... 44
Q. Cautionary Statements and Investment Considerations............................................ 44
Item 2. Properties....................................................................................... 49
Item 3. Legal Proceedings................................................................................ 49
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 50
PART II.................................................................................................... 52
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................ 52
Common Stock........................................................................................ 52
Preferred Stock..................................................................................... 52
Shareholder Rights Plans............................................................................ 52
Payment of Dividends and Policy..................................................................... 53
Item 6. Selected Financial Data.......................................................................... 53
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 53
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................... 53
Item 8. Financial Statements and Supplementary Data...................................................... 53
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 54
PART III................................................................................................... 54
Item 10. Directors and Executive Officers of the Registrant.............................................. 54
Item 11. Executive Compensation.......................................................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 54
Item 13. Certain Relationships and Related Transactions.................................................. 54
PART IV.................................................................................................... 54
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................ 54
INDEX TO EXHIBITS.......................................................................................... 67
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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. 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 section Q. "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.
PART I
Item 1. Business
A. General
The PMI Group, Inc. ("TPG"), a Delaware corporation, is a holding company
which conducts its residential mortgage insurance business through its direct
and indirect wholly-owned subsidiaries PMI Mortgage Insurance Co. ("PMI"), an
Arizona corporation, Residential Guaranty Co. ("RGC"), an Arizona corporation,
Residential Insurance Co. ("RIC"), an Arizona corporation, TPG Insurance Co.
("TIC"), a Vermont corporation, PMI Mortgage Guaranty Co. ("PMG"), an Arizona
corporation, TPG Segregated Portfolio Company ("TSPC"), a Cayman Islands
corporation, and PMI's wholly owned subsidiaries PMI Mortgage Insurance Ltd
("PMI Ltd"), an Australian mortgage insurance company. TPG also conducts title
insurance business through its wholly-owned subsidiary American Pioneer Title
Insurance Company ("APTIC"), a Florida
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corporation. In addition, PMI owns all of the outstanding common stock of PMI
Mortgage Services Co. ("MSC"), a California corporation which is engaged in the
business of contract underwriting, and PMI Securities Co. ("SECO"), 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 direct and
indirect wholly-owned subsidiaries are collectively referred to as the
"Company". PMI also owns 50% of the outstanding shares of common stock of CMG
Mortgage Insurance Company ("CMG"), a Wisconsin corporation, which also
conducts a residential mortgage insurance business and TPG owns 24.9% 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.
TPG, through PMI and CMG, is one of the leading residential mortgage insurers in
the United States. In addition to international and domestic primary mortgage
insurance, TPG subsidiaries provide title insurance, contract underwriting and
various services and products for the home mortgage finance industry. PMI was
founded in 1972. At December 31, 1999, the Company's total assets were $2.1
billion and its shareholders' equity was $1.2 billion.
B. Products
Domestic
There are two principal types of private residential mortgage insurance, both of
which insure a mortgage lender or investor in mortgage loans against borrower
default: "primary" and "pool." Primary insurance provides mortgage insurance
coverage to lenders who receive a down payment of less than 20% from a borrower.
This includes mortgage insurance coverage for lenders for mortgages with: (i)
loan-to-value ratios ("LTVs") of 85% and below, (ii) LTVs in excess of 85% and
less than or equal to 90% ("90s"); (iii) LTVs in excess of 90% and less than
or equal to 95% ("95s"); and (iv) LTVs in excess of 95% and less than or equal
to 97% ("97s"). During 1999, the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"),
generally the primary investors in mortgage loans, required that 90s have
insurance coverage ranging from 12% to 25%, and 95s and 97s have insurance
coverage ranging from 18% to 35%. Fannie Mae and Freddie Mac are collectively
referred to as government-sponsored enterprises ("GSEs"). The GSEs' reduced
mortgage insurance coverage levels require additional fees to be paid by the
borrower at origination. (See "D. Competition and Market Share", below and IC3.)
The coverage percentage insured by PMI is determined by the lender, usually to
comply with investor requirements to reduce the loss exposure on loans purchased
by them. Pool insurance is generally used as an additional credit enhancement
for certain secondary market mortgage transactions. Pool insurance generally
covers the loss on a defaulted mortgage loan which exceeds the claim payment
under the primary coverage, if primary insurance is required on that mortgage
loan, as well as the total loss on a defaulted mortgage loan which did not
require primary insurance, in each case up to a stated aggregate loss limit.
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Primary Insurance
PMI provides primary insurance coverage, insuring mortgage lenders and mortgage
loan investors against borrower default on individual first lien mortgage loans
on one-to-four unit residential properties, including condominiums. PMI and
other private mortgage insurers have no limit as to the maximum principal
balance of loans for which they may issue mortgage insurance. Primary coverage
can be used on any type of residential mortgage loan instrument approved by PMI
and is generally underwritten on a loan-by-loan basis. (See "H. Underwriting
Practices", below.) Primary mortgage insurance provides mortgage default
protection to lenders or investors on individual loans. PMI's obligation to an
insured with respect to a claim is determined by applying the appropriate
coverage percentage to the original loan amount. In lieu of paying the
calculated claim amount, PMI has the option of: (i) paying the entire loss and
taking title to the mortgaged property, or (ii) in the case of certain sales,
paying the difference between the sales proceeds received by the insured and the
claim amount up to a maximum of the coverage percentage. (See "J. Defaults and
Claims--Claims", below.)
PMI offers coverage ranging from 4% to 42% of the total of the outstanding loan
principal, delinquent interest and certain expenses associated with a default
and the subsequent foreclosure of a mortgage loan ("claim amount"). The
percentage of the total claim amount subject to payment by PMI in the event of a
claim on a mortgage loan that is the subject of primary insurance ("coverage
percentage") was predominantly in the 25% to 30% range for primary new
insurance written ("NIW") for the year ended December 31, 1999. The average
coverage percentage for PMI was 25% and 24% of NIW for the year ended December
31, 1999 and 1998, respectively. Certain states limit the amount of risk a
mortgage insurer may retain with respect to coverage of an insured loan to 25%
of the indebtedness to the insured. Coverage in excess of 25% of the
indebtedness to the insured ("deep coverage") must be reinsured. To minimize
reliance on third party reinsurers on deep coverage business, TPG formed RGC,
RIC and PMG to provide reinsurance of such deep coverage to PMI and CMG. (See
"K. Reinsurance", below.) At December 31, 1999, PMI's average coverage
percentage on insurance in force was 24.4%. (See "C. Industry Overview--Fannie
Mae and Freddie Mac", below.)
Mortgage insurance coverage cannot be canceled by PMI, except for nonpayment of
premiums or certain material violations of PMI's Master Policy. Mortgage
insurance coverage can be canceled by the insured at any time. The GSEs current
guidelines regarding cancellation of mortgage insurance generally provide that a
borrower's written request to cancel mortgage insurance should be honored if the
borrower has a satisfactory payment record and the principal balance is not
greater than 80% of the original value of the property. In addition, the Home
Owners Protection Act of 1998 provides for automatic termination, or
cancellation of mortgage insurance upon a borrower's request upon satisfaction
of certain conditions (See IC4). Generally, mortgage insurance remains renewable
at the option of the insured at a rate fixed when the insurance on the loan was
initially issued. As a result, the impact of increased claims and incurred
losses from policies originated in a particular year cannot be offset by renewal
premium increases on policies in force or mitigated by nonrenewal of insurance
coverage. Mortgage insurance premiums are usually charged to the borrower by the
mortgage lender or loan servicer, which in turn remits the premiums to the
mortgage insurer.
PMI has the following basic types of premium payment plans.
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Monthly Premium. A premium payment plan in which premiums are paid monthly
over the term of the coverage ("Monthly Premium Plan"). Under PMI's Monthly
Premium Plan only one or two months' of premium is paid at the mortgage loan
closing, and thereafter, monthly premiums are collected by the loan servicer for
monthly remittance to PMI. PMI also offers a plan under which the first monthly
premium is payable at the time the first monthly mortgage payment is due ("pmiNU
MONTHLY/ SM/"). The pmiNU MONTHLY/ SM/ plan helps reduce the amount a borrower
would typically have to pay at closing, thereby increasing mortgage loan
affordability. Monthly Premium and pmiNU MONTHLY/ SM/ Plans represented 95.9%
of NIW in 1999. During April 1999, PMI began offering two new monthly premium
products, pmiNU MONTHLY Premier /SM/, and pmiMonthly Premier /SM/, which offer
the option to finance a portion of the premium, or to pay a larger portion of
the premium up-front to receive a lower monthly premium. These new products are
designed to compete with the GSEs' programs that require the payment of an
additional fee for a further reduction in mortgage insurance coverage (See "D.
Competition and Market Share", below and IC3).
Single Premium. A premium payment plan that requires an initial premium
payment that extends coverage for more than one year and involves a lump-sum
payment at the loan closing ("Single Premium Plan"), which may be refundable if
the coverage is canceled by the insured lender (which generally occurs when the
loan is repaid or the value of the property has increased significantly).
During May 1999, PMI began offering its Super Single/ SM/ product that provides
coverage on 97% LTV loans. The single premium can be financed by the borrower by
adding it to the principal amount of the mortgage and generally covers the
greater of 10 years or amortization of the underlying loan to an 80% LTV. Single
Premium Plans represented 3.0% of NIW in 1999.
Annual Premium. A premium payment plan that requires the payment of the
first-year premium at the time of mortgage loan closing and annual renewal
premium payments in advance each year thereafter ("Annual Premium Plan").
Renewal payments generally are collected in monthly installments from the
borrower along with the mortgage payment and held in escrow by the loan servicer
for annual remittance to PMI in advance of each renewal year. Annual Premium
Plans represented 1.1% of NIW in 1999.
Pool Insurance
During the fourth quarter of 1997, PMI began offering a pool insurance product,
primarily to Fannie Mae and Freddie Mac, as part of PMI's value added strategy.
This product was also sold to state housing finance authorities. 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 risk written for this product was $231 million and $450 million for the
years ended December 31, 1999 and 1998, respectively. This product is similar
in structure to the pool insurance product previously offered by PMI during 1990
- - 1993, but has better risk management characteristics, including lower stop
loss limits, improved nationwide
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geographic diversification and lower LTVs. The average stop loss limit for this
product as of December 31, 1999 was 1.07%. Risk in force under pool insurance
programs with PMI's customers represented approximately three percent of the
$21.2 billion total primary risk in force at December 31, 1999 (See IC10.).
In July 1999, the California Department of Insurance approved a Recapture
Agreement between PMI and Forestview Mortgage Insurance Company ("Forestview")
relating to mortgage pool policies written prior to 1994. As a result of the
commutation and recapture of the Reinsurance Agreement with Forestview, PMI
received $45.5 million in cash in consideration of the recapture liability
(consisting of the returned unearned premium reserve, and the reimbursement of
the reserve for losses), the roll back of 1999 reinsurance transactions, and the
settlement of reimbursable fees and prepaid expenses. In connection with the
Recapture Agreement, PMI assumed mortgage insurance obligations of approximately
$42.8 million, net of expense allocations, previously insured by Forestview.
Risk in force for the recaptured Forestview portfolio was $1.41 billion at
December 31, 1999.
Risk-Sharing Products
In addition to standard primary and pool insurance, PMI offers: (i) layered co-
insurance, a primary mortgage insurance program for a covered loan for which a
mortgage originator or a state housing authority retains liability for losses
above a certain level of aggregate losses and below a second specified level of
aggregate losses, above which the mortgage insurer retains liability; (ii)
pmiADVANTAGE/SM/, a lender-paid primary mortgage insurance program that provides
reductions from standard rates based on the quality of the business generated;
(iii) pmiCAPTIVE/SM/, a captive reinsurance program that allows a reinsurance
company, generally an affiliate of the lender, to assume primary mortgage
insurance default losses at a specified entry point up to a maximum aggregate
exposure, up to an agreed upon amount of total coverage; (iv) performance
assurance agreements, for which PMI compensates lenders to cover a layer of
losses in excess of a specified level of losses associated with business
generated by the lender; and (v) pmiEXTRA/SM/ coverage, a product which provides
an additional layer of primary mortgage insurance coverage (up to 15%) on all
insured loans in a portfolio sold to GSEs. TPG also offers performance notes, a
program whereby TPG issues an unsecured, private placement note that pays a base
rate of interest plus, if appropriate, a performance addition. The interest rate
on the note varies based on the performance of the lender's book of business
written during the origination period. To date the risk-sharing products have
not represented a significant portion of PMI's or TPG's revenues. Several of the
above risk-sharing products, as well as pool insurance, are the subject of
pending regulatory reviews. Management is unable to predict the impact of these
regulatory issues on these products. (See "D. Competition and Market Share" and
IC2 and IC8.)
Joint Venture
CMG Mortgage Insurance Company ("CMG") offers mortgage guaranty insurance for
loans originated by credit unions. CMG is operated as a joint venture equally
owned between PMI and CUNA Mutual Investment Corporation (''CMIC''). PMI and
CMIC provide services to CMG, with CMIC providing primarily sales and marketing
services and PMI providing primarily
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insurance operation services. CMIC is a part of the CUNA Mutual Group, which
provides insurance and selected financial services to credit unions and their
members in the United States and over 50 other countries. CMG's claims-paying
ability is currently rated AA by both Fitch IBCA and by Duff & Phelps Credit
Rating Co.
As of December 31, 1999, CMG was licensed and operational in 49 states and the
District of Columbia. CMG is approved as a mortgage insurer by both Fannie Mae
and Freddie Mac, as well as by other purchasers of credit union originated
mortgage loans. Since inception, CMG has issued approximately 1,300 master
policies to credit union and credit union affiliated organizations nationwide.
At December 31, 1999, CMG had $5.8 billion of primary insurance in force.
Under the terms of the joint venture arrangement, at the end of fifteen years or
earlier under certain limited conditions, CMIC has the right to require PMI to
sell, and PMI has the right to require CMIC to purchase, PMI's interest in CMG
for an amount equal to the then current fair market value. For this purpose,
fair market value will be determined by agreement between PMI and CMIC, or
failing such agreement, through appraisal by nationally recognized investment
banking firms.
International
The Company also provides mortgage guaranty insurance and reinsurance in
Australia, New Zealand and Hong Kong, which is described in more detail under
"Section N. Other Businesses."
C. Industry Overview
Fannie Mae and Freddie Mac
The GSEs are the predominant purchasers and sellers of conventional mortgage
loans in the United States, providing a direct link between the primary mortgage
origination markets and the capital markets. The GSEs are permitted to purchase
conventional high- LTV mortgages only if the lender (i) secures private mortgage
insurance from an eligible insurer on those loans; (ii) retains a participation
of not less than 10% in the mortgage; or (iii) agrees to repurchase or replace
the mortgage in the event of a default under specified conditions. If the lender
retains a participation in the mortgage or agrees to repurchase or replace the
mortgage, applicable federal bank and savings institution regulations may
increase the level of capital required by the loan originations. Because loan
originators prefer to make loans that may be marketed in the secondary market to
Fannie Mae and/or Freddie Mac without having to hold such capital, they are
motivated to purchase mortgage insurance from insurers deemed eligible by the
GSEs. PMI is an authorized mortgage insurer for the GSEs. (See "O. Regulation",
below.)
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. Subsequent to the withdrawal of the
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legislation, Freddie Mac announced that it would pursue a 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. 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 (See IC3).
Fannie Mae and Freddie Mac impose requirements on private mortgage insurers for
such insurers to be eligible to insure loans sold to such agencies. One of the
GSEs eligibility requirements is that private mortgage insurers, including PMI,
must at least maintain an AA- rating with any public national rating agency. Any
change in PMI's existing eligibility status, primarily its claims-paying ability
rating from the various rating agencies, could have a material and adverse
effect on the Company's financial condition and results of operations. (See
IC5.)
Since the GSEs are the primary investors in mortgage loans, they have the
ability to implement new eligibility requirements for mortgage insurers, change
the pricing arrangements for purchasing retained participation mortgages as
compared to insured mortgages or alter or liberalize underwriting standards on
low down payment mortgages they purchase. Private mortgage insurers, including
PMI, are affected by such changes implemented by Fannie Mae or Freddie Mac. (See
"D. Competition and Market Share", "O. Regulation", and IC2 and IC3.)
Since 1992, Fannie Mae and Freddie Mac have been subject to oversight
legislation for GSEs by the Department of Housing & Urban Development (HUD)
which simultaneously tightened their capital requirements and set goals for
affordable housing. Their goals are based on the percentage of loans purchased
by the GSEs, determined by the number of dwelling units securing such loans.
Fannie Mae also expanded its Community Home Buyers Program to include a
commitment to purchase a certain volume of 97s.
Recently, HUD announced new affordable housing goals for the GSEs. Under the new
goals beginning for year 2001, at least 50% of all loans purchased by the GSEs
must support low- and moderate-income homebuyers. The GSEs' current goal for
affordable housing is that at least 48% of the units financed by each GSE be
low- and moderate-income housing, and that approximately 24% of such units be in
underserved areas (which are defined as census tracts with either a median
income no greater than 90% of area median, or with a median income no greater
than 120% of area median income and a minority population of at least 30%).
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. TPG believes that the GSEs' goals to
expand purchases of affordable housing loans have increased the overall size of
the total mortgage insurance market because such loans are traditionally in
excess of 80% LTV, with a majority being in excess of 90% LTV.
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 regulations for the GSEs. In April 1999, a notice of
proposed rulemaking was published in the
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Federal Register announcing OFHEO's development of proposed risk-based capital
regulations. 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 severe economic
conditions. 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 compared with those
companies with a rating lower than AAA (See IC3).
Freddie Mac's and Fannie Mae's automated underwriting services, Loan
Prospector/SM/ and Desktop Underwriter, respectively, can be used by mortgage
originators to determine whether Freddie Mac or Fannie Mae will purchase a loan
prior to closing. Through these systems, lenders are able to obtain approval for
mortgage guaranty insurance with any participating mortgage insurer. PMI works
with both agencies in offering insurance services through their systems, while
utilizing its proprietary risk management systems to monitor the risk quality of
loans insured through such systems. (See "H. Underwriting Practices--Role of
Technology, and Delegated Underwriting", below.)
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 with 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. The Home Owners Protection Act of 1998 (the "Act"), which became
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 and 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 which 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. (See "O.
Regulation", and IC4, below.)
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D. Competition and Market Share
The U.S. private mortgage insurance industry consists of eight active mortgage
insurers, including Mortgage Guaranty Insurance Corporation ("MGIC"), GE
Capital Mortgage Insurance Corporation ("GEMICO"), an affiliate of GE Capital
Corporation, United Guaranty Residential Insurance Company ("UGC"), an
affiliate of American International Group, Inc., and Radian Group, Inc.
(Radian"). PMI, including CMG, is the third largest private mortgage insurer in
the United States based on new primary insurance written in 1999. (Source:
Inside Mortgage Finance.) In 1999, MGIC possessed the largest share of the
private mortgage insurance market, with approximately 24.3% of NIW, and Radian,
PMI, GEMICO and UGC had market shares of approximately 17.5%, 16.3%, 15.2% and
14.4%, respectively. (Source: Inside Mortgage Finance.) PMI's 1999 market share
percentage includes 1.3% of the market held by CMG. (See Part II, Item 7--
"Management's Discussion And Analysis Of Financial Condition And Results of
Operations", and IC2.)
The following table indicates the market share by private mortgage insurer based
on NIW over the past five years:
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Private Mortgage Insurance Industry Market Share
Year Ended December 31,
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1999 1998 1997 1996 1995
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Mortgage Guaranty Insurance Corp. 24.3 % 23.1 % 26.4 % 25.5 % 27.4
Radian Guaranty Inc. (1) 17.5 19.4 17.8 15.7 14.9
PMI Mortgage Insurance Co. (2) 16.3 16.2 13.8 14.7 13.5
GE Capital Mortgage Insurance Co. 15.2 16.4 16.5 18.5 20.1
United Guaranty Corp. 14.4 12.7 12.8 12.7 12.9
Republic Mortgage Insurance Co. 10.0 9.7 10.3 11.2 9.7
Triad Guaranty Insurance Corp. 2.3 2.5 2.4 1.7 1.5
-------- -------- ------- ------- -------
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
======== ======== ======= ======= =======
</TABLE>
Source: Inside Mortgage Finance
(1) Formerly CMAC & Amerin; market share data prior to the merger represents
combined pro forma results of CMAC & Amerin.
(2) Includes CMG.
The following table indicates the market share by private mortgage insurer for
each quarter in 1999:
11
<PAGE>
<TABLE>
<CAPTION>
Private Mortgage Insurance Industry Market Share
1999 by Quarter
--------------------------------------------------------------------------------
4Q 1999 3Q 1999 2Q 1999 1Q 1999
-------------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Mortgage Guaranty Insurance Corp. 24.5 % 24.4 % 24.5 % 23.9 %
PMI Mortgage Insurance Co. (1) 16.6 16.1 16.5 15.9
United Guaranty Corp. 16.3 14.2 13.8 13.7
Radian Guaranty Inc. (2) 16.3 17.6 17.9 18.1
GE Capital Mortgage Insurance Corp. 14.8 15.1 15.8 14.9
Republic Mortgage Insurance Co. 9.3 10.4 9.2 10.8
Triad Guaranty Insurance Corp. 2.2 2.2 2.3 2.7
--------------------- ------------------ ---------------- ----------------
Total 100.0 % 100.0 % 100.0 % 100.0 %
===================== ================== =============== ===============
</TABLE>
Source: Inside Mortgage Finance
(1) Includes CMG.
(2) Formerly CMAC & Amerin; market share data prior to the merger represents
combined pro forma results of CMAC & Amerin
PMI and other private mortgage insurers also compete directly with federal and
state governmental and quasi-governmental agencies, principally the FHA and, to
a lesser degree, the VA. These agencies sponsor government-backed mortgage
insurance programs combined to accounted for 47.6%, 43.7%, 45.6%, and 44.8% for
1999, 1998, 1997 and 1996, respectively, of all loans insured or
guaranteed/(2)./ On January 1, 2000, the Department of Housing and Urban
Development announced a proposed increase in the maximum individual loan amount
that FHA can insure to $219,849 from $208,800. The maximum individual loan
amount that the VA can insure is $203,150 (See IC2). Private mortgage insurers
have no limit as to maximum individual loan amounts that they can insure.
(2) According to data from the Department of Housing and Urban Development
("HUD"), VA and Inside Mortgage Finance.
The Omnibus Spending Bill of 1999, 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. (See IC2.)
The following table indicates the relative share of the mortgage insurance
market based on NIW by FHA/VA and private mortgage insurers over the past five
years.
Federal Government and Private Mortgage Insurance Market Share
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
FHA/VA 47.6 43.7 % 45.6 % 44.8 % 38.5 %
Private Mortgage Insurance 52.4 56.3 % 54.4 55.2 61.5 %
-------------- ------------- ------------ ----------- ------------
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
============== ============= ============= =========== ============
</TABLE>
12
<PAGE>
Source: Inside Mortgage Finance
Fannie Mae and Freddie Mac announced an increase in the maximum single-family
principal balance loan limit eligible for their purchase from $240,000 to
$252,700 effective in 2000. Since the GSEs are the predominant purchasers and
sellers of conventional mortgage loans in the United States, loan originators
prefer to make loans that may be marketed in the secondary market to Fannie Mae
and/or Freddie Mac. Loan originators are motivated to purchase mortgage
insurance from insurers deemed eligible by the GSEs. Because PMI is an
authorized mortgage insurer for the GSEs, management believes any increase in
the GSEs loan limit eligible for their purchase may positively affect the number
of loans eligible for mortgage insurance and may have the effect of increasing
the size of the mortgage insurance market. (See "C. Industry Overview",
above.)
Freddie Mac and Fannie Mae both introduced programs in 1999 that offer reduced
mortgage insurance coverage availability for lenders that generally deliver
loans approved by the GSE's automated underwriting services, Loan Prospector/SM/
and Desktop Underwriter, 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% down
payment (a 95% LTV), from 30% to 25% of the mortgage loan covered by MI; (iii)
reduction in required MI coverage, for loans with a 10% down payment (a 90% LTV
loan), from 25% to 17% 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% LTV loan will require 18%
of the mortgage loan to have mortgage insurance coverage. Similarly, a 90% LTV
loan will require 12% of the mortgage loan have mortgage insurance. In order
for the homebuyer to have MI at these levels, such loans would require a payment
at closing or a higher note rate. Through 1999 the reduced MI coverage
programs have not produced any significant volume (See IC3.)
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 Federal Reserve Board is in the
process of considering whether similar activities are permitted for bank holding
companies. The Office of Thrift Supervision has also recently 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 reinsurance subsidiaries of national banks, savings
institutions, or bank holding companies could become significant competitors of
the Company in the future. In addition, the Gramm-Leach-Bliley Act of 1999,
among other things, 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 (See "O.
Regulation", IC2 and IC15.)
PMI and other private mortgage insurers also compete indirectly with mortgage
lenders that elect to retain the risk of loss from defaults on all or a portion
of their high-LTV mortgage loans rather than obtain insurance for such risk.
Certain lenders originate a first mortgage lien with an 80%
13
<PAGE>
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, as well as similar type
products, competes with mortgage insurance as an alternative for lenders selling
loans in the secondary mortgage market. On March 8, 2000, the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the Currency and other
banking regulators issued a proposal to amend their risk-based capital standards
to treat direct credit substitutes and recourse obligations consistently and
would incorporate the use of credit ratings as an indicator of a bank's risk of
loss. It is believed that the proposal would increase the amount of capital
national banks and thrifts would be required to hold for 80/10/10 and similar
products when the lender holds the first and second mortgage. State-chartered
banks already are subject to the higher capital requirement (See IC2). Any
change in legislation which affects the risk-based capital rules imposed on
banks and savings institutions, or which change the GSEs' insurance requirements
may affect the desirability of foregoing insurance for lending institutions or
the GSEs and, therefore, affect the size of the insurance mortgage market (See
"O. Regulation", below).
In addition to captive reinsurance arrangements with subsidiaries of banks,
mortgage insurers like PMI reinsure some portion of coverage issued to certain
lenders with affiliates of those lenders and/or through uncaptive structures.
PMI is also pursuing various risk-sharing arrangements for certain of its
customers, including offering various premium rates based on the risk
characteristics, loss performance or class of business of the loans to be
insured, or the costs associated with doing such business. While many factors
are considered in determining rates, there can be no assurance that the premiums
charged will be adequate to compensate PMI or TPG for the risks associated with
the coverage provided to its customers. Management is unable to predict the
impact of these arrangements with non-bank captive reinsurers and uncaptive
reinsurers, or the performance notes or their long-term competitive effect (See
"K. Reinsurance", IC4 and IC8.)
The Gramm-Leach-Bliley Act of 1999 (the "Act") became effective on March 11,
2000 and allows, among other things, 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. However, any such mortgage insurance subsidiary would be subject to
and governed by state insurance regulations, including capital and reserve
requirements, diversification of risk and restrictions on the payments of
dividends. Further, before any loans insured by the subsidiary are eligible
for purchase by the GSEs, the insurance subsidiary must meet Fannie Mae and
Freddie Mac eligibility standards, which currently require, among other things,
a claims-paying ability rating of at least AA-, and the establishment of
comprehensive operating policies, procedures and processes.
Coinciding with the effective date of the Act, several national banks announced
that they meet the criteria to own financial subsidiaries, including sufficient
capitalization and stated plans to create one or more operating subsidiaries.
Two national bank holding companies indicated that they intend to use their
financial subsidiaries to sell insurance. The Federal Reserve Board recently
issued a proposed rule to allow state-chartered banks that are members of the
Federal Reserve System own financial subsidiaries. The proposed rule is
designed to establish parity
14
<PAGE>
between state member banks and national banks. Because of the many aspects of
the Act which require clarification and promulgation of specific regulations,
the Company is not yet able to ascertain the full impact of the Act on the
Company (See IC15).
In addition to competition from federal agencies, PMI and other private mortgage
insurers face limited competition from state-supported mortgage insurance funds.
As of December 31, 1999, several states (among them California, Connecticut,
Maryland, Massachusetts, New York, and Vermont) have state housing insurance
funds which are either independent agencies or affiliated with state housing
agencies.
For the year ended December 31, 1999, total mortgage originations according to
the Mortgage Bankers Association of America were estimated to be $1.3 trillion
compared to $1.5 trillion for the year ended December 31, 1998.
E. Customers
PMI insures mortgage loans funded by mortgage originators. Mortgage originators
include mortgage bankers, savings institutions, commercial banks and other
mortgage lenders.
For the year ended December 31, 1999, PMI's primary customers were mortgage
bankers, with the balance of its customers being savings institutions,
commercial banks and other mortgage lenders. Mortgage brokers originate loans on
behalf of mortgage lenders and are not master policyholders. As a result,
mortgage brokers are not the beneficiaries of policies issued by PMI. The
beneficiary under the master policy is the owner of the insured loan and,
accordingly, when a loan is sold, the purchaser of the loan is entitled to the
policy benefits.
Because the GSEs are the predominant purchasers and sellers of conventional
mortgage loans in the United States, Fannie Mae and Freddie Mac are the
beneficiary of the majority of the Company's mortgage insurance coverage.
F. United States Business Composition
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 averaging five to seven
years. Insurance coverage may be canceled by the policy owner or servicer of the
loan at any time. PMI has no control over the owner's or servicer's decision to
cancel insurance coverage and self-insure or place coverage with another
mortgage insurance company. However, the GSE's have restrictions on changing
mortgage insurance providers. 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.
The composition of PMI's direct primary risk in force, as summarized on the
following table, reflects several changes over the five-year period from 1995 to
1999. The relatively low interest rates during this period resulted in an
increasing percentage of mortgages insured by PMI at a
15
<PAGE>
fixed rate of interest, representing 91.4% of direct primary risk in force at
December 31, 1999, up from 76.8% at year-end 1995. Based on PMI's experience,
fixed rate loans represent less risk than adjustable rate mortgages ("ARMs")
because claim frequency on ARMs is generally higher than on fixed rate loans.
PMI charges higher premium rates for ARMs, 95s and 97s to compensate for the
higher risk associated with such loans, although there can be no certainty that
the differential in the higher premium rate will be adequate to compensate for
the higher risk.
In 1995, the GSEs increased their coverage requirements to 30% and 25%, on 95s
and 90s, respectively. PMI's percentage of risk in force with the higher
coverage requirements has steadily increased since 1995, and the percentage of
risk in force comprised of 95s with 30% coverage has increased from 34.4% for
the year ended December 31, 1998 to 37.6%, for the year ended December 31, 1999.
During the period between 1998 and 1999, PMI's direct primary risk in force
increased by 9.8% from $19.3 billion at December 31, 1998 to $21.2 billion at
December 31, 1999.
During 1999, Fannie Mae and Freddie Mac reduced the mortgage insurance coverage
requirements for borrowers recommended for approval by their automated loan
underwriting systems, Desktop Underwriter/SM/ and Loan Prospector/SM/,
respectively. Management believes it is too early to assess impact of the
Fannie Mae and Freddie Mac reduction of required levels of mortgage insurance on
the Company's financial condition and results of operations. However, during
1999, PMI's percentage of insurance in force with higher coverage levels
continued to increase as mortgage lenders and investors continue to prefer MI
policies with the higher coverage percentages. If the reduction in required
levels of mortgage insurance were to become widely accepted by mortgage lenders
and their customers, this shift could have a materially adverse impact on the
Company's financial condition and results of operations. (See "D. Competition
and Market Share", above and IC3.)
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 December
31, 1999, 46.7% of PMI's risk in force consisted of 95s, which, in PMI's
experience, have had a claims frequency approximately twice that of mortgages
with LTVs equal to or less than 90% and over 85% ("90s"). "). At December 31,
1999, 48.4% of PMI's risk in force consisted of 90s and below. PMI also offers
coverage for mortgages with LTVs in excess of 95% and up to 97% ("97s"). At
December 31, 1999, 4.9% 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 coverage for 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.
Although PMI charges higher premium rates for loans that have higher risk
characteristics, including ARMs, 95s and 97s, 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 (See IC10.).
16
<PAGE>
The following table reflects the percentage of PMI's direct primary risk in
force (as determined on the basis of information available on the date of
mortgage origination) by categories and as of the dates indicated:
Direct Risk in Force
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Direct Risk in Force (In millions) $ 21,159 $ 19,324 $ 18,092 $ 17,336 $ 15,130
--------- --------- ---------- ---------- ----------
Lender Concentration:
Top 10 Lenders (by original applicant) 36.1 % 30.0 % 27.8 % 26.0 % 22.5 %
========= ========= ========= ========== ==========
LTV:
97s 4.9 % 3.3 % 1.8 % 0.0 % 0.0 %
95s 46.7 46.3 46.2 44.7 40.6
90s and below 48.4 50.4 52.0 55.3 59.4
--------- --------- --------- ---------- ----------
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
========= ========= ========= ========== ==========
Average Coverage Percentage 24.4 % 23.9 % 24.3 % 22.4 % 21.2 %
========= ========= ========= ========== ==========
Loan Type:
Fixed 91.4 % 89.7 % 83.3 % 80.6 % 76.8 %
ARM 7.9 9.2 15.2 17.7 21.3
ARM (scheduled/potential
negative amortization) 0.7 1.1 1.5 1.7 1.9
--------- --------- ---------- ---------- ----------
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
========= ========= ========== ========== ==========
Mortgage Term:
15 years and under 4.4 % 5.3 % 6.3 % 9.4 % 8.6 %
Over 15 years 95.6 94.7 93.7 90.6 91.4
--------- --------- ---------- ---------- ----------
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
========= ========= ========== ========== ==========
Property Type:
Single-family detached 87.5 % 87.1 % 86.3 % 86.7 % 86.7 %
Condominium 6.1 6.4 6.8 6.9 7.1
Other 6.4 6.5 6.9 6.4 6.2
--------- --------- ---------- ---------- ----------
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
========= ========= ========== ========== ==========
Occupancy Status:
Primary residence 98.0 % 98.6 % 99.0 % 99.2 % 99.3 %
Second home 1.2 1.0 0.8 0.6 0.5
Non-owner occupied 0.8 0.4 0.2 0.2 0.2
--------- --------- ---------- ---------- ----------
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
========= ========= ========== ========== ==========
Loan Amount:
$100,000 or less 24.0 % 26.4 % 27.3 % 28.3 % 28.8 %
Over $100,000 and up to $250,000 68.6 66.1 65.6 64.8 64.3
Over $250,000 7.4 7.5 7.1 6.9 6.9
--------- --------- ---------- ---------- ----------
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
========= ========= ========== ========== ==========
</TABLE>
G. Sales, Product Development and Underwriting Personnel
PMI employs a sales force and underwriting staff located throughout the country
to sell its products, underwrite loans and provide services to lenders located
throughout the United States. At December 31, 1999, PMI had 30 sales and
underwriting service field and satellite offices located in 26 states. PMI's
sales force receives compensation comprised of a base salary with incentive
compensation tied to performance objectives. PMI's Product Development and
Pricing
17
<PAGE>
Department has primary responsibility for advertising, sales materials, pricing
and the creation of new products and services. PMI's product development and
underwriting personnel at the director level and above, are eligible to
participate in a bonus plan; all other personnel are compensated solely by
salary.
PMI's underwriting force have access to electronic data interchange, automated
mortgage scoring systems and automated underwriting systems which give them the
ability to more efficiently process and underwrite both conforming and non-
conforming loans to investors standards. (See "H. Underwriting Practices -
Technology and Underwriting Practices" below.) PMI's Certificate Priority Center
("CPC"), in Dallas Texas is the central processing facility for underwriting
data input and the issuance of PMI's insurance certificates. CPC was designated
to centralize the processing of data input and to enhance operational
productivity and efficiency, customer service and expense management. New
policies processed at the CPC represented 54.1% of PMI's NIW in 1999 compared
with 38.3% in 1998. During 1999, applications processed at the CPC represented
64% of all applications compared with 47.0% in 1998.
The Company, through MSC, provides contract underwriting services that enable
customers to improve the efficiency and quality of their operations by
outsourcing all or part of their mortgage loan underwriting. Such contract
underwriting services are provided for mortgage loans for which PMI provides
mortgage insurance and for loans on which PMI does not. MSC also performs all of
the contract underwriting activities of CMG. As a part of its contract
underwriting services, PMI provides remedies which may include the assumption of
some of the costs of repurchasing insured and uninsured loans from the GSEs and
other investors. Generally, the scope of these remedies are in addition to those
contained in PMI's master primary insurance policies. Contract underwriting
services have become increasingly important to mortgage lenders as they seek to
reduce costs. New policies processed by contract underwriters represented 28.8%
of PMI's NIW in 1999 compared with 35.0% in 1998.
H. Underwriting Practices
Risk Management Approach
PMI underwrites its primary business based upon the historical performance of
risk factors of individual loan profiles, and utilizes automated underwriting
systems in the risk selection process to assist the underwriter with decision
making. PMI's underwriting process evaluates five categories of risk:
. Borrower. An evaluation of the borrower's credit history is an integral
part of PMI's risk selection process. In addition to the borrower's
credit history, PMI analyzes several factors, including the borrower's
employment history, income, funds needed for closing, and the details of
the home purchase.
18
<PAGE>
. Loan Characteristics. PMI analyzes four general characteristics of the
loan product to quantify risk: (i) LTV; (ii) type of loan instrument;
(iii) type of property; and (iv) purpose of the loan. Certain categories
of loans are generally not insured by PMI because such loans are deemed
to have an unacceptable level of risk, such as loans with scheduled
negative amortization, and loans originated using reduced documentation.
. Property Profile. PMI reviews appraisals regarding methodology used to
determine the property price.
. Housing Market Profile. PMI places significant emphasis on the condition
of regional housing markets in determining its underwriting guidelines.
PMI analyzes the factors that impact housing values in each of its major
markets and closely monitors regional market activity on a quarterly
basis.
. Mortgage Lender. PMI tracks the historical risk performance of all
customers that hold a master policy. This information is factored into
the determination of the loan programs that PMI will approve for various
lenders.
PMI uses national and territorial underwriting guidelines to evaluate the
potential risk of default on mortgage loans submitted for insurance coverage.
The national guidelines have developed over time and take into account PMI's
loss experience and the underwriting guidelines of Fannie Mae and Freddie Mac.
PMI expects its internal and contract underwriters to utilize their knowledge of
local markets, risk management principles and business judgment in evaluating
loans on their own merits in conjunction with PMI's underwriting guidelines.
Accordingly, PMI's underwriting staff is trained to consider combined risk
characteristics and their impact in different real estate markets and have
discretionary authority to insure loans which are substantially in conformance
with PMI's published underwriting guidelines. Significant deviations from such
guidelines require higher level underwriting approval. PMI also offers pre- and
post-loan credit counseling to borrowers using the 97% product as an aid in
managing the greater risks associated with 97s compared to 95s. (See IC12.)
Underwriting Process
To obtain mortgage insurance on a specific mortgage loan, a master policyholder
typically submits an application to one of PMI's regional underwriting offices,
supported by various documents. Besides the standard full documentation
submission program, PMI also accepts applications for insurance under a reduced
documentation submission program (the "Quick Application Program"), which is
limited to those lenders with a track record of high quality business. PMI's
Quick Application Program allows selected lenders to submit insurance
applications that do not include all standard documents. The lender is required
to maintain written verification of employment and source of funds needed for
closing and other supporting documentation in its origination file. PMI may
schedule on-site audits of lenders' files on loans
19
<PAGE>
submitted under this program. (See "G. Sales, Product Development and
Underwriting Personnel", above.)
The documents submitted to PMI by the mortgage lender generally include a copy
of the borrower's loan application, an appraisal report or other statistical
evaluation on the property by either the lender's staff appraiser or an
independent appraiser, a written credit report on the borrower and, under the
standard full documentation submission program, a verification of the borrower's
employment, income and funds needed for the loan closing (principally, down
payment) and the home purchase contract. Once the loan package is received by
PMI's home or field underwriting offices, key borrower, property and loan
product information is extracted from the file by an underwriting staff member
and analyzed by automated underwriting systems -- pmiAURA(SM) and pmiTERRA(SM).
During 1999, 56.6% of applications received were approved by the automated
underwriting systems. In 1998, 62.2% of applications received were approved by
the automated underwriting systems. Such applications generally have favorable
risk characteristics, such as strong borrower credit ratings, low borrower debt-
to-income ratios and stable borrower income histories. Any loans not
automatically approved are referred to an underwriter for review of the entire
insurance application package. The underwriter reviews the detailed systems
analysis and borrower, loan and property profiles to determine if the risk is
acceptable. The underwriter either approves, delays the final decision pending
receipt of more information or declines the application for insurance. PMI
generally responds within one business day after an application and supporting
documentation is received.
PMI's rejection rate remained consistent with 1998 at approximately 4.5% for the
year ended December 31, 1999. PMI shares its knowledge of risk management
principles and real estate economic conditions with customers to improve the
quality of submitted business and reduce the rejection rate.
Delegated Underwriting
PMI's Partner Delivered Quality Program (the "PDQ Program"), introduced in
1991, is a delegated underwriting program whereby approved lenders are allowed
to determine whether loans meet program guidelines and requirements approved by
PMI and are thus eligible for mortgage insurance. At present, over 1,000 lenders
actively approve applications under the PDQ Program. PMI's delegated business
accounted for 56.2% and 52.7% of PMI's NIW in 1999 and 1998, respectively, and
represented 44.1% of PMI's total risk in force at December 31, 1999. Delegated
underwriting enables PMI to meet mortgage lenders' demands for immediate
insurance coverage of certain loans. Such types of programs have now become
standard industry practice.
Under the PDQ Program, customers utilize their own PMI-approved underwriting
guidelines and eligibility requirements in determining whether PMI is committed
to insuring a loan. Once the lender notifies PMI of an insured loan, key loan
risk characteristics are evaluated by the pmiAURA(SM) model to monitor the
quality of delegated business on an ongoing basis. Additionally, PMI audits a
representative sample of loans insured by each lender participating in the PDQ
Program on a regular basis to determine compliance with program requirements. If
a lender participating in the program tentatively commits PMI to insure a loan
which fails to meet
20
<PAGE>
all of the applicable underwriting guidelines, PMI is obligated to insure such a
loan except under certain narrowly-drawn exceptions to coverage (for example,
maximum loan-to-value criteria). Loans that are not eligible for the PDQ Program
may be submitted to PMI for insurance coverage through the normal process. PMI's
PDQ Program is also accessed through a customer interface with Freddie Mac's
Loan Prospector(SM) system. PMI has currently limited its interface
participation with Loan Prospector(SM) customers and/or lenders who are approved
to use the PDQ program.
PMI believes that the performance of its delegated insured loans will not vary
materially over the long-term from the performance of all other insured loans
because: (i) only qualified lenders who demonstrate underwriting proficiency are
eligible for the program; (ii) only loans meeting average-to-above average
underwriting eligibility criteria are eligible for the program; and (iii) PMI
has the ability to monitor the quality of loans submitted under the PDQ Program
with proprietary risk management tools and an on-site audit of each PDQ lender.
Technology and Underwriting Practices
In September 1999, PMI began offering its products and services via the
Internet. PMI customers can order mortgage insurance directly from their Web
sites using an embedded link that "frames" e-PMI, which is PMI's all-purpose,
electronic delivery channel for mortgage insurance origination within the site
and provides access to PMI's online services under the customer's own branded
image. Framing, which provides connectivity to the e-PMI channel, is available
by request and tailored to a lender's specifications. Currently it offers users
immediate, real-time access to mortgage insurance origination services and
mortgage insurance rates. PMI offers e-PMI as a value-added service to better
meet the online mortgage origination needs of its customers. PMI will be
seeking to offer expanded services in the future through the phased introduction
of new capabilities to include access to Desktop Underwriter and Loan
Prospector(SM) decisioning, contract underwriting services, pmiAURA(SM)scoring,
and access to WEB-CONNECT(SM), PMI's online servicing update product.
PMI accepts applications for insurance electronically through an electronic data
interchange ("EDI") link with a lender. EDI links, through pmiPAPERLESS(SM),
serve to reduce paperwork for both PMI and its customers, streamline the process
by which mortgage insurance is applied for, reduce the number of errors
associated with re-entering information, and increase the speed with which PMI
is able to respond to applications, all of which can enhance PMI's relationship
with lenders while reducing underwriting costs.
pmiAURA(SM) employs claim and risk statistical models to predict the relative
likelihood of default by a mortgage borrower. pmiAURA(SM) assigns all
applications received by PMI a risk score predicting the likelihood of default,
and automatically refers certain applications to underwriters based on higher
risk characteristics, territorial underwriting guidelines or other
administrative requirements. The individual underwriter will then make the
final decision on those files referred by pmiAURA(SM). The pmiAURA(SM) database
contains performance data on over 2.8 million loans, and includes economic and
demographic information to enhance its predictive power. The pmiAURA(SM) system
generates three types of scores: a loan risk score that
21
<PAGE>
assesses the risk solely due to the borrower, loan and property characteristics
independent of market risk; a market score which is a measure of the default
risk due solely to the metropolitan area economic conditions; and the
pmiAURA(SM) Score, which combines the information in the loan risk and market
scores. Also, the newest fifth generation includes a revised credit score
indicator that provides an enhanced predictor of the relative likelihood of
default by a mortgage borrower.
The pmiTERRA(SM) system complements pmiAURA(SM) by providing a fully automated
appraisal analysis, and currently contains over 900,000 residential property
profiles. This analysis determines if the appraiser adequately supported the
final estimate of value. A key ingredient in the pmiTERRA(SM) appraisal model is
a consideration of the health of the real estate market in which the property is
located.
The automated underwriting systems free underwriters from having to review the
highest quality applications, and enable the underwriters to focus on more
complex credit packages and market and lender analyses. In addition to their use
in underwriting almost all of PMI's mortgage insurance applications from
lenders, the automated underwriting systems provide daily reports that assist
underwriting management in monitoring the credit and property risk being
committed for mortgage insurance. On the basis of its experience with the
automated underwriting systems, PMI believes that, in addition to improving
underwriting results, these automated underwriting systems have improved PMI's
underwriting efficiency and have brought consistency to the underwriting
judgment process. PMI's contract underwriters and its field underwriting force
have access to PMI's automated underwriting systems.
PMI, through its internal underwriting systems, provides its customers access to
Freddie Mac's and Fannie Mae's automated underwriting services, Loan
Prospector(SM) and Desktop Underwriter(SM), respectively, which are used as
tools by mortgage originators to determine whether Freddie Mac or Fannie Mae
will purchase a loan prior to closing. PMI works with both agencies in offering
insurance services through their systems, while utilizing its proprietary risk
management systems to monitor the risk quality of loans insured through such
systems. Currently, e-PMI customers are not offered access to the GSEs
automated underwriting programs.
As an added benefit, pmiAURA's(SM) extensive database provides detailed
performance reports of underwriting quality trends by geographic region, product
type, customer characteristics and other key factors. These reports allow PMI's
underwriting management to monitor risk quality on a daily basis and to
formulate long-term responses to developing risk quality trends. Ultimately,
such responses can lead to regional variations from, or permanent changes to,
PMI's underwriting guidelines. PMI currently licenses pmiAURA(SM) to
approximately 25 customers or lenders, including 6 of the top 10 mortgage
lenders, who use pmiAURA(SM) as a tool to help understand more completely the
risk profiles of the loans they originate and the applications PMI is most
likely to approve. PMI, through The Customer Technology Division of MSC, makes
available to all pmiAURA(SM) licensees customer service, technical support and
software upgrades. Currently, pmiAURA(SM), is approved by all four Wall Street
rating agencies as an effective tool for establishing levels of credit support
needed on securities backed by non-
22
<PAGE>
conforming, conventional loans. During 1999, PMI developed a modified version of
pmiAURA(SM) for users of Desktop Underwriter(TM) to evaluate FHA loans.
I. Affordable Housing
In recent years expanding home ownership opportunities for low and moderate-
income borrowers and communities has taken on an increased priority. PMI and
its lender customers have placed increased importance on this business. PMI's
approach to low-mod, or affordable lending, is to develop products and services
which assist responsible borrowers who may not have qualified using traditional
underwriting practices. These "non-traditional" underwriting standards assist
home buyers in verifying their ability to meet obligations in a timely and
conscientious manner, rather than accommodating borrowers who have historically
not managed their affairs in a responsible manner. The beneficiaries of these
programs have included recent immigrants who have not yet established
traditional credit histories; borrowers not accustomed to using traditional
savings institutions, and home buyers who although consistently employed, lack
the normally desired job stability due the nature of their employment.
To further promote affordable housing, PMI has entered into risk-sharing
arrangements with certain institutional lenders. PMI refers to such arrangements
as Layered Co-insurance. Layered Co-insurance is utilized primarily by financial
institutions to meet Community Reinvestment Act (CRA) lending goals. Under such
arrangements, the mortgage insurance is structured so that financial
responsibility is shared between the lender and PMI. Typically, PMI is
responsible for the first, and usually expected, loss layer, as well as a third
catastrophic layer, with the lender assuming a predetermined second loss layer.
PMI has also established partnerships with numerous national organizations to
mitigate affordable housing risks and expand the understanding of the
responsibilities of home ownership. These community partners include the San
Francisco based Consumer Credit Counseling Services, Neighborhood Reinvestment
Corp. and the affiliated Neighborhood Housing Services of America, and the
National American Indian Housing Conference. In addition, PMI has developed
partnerships with local organizations in an effort to expand home ownership
opportunities and promote community revitalization. These organizations include
the Oakland, California based Hispanic Unity Council, the San Francisco China
Town Community Development Corporation, the Orange County Affordable Home
Ownership Alliance, as well as several Native American nations, including the
Chickasaw, Choctaw, Cherokee and Navajo. In 1999 PMI's work with the Native
American nations was recognized by Social Compact, a nonprofit organization that
promotes grassroots strategies that attract private investment to lower-income
communities.
Programs offered under PMI's affordable housing initiatives receive the same
credit and actuarial analysis as all other standard programs. Loans to low and
moderate income borrowers
23
<PAGE>
and communities accounted for approximately 30% of NIW. Additionally, the
percentage of this production that relied on "special" affordable underwriting
guidelines as designated as such by lenders was 8.8% of new risk written in
1999, as compared to 6.5% in 1998. Management believes that affordable housing
loans have higher risks than its other insured business. As a result, PMI has
instituted various programs, including borrower counseling and risk-sharing
approaches, seeking to mitigate the higher risk characteristics of such loans.
J. Defaults and Claims
Defaults
PMI's default rate has decreased to 2.12% at December 31, 1999 from the December
31, 1998 rate of 2.31%. This decrease was primarily due to an improvement in the
national economy, and particularly California, and to an increase in policies in
force. (See IC12 and Part II Item 7 "Management's Discussion and Analysis of
Financial Condition And Results of Operations".)
PMI's claim process begins with the receipt of notification of a default from
the insured on an insured loan. Default is defined in the master policy as the
failure by the borrower to pay when due an amount equal to the scheduled monthly
mortgage payment under the terms of the mortgage. The master policy requires
insureds to notify PMI of defaults no later than 130 days after the initial
default. Generally, defaults are reported sooner, and the average time for
default reporting in 1999 by PMI insureds was within approximately 60 days of
the initial default. PMI has historically included all defaults reported by the
lenders in its default inventory, regardless of the time period since the
initial default. The incidence of default is affected by a variety of factors,
including the reduction of the borrower's income, unemployment, divorce,
illness, the inability to manage credit and the level of interest rates.
Defaults that are not cured result in a claim to PMI. (See "Claims and Policy
Servicing" below.) Borrowers may cure defaults by making all delinquent loan
payments or by selling the property in full satisfaction of all amounts due
under the mortgage.
The following table shows the number of loans insured by PMI, the number of
loans in default and the default rate.
U.S. Historical Domestic Default Rates
Total Insured Loans in Force
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Number of Insured Loans in Force 749,591 714,210 698,831 700,084 657,800
Number of Loans in Default 15,893 16,528 16,638 15,326 13,022
Default Rate 2.12 % 2.31 % 2.38 % 2.19 % 1.98 %
</TABLE>
Default rates differ from region to region in the United States depending upon
economic conditions and cyclical growth patterns. The two tables below
illustrate the impact of economic cycles on the various regions of the United
States and the ten largest states by PMI's risk in force as of December 31,
1999.
24
<PAGE>
Default Rates by Region(1)
<TABLE>
<CAPTION>
As of Period End,
------------------------------------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
Region 4th Q 3rd Q 2nd Q 1st Q 4th Q 3rd Q 2nd Q 1st Q 1997 1996 1995
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pacific(2) 2.31 % 2.31 % 2.28 % 2.64 % 2.69 % 2.67 % 2.72 % 3.03 % 3.14 % 3.22 % 3.34 %
New England(3) 1.88 1.51 1.55 1.69 1.79 1.68 1.64 1.81 1.81 1.80 1.93
Northeast(4) 2.64 2.62 2.54 2.87 2.91 2.77 2.68 2.88 2.79 2.52 2.22
South
Central(5) 1.81 1.74 1.64 1.78 1.92 1.78 1.73 1.87 1.98 1.67 1.51
Mid-Atlantic(6) 2.11 2.17 2.04 2.21 2.37 2.23 2.22 2.40 2.35 2.03 1.65
Great Lakes(7) 1.95 1.91 1.85 1.91 1.98 1.94 1.88 1.88 1.86 1.82 1.21
Southeast(8) 2.31 2.18 2.02 2.25 2.39 2.16 2.10 2.35 2.31 1.93 1.53
North
Central(9) 1.67 1.70 1.67 1.88 1.96 1.91 1.78 1.95 1.95 1.61 1.31
Plains(10) 1.65 1.78 1.59 1.76 1.73 1.63 1.45 1.53 1.56 1.21 0.89
Total Portfolio 2.12 2.07 1.99 2.22 2.31 2.20 2.16 2.36 2.38 2.19 1.98
</TABLE>
(1) Default rates are shown by region on location of the underlying property.
(2) Includes California, Hawaii, Nevada, Oregon and Washington.
(3) Includes Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island
and Vermont.
(4) Includes New Jersey, New York and Pennsylvania.
(5) Includes Alaska, Arizona, Colorado, Louisiana, New Mexico, Oklahoma, Texas
and Utah.
(6) Includes Delaware, Maryland, Virginia, Washington, D.C. and West Virginia.
(7) Includes Indiana, Kentucky, Michigan and Ohio.
(8) Includes Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina,
South Carolina and Tennessee.
(9) Includes Illinois, Minnesota, Missouri and Wisconsin.
(10) Includes Idaho, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota
and Wyoming.
25
<PAGE>
PMI's Default Rates for Top 10 States by Total Risk in Force(1)
<TABLE>
<CAPTION>
Percent of PMI's
Primary Risk in
Force as of Default Rate
December 31, as of December 31,
------------------- ---------------------------------------------------
1999 1999 1998 1997 1996 1995
---------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
California 15.61 % 2.59 % 3.15 % 3.73 % 3.81 % 4.08 %
Florida 7.50 3.00 3.08 2.93 2.40 1.92
Texas 7.27 2.06 2.18 2.25 2.04 1.85
New York 4.86 2.85 2.98 2.94 2.59 2.30
Illinois 4.73 2.01 2.35 2.56 2.14 1.84
Washington 4.72 1.62 1.58 1.66 1.58 1.21
Pennsylvania 4.03 2.38 2.64 2.38 2.13 1.91
Georgia 3.91 1.95 2.01 1.87 2.59 2.26
Virginia 3.71 1.42 1.55 1.67 1.54 1.18
Massachusetts 3.54 1.49 1.67 1.67 1.73 1.91
Total Portfolio 100.00 % 2.12 % 2.31 % 2.38 % 2.19 % 1.98 %
</TABLE>
(1) Top ten states as determined by total risk in force as of December 31,
1999. Default rates are shown by states based on location of the underlying
property.
Default rates on PMI's California policies decreased to 2.59% (representing
2,382 loans in default) at December 31, 1999, from 3.15% (representing 3,067
loans in default) at December 31, 1998. Claim sizes on California policies tend
to be larger than the national average claim size due to higher loan balances
relative to other states. (See "Claims and Servicing", below.) Policies
written in California accounted for approximately 29% and 48% of the total
dollar amount of claims paid for the year ended December 31, 1999 and 1998,
respectively.
The following table sets forth the dispersion of PMI's primary insurance in
force and risk in force as of December 31, 1999, by year of policy origination
since PMI began operations in 1972.
26
<PAGE>
Insurance and Risk in Force by Policy Year
<TABLE>
<CAPTION>
Primary Percent Primary Percent
Policy Year Insurance in Force of Total Risk in Force of Total
- ----------- ------------------- ---------- ------------------- ----------
($ in thousands) ($ in thousands)
<S> <C> <C> <C> <C>
1972-1992 $ 6,176,358 7% $ 1,249,042 6%
1993 7,451,202 9% 1,501,696 7%
1994 4,606,852 5% 988,217 5%
1995 4,632,861 5% 1,222,687 6%
1996 6,539,999 8% 1,742,731 8%
1997 8,173,685 9% 2,160,348 10%
1998 23,171,725 27% 5,822,036 28%
1999 25,923,340 30% 6,459,515 31%
------------------- --------- -------------------- ---------
Total Portfolio $ 86,676,022 100% $ 21,146,272 100%
=================== ========= ==================== =========
</TABLE>
Claims and Servicing
The majority of claims under PMI policies have historically occurred during the
third through the sixth years after issuance of the policies. Insurance written
by PMI from the period January 1, 1993 through December 31, 1996 represents 27%
of PMI's insurance in force at December 31, 1999. This portion of PMI's book of
business is in its expected peak claim period. Despite increasing coverage
percentages and increasing mortgage principal amounts, direct primary claims
paid by PMI in 1999 decreased to $79.6 million compared with $118.4 million in
1998.
The frequency of claims does not directly correlate to the frequency of defaults
because the rate at which defaults cure is influenced by (i) the individual
borrower's financial resources and circumstances, and (ii) regional economic
differences. Whether an uncured default leads to a claim principally depends on
the borrower's equity at the time of default and the borrower's (or the
insured's) ability to sell the home for an amount sufficient to satisfy all
amounts due under the mortgage loan. During the default period, PMI works with
the insured for possible early disposal of the underlying property when the
chance of the loan reinstating is minimal. Such dispositions typically result in
a savings to PMI over the percentage coverage amount payable under the master
policy.
The following table sets forth the dispersion of PMI's primary insurance in
force as of December 31, 1999, by year of policy origination and average coupon
rate.
27
<PAGE>
Insurance in Force by Policy Year
and Average Coupon Rate
As of December 31, 1999
-------------------------------------------------
Policy Average Percent
Year Rate (1) IIF of Total
---------- --------------- ---------
1972 - 1992 8.81 6,176,358 7.1
1993 7.39 7,451,202 8.6
1994 7.82 4,606,852 5.3
1995 8.03 4,632,861 5.3
1996 7.87 6,539,999 7.5
1997 7.81 8,173,685 9.4
1998 7.14 23,171,725 26.7
1999 7.42 % $ 25,976,313 30.0
-------------- ---------
Total $ 86,728,995 100.0 %
============== =========
(1) Average coupon rate on 30 year fixed rate mortgages
Under the terms of PMI's master policy, the lender is required to file a claim
with PMI no later than 60 days after it has acquired title to the underlying
property, usually through foreclosure. An insurance claim amount includes (i)
the amount of unpaid principal due under the loan; (ii) the amount of
accumulated delinquent interest due on the loan (excluding late charges) to the
date of claim filing; (iii) expenses advanced by the insured under the terms of
the master policy, such as hazard insurance premiums, property maintenance
expenses and property taxes to the date of claim filing; and (iv) certain
foreclosure and other expenses, including attorneys' fees. Such claim amount is
subject to review and possible adjustment by PMI. Depending on the applicable
state foreclosure law, an average of about 12 months elapses from the date of
default to payment of a claim on an uncured default. PMI's master policy
excludes coverage on loans secured by property with physical damage, whether
caused by fire, earthquake or other hazard where the borrower's default was
caused by an uninsured casualty.
PMI has the right to rescind coverage (and not pay a claim) if the lender, its
agents or the borrower misrepresent material information in the insurance
application. According to industry practice, a misrepresentation is generally
considered material if the insurer would not have agreed to insure the loan had
the true facts been known at the time of certificate issuance.
Within 60 days after a claim has been filed, PMI has the option of: (i) paying
the coverage percentage specified in the certificate of insurance (usually 17%
to 30% multiplied by the claim amount); (ii) in the event the property is sold
pursuant to an arrangement made prior to or during the 60-day period after the
claim is filed (a "prearranged sale"), paying the lesser of (A) 100% of the
claim amount less the proceeds of sale of the property or (B) the coverage
percentage multiplied by the claim amount, or (iii) paying 100% of the claim
amount in exchange for the insured's conveyance to PMI of good and marketable
title to the property, with PMI then selling the property for its own account.
Properties acquired through the last option are included on PMI's balance sheet
in other assets as residential properties from claim settlements (also known as
"REO"). PMI attempts to choose the claim settlement option which best
mitigates the amount
28
<PAGE>
of its claim payment. Generally, however, PMI settles by paying the coverage
percentage multiplied by the claim amount. In 1999 and 1998, PMI settled 29.3%
and 22.1%, respectively, of the primary claims processed for payment on the
basis of a prearranged sale. In 1999 and 1998, PMI exercised the option to
acquire the property on less than 8.0 and 3.6%, respectively, of the primary
claims processed for payment. At December 31, 1999 and 1998, PMI owned $13.0
million and $8.6 million, respectively, of REO valued at the lower of cost or
estimated realizable value.
The ratio of the claim paid to the original risk in force relating to such loan
is referred to as claim severity and is a factor that influences PMI's losses.
The main determinants of claim severity are the accrued interest on the mortgage
loan and the foreclosure expenses. These amounts depend in part on the time
required to complete foreclosure, which varies depending on state laws. Pre-
foreclosure sales and other early workout efforts help to reduce overall
severity. The average claim severity level has decreased from 99.9% in 1994 to
76.3% in 1999.
Technology for Claims and Policy Servicing
Technology is an integral part of the claims and policy servicing process and
PMI believes that technology will continue to take on a greater role in
increasing internal efficiencies and improving customer service. PMI uses an
automated claim-for-loss worksheet programs, which compiles pertinent data while
automatically calculating the claim amount and predicting the best settlement
alternative. To enhance efficiencies and ease of use for its customers, PMI
developed Document Free ClaimEase/SM/, which is designed to require only an
addendum to the uniform claim-for-loss worksheet, reducing paperwork and
resulting in more rapid claims settlements. In addition, several technology
tools have also been developed by PMI: pmiPHONE-CONNECT/SM/, which is a voice
response application, enabling the insured to access PMI's database by using
their telephones to inquire on the status of their coverage and get information
on billings, refunds, coverage and renewals; pmiPC-CONNECT/SM/, which gives the
insured the ability to dial into PMI's database using a modem-equipped personal
computer to inquire about and update certain loan information, including the
filing of claims; pmiWEB-CONNECT/SM/ is an enhanced version of pmi-CONNECT and
provides access by the insured to PMI's database via the Internet; PMI is also
capable of receiving claims, handling premium billing, and loan sale transfers
via EDI. To contain costs and expand internal efficiencies, PMI uses optical
imaging in its claims functions, allowing PMI to eliminate the transfer and
storage of documents relating to claims. PMI, through its automatic default
reporting process ("ADR"), allows paperless reporting of default information
by the insured.
Loss Payment Ratios
In 1985, the Company adopted substantially more conservative underwriting
standards that, along with increased prices and generally improving economic
conditions in various regions, are believed by the Company to have contributed
to the substantially lower cumulative loss payment ratios in 1985 and subsequent
years. While the cumulative loss payment ratios of policy years 1985 through
1998 will increase over time, the cumulative loss payment ratios for each such
year
29
<PAGE>
at December 31, 1994 is lower than the cumulative loss payment ratios for each
of the years 1980 through 1984 at the same number of years after original policy
issuance.
The following table sets forth cumulative losses paid by PMI at the end of each
successive year after the year of original policy issuance ("policy year"),
expressed as a percentage of the cumulative premiums written on such policies.
This table further shows that, measured by cumulative losses paid relative to
cumulative premiums written ("cumulative loss payment ratios"), the performance
of policies originally issued in the years 1980 through 1984 was adverse, with
cumulative loss payment ratios for those years ranging from 115.5% to 260.3% at
the end of 1994. Such adverse experience was significantly impacted by
deteriorating economic and real estate market conditions in the "Oil Patch"
states.
30
<PAGE>
<TABLE>
<CAPTION>
Years Percentage of Cumulative Losses Paid
Since to Cumulative Premiums Written
Policy
Issue Policy Issue Year
---------------------------------------------------------------------------
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
---------------------------------------------------------------------------
(in percents)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 0.4 0.4 0.9 0.3 0.2 - 0.1 - - -
2 11.8 23.3 38.1 14.8 9.8 4.5 1.5 0.4 0.1 0.3
3 39.2 90.4 112.1 47.3 44.0 18.7 5.2 2.0 2.0 3.6
4 74.2 139.3 166.3 83.0 83.1 35.2 8.7 5.1 6.1 10.8
5 95.5 168.3 180.9 129.3 114.3 47.4 12.2 9.7 11.6 21.9
6 100.8 168.0 229.6 165.9 127.1 56.4 15.6 13.1 18.5 32.4
7 90.8 184.8 251.0 177.5 135.9 60.7 18.5 17.5 23.1 40.3
8 98.5 197.3 265.4 184.6 139.3 63.0 21.3 20.7 26.2 45.7
9 107.8 203.6 265.7 187.7 141.9 65.0 24.1 23.0 29.1 49.6
10 111.4 205.6 264.4 189.8 142.6 65.3 25.8 25.1 31.5 51.7
11 113.0 207.1 263.8 191.0 142.9 65.9 27.4 26.5 33.6 52.8
12 114.1 208.8 264.4 191.3 142.6 65.8 28.4 27.8 34.6
13 114.6 208.9 263.3 191.1 142.1 65.8 28.8 28.4
14 115.0 209.8 262.2 190.6 141.7 65.9 29.0
15 115.1 209.5 261.5 190.1 141.5 66.0
16 115.3 209.2 260.8 189.8 141.3
17 115.5 208.9 260.4 189.5
18 115.5 208.5 259.8
19 115.5 208.1
20 115.4
<CAPTION>
---------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---------------------------------------------------------------------------
(in percents)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 - - - - - 0.1 - - - 0.1
2 0.7 0.8 1.1 1.0 1.0 2.8 2.9 2.3 1.2
3 7.1 6.6 6.9 5.5 6.5 10.4 8.3 5.8
4 17.8 16.9 16.3 13.4 13.7 15.4 11.9
5 31.7 28.9 28.3 18.7 18.0 18.2
6 41.8 39.8 36.1 21.1 20.1
7 50.5 47.4 40.3 21.9
8 56.2 51.3 41.5
9 59.2 52.7
10 60.9
</TABLE>
The table also demonstrates the general improvement in PMI's cumulative loss
payment ratios since policy year 1982. This reflects both improved claims
experience for the more recent years and the higher premium rates charged by PMI
beginning in 1984. Policy years 1986 through 1988 generally have had the best
cumulative loss payment ratios of any years since 1980. Policy years 1989
through 1992 display somewhat higher loss payment ratios than 1986 through 1988
at the same age of development. This is due primarily to the increased
refinancings of mortgages originated in policy years 1989 to 1992, resulting in
reduced aggregate premiums, and to higher default rates on California loans,
which have demonstrated relatively higher persistency. For policy years from
1993 through present, cumulative losses have been developing at a favorable rate
for the Company due to improving economic conditions.
31
<PAGE>
Claim activity is not spread evenly throughout the coverage period of a primary
book of business. Based on the Company's experience, the majority of claims
occur in the third through sixth years after loan origination, and relatively
few claims are paid during the first two years after loan origination.
Loss Reserves
A significant period of time may elapse between the occurrence of the borrower's
default on mortgage payments (the event triggering a potential future claims
payment), the reporting of such default to PMI and the eventual payment of the
claim related to such uncured default. To recognize the liability for unpaid
losses related to the default inventory, PMI (similar to other mortgage
insurers) establishes loss reserves in respect of defaults included in such
inventory, based upon the estimated claim rate and estimated average claim
amount. Included in loss reserves are loss adjustment expense (''LAE'') reserves
and incurred, but not reported, reserves. These reserves are estimates and there
can be no assurance that PMI's reserves will prove to be adequate to cover
ultimate loss developments on reported defaults. (See IC12.) Consistent with
industry accounting practices, PMI does not establish loss reserves in respect
of estimated potential defaults that may occur in the future.
PMI's reserving process for primary insurance segments default notifications by
year of receipt of the notice by PMI (the "report year method"). In the report
year method, ultimate claim rates and average claim amounts selected for the
current and each of the four prior report years are estimated based on past
experience and management judgment. Claim rates and amounts are also estimated
by region for the most recent report years to validate nationwide report year
estimates, which are then used in the normal reserving methodology. For each
report year, the claim rate, estimated average claim amount and the number of
reported defaults are multiplied together to determine the amount of direct
incurred losses for that report year. Losses paid to date for that report year
are subtracted from the estimated report year incurred losses to obtain the loss
reserve for that report year. The sum of the reserves for those five years,
together with a reserve for expected losses on the few defaults still pending
from prior years, yields the total loss reserve on reported defaults. PMI
reviews its claim rate and claim amount assumptions on at least a quarterly
basis and adjusts its loss reserves accordingly. The impact of inflation is not
explicitly isolated from other factors influencing the reserve estimates,
although inflation is implicitly included in the estimates. PMI does not
discount its loss reserves for financial reporting purposes.
PMI's reserving process is based upon the assumption that past experience,
adjusted for the anticipated effect of current economic conditions and projected
future economic trends, provides a reasonable basis for estimating future
events. However, estimation of loss reserves is a difficult process, especially
in light of the rapidly changing economic conditions over the past few years in
certain regions of the United States. In addition, economic conditions that have
affected the development of the loss reserves in the past may not necessarily
affect development patterns in the future. Pool business loss reserving is
subject to the same assumptions and economic uncertainties as primary insurance
and generally involves the following process. PMI divides all currently pending
pool insurance delinquencies into six categories of delinquency, which connote
progressively more serious stages of default (e.g., delinquent less than four
months,
32
<PAGE>
delinquent more than four months, in foreclosure but no sale date set, etc.). A
claim rate is selected for each category based on past experience and management
judgement. Expected claim sizes, stated as a percentage of the outstanding loan
balance on the delinquent loan, are similarly selected. The loss reserve is then
generally calculated as the sum over all delinquent loans of the product of the
outstanding loan balance, the claim rate and the expected claim size percentage.
PMI's Actuarial Services department performs the loss reserve analysis. On the
basis of such loss reserve analysis, management believes that the loss reserves
are, in the aggregate, computed in accordance with commonly accepted loss
reserving standards and principles and meet the requirements of the insurance
laws and regulations to which it is subject. Management believes that the loss
reserves are a reasonable provision for all unpaid loss and LAE obligations
under the terms of its policies and agreements. (See IC12.)
Such reserves are necessarily based on estimates and the ultimate net cost may
vary from such estimates. These estimates are regularly reviewed and updated
using the most current information available. Any resulting adjustments are
reflected in current financial statements. The following table is a
reconciliation of the beginning and ending reserve for losses and loss
adjustment expenses for each of the last three years:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- ------------
(In thousands)
<S> <C> <C> <C>
Balance, January 1 $ 215,259 $ 202,387 $ 199,774
Less reinsurance recoverable 6,782 6,067 5,287
------------- ------------- -----------
Net balance, January 1 208,477 196,320 194,487
------------- ------------- -----------
Losses and loss adjustment expenses incurred (principally
in respect of defaults occurring in)
Current year 159,293 146,884 158,147
Prior years (46,611) (11,168) (5,890)
------------- ------------- -----------
Total losses and loss adjustment expenses 112,682 135,716 152,257
------------- ------------- -----------
Losses and loss adjustment expense payments (principally in respect
of defaults occurring in)
Current year 1,798 12,503 27,700
Prior years 95,797 111,056 122,724
------------- ------------- -----------
Total payments 97,595 123,559 150,424
------------- ------------- -----------
Plus acquisition of Forestview Reserves 42,528 - -
Plus acquisition of Pinebrook Reserves 1,093 - -
Plus acquisition of PMI Ltd 4,473 - -
------------- ------------- -----------
Net balance, December 31 271,658 208,477 196,320
Plus reinsurance recoverable 10,342 6,782 6,067
Balance, December 31 $ 282,000 $ 215,259 $ 202,387
============= ============= ===========
</TABLE>
As a result of changes in estimates of ultimate losses resulting from insured
events in prior years, the provision for losses and loss adjustment expenses
(net of reinsurance recoverable) decreased by $46.6 million in 1999 due to the
impact of a favorable interest rate environment on loss
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mitigation activities and to lower than expected claims in California. The
provision for losses and loss adjustment expenses decreased by $11.2 million and
$5.9 million in 1998 and 1997, respectively, due primarily to lower than
expected losses in California. Such estimates were based on management's
analysis of various economic trends (including the real estate market and
unemployment rates) and their effect on recent claim rate and claim severity
experience.
K. Reinsurance
The use of reinsurance as a source of capital and as a risk management tool is
well established within the mortgage insurance industry. In addition, certain
mortgage insurers, including PMI, have agreed to reinsure portions of the risk
written on loans originated by certain lenders with captive reinsurance
companies affiliated with such lenders. Reinsurance does not discharge PMI, as
the primary insurer, from liability to a policyholder. The reinsurer simply
agrees to indemnify PMI for the reinsurer's share of losses incurred under a
reinsurance agreement, unlike an assumption arrangement, where the assuming
reinsurer's liability to the policyholder is substituted for that of PMI's.
Effective August 20, 1999, PMI entered into an excess-of-loss reinsurance treaty
relating to aggregate stop loss limit pool insurance contracts issued by PMI to
the GSEs during 1997 and 1998. The participating reinsurers have claims-paying
ratings of AA or AAA from Standard and Poor's. (See Part II, Item 8, Financial
Statements Note 7--"Reinsurance.")
Reinsurance Subsidiaries; RGC, RIC, and PMG
Certain states limit the amount of risk a mortgage insurer may retain to 25% of
the indebtedness to the insured and, as a result, the deep coverage portion of
such insurance over 25% must be reinsured. To minimize reliance on third party
reinsurers and to permit PMI and CMG to retain the premiums (and related risk)
on deep coverage business, TPG formed several wholly-owned subsidiaries RGC,
RIC, and PMG to provide reinsurance of such deep coverage to PMI and CMG. PMI
and CMG use reinsurance provided by its reinsurance subsidiaries solely for
purposes of compliance with statutory coverage limits. While TPG's reinsurance
subsidiaries generally have the ability to write direct mortgage insurance and
to provide reinsurance to unaffiliated mortgage insurers, TPG currently intends
to have its reinsurance subsidiaries write reinsurance solely for PMI and CMG
(See IC2 and IC8).
During 1997 PMI began issuing pool insurance to select companies. In connection
with the pool policies issued, PMI may only retain 25% of the risk covered by
such policies. PMI reinsures the
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remaining risk though its affiliates, including RGC, PMG and RIC, which was
formed and licensed to transact mortgage insurance in 1999. (See "B. Products",
above; "O. Regulation" and IC2, IC7, and IC8.)
L. Claims-Paying Ability Ratings
PMI's claims-paying ability is currently rated "AA+" (Excellent) by Standard &
Poor's Rating Services ("S&P"), "AA+" (Very Strong) by Fitch IBCA, Inc.
("Fitch"), "AA+" (Very High) by Duff & Phelps Credit Rating Co. ("Duff &
Phelps") and "Aa2" (Excellent) by Moody's Investors Service, Inc.
("Moody's"). PMI's claims-paying ability ratings from certain national rating
agencies have been based in significant part on various capital support
commitments from Allstate ("Allstate Support Agreements"). During March 2000,
S&P affirmed the AA+ 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. On October 28, 1994, TPG entered into a runoff support agreement with
Allstate (the "Runoff Support Agreement") 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 or, in the alternative, 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.
Fannie Mae and Freddie Mac impose requirements on private mortgage insurers for
such insurers to be eligible to insure loans sold to such agencies. In order to
be Fannie Mae and Freddie Mac eligible, PMI must maintain an AA- rating with any
public national rating agency. (See IC3 and IC5.)
M. Investment Portfolio
Cash flow from the Company's investment portfolio represented approximately 35%
of its total cash flow from operations during 1999, and pre-tax income from the
investment portfolio represented 33% of the Company's total pre-tax operating
income. PMI's investment policy is to attain consistent, competitive after tax
total returns. A strong emphasis is placed on providing a predictable, high
level of income, while maintaining adequate levels of liquidity, safety and
preservation of capital; growth is a secondary consideration. Fixed income
investment duration is restricted to the estimated range of liability and
surplus duration plus or minus 25%. In addition to satisfying state regulatory
limits, minimum average fixed income credit quality of "A" rating must be
maintained and no single credit risk may exceed 5% of total investments. At
December 31, 1999, based on market value, approximately 96% of the Company's
total investment portfolio was invested in securities rated "A" or better, with
64% rated "AAA" and 22% rated "AA," in each case by at least one nationally
recognized securities rating organization.
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The Company's investment policies and strategies are subject to change depending
upon regulatory, economic and market conditions and the existing or anticipated
financial condition and operating requirements, including the tax position of
the Company. At December 31, 1999, approximately 94% of the Company's
investment portfolio was managed internally.
At December 31, 1999, the consolidated market value of the Company's investment
portfolio was approximately $1.8 billion. At December 31, 1999, municipal
securities represented 81.4% of the market value of the total investment
portfolio. Securities due in less than one year, within one to five years,
within five to ten years; after ten years, and other represented 0.9%, 10.2%,
13.8%, 72.1%, and 3.0%, respectively, of such total market value. The Company's
net pre-tax investment income (excluding capital gains) was $95.1 million for
the year ended December 31, 1999, which represented a pre-tax yield of 5.9% for
the year, a decline from 6.06% for 1998. This decrease was the result of a
decline in the average interest rate on investments in 1999 as compared to 1998.
Net realized capital gains on the investment portfolio were $509 thousand and
$24.6 million for 1999 and 1998, respectively. (See Part II, Item 8, Financial
Statements Note 3--"Investments.")
N. Other Businesses
In March 1999, TPG announced a plan to diversify its revenue sources through
strategic investments and the development of international mortgage insurance
operations. During the first quarter of 1999, PMI commenced operations in Hong
Kong. In August 1999, PMI completed the acquisition of MGICA Ltd., an Australian
mortgage guaranty insurer, and subsequently renamed the company PMI Mortgage
Insurance Ltd. ("PMI Ltd."). TPG also increased its financial investment in RAM
Re by approximately $15 million. In addition, the company provides title
insurance.
Total revenues recognized for the year ended December 31, 1999 from TPG's
businesses other than U. S. mortgage guaranty insurance constituted
approximately 21.5% of the Company's consolidated revenues, compared with
approximately 17.4% and 13.8%, in 1998 and 1997, respectively.
PMI Ltd.
On August 6, 1999 the Company acquired PMI Ltd. for approximately $78.0
million. PMI Ltd. is the second largest mortgage guaranty insurer in Australia
and New Zealand as measured by annual insurance written. Substantially all of
PMI Ltd.'s new insurance written and insurance in force consists of single
premium payment policies. PMI Ltd. is regulated in Australia by the Australian
Prudential Regulatory Authority.
For the year ended December 31, 1999, PMI Ltd.'s NIW totaled $4.5 billion and
insurance in force was $19.2 billion. PMI Ltd's reserves were $3.7 million.
Australian mortgage guaranty insurance generally provides 100% insurance
coverage. PMI Ltd. contributed $6.7 million of net income for the period August
6, 1999 through December 31, 1999.
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<PAGE>
Hong Kong
During 1999, PMI opened an office in Hong Kong and began to reinsure residential
mortgages in Hong Kong. PMI entered into an agreement with the Hong Kong
mortgage corporation ("HKMC"), a public sector entity created to add liquidity
to the Hong Kong residential mortgage market. HKMC is the direct insurer of
residential mortgages with LTVs of up to 85%, with PMI providing reinsurance
coverage on amounts over 70% LTV. For the year ended 1999, PMI reinsured $189
million of loans.
RAM Re
TPG is a principal investor in RAM Reinsurance Company Ltd. ("RAM Re"), the
first AAA rated financial guaranty reinsurance company based in Bermuda. This
strategic investment was consummated, in part, because of the perceived industry
need for additional sources of highly rated financial guaranty capacity and
because of the desire to diversify into similar business industries. Ram Re
commenced business in the first quarter of 1998. Three executives of the Company
serve as directors of Ram Re.
American Pioneer Title Insurance Co.
The Company acquired APTIC, a Florida-based title insurance company, in 1992 as
part of its strategy to provide additional mortgage-related services to its
customers. APTIC is licensed in 41 states and the District of Columbia. Although
APTIC is currently writing business in 33 states, it primarily provides real
estate title insurance on residential property in Florida. A title insurance
policy protects the insured party against losses resulting from title defects,
liens and encumbrances existing as of the effective date of the policy and not
specifically excepted from the policy's coverage.
Based on direct premiums written during 1999, APTIC is ranked 5th among the 28
active title insurers conducting business in the State of Florida. For the year
ended December 31, 1999, 72.9% of APTIC's premiums earned came from its Florida
operations.
APTIC generates title insurance business through both direct and indirect
marketing to realtors, attorneys and lenders. As a direct marketer, APTIC
operates, under the name Chelsea Title Company, a branch network of title
production facilities and real estate closing offices. As an indirect marketer,
APTIC recruits and works with corporate title agencies, attorney agencies and
approved attorneys. Its agency business accounted for 95.2% and 93.8% of APTIC's
premiums earned for the years ended December 31, 1999 and 1998, respectively.
PMI Mortgage Services Co.
MSC provides a variety of technical products and mortgage underwriting services
through a staff of underwriters in 30 field offices. The Customer Technology
Division of MSC provides technical products and services to PMI's customers.
This department licenses the use of
37
<PAGE>
pmiAURA (SM) and pmiTERRA (SM) to customers for a fee, assists PMI's customers
in establishing EDI links with PMI, and provides other value added services.
The Risk Management Division of MSC provides contract underwriting services that
enable customers to improve the efficiency and quality of their operations by
outsourcing all or part of their mortgage loan underwriting to MSC. Such
contract underwriting services are provided for mortgage loans for which PMI
provides mortgage insurance and for loans on which PMI does not. MSC also
performs all of the mortgage insurance underwriting activities of CMG. Contract
underwriting services have become increasingly important to mortgage lenders as
they seek to reduce costs. Competition increased in 1998 among mortgage
insurance companies for contract underwriting customers. Contract underwriting
on-site is generally more expensive for the Company than underwriting a loan in-
house, and is a popular method among mortgage lenders for processing loan
applications. Contract underwriting processed loans represented 28.8% of PMI's
NIW for the year ended December 31, 1999 compared to 35.0% for the year ended
December 31, 1998 (See H. Underwriting Practices, above).
O. Regulation
State Regulation, Federal Legislation, and Fannie Mae and Freddie Mac
State Regulation.
General. The Company's insurance subsidiaries are subject to comprehensive,
detailed regulation for the protection of policyholders, rather than for the
benefit of investors, by the insurance departments of the various states in
which they are licensed to transact business. Although their scope varies, state
insurance laws in general grant broad powers to supervisory agencies or
officials to examine companies and to enforce rules or exercise discretion
touching almost every significant aspect of the insurance business. These
include the licensing of companies to transact business and varying degrees of
control over claims handling practices, reinsurance arrangements, premium rates,
the forms and policies offered to customers, financial statements, periodic
financial reporting, permissible investments (See "Investment Portfolio",
above.) and adherence to financial standards relating to statutory surplus,
dividends and other criteria of solvency intended to assure the satisfaction of
obligations to policyholders.
Mortgage insurers are generally restricted by state insurance laws and
regulations to writing residential mortgage insurance business only. This
restriction prohibits PMI, RGC, PMG, RIC and CMG from directly writing other
types of insurance. However, the non-insurance subsidiaries of TPG are not
generally subject to regulation under state insurance laws except with respect
to transactions with their insurance affiliates.
The Company's title insurance subsidiary, APTIC, is subject to comprehensive
regulation in the states in which it is licensed to transact business. Among
other things, such regulation requires APTIC to adhere to certain financial
standards relating to statutory reserves and other criteria of solvency.
Generally, title insurers are restricted to writing only title insurance, and
may not transact any other kind of insurance. This restriction prohibits APTIC
from using its capital and resources in support of other types of insurance
businesses.
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Insurance Holding Company Regulation. All states have enacted legislation that
requires each insurance company in a holding company system to register with the
insurance regulatory authority of its state of domicile and to furnish to such
regulator financial and other information concerning the operations of companies
within the holding company system that may materially affect the operations,
management or financial condition of the insurers within the system. Most states
also regulate transactions between insurance companies and their parents and
affiliates. Generally, such regulations require that all transactions within a
holding company system between an insurer and its affiliates be fair and
reasonable and that the insurer's statutory policyholders' surplus following any
transaction with an affiliate be both reasonable in relation to its outstanding
liabilities and adequate for its needs. In addition, Arizona law requires that
the Arizona Director of Insurance be given 30-days prior notice of certain types
of agreements between an insurance company and an affiliate.
TPG is an insurance holding company under the laws of the State of Arizona based
on its affiliation with PMI, PMG, RGC, RIC, RAM Re and PMI Ltd. The Arizona
insurance laws regulate, among other things, certain transactions in the
Company's Common Stock and certain transactions between PMI and PMG, RGC and RIC
and their parent or affiliates. Specifically, no person may, directly or
indirectly, offer to acquire or acquire beneficial ownership of more than 10% of
any class of outstanding securities of TPG, PMI or PMG, RGC and RIC unless such
person files a statement and other documents with the Arizona Director of
Insurance and obtains the Director's prior approval after a public hearing is
held on the matter. In addition, material transactions between PMI and PMG, RGC
and RIC and their parent or affiliates are subject to certain conditions,
including that they be "fair and reasonable." These restrictions generally apply
to all persons controlling or under common control with PMI or PMG, RGC and RIC.
"Control" is presumed to exist if 10% or more of PMI's or PMG's, RGC's and RIC's
voting securities is owned or controlled, directly or indirectly, by a person,
although the Arizona Director of Insurance may find that "control" in fact does
or does not exist where a person owns or controls either a lesser or greater
amount of securities. In addition, since APTIC is domiciled in the State of
Florida, TPG is also regulated as an insurance holding company under Florida
law. The applicable requirements of Florida law are similar to the provisions of
the Arizona insurance laws regulating insurance holding companies, with the
exception that in Florida, regulatory approval must be obtained prior to the
acquisition, directly or indirectly, of 5% or more of the voting securities of
APTIC or TPG. Because CMG is domiciled in Wisconsin, TPG is also regulated as an
insurance holding company under Wisconsin law. The applicable requirements of
Wisconsin law are similar to those of Arizona law regulating insurance holding
companies, except that the hearing to approve a change in control is optional in
Wisconsin. For purposes of Arizona, Florida and Wisconsin law, "control" means
the power to direct or cause the direction of the management of an insurer,
whether through the ownership of voting securities, by contract other than a
commercial contract for goods or non-management services, or otherwise, unless
the power is the result of an official position with or corporate office held by
the person.
Reserves. PMI is required under the insurance laws of Arizona and certain other
states to establish a special contingency reserve with annual additions of
amounts equal to 50% of premiums earned. The insurance laws of the various
states, including Florida, impose additional reserve requirements applicable to
title insurers such as APTIC. For instance, title insurers must
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<PAGE>
maintain, in addition to reserves for outstanding losses, an unearned premium
reserve computed according to statute and are subject to limitations with
respect to the level of risk they can assume on any one contract. At December
31, 1999, PMI had statutory policyholders' surplus of $134.1 million and
statutory contingency reserve of $1.24 billion. (See Part II, Item 8, Financial
Statements Note 14--"Statutory Accounting.")
Dividends. PMI's ability to pay dividends is limited, among other things, by
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
Arizona Insurance Directory, 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. In accordance with Arizona law,
PMI is permitted to pay ordinary dividends to TPG of $13.4 million in 2000
without prior approval of the Arizona Insurance Director. (See Part II, Item 8,
Financial Statements Note 13-- "Dividends and Shareholders Equity.")
The laws of Florida limit the payment of dividends by APTIC to PMI in any one
year to 10% of available and accumulated surplus derived from realized net
operating profits and net realized capital gains. As a result, APTIC may be
limited in its ability to pay dividends to PMI. CMG's ability to pay dividends
to PMI is subject to the laws of Wisconsin.
In addition to the dividend restrictions described above, insurance regulatory
authorities have broad discretion to limit the payment of dividends by insurance
companies. For example, if insurance regulators determine that payment of a
dividend or any other payments to an affiliate (such as payments under a tax
sharing agreement, payments for employee or other services, or payments pursuant
to a surplus note) would, because of the financial condition of the paying
insurance company or otherwise, be hazardous to such insurance company's
policyholders or creditors, the regulators may block payments that would
otherwise be permitted without prior approval.
Premium Rates and Policy Forms. PMI's premium rates and policy forms are
subject to regulation in every state in which it is licensed to transact
business in order to protect policyholders against the adverse effects of
excessive, inadequate or unfairly discriminatory rates and to encourage
competition in the insurance marketplace. In all states, premium rates and, in
most states, policy forms must be filed prior to their use. In some states, such
rates and forms must also be approved prior to use. Changes in premium rates are
subject to being justified, generally on the basis of the insurer's loss
experience, expenses and future trend analysis. The general default experience
in the mortgage insurance industry may also be considered.
Reinsurance. Regulation of reinsurance varies by state. Except for Arizona,
Illinois, Wisconsin, New York and California, most states have no special
restrictions on mortgage guaranty reinsurance other than standard reinsurance
requirements applicable to property and casualty insurance companies. Certain
restrictions apply under Arizona law to domestic companies and under the laws of
several other states to any licensed company ceding business to unlicensed
reinsurers. Under such laws, if a reinsurer is not admitted or approved in such
states, the company ceding business to the reinsurer cannot take credit in its
statutory financial statements for the risk ceded to such reinsurer absent
compliance with certain reinsurance security
40
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requirements. Arizona prohibits reinsurance unless the reinsurance arrangements
meets certain requirements, even if no statutory financial statement credit is
to be taken. In addition, Arizona, Wisconsin and several other states limit the
amount of risk a mortgage insurer may retain with respect to coverage of an
insured loan to 25% of the entire indebtedness to the insured. Coverage in
excess of 25% must be reinsured (See "K. Reinsurance", above).
Examination. PMI, APTIC, PMG, RGC and RIC and CMG are subject to examination of
their affairs by the insurance departments of each of the states in which they
are licensed to transact business. The Arizona Director of Insurance
periodically conducts a financial examination of insurance companies domiciled
in Arizona. In lieu of examining a foreign insurer, the Commissioner may accept
an examination report by a state that has been accredited by the NAIC.
Federal Regulation.
Private mortgage insurers are indirectly, but significantly, impacted by
regulations affecting purchasers of mortgage loans, such as Freddie Mac and
Fannie Mae, and regulations affecting governmental insurers, such as the FHA and
VA, and mortgage lenders. As a result, changes in federal housing legislation
and other laws and regulations that affect the demand for private mortgage
insurance may have a material effect on private mortgage insurers, including
PMI. Legislation that increases the number of persons eligible for FHA or VA
mortgages could have an adverse affect on the Company's ability to compete with
the FHA or VA.
The Home Owners Protection Act of 1998 (the "Act"), effective 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, 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 which 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 which 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
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notification laws include: California, Connecticut, Illinois, Maryland,
Minnesota, Missouri, New York, Texas and Washington.
RESPA. The Real Estate Settlement and Procedures Act of 1974 ("RESPA") applies
to most residential mortgages insured by PMI, and related regulations provide
that mortgage insurance is a "settlement service" for purposes of loans subject
to RESPA. Subject to limited exceptions, RESPA prohibits persons from accepting
anything of value for referring real estate settlement services to any provider
of such services. Although many states, including Arizona, prohibit mortgage
insurers from giving rebates, RESPA has been interpreted to cover many non-fee
services as well. The recently renewed interest of HUD in pursuing violations of
RESPA has increased awareness of both mortgage insurers and their customers of
the possible sanctions of this law.
HMDA. Most originators of mortgage loans are required to collect and report
data relating to a mortgage loan applicant's race, nationality, gender, marital
status and census tract to HUD or the Federal Reserve under the Home Mortgage
Disclosure Act of 1975 ("HMDA"). The purpose of HMDA is to detect possible
discrimination in home lending and, through disclosure, to discourage such
discrimination. Mortgage insurers are not required pursuant to any law or
regulation to report HMDA data, although under the laws of several states,
mortgage insurers are currently prohibited from discriminating on the basis of
certain classifications. The active mortgage insurers, through their trade
association, MICA, have entered into an agreement with the Federal Financial
Institutions Examinations Council ("MFIEC") to report the same data on loans
submitted for insurance as is required for most mortgage lenders under HMDA.
Mortgage lenders are subject to various laws, including HMDA, RESPA, the
Community Reinvestment Act, and the Fair Housing Act. Fannie Mae and Freddie
Mac are also subject to RESPA and various laws, including laws relating to
government sponsored enterprises, which may impose obligations or create
incentives for increased lending to low and moderate income persons or in
targeted areas.
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 (the "Act")
became effective on March 11, 2000 and allows, among other things, 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. However, any such mortgage
insurance subsidiary would be subject to and governed by state insurance
regulations, including capital and reserve requirements, diversification of risk
and restrictions on the payments of dividends. Because of the many aspects of
the Act which require clarification and promulgation of specific regulations,
the Company is not yet able to ascertain the full impact of the Act on the
Company (See IC15).
Fannie Mae and Freddie Mac. TPG and PMI are also significantly, impacted by
laws and regulations affecting originators and purchasers of mortgage loans,
particularly Fannie Mae and Freddie Mac, eligibility requirements imposed by the
GSEs on private mortgage insurers for such insurers to be eligible to insure
loans sold to such agencies and regulations affecting
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governmental insurers such as the FHA. Private mortgage insurers, including PMI,
are highly dependent upon federal housing legislation and other laws and
regulations which affect the demand for private mortgage insurance and the
housing market generally. (See "C industry Overview - Fannie Mae and Freddie
Mac", above and IC3.)
Fannie Mae and Freddie Mac announced an increase in the maximum single-family
principal balance loan limit eligible for their purchase from $240,000 to
$252,700 effective in 2000. Fannie Mae and Freddie Mac both recently 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(TM) and Loan Prospector (SM), 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% down payment (a 95% LTV), from
30% to 25% of the mortgage loan covered by MI; (iii) reduction in required MI
coverage, for loans with a 10% down payment (a 90 % LTV loan), from 25% to 17%
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% LTV loan will require 18% of the mortgage loan have
mortgage insurance coverage. Similarly, a 90% LTV loan will require 12 % of the
mortgage loan have mortgage insurance. In order for the homebuyer to have MI at
these levels, such loans would require a payment at closing or a higher note
rate.
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. 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. Fannie Mae
and Freddie Mac also have the discretion to reduce the amount of private
mortgage insurance they require on loans.
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992
directed the Office of Federal Housing Enterprise Oversight ("OFHEO") to develop
risk-based capital regulations for the GSEs. Based on the initial regulations
published in April 1999, the GSEs will be subjected to a risk-based capital
stress test that will determine the amount of capital that a GSE must hold to
maintain positive capital throughout a 10-year period of severe economic
conditions. The proposed regulations could increase that amount of capital the
GSEs are presently required to maintain for certain loans with loan-to-value
ratios ("LTV") of 95 percent or higher. Because of the numerous aspects of the
OFHEO proposal which require clarification and which are likely to be revised
before being declared effective, it is considered extremely unlikely that OFHEO
will be able to finalize a rule before 2001.
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National Association of Insurance Commissioners (NAIC). The NAIC has developed
a rating system, the Insurance Regulatory Information System (IRIS), primarily
intended to assist state insurance departments in overseeing the statutory
financial condition of all insurance companies operating within their respective
states. IRIS consists of 11 key financial ratios, which are intended to indicate
unusual fluctuations in an insurer's statutory financial position and/or
operating results.
P. Employees
At December 31, 1999, TPG, including its subsidiaries had 1,029 full and part-
time employees; 734 persons perform services primarily for PMI, 17 perform
services primarily for CMG and an additional 278 persons are employed by APTIC.
TPG's employees are not unionized and TPG considers its employee relations to be
good. In addition, MSC had 345 temporary workers and contract underwriters at
December 31, 1999.
Q. CAUTIONARY STATEMENTS AND INVESTMENT CONSIDERATIONS
GENERAL ECONOMIC CONDITIONS (IC1)
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 reduce the demand for mortgage
insurance, cause claims on policies issued by PMI to increase, and increase
PMI's loss experience.
MARKET SHARE AND COMPETITION (IC2)
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 of lending institutions that
choose to remain uninsured, 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.
On October 4 1999, the Federal Housing Finance Board adopted resolutions which
authorizes 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
program. Under this program, each FHLB is 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 10% of the purchase price from 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 the increase in the maximum
individual loan amount the FHA can insure. The Department of Housing and Urban
Development has announced a proposed increase in the maximum individual loan
amount that FHA can insure to $219,849 from $208,800. If this increase is
approved, demand for private mortgage insurance could decrease. In addition,
the Omnibus Spending Bill of 1999, signed into law on October 21, 1998,
streamlined the FHA down-payment formula and made FHA insurance more competitive
with private mortgage insurance in areas with higher home prices.
FANNIE MAE AND FREDDIE MAC (IC3)
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
were to become widely accepted by mortgage lenders and their customers, the
reduction could harm the Company's financial condition and results of
operations.
On April 13, 1999 the Office of Federal Housing Enterprise Oversight announced
proposed risk-based capital regulations, which 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 an AA or
lower rating. 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 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.
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.
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. 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, 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. Management is
uncertain about the impact of this 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 operations.
During an environment 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 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
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. 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-would seriously harm effect
the Company's financial condition and results of operations (See IC3).
LIQUIDITY (IC6)
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 (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. 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 (IC8)
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. PMI is reviewing the Illinois
Letter. 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 (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.
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 (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 December
31, 1999, 46.7% of PMI's risk in force consisted of 95s, which, in PMI's
experience, have had a claims frequency approximately twice that of mortgages
with LTVs equal to or less than 90% and over 85% ("90s"). PMI also offers
coverage for mortgages with LTVs in excess of 95% and up to 97% ("97s"). At
December 31, 1999, 4.9% 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,
which is generally used as an additional credit enhancement for certain
secondary market mortgage transactions. New pool risk written was $231 million
for the year ended December 31, 1999 and $450 million for the year ended
December 31, 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 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 (IC11)
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 (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 AND INTERNATIONAL RISKS (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 15.6%, 7.5% and 7.3% of its risk in force concentrated and where the default
rate on all PMI policies in force is 2.6%, 3.0% and 2.1% compared with 2.1%
nationwide as of December 31, 1999.
As the Company seeks to expand its business internationally, it will
increasingly be subject to risks associated with international operations,
including the need for regulatory and third party approvals, challenges
retaining key foreign-based employees and maintaining key relationships with
customers and business partners in international markets, the economic strength
of the mortgage origination markets in targeted foreign markets, including
Australia, New Zealand, and Hong Kong, changes in foreign regulations and laws,
foreign currency exchange and translation issues, potential increases in the
level of defaults and claims on policies insured by foreign-based subsidiaries,
and the need to integrate PMI's risk management technology systems and products
with those of its foreign operations.
CAPTIVE REINSURANCE ARRANGEMENTS; RISK-SHARING TRANSACTIONS (IC14)
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 (IC15)
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.
Item 2. Properties
TPG leases its home office in San Francisco, California, which consists of
approximately 100,000 square feet of office space. The San Francisco lease
expires on December 31, 2004. In addition, TPG leases space for 34 PMI field
offices. Such field office leases cover an average of approximately 4,300 square
feet and have terms of not more than five years. During 1997, PMI established
its Certificate Priority Center, which is located in Dallas, Texas. The CPC
consists of approximately 18,000 square feet of office space.
TPG believes its existing properties are well utilized and are suitable and
adequate for its present circumstances.
Item 3. Legal Proceedings
On December 17, 1999, G. Craig Baynham and Linnie Baynham (collectively, the
"Plaintiffs") filed a putative class action suit against PMI Mortgage Insurance
Co. ("PMI"). The complaint,
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captioned G. Craig Baynham and Linnie Baynham v. PMI Mortgage Insurance Co.,
(case no. CV199-241), was filed in the United States District Court For The
Southern District of Georgia, State of Georgia and alleges that PMI entered into
agreements or understandings with mortgage lenders that PMI would provide pool
insurance or other benefits to the lenders at preferential, below market rates,
in return for the lenders' designation of PMI as the mortgage insurer for
mortgages originated by the lenders. Based on the alleged conduct, Plaintiffs
assert a cause of action on behalf of the proposed class of mortgage insurees
against PMI for violation of section 8 of the Real Estate Settlement Procedures
Act ("RESPA") 12 U.S.C. (S)2607(a). Plaintiffs seek relief under RESPA's treble
damage provision, along with injunctive relief and attorneys' fees and expenses.
The complaint also seeks to certify a class of persons who, on or after January
1, 1996 obtained or obtain federally related mortgage loans for single-to four
family homes, whose loans include primary mortgage insurance, reinsurance
contracts, contract underwriting services, or financing agreements from PMI.
The Company understands that several other mortgage insurance companies have
been named as defendants in lawsuits with similar allegations recently filed in
the same federal court as the case pending against PMI. The Company intends to
contest this action vigorously, and based on information presently available to
the Company, management believes that the ultimate outcome of this matter will
not have a material adverse effect on the Company's financial position or
results of operations.
Various other legal actions and regulatory reviews are currently pending that
involve the Company and specific aspects of its conduct of business. In the
opinion of management, the ultimate liability or resolution in one or more of
the foregoing actions is not expected to have a material adverse effect on the
financial condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of 1999 to a vote of
stockholders through the solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF REGISTRANT
Set forth below is certain information regarding TPG's executive officers as of
December 31, 1999, including age as of March 31, 2000, and business experience
for at least the past five years.
W. ROGER HAUGHTON, 52, has been Chairman of the Board of TPG since May 1998 and
has been Chief Executive Officer since January 1995. Mr. Haughton was President
of TPG from January 1995 until September 1998. Mr. Haughton has been Chairman,
Chief Executive Officer and President of PMI Mortgage Insurance Co. ("PMI")
since January 1993. Mr. Haughton joined PMI in 1985 as Vice President of
Underwriting, after 16 years with Allstate Insurance Company ("Allstate"). In
1987, he was promoted to Vice President/General Manager for PMI's Central Zone,
responsible for all sales and field office operations in that region. In 1989,
he became Group Vice President of Insurance Operations, Claims, Underwriting and
Actuarial Services
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departments. Mr. Haughton has a long history of active volunteerism with various
affordable housing organizations, including Habitat for Humanity, and serves as
chairman of the board of Social Compact. Mr. Haughton has been a Director since
January 1995. He is an Ex Officio member of the Governance and Nominating
Committee.
L. STEPHEN SMITH, 50, President and Chief Operating Officer of TPG and PMI since
September 1998. Prior thereto he was Executive Vice President of Marketing and
Field Operations of PMI since May 1994 and was elected to the same positions
with TPG in January 1995. Prior thereto, he was PMI's Senior Vice President of
Field Operations from September 1993 to May 1994, Senior Vice President of
Marketing and Customer Technology from December 1991 to September 1993 and Vice
President/General Manager of PMI's Eastern Zone from September 1985 to December
1991.
CLAUDE J. SEAMAN, 53, has been Group Executive Vice President Strategic
Investments of TPG and PMI since February 1999. Prior thereto, he was Executive
Vice President of Insurance Operations of PMI since May 1994, and was elected to
the same positions with TPG in January 1995. Prior thereto, he was PMI's Senior
Vice President of Insurance Operations from March 1993 to May 1994, Vice
President of Claims from December 1991 to March 1993 and Vice President of
Underwriting from January 1987 to December 1991.
JOHN M. LORENZEN, Jr., 55, has been Executive Vice President of PMI since May
1994 and Chief Financial Officer of PMI since April 1989, and was elected to the
same positions with TPG in January 1995. Prior thereto, he was PMI's Senior Vice
President from April 1989 to May 1994 and Vice President of Finance from April
1985 to April 1989.
BRADLEY M. SHUSTER, 45, has been Executive Vice President Corporate Development
of TPG and PMI since February 1999. Prior thereto, he was Senior Vice President,
Treasurer and Chief Investment Officer of PMI since August 1995, and was elected
to the same position with TPG, in September 1995. Prior thereto, he was an audit
partner with the accounting firm of Deloitte & Touche LLP from May 1988 to July
1995.
VICTOR J. BACIGALUPI, 56, has been Executive Vice President, General Counsel and
Secretary of TPG and PMI since August 1999. Prior thereto he was Senior Vice
President, General Counsel and Secretary of TPG and PMI since November 1996.
Prior to joining TPG, he was a partner in the law firm of Bronson, Bronson &
McKinnon LLP, San Francisco, California since February 1992.
DANIEL L. ROBERTS, 49, has been Executive Vice President, Chief Information
Officer of TPG and PMI since March 1, 2000. Prior thereto he was Senior Vice
President, Chief Information Officer of TPG and PMI since December 1997. Prior
to joining TPG, he was vice president and chief information officer of St.
Joseph Health System, a position he held since he joined the company in October
1994. Prior thereto, he was vice president, information services and chief
information officer for a division of Catholic Healthcare West, positions he
held since joining the company in December 1990. Mr. Roberts was a consulting
partner with the accounting firm of Deloitte & Touche from July 1985 to December
1990.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Common Stock
TPG is listed on the New York Stock Exchange and the Pacific Exchange under the
trading symbol PMI. As of December 31, 1999 there were 44,702,080 shares issued
and outstanding. As of February 29, 2000 there were 44,324,697 shares issued
and outstanding held by approximately 45 stockholders of record and
approximately 4,100 beneficial owners of shares held by brokers and fiduciaries.
The following table shows the high, low and closing common stock prices by
quarter from the New York Stock Exchange Composite Listing for the two years
ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- -------------------------------------
High Low Close High Low Close
---------- ------------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
First quarter 35 7/8 26 43/64 30 59/64 55 59/64 42 1/2 53 53/64
Second quarter 42 3/8 28 11/64 41 7/8 57 45 5/8 48 63/64
Third quarter 47 5/64 39 13/16 40 7/8 50 11/64 27 43/64 30 1/2
Fourth quarter 55 1/2 40 7/8 48 13/16 39 59/64 22 32 59/64
</TABLE>
Preferred Stock
TPG's Board of Directors is authorized to issue up to 5,000,000 shares of
preferred stock of TPG in classes or series and to fix the designations,
preferences, qualifications, limitations or restrictions of any class or series
with respect to the rate and nature of dividends, the price and terms and
conditions on which shares may be redeemed, the amount payable in the event of
voluntary or involuntary liquidation, the terms and conditions for conversion or
exchange into any other class or series of the stock, voting rights and other
terms. The Company may issue, without the approval of the holders of common
stock, preferred stock which has voting, dividend or liquidation rights superior
to the common stock and which may adversely affect the rights of the holders of
common stock. The Company has reserved for issuance under the Shareholder Rights
Plan described below up to 400,000 shares of preferred stock.
Shareholder Rights Plan
On January 13, 1998, the Company adopted a Preferred Share Purchase Rights Plan
("Rights Plan"). Under the Rights Plan, all shareholders of record as of January
26, 1998 received rights to purchase shares of a new series of preferred stock
on the basis of one right for each common stock held on that date. However,
rights issued under the Rights Plan will not be exercisable initially. The
rights will trade with the Company's common stock and no certificates will be
issued until certain triggering events occur. The Rights Plan has a 10-year term
from the record date, but the Company's Board of Director's will review the
merits of redeeming or continuing the Rights Plan not less than once every three
years. Rights issued under the plan will be exercisable only if a person or
group acquires 10% or more of the Company's common stock or
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announces a tender offer for 10% or more of the common stock. If a person or
group acquires 10% or more of the Company's common stock, all rightholders
except the buyer will be entitled to acquire the Company's common stock at a
discount and/or under certain circumstances to purchase shares of the acquiring
company at a discount. The Rights Plan contains an exception that would allow
passive institution investors to acquire up to a 15% ownership interest before
the rights would become exercisable.
Payment of Dividends and Policy
Payment of future dividends is subject to a declaration by TPG's Board of
Directors. The dividend policy is also dependent on the ability of PMI to pay
dividends to TPG, which is subject to, among other factors, regulatory
restrictions by the Arizona Department of Insurance and TPG's credit agreements
and the Runoff Support Agreement. (See Part I. "O. Regulation" and Part II,
Item 8, Financial Statement Note 14--"Dividends and Stockholders' Equity".)
During the second quarter of 1995, TPG's Board of Directors declared its first
dividend on common stock of $0.05 per share, and has declared and paid a
quarterly dividend of $0.05 per share through the second quarter of 1999. In
connection with the Company's 3-for-2 stock split on August 16, 1999, the
quarterly dividend was adjusted and increased to $0.04 per share for the third
and fourth quarters of 1999.
Item 6. Selected Financial Data
The information required by this Item is incorporated by reference from portions
of The PMI Group, Inc. 1999 Annual Report to Stockholders under the heading
"Eleven year Summary of Financial Data" filed as part of Exhibit 13.1.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this Item is incorporated by reference from portions
of The PMI Group, Inc. 1999 Annual Report to Stockholders under the heading
"Management Discussion and Analysis" as part of Exhibit 13.1.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
At December 31, 1999, the average duration of the Company's fixed income
investment portfolio was 5.3 years, and the Company did not have a significant
amount of derivative financial instruments in its investment portfolio. The
result of a 1% increase in interest rates would be a 5.3% decrease in the value
of the Company's investment portfolio, while the result of a 1% decrease in
interest rates would be a 4.8% increase in the value of the Company's investment
portfolio.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is incorporated by reference from portions
of The PMI Group, Inc. 1999 Annual Report to Stockholders as part of Exhibit
13.1.
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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Effective February 17, 2000, the Company's Board of Directors approved the
engagement of Ernst & Young LLP as the Company's independent auditors for the
fiscal year ending December 31, 2000, subject to the ratification of the
Company's stockholders.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning TPG's Directors as required by this Item is
incorporated by reference from TPG's 1999 Proxy Statement under the captions
"Nominees For Director of TPG" and "Section 16(a) Beneficial Ownership
Reporting Compliance". Information regarding Executive Officers of TPG is
included in a separate item captioned "Executive Officers of Registrant" in
Part I of this report.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from TPG's
1999 Proxy Statement under the captions "Directors-Compensation and Benefits,"
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participants".
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference from TPG's
1999 Proxy Statement under the caption "Security Ownership of Certain
Beneficial Owners and Management".
Item 13. Certain Relationships and Related Transactions
Not Applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements: The financial statements listed in the
accompanying Index to Consolidated Financial Statements and Financial
Statement Schedules are filed as part of this Form 10-K.
49
<PAGE>
2. Financial Statement Schedules: The financial statement schedules
listed in the accompanying Index to Consolidated Financial Statements and
Financial Statement Schedules are filed as part of the Form 10-K. All other
schedules are omitted because of the absence of conditions under which they
are required or because the required information is included in the
consolidated financial statements or notes thereto.
3. Exhibits: The exhibits listed in the accompanying Index to Exhibits
are filed as part of this Form 10-K.
(b) Reports on Form 8-K:
(i) On December 29, 1999, TPG filed a report on Form 8-K to announce that
it issued a press release advising that its mortgage insurance
subsidiary, PMI Mortgage Insurance Co. ("PMI") had been named as a
defendant in a purported class action lawsuit filed in the United
States District Court for the Southern Division of Georgia, Augusta
Division, captioned G. Craig Baynham and Linnie Baynham v. PMI
Mortgage Insurance Company (Case # CV199-241).; and
(ii) On February 23, 2000, TPG filed a report on Form 8-K to announce that
on February 17, 2000, its Board of Directors approved the engagement
of Ernst & Young LLP as its independent auditors for the fiscal year
ending December 31, 2000 to replace the firm of Deloitte & Touche LLP.
There were no "reportable events" as that term is described in Item
304(a)(1)(v) of Regulation S-K.
50
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[Item 14(a) 1 and 2]
<TABLE>
<CAPTION>
Page
----------------------------------
Annual Report
Consolidated Financial Statements Form 10-K To Shareholders
--------------------------------- --------- ---------------
<S> <C> <C>
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 N/A 30
Consolidated Balance Sheets as of December 31, 1999 and 1998 N/A 31
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997 N/A 32
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 N/A 33
Notes to Consolidated Financial Statements N/A 34-53
Report of Independent Auditors N/A 56
Financial Statement Schedules
-----------------------------
Report of Independent Auditors on Financial Statement 54 N/A
Schedules as of and
for the specified years in the three-year period ended
December 31, 1999:
Schedule I-Summary of investments other than in related 55 N/A
parties
Schedule II-Condensed financial information of Registrant 56-59 N/A
Schedule III-Supplementary insurance information 60 N/A
Schedule IV-reinsurance 61 N/A
</TABLE>
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of San
Francisco, State of California, on the 28th day of March, 2000.
The PMI Group, Inc.
BY: /s/ W. Roger Haughton
---------------------
W. Roger Haughton
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 28, 2000 by the following persons on behalf of
the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ W. Roger Haughton Chairman of the Board and
- --------------------- Chief Executive Officer March 28, 2000
W. Roger Haughton
/s/ John M. Lorenzen, Jr. Executive Vice President, March 28, 2000
- ------------------------- Chief Financial Officer,
John M. Lorenzen, Jr. and Assistant Secretary
(Principal Financial Officer)
/s/ William A. Seymore Vice President, Controller March 28, 2000
- ---------------------- (Controller and Principal
William A. Seymore Accounting Officer)
/s/ James C. Castle Director March 28, 2000
- -------------------
Dr. James C. Castle
Director March __, 2000
- -------------------
Donald C. Clark
/s/ Wayne E. Hedien Director March 28, 2000
- -------------------
Wayne E. Hedien
/s/ Raymond L. Ocampo Jr. Director March 28, 2000
- -------------------------
Raymond L. Ocampo Jr.
/s/ John D. Roach Director March 28, 2000
- -----------------
John D. Roach
/s/ Kenneth T. Rosen Director March 28, 2000
- --------------------
Dr. Kenneth T. Rosen
/s/ Richard L. Thomas Director March 28, 2000
- ---------------------
Richard L. Thomas
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Mary Lee Widener Director March 28, 2000
- --------------------
Mary Lee Widener
/s/ Ronald H. Zech Director March 28, 2000
- ------------------
Ronald H. Zech
</TABLE>
53
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of The PMI Group, Inc.:
We have audited the consolidated financial statements of The PMI Group,
Inc. and subsidiaries as of December 31, 1999 and 1998, and for each of the
three years in the period ended December 31, 1999, and have issued our report
thereon dated January 20, 2000; such consolidated financial statements and
report are included in your 1999 Annual Report to Shareholders and are
incorporated herein by reference. Our audits also included the financial
statement schedules of The PMI Group, Inc. and subsidiaries, listed in item
14(a) 2. These consolidated financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such consolidated financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, represent fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
San Francisco, California
January 20, 2000
54
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1999
<TABLE>
<CAPTION>
Amount at which
Type of Investment Amortized Market Shown in the
------------------ Cost Value Balance Sheet
---------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States government and
government agencies and authorities $ 87,223 $ 84,047 $ 84,047
States, municipalities and political subdivisions 1,260,409 1,261,308 1,261,308
All other corporate 137,764 133,955 133,955
---------------- --------------- ---------------
Total fixed maturities 1,485,396 $ 1,479,310 1,479,310
---------------- =============== ---------------
Equity securities:
Common stocks:
Banks, trust and insurance companies 3,189 $ 4,483 4,483
Industrial, miscellaneous and all other 41,525 79,407 79,407
Non-redeemable preferred stocks 17,660 17,582 17,582
---------------- --------------- ---------------
Total equity securities 62,374 $ 101,472 101,472
---------------- =============== ---------------
Short-term investments 145,087 145,093
---------------- ---------------
Total investments, other than related party $ 1,692,857 $ 1,725,875
================ ===============
</TABLE>
55
<PAGE>
THE PMI GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
PARENT COMPANY ONLY
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
------
Investment portfolio, available for sale, at market value:
Fixed income securities (cost - $32,745 and $50,578) $ 31,696 $ 51,904
Short-term investments 60,973 3,722
Common Stock of affiliate, at underlying book value 36,746 20,471
------------- -------------
Total investments 129,415 76,097
------------- -------------
Cash 407 473
Investment in subsidiaries, at equity in net assets 1,279,336 1,217,738
Other assets 14,685 12,491
------------- -------------
Total assets $ 1,423,843 $ 1,306,799
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Long-term debt $ 99,542 $ 99,476
Accounts payable - affiliates 1,630 1,678
Other liabilities 3,235 5,997
------------- -------------
Total liabilities 104,407 107,151
------------- -------------
Commitments and contingent liabilities (Note A) - -
Junior subordinated deferrable interest debenture
held solely by subsidiary trust 102,168 102,133
Shareholders' equity:
Preferred stock-$.01 par value; 5,000,000 shares authorized - -
Common stock -- $.01 par value; 125,000,000 shares authorized,
52,793,777 and 35,196,002 shares issued 528 352
Additional paid-in capital 265,828 265,040
Accumulated other comprehensive income 20,186 74,462
Retained earnings 1,258,617 1,060,724
------------- -------------
1,545,159 1,400,578
Less treasury stock (8,091,924 and 4,917,401 shares at cost) 327,891 303,063
------------- -------------
Total shareholders' equity 1,217,268 1,097,515
------------- -------------
Total liabilities and shareholders' equity $ 1,423,843 $ 1,306,799
============= =============
</TABLE>
See accompanying supplementary notes to Parent company
condensed financial statements.
56
<PAGE>
THE PMI GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
PARENT COMPANY ONLY
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Revenue:
Equity in undistributed net income of subsidiaries $ 112,029 $ 90,696 $ 101,488
Subsidiary dividends 97,339 103,200 78,863
Investment income, net 8,913 9,600 8,990
Capital gains (losses), net 329 1,045 (2,405)
-------------- -------------- --------------
Total revenue 218,610 204,541 186,936
-------------- -------------- --------------
Expenses:
Operating expenses 6,456 722 642
Interest expense 15,810 15,592 14,618
-------------- -------------- --------------
Total expenses 22,266 16,314 15,260
-------------- -------------- --------------
Income before tax 196,344 188,227 171,676
Income tax expense (benefit) (8,122) (2,133) (3,633)
-------------- -------------- --------------
Net income $ 204,466 $ 190,360 $ 175,309
============== ============== ==============
</TABLE>
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
PARENT COMPANY ONLY
Years Ended December 31, 1999, 1998 and 1997 (in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net income $ 204,466 $ 190,360 $ 175,309
------------ ------------ -----------
Other comprehensive income net of tax:
Unrealized gain on investments:
Unrealized holding gains (losses) arising during period (54,062) 3,205 19,664
Less: reclassification adjustment for (gains) losses included
in net income (214) (679) 1,563
------------ ------------ -----------
Other comprehensive income (loss), net of tax (54,276) 2,526 21,227
------------ ------------ -----------
Comprehensive income $ 150,190 $ 192,886 $ 196,536
============ ============ ===========
</TABLE>
See accompanying supplementary notes to Parent company condensed financial
statements.
57
<PAGE>
THE PMI GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STAEMENTS OF CASH FLOWS
PARENT COMPANY ONLY
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ---------------- ---------------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 204,466 $ 190,360 $ 175,309
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization 278 1,063 848
Equity in net income of subsidiaries (209,368) (193,896) (180,351)
Capital (gains) losses, net (329) (1,045) 2,405
Increase (decrease) in payable to affiliates (48) 565 (4,246)
Other (7,435) 2,282 (10,437)
------------- ------------- ------------
Net cash provided by (used in) operating activities (12,436) (671) (16,472)
------------- ------------- ------------
Cash flows from investing activities:
Dividends from subsidiaries 97,339 103,200 78,863
Investment in affiliates (16,878) (24,173) (13,093)
Purchases of fixed income securities (3,887) (1,000) (92,350)
Investment collections of fixed income securities - 6,271 5,000
Proceeds from sales of fixed income securities 22,110 40,522 46,667
Proceeds from sales of equity securities - 93 -
Net (increase) decrease in short-term investments (57,251) 32,455 13,200
------------- ------------- ------------
Net cash provided by (used in) investing activities 41,433 157,368 38,287
------------- ------------- ------------
Cash flows from financing activities:
Issuance of junior subordinated debentures - - 102,093
Dividends paid to shareholders (5,199) (6,333) (6,733)
Proceeds from exercise of stock options 964 2,592 3,181
Purchase of The PMI Group, Inc. common stock (24,828) (152,920) (120,002)
------------- ------------- ------------
Net cash provided by (used in) financing activities (29,063) (156,661) (21,461)
------------- ------------- ------------
Net increase (decrease) in cash (66) 36 354
Cash at beginning of year 473 437 83
------------- ------------- ------------
Cash at end of year $ 407 $ 473 $ 437
============= ============= ============
</TABLE>
See accompanying supplementary notes to Parent company condensed financial
statements.
58
<PAGE>
THE PMI GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
SUPPLEMENTARY NOTES
Note A
The accompanying Parent Company ("TPG") financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes to Consolidated
Financial Statements (including Notes 9, 11 and 12 related to long-term
obligations, commitments and contingent liabilities and the junior subordinated
debenture) appearing on pages 40-42 of The PMI Group, Inc. 1999 Annual Report to
Shareholders.
Note B
During 1999, 1998 and 1997, TPG received $97.3 million, $103.2 million, and
$78.9 million, respectively, of ordinary and extraordinary cash dividends from
subsidiaries.
59
<PAGE>
THE PMI GROUP, INC.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
As of and for the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Reserve for
Losses and Losses and Amortization
Deferred Loss Net Loss of Deferred Other
Acquisition Adjustment Unearned Premiums Investment Adjustment Acquisition Operating Premiums
Segment Costs Expenses Premiums Earned Income Expenses Costs Expenses Written
- ------- ------------- ------------ ------------ ------------ ----------- ------------- ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999
MI (1) $ 67,281 $ 269,931 $ 102,022 $ 447,214 $ 80,922 $ 110,465 $ 80,252 $ 54,017 $ 459,065
Inter-
national (2) 2,298 3,714 80,067 11,291 3,673 1,213 - 4,472 12,071
Title - 8,355 - 100,118 1,634 1,004 - 88,244 100,118
Other (3) - - - - 8,913 - - 23,506 -
----------- ----------- ----------- ----------- ---------- ------------ ----------- ----------- ------------
Total $ 69,579 $ 282,000 $ 182,089 $ 558,623 $ 95,142 $ 112,682 $ 80,252 $ 170,239 $ 571,254
=========== =========== =========== =========== ========== ============ =========== =========== ============
1998
MI (1) $ 61,605 $ 206,132 $ 94,886 $ 411,922 $ 77,257 $ 135,097 $ 60,280 $ 44,293 $ 409,796
Title - 9,127 - 79,304 1,401 619 - 69,109 79,304
Other (3) - - - - 6,023 - - 29,223 -
----------- ----------- ----------- ----------- ---------- ------------ ----------- ----------- ------------
Total $ 61,605 $ 215,259 $ 94,886 $ 491,226 $ 84,681 $ 135,716 $ 60,280 $ 142,625 $ 489,100
=========== =========== =========== =========== ========== ============ =========== =========== ============
1997
MI (1) $ 37,864 $ 192,211 $ 94,150 $ 394,010 $ 73,007 $ 150,367 $ 43,395 $ 40,952 $ 372,114
Title - 10,176 - 59,938 1,257 1,890 - 53,085 59,938
Other (3) - - - - 8,872 - - 17,708 -
----------- ----------- ----------- ----------- ---------- ------------ ----------- ----------- ------------
Total $ 37,864 $ 202,387 $ 94,150 $ 453,948 $ 83,136 $ 152,257 $ 43,395 $ 111,745 $ 432,052
=========== =========== =========== =========== ========== ============ =========== =========== ============
</TABLE>
(1) Represents Domestic Mortgage Insurance Operations
(2) Represents International Mortgage Insurance Operations
(3) Represents ancillary services and parent company investment income.
The 1997 amounts have been restated to conform to the SFAS 131
presentation of segments.
60
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Percentage
Ceded Assumed of Amount
Premiums earned for the Gross to Other from Other Net Assumed
year ended December 31, Amount Companies Companies Amount to Net
----------------------- ------------ ----------- --------------- --------------- ------------
(In thousands, except percentages)
<S> <C> <C> <C> <C> <C>
1999
Consolidated Mortgage Guaranty $ 474,096 $ 22,034 $ 6,443 $ 458,505 1.4%
Title 100,355 239 2 100,118 0.0%
------------ ----------- ----------- ----------- -------
Total $ 574,451 $ 22,273 $ 6,445 $ 558,623 1.2%
============ =========== =========== =========== =======
1998
Consolidated Mortgage Guaranty $ 426,613 $ 17,783 $ 3,092 $ 411,922 0.8%
Title 79,483 188 9 79,304 0.0%
------------ ----------- ----------- ----------- -------
Total $ 506,096 $ 17,971 $ 3,101 $ 491,226 0.6%
============ =========== =========== =========== =======
1997
Consolidated Mortgage Guaranty $ 398,904 $ 6,068 $ 1,174 $ 394,010 0.3%
Title 60,068 138 8 59,938 0.0%
------------ ----------- ----------- ----------- -------
Total $ 458,972 $ 6,206 $ 1,182 $ 453,948 0.3%
============ =========== =========== =========== =======
</TABLE>
61
<PAGE>
INDEX TO EXHIBITS
[Item 14(a) 3]
<TABLE>
<CAPTION>
Exhibit
- -------
Number Description of Exhibits
- ------- ---------------------------------------------------------------------
<C> <S>
3.1(b) Restated Certificate of Incorporation of the Registrant.
3.2(g) By-laws of the Registrant as amended and restated September 15, 1998.
4.1(b) Specimen common stock Certificate.
4.2(d) Indenture dated as of November 19, 1996 between The PMI Group, Inc.
and the Bank of New York Trustee in connection with sale of
$100,000,000 aggregate principal amount of 6 3/4% Notes due November
15, 2006.
4.3(e) The Junior Subordinated Indenture dated February 4, 1997 between The
PMI Group, Inc. and The Bank of New York, Inc.
4.4(e) Form of Right Certificate, relating to Rights Agreement dated as of
January 26, 1998.
4.5(j) 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.
4.6(j) 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.
4.7(j) 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(i) * PMI Mortgage Insurance Co. Bonus Incentive Plan dated as of February
18, 1999
10.2* The PMI Group, Inc. Equity Incentive Plan. (Restated as of August 16,
1999)
10.3* The PMI Group, Inc. Stock Plan for Non-Employee Directors. (restated
as of August 16, 1999).
10.4(k) The PMI Group, Inc. Directors Deferred Compensation Plan. (amended &
restated as of July 21, 1999).
10.5(a) Form of 1984 Master Policy of PMI Mortgage Insurance Co.
10.6(a) Form of 1994 Master Policy of PMI Mortgage Insurance Co.
10.7(a) CMG Shareholders Agreement dated September 8, 1994 between CUNA Mutual
Investment Corporation and PMI Mortgage Insurance Co.
</TABLE>
62
<PAGE>
<TABLE>
<C> <S>
10.8(b) Runoff Support Agreement dated October 28, 1994 between Allstate
Insurance Company, the Registrant and PMI Mortgage Insurance Co.
10.9(b) Form of Tax Sharing Agreement among the Registrant, the Registrant's
subsidiaries, The Allstate Corporation, Allstate Insurance Company and
Sears, Roebuck and Co.
10.10(a) Mortgage Insurance Variable Quota Share Reinsurance Treaty effective
January 1, 1991 issued to PMI Mortgage Insurance Co. by Hannover
Ruckversicherungs-Aktiengesellschaft ("Hannover").
10.11(a) First Amendment to Mortgage Insurance Variable Quota Share Reinsurance
Treaty made as of January 1, 1992 between Hannover and PMI Mortgage
Insurance Co.
10.12(j) Supplemental Employee Retirement Plan (amended and restated as of May
20, 1999).
10.13(a) First Amendment to the Quota Share Primary Mortgage Reinsurance
Agreement (No. 15031-940) made as of October 1, 1994 between PMI
Mortgage Insurance Co. and Capital Mortgage Reinsurance Company
10.14(a) Form of Indemnification Agreement between the Registrant and its
officers and directors.
10.15(a) Per Mortgage Excess of Loss Reinsurance Treaty effective January 1,
1994 issued to PMI Mortgage Insurance Co. by Hannover.
10.16 The PMI Group, Inc. Retirement Plan (amended and restated as of
February 17, 2000).
10.17(j) The PMI Group, Inc., Additional Benefit Plan dated as of February 18,
1999
10.18(e) The Guarantee Agreement, dated February 4, 1997 between The PMI Group,
Inc. (As Guarantor) and The Bank of New York (As Trustee).
10.19(e) Amended and Restated Trust Agreement dated as of February 4, 1997
among The PMI Group, Inc., as Depositor, The Bank of New York, as
Property Trustee, and The Bank of New York (Delaware), as Delaware
Trustee.
10.20* The PMI Group, Inc., Employee Stock Purchase Plan (restated as of
August 16, 1999)
10.21(e) Form of Change of Control Employment Agreement
10.22(k) The PMI Group, Inc., Officer Deferred Compensation Plan. (amended and
restated as of September 16, 1999)
10.23 Excess of Loss Reinsurance Treaty effective August 20, 1999 issued by
PMI Mortgage Insurance Co. to reinsurers. The Company agrees to
furnish to the Securities and Exchange Commission, upon request,
copies of all agreements defining the rights of reinsurers of pool
insurance contracts where the total amount of premiums paid does not
exceed ten percent of the Company's total assets.
11.1 Statement re: computation of per share earnings.
12.1 Statement re: computation of earnings to fixed charges.
13.1 Selected Financial Data, Management's Discussion and Analysis of
Financial Condition and Results of Operations and Financial Statements
and Supplementary Data portions of The PMI Group, Inc.'s 1999 Annual
Report to Shareholders.
21.1 Subsidiaries of the Registrant.
</TABLE>
63
<PAGE>
<TABLE>
<C> <S>
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule.
</TABLE>
(a) Previously filed with the Company's Form S-1 Registration Statement (No.
33-88542), which became effective in April 1995 ("Form S-1").
(b) Previously filed with Amendment No. 1 to Form S-1, filed with the SEC on
March 2, 1995.
(c) Previously filed with Amendment No. 2 to Form S-1, filed with the SEC on
March 13, 1995.
(d) Previously filed with Form 8-K, filed with the SEC on November 25, 1996
(e) Previously filed with Form 10-K, filed with the SEC on March 27, 1998.
(f) Previously filed with Form 10-Q, filed with the SEC on August 13, 1998.
(g) Previously filed with Form 8-K, filed with the Sec on September 29, 1998.
(h) Previously filed with the Company's Form S-3 Registration Statement (No.
33-66829) which became effective in November 1998.
(i) Previously filed with Form 10-K, filed with the SEC on March 30, 1999.
(j) Previously filed with Form 10-Q, filed with the SEC on August 16, 1999.
(k) Previously filed with the Company's Form S-8 Registration Statement (No.
333-32190) which became effective on March 10, 2000.
* Compensatory or benefit plan in which certain executive officers or
Directors of The PMI Group, Inc., or its subsidiaries are eligible to
participate.
64
<PAGE>
THE PMI GROUP, INC.
EQUITY INCENTIVE PLAN
(August 16, 1999 Restatement)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 1 BACKGROUND, PURPOSE AND DURATION.............................. 1
1.1 Effective Date.................................................... 1
1.2 Purpose of the Plan............................................... 1
SECTION 2 DEFINITIONS................................................... 1
2.1 "1934 Act"........................................................ 1
2.2 "Affiliate"....................................................... 1
2.3 "Award"........................................................... 1
2.4 "Award Agreement"................................................. 1
2.5 "Board"........................................................... 1
2.6 "Change of Control"............................................... 2
2.7 "Code"............................................................ 3
2.8 "Committee"....................................................... 3
2.9 "Company"......................................................... 4
2.10 "Consultant"...................................................... 4
2.11 "Deferred Compensation Account"................................... 4
2.12 "Determination Date".............................................. 4
2.13 "Director"........................................................ 4
2.14 "Disability"...................................................... 4
2.15 "Employee"........................................................ 4
2.16 "Exercise Price".................................................. 4
2.17 "Fair Market Value"............................................... 4
2.18 "Fiscal Year"..................................................... 4
2.19 "Grant Date"...................................................... 4
2.20 "Incentive Stock Option".......................................... 4
2.21 "Nonqualified Stock Option"....................................... 4
2.22 "Option".......................................................... 5
2.23 "Participant"..................................................... 5
2.24 "Performance Goals"............................................... 5
2.25 "Performance Period".............................................. 5
2.26 "Performance Share"............................................... 5
2.27 "Performance Unit"................................................ 5
2.28 "Period of Restriction"........................................... 5
2.29 "Plan"............................................................ 5
2.30 "Restricted Stock"................................................ 5
2.31 "Retirement"...................................................... 5
2.32 "Rule 16b-3"...................................................... 5
2.33 "Section 16 Person"............................................... 6
2.34 "Share"........................................................... 6
2.35 "Stock Unit"...................................................... 6
2.36 "Subsidiary"...................................................... 6
2.37 "Termination of Service".......................................... 6
SECTION 3 ADMINISTRATION................................................ 6
</TABLE>
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TABLE OF CONTENTS
(continued)
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3.1 The Committee..................................................... 6
3.2 Authority of the Committee........................................ 6
3.3 Delegation by the Committee....................................... 7
3.4 Decisions Binding................................................. 7
SECTION 4 SHARES SUBJECT TO THE PLAN.................................... 7
4.1 Number of Shares.................................................. 7
4.2 Lapsed Awards..................................................... 7
4.3 Adjustments in Awards and Authorized Shares....................... 7
SECTION 5 STOCK OPTIONS................................................. 8
5.1 Grant of Options.................................................. 8
5.2 Award Agreement................................................... 8
5.3 Exercise Price.................................................... 8
5.3.1 Nonqualified Stock Options................................ 8
5.3.2 Incentive Stock Options................................... 8
5.3.3 Substitute Options........................................ 8
5.4 Expiration of Options............................................. 8
5.4.1 Expiration Dates.......................................... 8
5.4.2 Death of Participant...................................... 9
5.4.3 Committee Discretion...................................... 9
5.5 Exercisability of Options......................................... 9
5.5.1 Special Rule for Retirement, Death and Disability......... 9
5.5.2 Special Rule for Change of Control........................ 9
5.6 Payment........................................................... 10
5.7 Restrictions on Share Transferability............................. 10
5.8 Deferral.......................................................... 10
5.8.1 Election to Defer Option Proceeds......................... 10
5.8.2 Form and Timing of Payment................................ 11
5.8.3 Participants Remain Unsecured Creditors................... 11
5.8.4 Nontransferability of Deferred Option Compensation
Accounts.................................................. 11
5.8.5 Provisions of the Officer Deferred Compensation
Plan May Govern........................................... 11
5.9 Certain Additional Provisions for Incentive Stock Options......... 11
5.9.1 Exercisability............................................ 11
5.9.2 Termination of Service.................................... 11
5.9.3 Company and Subsidiaries Only............................. 11
5.9.4 Expiration................................................ 11
5.10 Grant of Reload Options........................................... 12
SECTION 6 RESTRICTED STOCK.............................................. 12
6.1 Grant of Restricted Stock......................................... 12
6.2 Restricted Stock Agreement........................................ 12
6.3 Transferability................................................... 12
6.4 Other Restrictions................................................ 12
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TABLE OF CONTENTS
(continued)
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6.4.1 General Restrictions...................................... 12
6.4.2 Section 162(m) Performance Restrictions................... 12
6.4.3 Legend on Certificates.................................... 13
6.5 Removal of Restrictions........................................... 13
6.5.1 Special Rule for Retirement, Death and Disability......... 13
6.5.2 Special Rule for Change of Control........................ 13
6.6 Voting Rights..................................................... 13
6.7 Dividends and Other Distributions................................. 13
6.8 Return of Restricted Stock to Company............................. 14
SECTION 7 PERFORMANCE UNITS AND PERFORMANCE SHARES...................... 14
7.1 Grant of Performance Units and Shares............................. 14
7.2 Initial Value..................................................... 14
7.3 Performance Objectives and Other Terms............................ 14
7.3.1 General Performance Objectives............................ 14
7.3.2 Section 162(m) Performance Objectives..................... 14
7.4 Earning of Performance Units and Performance Shares............... 15
7.4.1 Special Rule for Retirement, Death and Disability......... 15
7.4.2 Special Rule for Change of Control........................ 15
7.5 Form and Timing of Payment........................................ 15
7.5.1 Deferrals................................................. 15
7.6 Cancellation...................................................... 15
SECTION 8 MISCELLANEOUS................................................. 16
8.1 No Effect on Employment or Service................................ 16
8.2 Participation..................................................... 16
8.3 Indemnification................................................... 16
8.4 Successors........................................................ 16
8.5 Beneficiary Designations.......................................... 16
8.6 Nontransferability of Awards...................................... 16
8.7 No Rights as Stockholder.......................................... 17
8.8 Withholding Requirements.......................................... 17
8.9 Withholding Arrangements.......................................... 17
SECTION 9 AMENDMENT, TERMINATION AND DURATION........................... 17
9.1 Amendment, Suspension or Termination.............................. 17
9.2 Duration of the Plan.............................................. 18
SECTION 10 LEGAL CONSTRUCTION............................................ 18
10.1 Gender and Number................................................. 18
10.2 Severability...................................................... 18
10.3 Requirements of Law............................................... 18
10.4 Governing Law..................................................... 18
10.5 Captions.......................................................... 18
</TABLE>
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<PAGE>
THE PMI GROUP, INC.
EQUITY INCENTIVE PLAN
(August 16, 1999 Restatement)
SECTION 1
BACKGROUND, PURPOSE AND DURATION
1.1 Effective Date. The PMI Group, Inc. having established the Plan,
--------------
hereby amends and restates the Plan on the occasion of the Company's 3-for-2
stock split, effective as of August 16, 1999. Except for changes relating to
the stock split, the terms of the Plan, as in effect prior to February 18, 1999,
shall govern any outstanding Awards granted prior to February 18, 1999.
1.2 Purpose of the Plan. The Plan is intended to increase incentives
-------------------
and to encourage Share ownership on the part of (1) employees of the Company and
its Affiliates, and (2) consultants who provide significant services to the
Company and its Affiliates. The Plan also is intended to further the growth and
profitability of the Company. The Plan is intended to permit the grant of
Awards that qualify as performance-based compensation under section 162(m) of
the Code.
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 "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 "Affiliate" means any corporation or any other entity (including,
---------
but not limited to, partnerships and joint ventures) controlling, controlled by,
or under common control with the Company.
2.3 "Award" means, individually or collectively, a grant under the
-----
Plan of Nonqualified Stock Options, Incentive Stock Options, Restricted Stock,
Performance Units or Performance Shares.
2.4 "Award Agreement" means the written agreement setting forth the
---------------
terms and provisions applicable to each Award granted under the Plan.
2.5 "Board" means the Board of Directors of the Company.
-----
<PAGE>
2.6 "Change of Control" means:
-----------------
(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 twenty percent
(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 2.9. Notwithstanding the foregoing, in
its sole discretion, the Board may increase the twenty percent (20%) threshold
set forth above in this subsection (a) prior to any acquisition of twenty
percent (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
2
<PAGE>
Outstanding Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than sixty percent
(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, twenty percent (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 twenty
percent (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 twenty percent (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 2.9,
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.
2.7 "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 thereunder,
and any comparable provision of any future legislation or regulation amending,
supplementing or superseding such section or regulation.
2.8 "Committee" means the committee appointed by the Board (pursuant
---------
to Section 3.1) to administer the Plan. Unless otherwise determined by the
Board, the Company's Compensation Committee shall constitute the Committee.
2.9 "Company" means The PMI Group, Inc., a Delaware corporation, or
-------
any successor thereto.
3
<PAGE>
2.10 "Consultant" means any consultant, independent contractor, or
----------
other person who provides significant services to the Company or its Affiliates,
but who is neither an Employee nor a Director.
2.11 "Deferred Compensation Account" means an account established in
-----------------------------
the name of the Participant on the books and records of the Company pursuant to
Section 5.8.
2.12 "Determination Date" means the latest possible date that will
------------------
not jeopardize an Award's qualification as performance-based compensation under
section 162(m) of the Code. Notwithstanding the previous sentence, for Awards
not intended to qualify as performance-based compensation, "Determination Date"
shall mean such date as the Committee may determine in its discretion.
2.13 "Director" means any individual who is a member of the Board.
--------
2.14 "Disability" means a permanent and total disability within the
----------
meaning of section 22(e)(3) of the Code, provided that in the case of Awards
other than Incentive Stock Options, the Committee in its discretion may
determine whether a permanent and total disability exists in accordance with
uniform and non-discriminatory standards adopted by the Committee from time to
time.
2.15 "Employee" means any employee of the Company or of an Affiliate,
--------
whether such employee is so employed at the time the Plan is adopted or becomes
so employed subsequent to the adoption of the Plan.
2.16 "Exercise Price" means the price at which a Share may be
--------------
purchased by a Participant pursuant to the exercise of an Option.
2.17 "Fair Market Value" means the mean between the high and low
-----------------
prices for Shares on the relevant date, or if there were no sales on such date,
the arithmetic mean of the highest and lowest quoted selling prices on the
nearest day before and the nearest day after the relevant date, as determined by
the Committee.
2.18 "Fiscal Year" means the fiscal year of the Company.
-----------
2.19 "Grant Date" means, with respect to an Award, the date that the
----------
Award was granted. The Grant Date shall be the date on which the Committee
approves the material terms of the Award or such later date as the Committee, in
its discretion, may determine.
2.20 "Incentive Stock Option" means an Option to purchase Shares
----------------------
which is designated as an Incentive Stock Option and is intended to meet the
requirements of section 422 of the Code.
2.21 "Nonqualified Stock Option" means an option to purchase Shares
-------------------------
which is not intended to be an Incentive Stock Option.
4
<PAGE>
2.22 "Option" means an Incentive Stock Option or a Nonqualified Stock
------
Option.
2.23 "Participant" means an Employee or Consultant who has an
-----------
outstanding Award.
2.24 "Performance Goals" means the goal(s) (or combined goal(s))
-----------------
determined by the Committee (in its discretion) to be applicable to a
Participant with respect to an Award. As determined by the Committee, the
Performance Goals applicable to an Award may provide for a targeted level or
levels of achievement using one or more of the following measures: (a) Cash
Operating Earnings Per Share, (b) Earnings Per Share, (c) Expense Ratio, (d)
Loss Ratio, (e) Market Share, (f) Net Income, (g) Net Operating Income Earnings
Per Share, (h) Net Operating Income Per Share, (i) New Insurance Written, (j)
Price to Earnings Ratio, (k) Return on Average Equity, (l) Risk in Force, and
(m) Total Shareholder Return. The Performance Goals may differ from Participant
to Participant and from Award to Award. Any criteria used may be measured in
absolute terms or as compared to another company or companies. Any criteria
used may be measured against the performance of the Company as a whole or a
segment of the Company.
2.25 "Performance Period" means any period of not less than twelve
------------------
consecutive calendar months, as determined by the Committee, in its sole
discretion.
2.26 "Performance Share" means a Performance Share granted to a
-----------------
Participant pursuant to Section 7.
2.27 "Performance Unit" means a Performance Unit granted to a
----------------
Participant pursuant to Section 7.
2.28 "Period of Restriction" means the period during which shares of
---------------------
Restricted Stock are subject to forfeiture and/or restrictions on
transferability.
2.29 "Plan" means The PMI Group, Inc. Equity Incentive Plan, as set
----
forth in this instrument and as hereafter amended from time to time.
2.30 "Restricted Stock" means an Award granted to a Participant
----------------
pursuant to Section 6.
2.31 "Retirement" means, in the case of an Employee, (a) a
----------
Termination of Service occurring on or after age sixty five (65), (b) a
Termination of Service at or after age 55 with at least ten years of Benefit
Accrual Service (as defined under The PMI Group, Inc. Retirement Plan, as
amended), or (c) a Termination of Service approved by the Company as an early
retirement; provided that in the case of a Section 16 Person, such early
retirement must be approved by the Committee. With respect to a Consultant, no
Termination of Service shall be deemed to be on account of "Retirement."
2.32 "Rule 16b-3" means Rule 16b-3 promulgated under the 1934 Act, as
----------
amended, and any future regulation amending, supplementing or superseding such
regulation.
5
<PAGE>
2.33 "Section 16 Person" means a person who, with respect to the
-----------------
Shares, is subject to section 16 of the 1934 Act.
2.34 "Share" means one share of the Company's common stock, $.01 par
-----
value.
2.35 "Stock Unit" means a bookkeeping entry initially representing an
----------
amount equivalent to the Fair Market Value of one Share covered by the exercise
of an Option in respect of which the Participant has made a deferral election
pursuant to Section 5.8. Stock Units represent an unfunded and unsecured
obligation of the Company.
2.36 "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.
2.37 "Termination of Service" means (a) in the case of an Employee, a
----------------------
cessation of the employee-employer relationship between an Employee and the
Company or an Affiliate for any reason, including, but not by way of limitation,
a termination by resignation, discharge, death, Disability, Retirement, or the
disaffiliation of an Affiliate, but excluding any such termination where there
is a simultaneous reemployment by the Company or an Affiliate; and (b) in the
case of a Consultant, a cessation of the service relationship between a
Consultant and the Company or an Affiliate for any reason, including, but not by
way of limitation, a termination by resignation, discharge, death, Disability,
or the disaffiliation of an Affiliate, but excluding any such termination where
there is a simultaneous re-engagement of the consultant by the Company or an
Affiliate.
SECTION 3
ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the Committee.
-------------
The Committee shall consist of not less than two (2) Directors. The members of
the Committee shall be appointed from time to time by, and serve at the pleasure
of, the Board. Each member of the Committee shall qualify as (a) a "non-
employee director" under Rule 16b-3, and (b) an "outside director" under section
162(m) of the Code. If it is later determined that one or more members of the
Committee do not so qualify, actions taken by the Committee prior to such
determination shall be valid despite such failure to qualify.
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) determine which Employees and Consultants shall be granted
Awards, (b) prescribe the terms and conditions of the Awards, (c) interpret the
Plan and the Awards, (d) adopt such procedures and subplans as are necessary or
appropriate to permit participation in the Plan by Employees and Consultants who
are foreign nationals or employed outside of the United States, (e) adopt rules
for the administration, interpretation and application of the Plan as are
consistent therewith, and (f) interpret, amend or revoke any such rules. Except
6
<PAGE>
as provided in Section 4.3, after an Award has been granted, the Committee shall
not reduce the Exercise Price of the Award (or cancel the Award and grant a
substitute Award having a lower Exercise Price).
3.3 Delegation by the Committee. The Committee, in its sole
---------------------------
discretion and on such terms and conditions as it may provide, may delegate all
or any part of its authority and powers under the Plan to one or more Directors
and/or officers of the Company; provided, however, that the Committee may not
delegate its authority and powers (a) with respect to Section 16 Persons, (b) in
any way which would jeopardize the Plan's qualification under Rule 16b-3, or (c)
with respect to Awards which are intended to qualify as performance-based
compensation under section 162(m) of the Code.
3.4 Decisions Binding. All determinations and decisions made by the
-----------------
Committee, the Board, and any delegate of the Committee pursuant to the
provisions of the Plan 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 4,350,000. Notwithstanding the preceding, the aggregate number of Shares
subject to Awards of Restricted Stock granted under the Plan shall not exceed
135,000 and the aggregate number of Shares subject to Awards of Performance
Units and Performance Shares granted under the Plan shall not exceed 135,000.
Shares granted under the Plan may be either authorized but unissued Shares or
treasury Shares.
4.2 Lapsed Awards. If an Award terminates, expires, or lapses for
-------------
any reason, any Shares subject to such Award again shall be available to be the
subject of an Award. In addition, if any Shares are tendered to the Company
(whether by physical delivery or attestation) as full or partial payment for the
exercise of an Option or in satisfaction of a tax withholding obligation
pursuant to an Award, only the net Shares issued shall be deemed delivered for
purposes of determining the maximum number of Shares that may be delivered under
Section 4.1.
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, the
number, class, and price of Shares subject to outstanding Awards, and the
numerical limit of Section 5.1, 6.1 and 7.1 in such manner as the Committee (in
its sole discretion) shall determine to be appropriate to prevent the dilution
or diminution of such Awards.
7
<PAGE>
SECTION 5
STOCK OPTIONS
5.1 Grant of Options. Subject to the terms and provisions of the
----------------
Plan, Options may be granted to Employees and Consultants at any time and from
time to time as determined by the Committee in its sole discretion. The
Committee, in its sole discretion, shall determine the number of Shares subject
to each Option, provided that during any Fiscal Year, no Participant shall be
granted Options covering more than 300,000 Shares. The Committee may grant
Incentive Stock Options, Nonqualified Stock Options, or a combination thereof.
5.2 Award Agreement. Each Option shall be evidenced by an Award
---------------
Agreement that shall specify the Exercise Price, the expiration date of the
Option, the number of Shares to which the Option pertains, any conditions to
exercise of the Option, and such other terms and conditions as the Committee, in
its discretion, shall determine. The Award Agreement shall specify whether the
Option is intended to be an Incentive Stock Option or a Nonqualified Stock
Option.
5.3 Exercise Price. Subject to the provisions of this Section 5.3,
--------------
the Exercise Price for each Option shall be determined by the Committee in its
sole discretion.
5.3.1 Nonqualified Stock Options. In the case of a Nonqualified
--------------------------
Stock Option, the Exercise Price shall be not less than one hundred percent
(100%) of the Fair Market Value of a Share on the Grant Date.
5.3.2 Incentive Stock Options. In the case of an Incentive Stock
-----------------------
Option, the Exercise Price shall be not less than one hundred percent (100%) of
the Fair Market Value of a Share on the Grant Date; provided, however, that if
on the Grant Date, the Employee (together with persons whose stock ownership is
attributed to the Employee pursuant to section 424(d) of the Code) owns stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or any of its Subsidiaries, the Exercise Price
shall be not less than one hundred and ten percent (110%) of the Fair Market
Value of a Share on the Grant Date.
5.3.3 Substitute Options. Notwithstanding the provisions of
------------------
Sections 5.3.1 and 5.3.2, in the event that the Company or an Affiliate
consummates a transaction described in section 424(a) of the Code (e.g., the
acquisition of property or stock from an unrelated corporation), persons who
become Employees or Consultants on account of such transaction may be granted
Options in substitution for options granted by their former employer. If such
substitute Options are granted, the Committee, in its sole discretion and
consistent with section 424(a) of the Code, shall determine the exercise price
of such substitute Options.
5.4 Expiration of Options.
---------------------
5.4.1 Expiration Dates. Each Option shall terminate no later
----------------
than the first to occur of the following events:
(a) The expiration of ten (10) years from the Grant Date; or
8
<PAGE>
(b) The expiration of one (1) year from the date of the
Participant's Termination of Service for a reason other than the Participant's
death, Disability or Retirement; or
(c) The expiration of three (3) years from the date of the
Participant's Termination of Service by reason of Disability; or
(d) The expiration of three (3) years from the date of the
Participant's Retirement (subject to Section 5.9.2 regarding Incentive Stock
Options); or
(e) The date for termination of the Option determined by the
Committee in its sole discretion and set forth in the written Award Agreement.
5.4.2 Death of Participant. Notwithstanding Section 5.4.1, if a
--------------------
Participant who is an Employee dies prior to the expiration of his or her
Options, the Committee, in its discretion, may provide that his or her Options
shall be exercisable for up to three (3) years after the date of death. If a
Participant who is a Consultant dies prior to the expiration of his or her
Options, the Committee, in its discretion, may provide that his or her Options
shall be exercisable for up to three (3) years after the date of death.
5.4.3 Committee Discretion. Subject to the limits of Sections
--------------------
5.4.1 and 5.4.2, the Committee, in its sole discretion, (a) shall provide in
each Award Agreement when each Option expires and becomes unexercisable, and (b)
may, after an Option is granted and before such Option expires, extend the
maximum term of the Option (subject to Section 5.9.4 regarding Incentive Stock
Options).
5.5 Exercisability of Options. Options granted under the Plan shall
-------------------------
be exercisable at such times and be subject to such restrictions and conditions
as the Committee shall determine in its sole discretion. After an Option is
granted, the Committee, in its sole discretion, may accelerate the
exercisability of the Option.
5.5.1 Special Rule for Retirement, Death and Disability.
-------------------------------------------------
Notwithstanding any contrary provision of the Plan, the right to exercise each
Option shall accrue as to one hundred percent (100%) of the Shares subject to
such Option upon the Participant's Termination of Service due to Retirement,
death or Disability.
5.5.2 Special Rule for Change of Control. Notwithstanding any
----------------------------------
contrary provision of the Plan, immediately upon the occurrence of a Change of
Control that occurs prior to a Participant's Termination of Service, the right
to exercise each Option then outstanding shall accrue as to one hundred percent
(100%) of the Shares subject to such Option. Notwithstanding the preceding
provisions of this Section 5.5.2, if the Committee determines that the
acceleration of vesting of Options following a Change of Control would cause a
Change of Control transaction to be ineligible for pooling of interests
accounting under APB No. 16, which transaction (but for such accelerated
vesting) otherwise would have been eligible for such accounting treatment, the
Committee, in its sole discretion, may determine that no such accelerated
vesting shall occur.
5.6 Payment. Options shall be exercised by the Participant's
-------
delivery of a written notice of exercise to the Secretary of the Company (or its
designee), setting forth the
9
<PAGE>
number of Shares with respect to which the Option is to be exercised,
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. The Committee, in its sole
discretion, also may permit exercise (a) by tendering previously acquired Shares
having an aggregate Fair Market Value at the time of exercise equal to the total
Exercise Price, or (b) by any other means which the Committee, in its sole
discretion, determines to both provide legal consideration for the Shares, and
to be consistent with the purposes of the Plan.
Subject to Section 5.8, 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.
5.7 Restrictions on Share Transferability. The Committee may impose
-------------------------------------
such restrictions on any Shares acquired pursuant to the exercise of an Option
as it may deem advisable, including, but not limited to, restrictions related to
applicable Federal securities laws, the requirements of any national securities
exchange or system upon which Shares are then listed or traded, or any blue sky
or state securities laws.
5.8 Deferral.
--------
5.8.1 Election to Defer Option Proceeds. Notwithstanding any
---------------------------------
contrary provision of the Plan, a Participant who is eligible to defer income
under the Company's Officer 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 5.6(a),
provided that Shares tendered or applied in exercise of such Option shall have
been held by the Participant for at least six (6) 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 5.8, a
deferral election made by a Participant pursuant to this Section 5.8.1 shall be
void and shall not be given effect unless (i) the Participant's deferral
election is made at least six (6) 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 (6) full calendar months prior to the
calendar month in which the Option is exercised, and (iii) the Participant is
employed by or is rendering services to the Company or any of its Subsidiaries
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 (6) calendar month period
described therein. Upon exercise of an Option to which a 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 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 a Deferred Option Compensation Account
at the date of exercise. A separate Deferred Option Compensation Account shall
be maintained with respect to each Participant and to each effective deferral
election.
10
<PAGE>
5.8.2 Form and Timing of Payment. Payment 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 under Section 5.8.1 is made, provided, however,
that in no event shall payment occur more than sixty (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 payment of a Stock Unit is made, the number of
Shares represented by a Stock Unit shall be subject to adjustment pursuant to
Section 4.3.
5.8.3 Participants Remain Unsecured Creditors. 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.
5.8.4 Nontransferability of Deferred Option Compensation Accounts.
-----------------------------------------------------------
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.
5.8.5 Provisions of the Officer Deferred Compensation Plan May
--------------------------------------------------------
Govern. To the extent determined by the Committee, any amount deferred under
this Section 5.8, 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 such plan shall govern the operation and
administration of amounts deferred under this Section 5.8 and credited to
Deferred Option Compensation Accounts.
5.9 Certain Additional Provisions for Incentive Stock Options.
---------------------------------------------------------
5.9.1 Exercisability. The aggregate Fair Market Value (determined
--------------
on the Grant Date(s)) of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by any Employee during any calendar
year (under all plans of the Company and its Subsidiaries) shall not exceed
$100,000.
5.9.2 Termination of Service. If any portion of an Incentive Stock
----------------------
Option is exercised more than three (3) months after the Participant's
Termination of Service for any reason other than Disability or death (unless (a)
the Participant dies during such three-month period, and (b) the Award Agreement
or the Committee permits later exercise), the portion so exercised shall be
deemed a Nonqualified Stock Option.
5.9.3 Company and Subsidiaries Only. Incentive Stock Options may be
-----------------------------
granted only to persons who are employees of the Company or a Subsidiary on the
Grant Date.
5.9.4 Expiration. No Incentive Stock Option may be exercised after
----------
the expiration of ten (10) years from the Grant Date; provided, however, that if
the Option is granted to an Employee who, together with persons whose stock
ownership is attributed to the Employee
11
<PAGE>
pursuant to section 424(d) of the Code, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of the stock of
the Company or any of its Subsidiaries, the Option may not be exercised after
the expiration of five (5) years from the Grant Date.
5.10 Grant of Reload Options. The Committee may provide in an Award
-----------------------
Agreement that a Participant who exercises all or part of an Option by payment
of the Exercise Price with already-owned Shares, shall be granted an additional
option (a "Reload Option") for a number of shares of stock equal to the number
of Shares tendered to exercise the previously granted Option plus, if the
Committee so determines, any Shares withheld or delivered in satisfaction of any
tax withholding requirements. As determined by the Committee, each Reload
Option shall (a) have a Grant Date which is the date as of which the previously
granted Option is exercised, and (b) be exercisable on the same terms and
conditions as the previously granted Option, except that the Exercise Price
shall be determined as of the Grant Date.
SECTION 6
RESTRICTED STOCK
6.1 Grant of Restricted Stock. Subject to the terms and provisions
-------------------------
of the Plan, the Committee, at any time and from time to time, may grant Shares
of Restricted Stock to Employees and Consultants in such amounts as the
Committee, in its sole discretion, shall determine. The Committee, in its sole
discretion, shall determine the number of Shares to be granted to each
Participant, provided that during any Fiscal Year, no Participant shall be
granted more than 15,000 Shares of Restricted Stock.
6.2 Restricted Stock Agreement. Each Award of Restricted Stock shall
--------------------------
be evidenced by an Award Agreement that shall specify the Period of Restriction,
the number of Shares granted, any price to be paid for the Shares, and such
other terms and conditions as the Committee, in its sole discretion, shall
determine. Unless the Committee determines otherwise, Shares of Restricted
Stock shall be held by the Company as escrow agent until the restrictions on
such Shares have lapsed.
6.3 Transferability. Shares of Restricted Stock may not be sold,
---------------
transferred, pledged, assigned, or otherwise alienated or hypothecated until the
end of the applicable Period of Restriction.
6.4 Other Restrictions. The Committee, in its sole discretion, may
------------------
impose such other restrictions on Shares of Restricted Stock as it may deem
advisable or appropriate, in accordance with this Section 6.4.
6.4.1 General Restrictions. The Committee may set restrictions
based upon the achievement of specific performance objectives (Company-wide,
business unit or individual), applicable federal or state securities laws, or
any other basis determined by the Committee in its discretion.
12
<PAGE>
6.4.2 Section 162(m) Performance Restrictions. For purposes of
---------------------------------------
qualifying grants of Restricted Stock as "performance-based compensation" under
section 162(m) of the Code, the Committee, in its discretion, may set
restrictions based upon the achievement of Performance Goals. The Performance
Goals shall be set by the Committee on or before the latest date permissible to
enable the Restricted Stock to qualify as "performance-based compensation" under
section 162(m) of the Code. In granting Restricted Stock which is intended to
qualify under section 162(m) of the Code, the Committee shall follow any
procedures determined by it from time to time to be necessary or appropriate to
ensure qualification of the Restricted Stock under section 162(m) of the Code
(e.g., in determining the Performance Goals).
6.4.3 Legend on Certificates. The Committee, in its discretion, may
----------------------
legend the certificates representing Restricted Stock to give appropriate notice
of such restrictions. For example, the Committee may determine that some or all
certificates representing Shares of Restricted Stock shall bear the following
legend:
"The sale or other transfer of the shares of stock represented by this
certificate, whether voluntary, involuntary, or by operation of law, is subject
to certain restrictions on transfer as set forth in The PMI Group, Inc. Equity
Incentive Plan, and in a Restricted Stock Agreement. A copy of the Plan and
such Restricted Stock Agreement may be obtained from the Secretary of The PMI
Group, Inc."
6.5 Removal of Restrictions. Shares of Restricted Stock covered by
-----------------------
each Restricted Stock grant made under the Plan shall be released from escrow as
soon as practicable after the last day of the Period of Restriction. The
Committee, in its discretion, may accelerate the time at which any restrictions
shall lapse, and remove any restrictions. After the restrictions have lapsed,
the Participant shall be entitled to have any legend or legends under Section
6.4 removed from his or her Share certificate, and the Shares shall be freely
transferable by the Participant.
6.5.1 Special Rule for Retirement, Death and Disability.
-------------------------------------------------
Notwithstanding any contrary provision of the Plan, one hundred percent (100%)
of any outstanding Shares of Restricted Stock shall be one hundred percent
(100%) vested in the Participant upon the Participant's Termination of Service
due to Retirement, death or Disability.
6.5.2 Special Rule for Change of Control. Notwithstanding any
----------------------------------
contrary provision of the Plan, immediately upon the occurrence of a Change of
Control that occurs prior to a Participant's Termination of Service, one hundred
percent (100%) of any outstanding Shares of Restricted Stock shall be one
hundred percent (100%) vested in the Participant. Notwithstanding the preceding
provisions of this Section 6.5.2, if the Committee determines that the
acceleration of vesting of Restricted Stock following a Change of Control would
cause a Change of Control transaction to be ineligible for pooling of interests
accounting under APB No. 16, which transaction (but for such accelerated
vesting) otherwise would have been eligible for such accounting treatment, the
Committee, in its sole discretion, may determine that no such accelerated
vesting shall occur.
13
<PAGE>
6.6 Voting Rights. During the Period of Restriction, Participants
-------------
holding Shares of Restricted Stock granted hereunder may exercise full voting
rights with respect to those Shares, unless otherwise provided in the Award
Agreement.
6.7 Dividends and Other Distributions. During the Period of
---------------------------------
Restriction, Participants holding Shares of Restricted Stock shall be entitled
to receive all dividends and other distributions paid with respect to such
Shares unless otherwise provided in the Award Agreement. If any such dividends
or distributions are paid in Shares, the Shares shall be subject to the same
restrictions on transferability and forfeitability as the Shares of Restricted
Stock with respect to which they were paid.
6.8 Return of Restricted Stock to Company. On the date set forth in
-------------------------------------
the Award Agreement, the Restricted Stock for which restrictions have not lapsed
shall revert to the Company and again shall become available for grant under the
Plan.
SECTION 7
PERFORMANCE UNITS AND PERFORMANCE SHARES
7.1 Grant of Performance Units and Shares. Performance Units and
-------------------------------------
Performance Shares may be granted to Employees and Consultants at any time and
from time to time, as shall be determined by the Committee, in its sole
discretion. The Committee shall have complete discretion in determining the
number of Performance Units and Performance Shares granted to any Participant,
provided that during any Fiscal Year no more than 15,000 Performance Units or
Performance Shares may be granted to any Participant.
7.2 Initial Value. Each Performance Unit shall have an initial value
-------------
that is established by the Committee on or before the Grant Date, provided that
such value shall not exceed the Fair Market Value of a Share on the Grant Date.
Each Performance Share shall have an initial value equal to the Fair Market
Value of a Share on the Grant Date.
7.3 Performance Objectives and Other Terms. The Committee shall set
--------------------------------------
performance objectives in its discretion which, depending on the extent to which
they are met, will determine the number or value of Performance Units or Shares
that will be paid out to the Participants. The Committee may set performance
objectives based upon the achievement of Company-wide, business unit, or
individual goals, or any other basis determined by the Committee in its
discretion. The time period during which the performance objectives must be met
shall be called the "Performance Period." Each Award of Performance Units or
Shares shall be evidenced by an Award Agreement that shall specify the
Performance Period, and such other terms and conditions as the Committee, in its
sole discretion, shall determine.
7.3.1 General Performance Objectives. The Committee may set
------------------------------
performance objectives based upon the achievement of Company-wide, business unit
or individual goals, or any other basis determined by the Committee in its
discretion.
7.3.2 Section 162(m) Performance Objectives. For purposes of
-------------------------------------
qualifying grants of Performance Units or Shares as "performance-based
compensation" under
14
<PAGE>
section 162(m) of the Code, the Committee, in its discretion, may determine that
the performance objectives applicable to Performance Units or Shares shall be
based on the achievement of Performance Goals. The Performance Goals shall be
set by the Committee on or before the latest date permissible to enable the
Performance Units or Shares to qualify as "performance-based compensation" under
section 162(m) of the Code. In granting Performance Units or Shares which are
intended to qualify under section 162(m) of the Code, the Committee shall follow
any procedures determined by it from time to time to be necessary or appropriate
to ensure qualification of the Performance Units or Shares under section 162(m)
of the Code (e.g., in determining the Performance Goals).
7.4 Earning of Performance Units and Performance Shares. After the
---------------------------------------------------
applicable Performance Period has ended, the Participant shall be entitled to
receive a payout of the number of Performance Units or Shares earned during the
Performance Period, depending upon the extent to which the applicable
performance objectives have been achieved. After the grant of a Performance
Unit or Share, the Committee, in its sole discretion, may reduce or waive any
performance objectives for Award, except with respect to Awards which are
intended to qualify as performance-based compensation under Section 162(m) of
the Code.
7.4.1 Special Rule for Retirement, Death and Disability.
-------------------------------------------------
Notwithstanding any contrary provision of the Plan, upon the Participant's
Termination of Service due to Retirement, death or Disability, one hundred
percent (100%) of any outstanding Performance Units or Shares shall be deemed to
be earned and shall be immediately payable to the Participant, or, in cases
where a Participant has received a target award of Performance Units or Shares,
one hundred percent (100%) of the target amount shall vest.
7.4.2 Special Rule for Change of Control. Notwithstanding any
----------------------------------
contrary provision of the Plan, immediately upon the occurrence of a Change of
Control that occurs prior to a Participant's Termination of Service, one hundred
percent (100%) of any outstanding Performance Units or Shares shall be deemed to
be earned and shall be immediately payable to the Participant, or, in cases
where a Participant has received a target award of Performance Units or Shares,
one hundred percent (100%) of the target amount shall vest. Notwithstanding the
preceding provisions of this Section 7.4.2, if the Committee determines that the
acceleration of vesting of Performance Units or Shares following a Change of
Control would cause a Change of Control transaction to be ineligible for pooling
of interests accounting under APB No. 16, which transaction (but for such
accelerated vesting) otherwise would have been eligible for such accounting
treatment, the Committee, in its sole discretion, may determine that no such
accelerated vesting shall occur.
7.5 Form and Timing of Payment. Subject to Section 7.5.1, payment of
--------------------------
earned Performance Units or Performance Shares shall be made as soon as
practicable after the expiration of the applicable Performance Period. The
Committee, in its sole discretion, may pay such earned Awards in cash, Shares or
a combination thereof.
7.5.1 Deferrals. The Committee, in its sole discretion, may permit
---------
a Participant to defer receipt of the payment of cash or the delivery of Shares
that would otherwise
15
<PAGE>
be delivered to a Participant under this Section 7.5. Any such deferral
elections shall be subject to such rules and procedures as shall be determined
by the Committee in its sole discretion.
7.6 Cancellation. On the date set forth in the Award Agreement, all
------------
unearned or unvested Performance Units or Performance Shares shall be forfeited
to the Company, and again shall be available for grant under the Plan.
SECTION 8
MISCELLANEOUS
8.1 No Effect on Employment or Service. Nothing in the Plan shall
----------------------------------
interfere with or limit in any way the right of the Company to terminate any
Participant's employment or service at any time, with or without cause. For
purposes of the Plan, transfer of employment of a Participant between the
Company and any one of its Affiliates (or between Affiliates) shall not be
deemed a Termination of Service. Employment with the Company and its Affiliates
is on an at-will basis only.
8.2 Participation. No Employee or Consultant shall have the right to
-------------
be selected to receive an Award under this Plan, or, having been so selected, to
be selected to receive a future Award.
8.3 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 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 Award 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.
8.4 Successors. All obligations of the Company under the Plan, with
----------
respect to Awards granted hereunder, 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.
8.5 Beneficiary Designations. If permitted by the Committee, a
------------------------
Participant under the Plan 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
16
<PAGE>
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 Award Agreement, any
unexercised vested Award may be exercised by the administrator or executor of
the Participant's estate.
8.6 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 8.5. 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, in a
manner specified by the Committee, transfer a Nonqualified Stock Option by bona
fide gift and not for any consideration, to (a) a member of the Participant's
immediate family, (b) a trust or other entity for the exclusive benefit of the
Participant and/or a member or members of the Participant's immediate family,
(c) a partnership, limited liability company or other entity whose only partners
or members are the Participant and/or a member or members of the Participant's
immediate family, or (d) a tax-qualified, not for profit organization.
8.7 No Rights as Stockholder. Except to the limited extent provided
------------------------
in Sections 6.6 and 6.7, 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 (or beneficiary).
8.8 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 federal, state, local and foreign
taxes (including the Participant's FICA obligation) required to be withheld with
respect to such Award (or exercise thereof). Notwithstanding any contrary
provision of the Plan, if a Participant fails to remit to the Company such
withholding amount within the time period specified by the Committee (in its
discretion), the Participant's Award may, in the Committee's discretion, be
forfeited and in such case the Participant shall not receive any of the Shares
subject to such Award.
8.9 Withholding Arrangements. The Committee, in its sole discretion
------------------------
and pursuant to such procedures as it may specify from time to time, may permit
or require a Participant to satisfy all or part of the tax withholding
obligations in connection with an Award by (a) having the Company withhold
otherwise deliverable Shares, or (b) delivering to the Company already-owned
Shares having a Fair Market Value equal to the amount required to be withheld.
The amount of the withholding requirement shall be deemed to include any amount
which the Committee determines, not to exceed the amount determined by using the
maximum federal, state, local or foreign jurisdiction marginal income tax rates
applicable to the Participant with respect to the Award on the date that the
amount of tax to be withheld is to be determined. The Fair Market Value of the
Shares to be withheld or delivered shall be determined as of the date that the
taxes are required to be withheld.
17
<PAGE>
SECTION 9
AMENDMENT, TERMINATION AND DURATION
9.1 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. 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. No Award
may be granted during any period of suspension or after termination of the Plan.
9.2 Duration of the Plan. The Plan shall commence on the date
--------------------
specified herein, and subject to Section 9.1 (regarding the Board's right to
amend or terminate the Plan), shall remain in effect thereafter. However,
without further stockholder approval, no Incentive Stock Option may be granted
under the Plan after ten (10) years from the Effective Date.
SECTION 10
LEGAL CONSTRUCTION
10.1 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.
10.2 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.
10.3 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.
10.4 Governing Law. The Plan and all Award Agreements shall be
-------------
construed in accordance with and governed by the laws of the State of
California, but without regard to its conflict of law provisions.
10.5 Captions. Captions are provided herein for convenience only,
--------
and shall not serve as a basis for interpretation or construction of the Plan.
18
<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: August __, 1999 By _________________________
Name: Charles F. Broom
Title: Vice President, Human Resources
19
<PAGE>
THE PMI GROUP, INC.
STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
(Amended and Restated as of August 16, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <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>
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 on the occasion of the Company's 3-for-2 stock
split, effective as of August 16, 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.
<PAGE>
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, 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
2
<PAGE>
appropriate to permit participation in the Plan by Non-Employee Directors who
are foreign nationals or employed outside of the United States.
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
150,000. 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 1,500 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 4,500 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 2,250
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 2,250 Shares, plus (b) an option to purchase
up to an additional 2,250 Shares (prorated based on the number of full months of
service which remain until the next Grant Date). A Director joining the
3
<PAGE>
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 shall receive on his or her initial Grant Date only
an Option to purchase 6,000 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 2,250 Shares (3,750 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 6,000 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 2,250
Shares (3,750 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;
4
<PAGE>
(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 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
5
<PAGE>
month period described therein. Upon exercise of an Option to which a 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 450 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 37.5 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 450 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 or she may be
a party or in which he
7
<PAGE>
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. RETIREMENT PLAN
(Amended and Restated as of February 17, 2000 -
Effective January 1, 1998)
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
INTRODUCTION.............................................................................................................. 1
ARTICLE 1 DEFINITIONS..................................................................................................... 2
1.01 "Accrued Benefit".............................................................................................. 2
1.02 "Active Participant"........................................................................................... 2
1.03 "Actuarial Equivalent"......................................................................................... 2
1.04 "Actuary"...................................................................................................... 2
1.05 "Adjustment Factor"............................................................................................ 2
1.06 "Affiliated Employer".......................................................................................... 2
1.07 "Applicable Interest Rate"..................................................................................... 2
1.08 "Beneficiary".................................................................................................. 2
1.09 "Benefit Accrual Service"...................................................................................... 2
1.10 "Benefit Commencement Date".................................................................................... 3
1.11 "Board" or "Board of Directors"................................................................................ 3
1.12 "Break in Service"............................................................................................. 3
1.13 "Code"......................................................................................................... 3
1.14 "Committee".................................................................................................... 3
1.15 "Compensation"................................................................................................. 3
1.16 "Covered Compensation"......................................................................................... 4
1.17 "Deferred Vested Benefit"...................................................................................... 4
1.18 "Early Retirement Benefit"..................................................................................... 4
1.19 "Early Retirement Date"........................................................................................ 4
1.20 "Effective Date"............................................................................................... 4
1.21 "Eligible Employee"............................................................................................ 4
1.22 "Employee"..................................................................................................... 5
1.23 "Employee's Age"............................................................................................... 5
1.24 "Employer"..................................................................................................... 5
1.25 "Employment Commencement Date"................................................................................. 5
1.26 "ERISA"........................................................................................................ 5
1.27 "Final Average Compensation"................................................................................... 5
1.28 "Fund"......................................................................................................... 5
1.29 "Funding Agent"................................................................................................ 6
1.30 "Highly Compensated Employee" and "Highly Compensated Former Employee"......................................... 6
1.31 "Hour of Service".............................................................................................. 6
1.32 "Joint Annuitant".............................................................................................. 6
1.33 "Joint & Survivor Annuity"..................................................................................... 6
1.34 "Leased Employee".............................................................................................. 6
1.35 "Limitation Year".............................................................................................. 6
1.36 "Maternity or Paternity Absence"............................................................................... 6
1.37 "Named Fiduciary".............................................................................................. 6
</TABLE>
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<S> <C>
1.38 "Normal Retirement Age"......................................................................................... 6
1.39 "Normal Retirement Benefit"..................................................................................... 6
1.40 "Normal Retirement Date"........................................................................................ 7
1.41 "One-Year Break in Service"..................................................................................... 7
1.42 "Participant"................................................................................................... 7
1.43 "Participating Employer"........................................................................................ 7
1.44 "Participation"................................................................................................. 7
1.45 "Period of Benefit Accrual Service"............................................................................. 7
1.46 "Period of Service"............................................................................................. 7
1.47 "Plan".......................................................................................................... 7
1.48 "Plan Sponsor".................................................................................................. 7
1.49 "Plan Year"..................................................................................................... 7
1.50 "Postponed Retirement Benefit".................................................................................. 7
1.51 "Postponed Retirement Date"..................................................................................... 7
1.52 "Predecessor Employer".......................................................................................... 8
1.53 "Predecessor to this Plan"...................................................................................... 8
1.54 "Qualified Joint & Survivor Annuity"............................................................................ 8
1.55 "Reemployment Date"............................................................................................. 8
1.56 "Retirement Date"............................................................................................... 8
1.57 "Severance Period".............................................................................................. 8
1.58 "Spouse"........................................................................................................ 8
1.59 "Termination"................................................................................................... 8
1.60 "Termination Date".............................................................................................. 8
1.61 "Trust"......................................................................................................... 9
1.62 "Trustee"....................................................................................................... 9
1.63 "Year of Benefit Accrual Service"............................................................................... 9
1.64 "Year of Eligibility Service"................................................................................... 9
1.65 "Year of Vesting Service"....................................................................................... 9
ARTICLE 2 SERVICE COUNTING RULES........................................................................................... 10
2.01 Period of Service -- General Rule.............................................................................. 10
2.02 Period of Service -- Computation............................................................................... 10
2.03 Eligibility Service............................................................................................ 11
2.04 Benefit Accrual Service........................................................................................ 11
2.05 Service -- General Rule........................................................................................ 11
ARTICLE 3 ELIGIBILITY FOR PARTICIPATION AND TRANSFERS..................................................................... 12
3.01 Eligibility to Become a Participant............................................................................ 12
3.02 Eligibility Service Disregarded................................................................................ 12
</TABLE>
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TABLE OF CONTENTS
(continued)
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3.03 Transfer to Another Plan...................................................................................... 13
ARTICLE 4 RETIREMENT ELIGIBILITY AND SUSPENSION OF BENEFITS.............................................................. 14
4.01 Retirement.................................................................................................... 14
4.02 Suspension of Benefits -- Postponed Retirement................................................................ 14
4.03 Suspension of Benefits -- Rehires............................................................................. 14
4.04 Suspension of Benefit Notice.................................................................................. 14
4.05 Section 203(a)(3)(B) Service.................................................................................. 14
4.06 Recommencement of Benefits.................................................................................... 15
4.07 Required Commencement at Age 70 1/2........................................................................... 15
4.08 Required Commencement -- Conditions........................................................................... 15
4.09 Blocking...................................................................................................... 15
ARTICLE 5 AMOUNT OF RETIREMENT BENEFIT................................................................................... 16
5.01 Normal Retirement Benefit..................................................................................... 16
5.02 Postponed Retirement Benefit.................................................................................. 18
5.03 Early Retirement Benefit...................................................................................... 18
5.04 Accrued Benefit -- Participant Who Has Attained Retirement Age................................................ 19
5.05 Accrued Benefit -- Who has Not Attained Retirement Age shall be:.............................................. 19
5.06 Adjustment for Suspension of Benefits......................................................................... 19
ARTICLE 6 REQUIRED BENEFIT LIMITATIONS................................................................................... 20
6.01 Code Section 415 Limits....................................................................................... 20
6.02 Special Limitation for 25 Highest-Paid Employees.............................................................. 21
6.03 Exceptions to Special Limitation.............................................................................. 22
6.04 Distributions Allowed if Security Furnished................................................................... 22
6.05 Plan Termination Limit........................................................................................ 22
6.06 Highly Compensated Employee or Former Employee................................................................ 22
6.07 Definitions................................................................................................... 23
ARTICLE 7 VESTING........................................................................................................ 24
7.01 General Rule.................................................................................................. 24
7.02 Vesting at Normal Retirement Age.............................................................................. 24
7.03 Vesting Before Normal Retirement Age.......................................................................... 24
7.04 Vesting Upon Plan Termination................................................................................. 24
7.05 Vesting Service Disregarded................................................................................... 24
7.06 Repayment of Cash-Out......................................................................................... 25
7.07 Vesting Service............................................................................................... 26
</TABLE>
-iii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<S> <C>
ARTICLE 8 QUALIFIED PRERETIREMENT SURVIVOR ANNUITY....................................................................... 27
8.01 Automatic Preretirement Spousal Death Benefit................................................................. 27
ARTICLE 9 FORMS OF BENEFIT............................................................................................... 29
9.01 Qualified Joint & Survivor Annuity............................................................................ 29
9.02 Involuntary Lump Sum Payment.................................................................................. 29
9.03 Right to Elect................................................................................................ 29
9.04 Election of Forms............................................................................................. 29
9.05 Optional Forms of Retirement Benefit.......................................................................... 30
9.06 Beneficiary................................................................................................... 31
9.07 Eligible Rollover Distributions............................................................................... 32
ARTICLE 10 FUNDING....................................................................................................... 34
10.01 Funding Agreement............................................................................................. 34
10.02 Non-Diversion of the Fund..................................................................................... 34
ARTICLE 11 PLAN ADMINISTRATION........................................................................................... 35
11.01 Appointment of Committee...................................................................................... 35
11.02 Powers and Duties............................................................................................. 35
11.03 Actions by the Committee...................................................................................... 36
11.04 Interested Committee Members.................................................................................. 36
11.05 Indemnification............................................................................................... 36
11.06 Conclusiveness of Action...................................................................................... 37
11.07 Payment of Expenses........................................................................................... 37
11.08 Claim Procedure............................................................................................... 37
ARTICLE 12 FUNDING POLICY AND CONTRIBUTIONS.............................................................................. 38
12.01 Employer Contributions........................................................................................ 38
12.02 Participant Contributions..................................................................................... 38
12.03 Contingent Nature of Contributions............................................................................ 38
ARTICLE 13 AMENDMENT, TERMINATION AND MERGER OF THE PLAN................................................................. 39
13.01 Right to Amend the Plan....................................................................................... 39
13.02 Right to Terminate the Plan................................................................................... 39
13.03 Allocation of Assets and Surplus.............................................................................. 39
13.04 Plan Mergers, Consolidations, and Transfers................................................................... 39
13.05 Amendment of Vesting Schedule................................................................................. 40
</TABLE>
-iv-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<S> <C>
ARTICLE 14 TOP-HEAVY PLAN PROVISIONS..................................................................................... 41
14.01 General Rule.................................................................................................. 41
14.02 Vesting Provision............................................................................................. 41
14.03 Minimum Benefit Provision..................................................................................... 41
14.04 Change in 415(e) Limits....................................................................................... 42
14.05 Coordination With Other Plans................................................................................. 42
14.06 Top-Heavy and Super Top-Heavy Plan Definition................................................................. 42
14.07 Key Employee.................................................................................................. 45
14.08 Non-Key Employee.............................................................................................. 46
14.09 Collective Bargaining Rules................................................................................... 46
ARTICLE 15 MISCELLANEOUS................................................................................................. 47
15.01 Limitation on Distributions................................................................................... 47
15.02 Limitation on Reversion of Contributions...................................................................... 47
15.03 Voluntary Plan................................................................................................ 47
15.04 Nonalienation of Benefits..................................................................................... 48
15.05 Inability to Receive Benefits................................................................................. 48
15.06 Missing Persons............................................................................................... 48
15.07 Military Service.............................................................................................. 48
15.08 Limitation of Third-Party Rights.............................................................................. 48
15.09 Invalid Provisions............................................................................................ 48
15.10 One Plan...................................................................................................... 49
15.11 Use and Form of Words......................................................................................... 49
15.12 Headings...................................................................................................... 49
15.13 Governing Law................................................................................................. 49
</TABLE>
-v-
<PAGE>
INTRODUCTION
------------
The PMI Group, Inc., having established The PMI Group, Inc. Retirement
Plan (the "Plan") effective as of April 1, 1995, and having amended the
Plan on three subsequent occasions, hereby amends and restates the Plan in
its entirety, effective as of January 1, 1998 (except as otherwise provided
herein). The Plan is intended to qualify under Section 401(a) of the
Internal Revenue Code of 1986, as amended.
<PAGE>
ARTICLE 1
DEFINITIONS
-----------
1.01 "Accrued Benefit" shall mean the amount of annual pension benefit, payable
---------------
as a straight life annuity, commencing at Normal Retirement Age, as shall
be considered accrued at any time for a Participant in accordance with the
provisions of Article 5.
1.02 "Active Participant" shall mean a Participant who also is an Eligible
------------------
Employee.
1.03 "Actuarial Equivalent" shall mean a benefit of equivalent current values
--------------------
to the benefit that would otherwise have been provided to the Participant,
determined on the basis of appropriate actuarial assumptions and methods
that may differ from those used in establishing Plan costs and
liabilities. Interest shall be eight percent per annum and mortality shall
be the "applicable mortality table" described in Section 417(e)(3) of the
Code; provided, however, that the interest used for determining lump sums
shall be the Applicable Interest Rate.
1.04 "Actuary" shall mean that individual who is an "enrolled actuary" as
-------
defined in Section 7701(a)(35) of the Code or that firm of actuaries that
has on its staff such an actuary, appointed by the Committee.
1.05 "Adjustment Factor" shall mean the cost of living adjustment factor
-----------------
prescribed by the Secretary of the Treasury under Section 415(d) of the
Code for years beginning after December 31, 1987, applied to such items
and in such manner as the Secretary shall prescribe.
1.06 "Affiliated Employer" shall mean the Plan Sponsor and any corporation,
-------------------
trade, or business, which, together with the Plan Sponsor, is a member of
a "controlled group of corporations," a group under "common control," or
an "affiliated service group," all as determined under Sections 414(b),
(c), (m), (o) of the Code, provided that solely for purposes of Section
6.01, the rule set forth in Section 415(h) of the Code also shall apply.
1.07 "Applicable Interest Rate" shall be the average daily interest rate on
------------------------
30-year Treasury securities for the fifth month preceding the start of
the Plan Year.
1.08 "Beneficiary" shall mean that person or persons or entity or entities
-----------
(including a trust) or estate that shall be entitled to receive benefits
payable pursuant to the provisions of this Plan by virtue of a
Participant's death, pursuant to the provisions of Article 9.
1.09 "Benefit Accrual Service" shall mean the period of service of a
-----------------------
Participant that is used to calculate the amount of the Participant's
Accrued Benefit, determined in accordance with Article 2.
2
<PAGE>
1.10 "Benefit Commencement Date" shall mean the first day of the month
-------------------------
coincident with or following the date of Termination or the date when the
Participant first becomes eligible to begin to receive benefits unless the
Participant elects to postpone receiving benefits until a later date, even
though the first payment may not actually have been made at that date.
1.11 "Board" or "Board of Directors" shall mean the Board of Directors of The
-----------------------------
PMI Group, Inc. except that any action that could be taken by the Board
may also be taken by a duly authorized Committee of the Board.
1.12 "Break in Service" shall mean a Termination followed by the completion
----------------
of a One-Year Break in Service.
1.13 "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.
1.14 "Committee" shall mean the committee of individuals appointed by the
---------
Board to be responsible for the operations and administration of the
Plan in accordance with the provisions of Article 11.
1.15 "Compensation" shall mean an Employee's wages, salaries, fees for
------------
professional services, and other amounts received (without regard to
whether or not an amount is paid in cash) for services actually rendered
in the course of employment with the Employer to the extent that amounts
are includable in gross income. Compensation shall also include any
remuneration that is currently excluded from the Participant's gross
income by reason of the application of Sections 125 and 129, 401(k) or
402(h)(1)(B) of the Code. Notwithstanding the foregoing, Compensation with
respect to any Employee shall exclude:
(a) Any compensation directly paid or payable as fringe benefits;
(b) Any contributions made by the Employer for or on account of the
Employees under this Plan, or under any other employee benefit plan
other than as specifically excepted herein;
(c) Any compensation paid or payable by reason of services performed
prior to the date the Employee becomes a Participant;
(d) Any compensation paid or payable by reason of services performed
after the date the Employee ceased to be a Participant;
(e) Any compensation paid as part of a severance agreement;
(f) Any compensation paid in lieu of vacation not taken;
3
<PAGE>
(g) Amounts in excess of $150,000, as indexed for cost of living in
accordance with Sections 401(a)(17) and 415(d) of the Code (e.g.,
$160,000 for 1998 and 1999, and $170,000 for 2000); and
(h) Any equity-based compensation (including, but not limited to, stock
options, restricted or unrestricted stock and performance shares)
under the Plan Sponsor's Equity Incentive Plan or any similar equity-
based plan or arrangement sponsored by an Affiliated Employer,
whether such compensation is paid in shares of stock or cash.
1.16 "Covered Compensation" shall mean, with respect to any Participant, the
--------------------
average of the contribution and benefit bases in effect under Section 230
of the Social Security Act for each year in the 35-year period ending with
the year in which the Participant attains Social Security retirement age,
as calculated under Section 401(l)(5)(e)(i) of the Code using the
unrounded values.
1.17 "Deferred Vested Benefit" shall mean the benefit to which a vested
-----------------------
Participant would be entitled after a Break in Service, as calculated in
accordance with Article 5.
1.18 "Early Retirement Benefit" shall mean the benefit to which a Participant
------------------------
would be entitled in the event of his retirement at his or her Early
Retirement Date, as calculated in accordance with Article 5.
1.19 "Early Retirement Date" shall mean the date on which a Participant
---------------------
becomes eligible and elects to retire with an early retirement benefit
under the Plan, as determined in accordance with Section 5.03.
1.20 "Effective Date" shall mean January 1, 1998, except as otherwise provided
--------------
herein; provided however, that any provision of the Plan required as a
result of the Small Business Job Protection Act of 1996, the Taxpayer
Relief Act of 1997, the Uruguay Round Agreements Act of 1994, the
Uniformed Services Employment and Reemployment Rights Act of 1994 or any
other applicable legislation, shall be effective as of the date specified
in such legislation.
1.21 "Eligible Employee" shall mean every Employee of an Employer except an
-----------------
Employee:
(a) who is an individual included in a unit of Employees whose
compensation and conditions of employment are established by the
terms of a collective bargaining agreement between an Employer and
employee representatives, as described in Section 7701(a)(46) of the
Code, where retirement benefits were the subject of good faith
bargaining, unless and until such collective bargaining agreement
provides that the Plan will apply to such individual; or
(b) who is an individual included in a unit or class of Employees who are
excluded from coverage by the Plan pursuant to the policies and
records of the Plan Sponsor; or
4
<PAGE>
(c) who, as to any period of time, is classified or treated by an
Employer as an independent contractor, a consultant, a Leased
Employee, or an employee of an employment agency or any entity other
than an Employer, even if such individual is subsequently determined
to have been a common-law employee of an Employer during such period.
1.22 "Employee" shall mean an individual who is (a) employed by an Employer or
--------
Affiliated Employer as a common-law employee, or (b) a Leased Employee.
However, if Leased Employees constitute less than 20% of the nonhighly
compensated work force (within the meaning of Section 414(n)(5)(c)(ii) of
the Code), the term "Employee" shall not include those Leased Employees
who are covered by a plan described in Section 414(n)(5) of the Code.
1.23 "Employee's Age" shall mean, for the purposes of calculations involving
--------------
the age of the Employee, the following. The Employee shall be assumed to
have been born on the first day of the month coincident with or following
the Employee's date of birth and shall be assumed to have lived through
the last day of the month in which the date of the event for which the
Employee's age is being calculated occurs. Using the above assumptions,
the Employee's Age shall be defined to be the number of months divided by
12 and rounded to three decimal places. Linear interpolation shall be
used, where necessary, in calculations involving the Employee's Age.
1.24 "Employer" shall mean The PMI Group, Inc. and any other Affiliated
--------
Employer that, with the consent of the Board, shall adopt this Plan for
its Eligible Employees, but only for the period during which consent is in
effect. "Employer" when used in this Plan shall refer to such adopting
entities either individually or collectively, as the context may require.
1.25 "Employment Commencement Date" shall mean the date on which the Employee
----------------------------
first is credited with an Hour of Service.
1.26 "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
-----
as amended. Reference to a specific section of ERISA shall include such
section, any valid regulation promulgated thereunder, and any comparable
provision of any future legislation amending, supplementing or superseding
such section.
1.27 "Final Average Compensation" shall mean the highest amount obtainable by
--------------------------
the annual Compensation of a Participant paid in any five consecutive
calendar years out of the last ten calendar years. In calculating Final
Average Compensation for a Participant who is being credited with Service
under Section 2.01(d) of this Plan (relating to a Participant receiving
benefits under a long-term disability plan), it shall be assumed that such
Participant continued to earn at the rate equal to his Final Average
Compensation as calculated under this Section on the date he first
commenced to receive Service credit under Section 2.01(d).
1.28 "Fund" shall mean any fund provided for in a trust arrangement or an
----
insurance contract or a combination of both, which is held by a Funding
Agent, to which contributions under the
5
<PAGE>
Plan on and after the Effective Date will be made, and out of which
benefits are paid to the Participants or otherwise provided for.
1.29 "Funding Agent" shall mean a Trustee or insurance company or any duly
-------------
appointed successor or successors selected to hold a Fund.
1.30 "Highly Compensated Employee" and "Highly Compensated Former Employee"
--------------------------- ----------------------------------
shall mean an Employee who is determined to be a Highly Compensated
Employee or Highly Compensated Former Employee under the provisions of
Article 6 of this Plan.
1.31 "Hour of Service" shall mean each hour for which an Employee is directly
---------------
or indirectly paid or entitled to payment by an Employer or Affiliated
Employer for the performance of duties in accordance with Department of
Labor Regulation Section 2530.200b-2(a)(1).
1.32 "Joint Annuitant" shall mean the Beneficiary who will receive retirement
---------------
benefits after the death of the Participant on the basis of the
provisions of a Joint & Survivor Annuity, as described in Article 9.
1.33 "Joint & Survivor Annuity" shall mean a retirement benefit under which
------------------------
equal monthly installments are payable during the joint lifetimes of the
retired Participant and the Joint Annuitant, and under which, upon the
earlier death of the retired Participant, the same amount, or 50 percent
as elected by the Participant prior to his Benefit Commencement Date,
continues to be paid to the Joint Annuitant for the Joint Annuitant's
lifetime.
1.34 "Leased Employee" shall mean an individual who is a leased employee
---------------
(within the meaning of Section 414(n)(2) of the Code) of an Affiliated
Employer.
1.35 "Limitation Year" shall mean the 12-month period ending on each December
---------------
31.
1.36 "Maternity or Paternity Absence" means an absence from employment by
------------------------------
reason of the pregnancy of an Employee, the birth of a child of the
Employee, the placement of a child in connection with the child's adoption
by the Employee, or the caring for a child during the period immediately
following the birth or adoption, which the Employee certifies to the
Employee.
1.37 "Named Fiduciary" shall mean a fiduciary designated as such under the
---------------
provisions of Article 11.
1.38 "Normal Retirement Age" shall mean the age at which the Employee reaches
---------------------
his Normal Retirement Date as defined in Section 1.41.
1.39 "Normal Retirement Benefit" shall mean the benefit to which a Participant
-------------------------
would be entitled in the event of the Participant's retirement on the
Participant's Normal Retirement Date, as calculated in accordance with
Article 5.
6
<PAGE>
1.40 "Normal Retirement Date" shall mean the first day of the month
----------------------
coincident with or following the Participant's 65th birthday.
1.41 "One-Year Break in Service" shall mean a Severance Period of 12
-------------------------
consecutive months.
1.42 "Participant" shall mean any Eligible Employee who becomes a Participant
-----------
in the Plan pursuant to Article 3 and shall include any individual who has
separated from Service or ceased to be an Eligible Employee and for whom
there is still a liability under the Plan.
1.43 "Participating Employer" shall mean any Affiliated Employer that has
----------------------
elected, with the approval of the Board, to participate in the Plan as to
some or all of its Eligible Employees by adopting this Plan and the
funding agreement described in Section 10.01 of this Plan. Such employees
shall be considered Eligible Employees under the Plan and, for the
purposes of their benefits under the Plan, the Participating Employer
shall be included in the definition of Employer.
1.44 "Participation" shall mean Service while an Active Participant.
-------------
1.45 "Period of Benefit Accrual Service" shall mean as to each Participant,
---------------------------------
each period beginning on the date of his or her commencement as an
Eligible Employee and ending on his or her next Termination Date.
1.46 "Period of Service" shall mean as to each Employee (a) each period
-----------------
beginning on his or her Employment Commencement Date or Reemployment Date
and ending on his or her next Termination Date, and (b) to the extent not
counted under (a), each absence of twelve (12) months or less from service
with all Employers and Affiliated Employers, which began by reason of, or
within which occurred, such Employee's resignation, retirement, discharge
or death. For purposes of applying this Section 1.46, an Employee's Period
of Service shall include periods of employment with any other employer
which is a "predecessor employer" of an Affiliated Employer (within the
meaning of Section 414(a) of the Code).
1.47 "Plan" shall mean The PMI Group, Inc. Retirement Plan, as embodied herein,
----
and any amendments thereto.
1.48 "Plan Sponsor" shall mean The PMI Group, Inc.
------------
1.49 "Plan Year" shall mean the period beginning January 1 and ending
---------
December 31.
1.50 "Postponed Retirement Benefit" shall mean the benefit to which a
----------------------------
Participant would be entitled in the event of his retirement after his
Normal Retirement Date, as calculated in accordance with Article 5.
1.51 "Postponed Retirement Date" shall mean the first day of the calendar
-------------------------
month coincident with or next following the Participant's Termination
Date, if such date is later than the Participant's Normal Retirement Date.
7
<PAGE>
1.52 "Predecessor Employer" shall mean, with respect to an Employee, one or
--------------------
more of the following organizations or units, if the Employee was
previously employed by them: PMI Mortgage Insurance Company, American
Pioneer Title Insurance Company, PMI Mortgage Services Company, and PMI
Reinsurance Company.
1.53 "Predecessor to this Plan" shall mean any plan for which this Plan is a
------------------------
restatement, any plan that has been merged into this Plan or any
Predecessor to this Plan, or any other plan sponsored by an entity that
became an Affiliated Employer by acquisition or merger, and that adopted
this Plan or a Predecessor to this Plan for any of its employees who had
been participants in such other plan.
1.54 "Qualified Joint & Survivor Annuity" shall mean, for a married
----------------------------------
Participant, a Joint and Survivor Annuity with the Participant's Spouse as
Joint Annuitant and a 50 percent survivor benefit. For a single
Participant it shall mean a benefit payable in the form of an annuity for
the life of the Participant. The Qualified Joint & Survivor Annuity for a
married Participant shall be at least the Actuarial Equivalent, determined
under the applicable factors of Article 9 of the Participant's Accrued
Benefit or, if greater in Actuarial Equivalent value, any optional form of
benefit then available to the Participant under the Plan.
1.55 "Reemployment Date" shall mean the date on which an Employee first
-----------------
completes an Hour of Service after a Termination Date.
1.56 "Retirement Date" shall mean a Participant's Normal, Early or Postponed
---------------
Retirement Date.
1.57 "Severance Period" shall mean each period beginning on an Employee's
----------------
Termination Date and ending on his or her next Reemployment Date.
1.58 "Spouse" shall mean the person to whom the Participant is legally married
------
on the date the Participant receives the Participant's benefit payment
from the Plan, or the Participant's date of death, if earlier.
1.59 "Termination" shall mean the cessation of active employment with the
-----------
Employer or an Affiliated Employer.
1.60 "Termination Date" shall mean the earlier of (a) the date on which an
----------------
Employee dies, resigns, retires or is discharged from employment with all
Employers and Affiliated Employers, or (b) the first anniversary of the
first date of a period in which an Employee remains absent from service
with all Employers and Affiliated Employers for any reason other than his
or her death, resignation, retirement or discharge, or if the absence is
on account of a Maternity or Paternity Absence, the second anniversary of
the first date of the Employee's absence from service with all Employers
and Affiliated Employers. In accordance with Treas. Reg. Section 1.410(a)-
9, the period between the first and second anniversaries of absence from
service as the result of Maternity or Paternity Absence (the "Second
Year") is neither a Period of Service nor a Severance Period. Accordingly,
an Employee shall receive no credit for a Year of Benefit Accrual Service,
a Year of Eligibility
8
<PAGE>
Service or a Year of Vesting Service during the Employee's Second Year,
but the Employee's Severance Period shall not commence until the end of
the Second Year.
1.61 "Trust" shall mean any trust established under an agreement between the
-----
Employer and a Trustee under which any portion of the Fund is held, and
shall include any and all amendments to the Trust agreement.
1.62 "Trustee" shall mean any trustee holding any portion of the Fund under a
-------
Trust agreement forming a part of the Plan.
1.63 "Year of Benefit Accrual Service" shall mean a 12-month Period of
-------------------------------
Benefit Accrual Service. Subject to Section 2.04, an Employee's total
number of Years of Benefit Accrual Service shall be calculated by assuming
that the Employee (a) was hired on the first day of the month coincident
with or following the Employee's actual date of hire, and (b) incurred a
Termination Date on the last day of the month in which the Employee's
actual Termination Date occurs. Years of Benefit Accrual Service shall be
calculated by dividing the number of months determined in the preceding
sentence by 12, and rounding down to three decimal places. Linear
interpolation shall be used where necessary.
1.64 "Year of Eligibility Service" shall mean a 12-month Period of Service.
---------------------------
Subject to Section 3.02, and Employee's total number of Years of
Eligibility Service shall be calculated by assuming that the Employee (a)
was hired on the first day of the month coincident with or following the
Employee's actual date of hire, and (b) incurred a Termination Date on the
last day of the month in which the Employee's actual Termination Date
occurs. Years of Eligibility Service shall be calculated by dividing the
number of months determined in the preceding sentence by 12, and rounding
down to three decimal places. Linear interpolation shall be used where
necessary.
1.65 "Year of Vesting Service" shall mean a 12-month Period of Service.
-----------------------
Subject to Section 7.05, an Employee's total number of Years of Vesting
Service shall be calculated by assuming that the Employee (a) was hired on
the first day of the month coincident with or following the Employee's
actual date of hire, and (b) incurred a Termination Date on the last day
of the month in which the Employee's actual Termination Date occurs. Years
of Vesting Service shall be calculated by dividing the number of months
determined in the preceding sentence by 12, and rounding down to three
decimal places. Linear interpolation shall be used where necessary.
9
<PAGE>
ARTICLE 2
SERVICE COUNTING RULES
----------------------
2.01 Period of Service -- General Rule. An Employee shall be credited with a
---------------------------------
Period of Service for:
(a) Each period for which a person is directly or indirectly paid, or
entitled to payment, by an Affiliated Employer or a Predecessor
Employer for the performance of duties. This Service shall be
credited to the person during the appropriate Computation Period in
which the duties are performed;
(b) Each period for which a person is directly or indirectly paid, or
entitled to payment, by an Affiliated Employer or a Predecessor
Employer for reasons other than for the performance of duties (such
as vacation, holiday, illness, incapacity including disability, jury
duty, military duty, leave of absence, or a leave of absence pursuant
to the Family Leave Act, or layoff). This Service shall be credited
to the Employee during the Computation Period in which the
nonperformance of duties occurs, but the total credit for any single
continuous period during which the employee performs no duties
(whether or not in a single Computation Period) of such Service shall
not exceed 501 hours. The computation of non-work hours described in
this subsection will be computed in accordance with the provisions of
the Department of Labor Regulation Section 2530.200b-2;
(c) Each period for which back pay, irrespective of mitigation of
damages, has been either awarded or agreed to by an Affiliated
Employer or Predecessor Employer. This Service will be credited to
the person for the Plan Year to which the award or agreement
pertains;
(d) Each period for which an Employee is not paid or entitled to
payment but during which he normally would have performed duties for
a Participating Employer during any period for which he is eligible
to receive benefits under the long-term disability plan of a
Participating Employer; and
(e) Each period for which an Employee is not paid or entitled to pay but
during which the Employee is absent for a period of military service
for which reemployment rights are protected by law, but only if the
Employee returns to employment within the time required by law.
2.02 Period of Service -- Computation. For the purpose of calculating Service
--------------------------------
under the Plan, an Employee shall be assumed to have been hired on the
first day of the month coincident with or following the Employee's date of
hire and shall be assumed to have been terminated on the last day of the
month in which the Employee's date of termination or retirement occurs.
10
<PAGE>
Using the above assumptions, Service shall be defined to be the number of
months of Service divided by 12 and rounded to three decimal places.
Linear interpolation shall be used, where necessary, in calculations
involving Service.
2.03 Eligibility Service. An Eligible Employee shall be credited with a Year
-------------------
of Eligibility Service if the Participant performs 12 months of Service
during the Computation Period commencing with the date of the
Participant's hire or most recent rehire following a Break in Service or,
if the Participant fails to perform 12 months of Service in that
Computation Period, the Participant shall be credited with a Year of
Eligibility Service if the Participant performs 12 months of Service in
any Computation Period commencing after his hire or rehire date. If a
Participant incurs a Break in Service, Eligibility Service prior to his
Termination Date shall not be counted until the Participant performs a
Year of Eligibility Service following his Break in Service.
2.04 Benefit Accrual Service. Benefit Accrual Service shall include any
-----------------------
Period of Service except in the case of an employee who was a participant
in the Allstate Retirement Plan on April 1, 1995. Such prior Allstate
Retirement Plan participant shall not receive any Benefit Accrual Service
prior to May 1, 1995. Employees hired by the Employer between May 2, 1994
and April 30, 1995 shall begin receiving Benefit Accrual Service on their
original hire date with the Employer and will participate in the Plan one
year from their original hire date with the Employer.
2.05 Service -- General Rule. A Participant shall be credited with a Year of
-----------------------
Service for purposes of this Plan other than for determining eligibility
if the Participant performs 12 months of Service during a Plan Year,
except that a Year of Service shall not be credited for any Plan Years
prior to a Break in Service in any of the following cases:
(a) Rehire Rule -- The Participant has not been credited with one Year of
-----------
Eligibility Service following his date of rehire, or
(b) Cash-Out Rule -- The Participant has previously received a
-------------
distribution of the present value of his entire nonforfeitable
benefit, following his Termination Date, unless the Participant has
repaid in full the distribution, with interest in accordance with
Section 7.06 of this Plan. For the purposes of this rule, a
Participant who is not entitled to a Deferred Vested Benefit upon his
Termination Date shall be considered to be cashed out upon his
Termination Date, or
(c) Rule of Parity -- The Participant was not entitled to a Deferred
--------------
Vested Benefit at his Termination Date and has incurred a number of
consecutive One-Year Breaks in Service equal to the greater of five or
the number of Years of Service credited to him prior to the first of
such consecutive One-Year Breaks in Service.
11
<PAGE>
ARTICLE 3
ELIGIBILITY FOR PARTICIPATION AND TRANSFERS
-------------------------------------------
3.01 Eligibility to Become a Participant. Each individual who was a
-----------------------------------
Participant in the Plan on the day before the Effective Date and is an
Eligible Employee on the Effective Date, shall automatically continue as a
Participant on the Effective Date. Each other Eligible Employee shall
become a Participant in the Plan on the first day of the calendar month
that follows the first date on which he has completed one Year of
Eligibility Service.
3.02 Eligibility Service Disregarded. The Years of Eligibility Service of a
-------------------------------
terminated Participant who is reemployed shall be determined in
accordance with the following rules.
(a) One-Year Break in Service Before Completing One Year of Eligibility
-------------------------------------------------------------------
Service. If an Employee incurs a One-Year Break in Service before
-------
completing one Year of Eligibility Service, he or she shall be
treated as a new Employee, upon subsequent reemployment, for the
purpose of determining eligibility for participation in the Plan.
Thus, such an Employee must satisfy the requirements of Section 3.01
after his or her Reemployment Date in order to become a Participant
in the Plan, and any service before the One-Year Break in Service
shall be disregarded.
(b) Reemployment of Terminated Participants.
---------------------------------------
(1) Prior Service Disregarded. If a Participant incurs a One-Year
-------------------------
Break in Service, and his or her vested percentage interest in
his or her Accrued Benefit under the Plan was 0% when the One-
Year Break in Service began, and the number of his or her
consecutive One-Year Breaks in Service exceeds the greater of
(i) the number of his or her Years of Vesting Service, or (ii)
five (5), then he or she must again satisfy the requirements of
Section 3.01 after his or her Reemployment Date in order to
become a Participant in the Plan, and any service before the
One-Year Break in Service shall be disregarded for purposes of
eligibility.
(2) Prior Service Counted. If a Participant does not incur a
---------------------
One-Year Break in Service or incurs a One-Year Break in Service
and:
(i) his or her vested percentage interest in his or her
Accrued Benefit under the Plan was greater than 0% when
the One-Year Break in Service began, or
(ii) the number of his or her consecutive One-Year Breaks in
Service does not exceed the greater of (A) the number of
his or her Years of Vesting Service, or (B) five (5), then
he or she shall become a Participant in the
12
<PAGE>
Plan again on his or her Reemployment Date (provided he
or she is reemployed as an Eligible Employee).
3.03 Transfer to Another Plan. A Participant who ceases to be an Eligible
------------------------
Employee without incurring a Termination shall cease to accrue benefits
under this Plan as of the date on which he ceased to be an Eligible
Employee, and his Accrued Benefit will be frozen as of the close of the
Plan Year in which he ceases to be an Eligible Employee, but he shall
continue to be a Participant for other purposes under the Plan and, if he
continues to remain in the employ of an Affiliated Employer, shall
continue to earn Vesting Service.
13
<PAGE>
ARTICLE 4
RETIREMENT ELIGIBILITY AND SUSPENSION OF BENEFITS
-------------------------------------------------
4.01 Retirement. A Participant who has reached his Retirement Date shall be
----------
entitled to retire from employment with all Employers and Affiliated
Employers and receive benefits in accordance with Article 5.
4.02 Suspension of Benefits -- Postponed Retirement. If a Participant's Service
----------------------------------------------
continues after his Normal Retirement Age and such Service after his
Normal Retirement Age constitutes Section 203(a)(3)(B) Service (as defined
in Section 4.05), such Participant's benefits will be suspended, provided
that the Committee notifies him that his benefits have been suspended in
the manner provided by Section 4.04 of this Article.
4.03 Suspension of Benefits -- Rehires. If a person receiving benefits
---------------------------------
hereunder is rehired by the Employer, payment of those benefits will be
suspended as long as the rehired Employee remains employed with the
Employer, provided such Service constitutes Section 203(a)(3)(B) Service
(as defined in Section 4.05) and provided that the Committee notifies him
that benefits have been suspended, in the manner provided by Section 4.04
of this Article.
4.04 Suspension of Benefit Notice. The notice required under Sections 4.02 or
----------------------------
4.03 of this Article shall contain:
(a) a description of the specific reasons for the suspension of benefit
payments,
(b) a general description of the Plan's provisions relating to the
suspension,
(c) a copy of such provisions,
(d) a statement to the effect that applicable Department of Labor
regulations may be found in Section 2530.203-3 of the Code of Federal
Regulations, and
(e) a description of the Plan's procedure for affording a review of such
suspension.
Such notice shall be furnished by personal delivery or first-class mail
during the first calendar month in which payments are discontinued.
4.05 Section 203(a)(3)(B) Service. In accordance with Department of Labor
----------------------------
Regulations Section 2530.203-3, "Section 203(a)(3)(B) Service" shall be
determined on a monthly basis and an Employee shall be deemed to be in
Section 203(a)(3)(B) Service in any month in which he shall perform 40 or
more Hours of Service as defined in Department of Labor Regulations
Section 2530.200b - 2(a)(1) and (2). An Employee shall have the right to
-14-
<PAGE>
contest the determination of his status in accordance with the procedures
set forth in Section 11.08 of this Plan.
4.06 Recommencement of Benefits. Benefits that are suspended in accordance with
--------------------------
Section 4.02 or 4.03 of this Article shall be paid in any month in which
the Participant is not considered to be in Section 203(a)(3)(B) Service.
If an Employee whose benefits are suspended continues or recommences
Participation in this Plan and thereafter again becomes entitled to
benefits hereunder by virtue of a new Early, Normal, or Postponed
Retirement, previously suspended benefits shall not be recommenced, and
the Participant shall be entitled only to his Early, Normal, or Postponed
Retirement Benefit, as of the Participant's new Early, Normal, or
Postponed Retirement Date, adjusted as provided in Section 5.06.
4.07 Required Commencement at Age 70 1/2. A Participant not currently receiving
-----------------------------------
benefits under this Plan who attains age 70 1/2 shall commence receiving
benefits as if the Participant had retired on December 31 of the calendar
year in which the Participant attains age 70 1/2, and had a Benefit
Commencement Date of April 1 of the following calendar year. Each December
31 thereafter, and upon the Participant's later actual Postponed
Retirement Date, the Participant benefit payment shall be recalculated
using the Participant's actual Benefit Accrual Service and actual Final
Average Compensation.
4.08 Required Commencement -- Conditions. Notwithstanding any provision of this
-----------------------------------
Plan to the contrary, all distributions under the Plan shall be made in
accordance with the requirements of Section 401(a)(9) of the Code and the
regulations thereunder, including the incidental death benefit
requirements of Treasury Regulation Section 1.401(a)(9)-2. The provisions
of this Section override any distribution options under the Plan if
inconsistent with the requirements of Section 401(a)(9) of the Code.
4.09 Blocking. In the event of a sale of a division or subsidiary of the
--------
Employer, a Participant shall not be considered to have attained his
Early, Normal or Deferred Retirement Date until he shall have separated
from service from the division or subsidiary that was sold by the
Employer. In such event, Service with the division or subsidiary that was
sold shall be considered Service with the Employer but shall not be
Benefit Accrual Service, and all provisions of this Plan shall apply
accordingly.
-15-
<PAGE>
ARTICLE 5
AMOUNT OF RETIREMENT BENEFIT
----------------------------
5.01 Normal Retirement Benefit.
-------------------------
(a) A Participant's Normal Retirement Benefit shall be an annual annuity
for the life of the Participant, payable monthly, commencing upon
the Participant's Normal Retirement Date, equal to a Participant's
Base Benefit added to the Participant's Additional Benefit, as
described below:
(1) "Base Benefit" is equal to 1.55 percent of a Participant's
------------
Final Average Annual Compensation multiplied by the
Participant's Years of Benefit Accrual Service.
(2) "Additional Benefit" is equal to 0.65 percent of the excess of
-----------------
the Final Average Compensation over the Participant's Covered
Compensation, multiplied by the Participant's Years of Benefit
Accrual Service up to a maximum of 35 years.
(3) "Allstate Benefit." A Participant with a frozen benefit fro
----------------
the Allstate Retirement Plan will also receive an additional
benefit equal to the following: The PMI Final Average
Compensation at the time of termination divided by the Average
Annual Allstate Compensation, minus one, times the frozen
Allstate benefit.
(b) Beefed-Up Benefit. The potentially higher benefit described in this
-----------------
Section 5.01(b) is applicable to a Participant (if at all) only if
the Participant is neither a Highly Compensated Employee nor a
Highly Compensated Former Employee. A Participant who retires from
employment with all Employers and Affiliated Employers both (1)
before December 31, 1999, and (2) while at least age 55 but less
than age 60, shall have his or her Base Benefit and Additional
Benefit (as described in Section 5.01(a)) recalculated as provided
in this Section 5.01(b). If such recalculated Base Benefit and
Additional Benefit exceeds the Base Benefit and Additional Benefit
as originally calculated under Section 5.01(a), the Participant
shall be entitled to the recalculated Base Benefit and Additional
Benefit.
(1) 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 his or her
Compensation in the last twelve months prior to retirement.
-16-
<PAGE>
(2) For a Participant who was hired at Allstate before 1978, his
or her Base Benefit and Additional Benefit will be first
decreased by (i) and then increased by (ii):
(i) 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 pre-1978 benefit under the Allstate Retirement Plan.
(ii) 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 post-1988 benefit under the Allstate Retirement
Plan.
(c) Bridge Benefit. The benefit described in this Section 5.01(c) is
--------------
applicable to a Participant (if at all) only if the Participant is
neither a Highly Compensated Employee nor a Highly Compensated
Former Employee. If a Participant retires from employment with all
Employers and Affiliated Employers after attaining at least age 55
and 20 years of combined service with the Employers and Allstate,
but did not have 20 years of service with Allstate on April 1, 1995,
the Participant shall be entitled to a temporary annuity equal to:
(A) as reduced in (B) payable for the period described in (C) below:
(A) The monthly life annuity payable from the Allstate Retirement
Plan starting at the Participant's Normal Retirement Date
under the Allstate Retirement Plan. (This is the accrued
Allstate benefit on April 1, 1995, as communicated by
Allstate.)
(B) 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 under the
Allstate Retirement Plan.
(C) The monthly life annuity will be paid starting on the first
day of the month following retirement under the Plan until the
earlier of the Participant's death or the date on 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 (B) 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 (B) will be further reduced
one percent.
-17-
<PAGE>
5.02 Postponed Retirement Benefit. A Participant who retires on the Postponed
----------------------------
Retirement Date shall receive a Postponed Retirement Benefit that, subject
to the provisions of the optional retirement benefit and the Joint &
Survivor Annuity, shall consist of a monthly payment on the first day of
each calendar month commencing with the Participant's Postponed Retirement
Benefit Date, and ending with the last such payment before the
Participant's death, equal to the Participant's Normal Retirement Benefit
but with Benefit Accrual Service, Compensation, and Final Average
Compensation determined as of the Participant's Postponed Retirement Date.
5.03 Early Retirement Benefit. A Participant who retires from employment with
------------------------
all Employers and Affiliated Employers prior to the Participant's Normal
Retirement Date but on or after attaining age 55, and who has completed at
such time ten Years of Benefit Accrual Service, shall be entitled to an
Early Retirement Benefit of an annual annuity for life, payable monthly,
commencing at the date that would have been the Participant's Normal
Retirement Date. At the election of the Participant, the Participant may
receive the Participant's Early Retirement Benefit as an annuity
commencing at the Participant's Early Retirement Date, or at any date
thereafter, in a reduced amount calculated by multiplying the Normal
Retirement Benefit (based upon the Participant's years of credit Service
and Final Average Compensation as of the Participant's Early Retirement
Date) calculated under Section 5.01 by the appropriate factor as defined
below and using linear interpolation for partial years as necessary.
The Base Benefit as described in Section 5.01 will be reduced by 4.8
percent for each year before the Base Retirement Age as defined in the
following table:
<TABLE>
<CAPTION>
Year of Birth Base
Retirement
Age
<S> <C>
Before 1942 Age 60
1942 - 1944 Age 61
1945 - 1947 Age 62
1948 - 1950 Age 63
1951 - 1953 Age 64
After 1953 Age 65
</TABLE>
The Additional Benefit as described in Section 5.01 will be reduced by
eight percent for each year of early retirement from age 62 to age 65 and
by four percent for each year of early retirement from age 55 to age 62.
-18-
<PAGE>
Notwithstanding the foregoing, Participants electing early retirement prior
to December 31, 1999, and prior to their 60th birthday will be eligible for
the "Beef Up" provision. Under this provision, a Participant is eligible
for a "Beefed Up" benefit if the Participant's date of retirement is one or
more calendar years earlier than the earlier of (a) the Participant's 60th
birthday, or (b) December 31, 1999. Under the provision, the Participant's
Final Average Compensation will be the greater of that which is calculated
under Section 1.28 or that which would be calculated under Section 1.28 if
the Participant continued to work until the earlier of his 60th birthday or
December 31, 1999, and earned in each future year the same as that which he
earned in his final full year of employment.
5.04 Accrued Benefit -- Participant Who Has Attained Retirement Age. The
--------------------------------------------------------------
Participant's Accrued Benefit shall be the Early, Normal, or Postponed
Retirement Benefit to which the Participant would be entitled if he were
to retire at such time, payable as an annuity for life commencing at
Normal Retirement Age or, if the Participant has attained his Normal
Retirement Age, as of the first of the calendar month coincident with or
next following the date of calculation.
5.05 Accrued Benefit -- Who has Not Attained Retirement Age shall be:
---------------------------------------------------------------
(a) Deferred Vested Benefit. A Participant who has incurred a Break in
-----------------------
Service shall be entitled to an annual pension benefit, payable as a
straight life annuity commencing at Normal Retirement Date equal to
the Participant's Accrued Benefit on his Termination Date, provided
that the Participant is vested under the provisions of Article 7,
unless such Participant has been cashed out pursuant to Section 9.02.
(b) Deferred Vested Benefit -- Early Commencement. A Participant entitled
---------------------------------------------
to a Deferred Vested Benefit who has satisfied the Service
requirement for entitlement to an Early Retirement Benefit and who
subsequently satisfies the age requirements for entitlement to an
Early Retirement Benefit shall be entitled to elect to receive his
Deferred Vested Benefit at a date prior to the date on which it
otherwise would be payable, in an Actuarial Equivalent amount
calculated in accordance with the factors defined below and using
linear interpolation for partial years as necessary:
The Base Benefit and Additional Benefit as described in Section 5.01
will be reduced by eight percent for each year the benefit commences
prior to age 65 but after age 60 and an additional four percent for
each year the benefit commences prior to age 60.
5.06 Adjustment for Suspension of Benefits. The otherwise payable Early,
-------------------------------------
Normal, or Postponed Retirement Benefit of any Participant who had
previously become entitled to an Early, Normal, or Postponed Retirement
Benefit, but whose benefit payments were suspended pursuant to the
provisions of Article 4, shall be reduced by the Actuarial Equivalent of
any payments previously made to him.
-19-
<PAGE>
ARTICLE 6
REQUIRED BENEFIT LIMITATIONS
----------------------------
6.01 Code Section 415 Limits. The benefits otherwise payable to a Participant,
-----------------------
or a Beneficiary under this Plan and, where relevant, the Accrued Benefit
of a Participant, shall be limited to the extent required, and only to the
extent required, by the provisions of Section 415 of the Code and rulings,
notices and regulations issued thereunder. To the extent applicable,
Section 415 of the Code and rulings, notices, and regulations issued
thereunder are hereby incorporated by reference into this Plan. In
calculating these limits, the following rules shall apply:
(a) Actuarial Equivalencies -- Effective as of April 1, 1995:
-----------------------
(1) For purposes of determining the actuarial equivalent of the
limitation described in Section 415(b)(2)(C) of the Code (and,
except as provided in subparagraph (a)(2) of this Section 6.01,
for purposes of determining the actuarial equivalent of the
benefit as described in Section 415(b)(2)(B) of the Code), the
mortality assumption used shall be the "applicable mortality
table" described in Section 417(e)(3) of the Code and the
interest rate assumption used shall be not less than the greater
of 5% or the interest rate specified in Section 1.03.
(2) For purposes of determining the actuarial equivalent of the
benefit described in Section 415(b)(2)(B) of the Code for any
form of benefit subject to Section 417(e)(3) of the Code, the
mortality assumption used shall be the "applicable mortality
table" described in Section 417(e)(3) of the Code and the
interest rate assumption used shall be not less than the greater
of the Applicable Interest Rate or the interest rate specified
in Section 1.03.
(3) For purposes of determining the actuarial equivalent of the
limitation described in Section 415(b)(2)(D) of the Code, the
mortality assumption used shall be the "applicable mortality
table" described in Section 417(e)(3) of the Code and the
interest rate assumption used shall be not greater than the
lesser of 5% or the interest rate specified in Section 1.03.
(b) Cost-of-Living Adjustments -- If the applicable Section 415 limits
--------------------------
are increased after a benefit is in pay status by virtue of an
adjustment to those limits reflecting a change in the cost-of-living
index, benefit payments to a Participant or his Beneficiary shall be
increased automatically to the maximum extent permitted under the
revised limits. This increase shall occur only to the extent it would
not cause the benefit to exceed the benefit to which the Participant
or Beneficiary would have been entitled in the absence of the Section
415 limits.
-20-
<PAGE>
(c) Surviving Spouse Payments -- If, upon the death of a Participant
-------------------------
whose benefits were limited under this Section 6.01, the
Participant's surviving Spouse shall be entitled to a benefit payment
smaller than that which was payable while the Participant was alive,
the benefit payments to the spouse shall equal the lesser of (1) and
(2) below, where:
(1) is the benefit payment that would be payable to the surviving
Spouse if benefits under this Plan had not been limited by this
Section 6.01, and
(2) is the benefit payment that would be payable to the surviving
Spouse if the benefit provided under this plan had been a Joint
& Survivor Annuity with survivor benefits equal to 50 percent of
the amount payable while the Participant was alive, in an amount
equal to the maximum limitations provided under this Section
6.01.
(d) Reduction for Participation in Defined Contribution Plans -- For any
---------------------------------------------------------
Limitation Year beginning prior to December 31, 1999, if the
Participant is, or ever has been, covered under one or more qualified
defined contribution plans maintained by the Employer or an
Affiliated Employer, the combined plan limits of Section 415(e) of
the Code shall be calculated by reducing the limits applicable to
this Plan first, prior to restricting annual additions to any such
defined contribution plan. This subsection (d) shall have no force or
effect for any Limitation Year beginning after December 31, 1999.
(e) Reduction for Participation in Defined Benefit Plans -- If the
----------------------------------------------------
Participant is entitled to a benefit under any defined benefit plan
that is, or ever has been, maintained by the Employer or an
Affiliated Employer, the limits under this Section 6.01 shall be
applied to the combined benefits payable and the benefit payable
hereunder shall be reduced to the extent necessary to make the
combined benefits meet the limits under this Section 6.01.
(f) Average Compensation -- To calculate Average Compensation for an
--------------------
Employee's high three years of service, compensation shall be the
Employee's Compensation as defined in Section 1.15, and the three
years' average shall be calculated using consecutive calendar years.
6.02 Special Limitation for 25 Highest-Paid Employees. The provision of this
------------------------------------------------
Section 6.02 shall apply to the 25 highest-paid Highly Compensated
Employees or Highly Compensated Former Employees for a Plan Year. Subject
to Section 6.03, if a benefit becomes or is payable for a Plan Year to
such an Employee, it cannot exceed an amount equal to the payments that
would be made during the Plan Year on behalf of the Employee under a
single life annuity that is the Actuarial Equivalent of the sum of the
Employee's Accrued Benefit and any other benefits under the Plan.
-21-
<PAGE>
6.03 Exceptions to Special Limitation. The provisions of Section 6.02 shall not
--------------------------------
apply if: (a) the value of the benefits that would be payable to an
Employee described in Section 6.02 are less than one percent of the value
of current liabilities, or (b) the value of the assets held in the Fund
equals or exceeds, immediately after payment of a benefit to an Employee
described in Section 6.02, 110 percent of the value of current
liabilities. For purposes of this Section, the value of current
liabilities shall be as defined in Section 412(l)(7) of the Code.
6.04 Distributions Allowed if Security Furnished. A benefit that is restricted
-------------------------------------------
pursuant to Section 6.02 may be nevertheless distributed if the Employee
is obligated to repay the Plan, in the event of a termination of the Plan,
any amount necessary for the distributions of assets to satisfy the
requirements of Section 401(a)(4) of the Code. The amount the Employee
shall be obligated to repay, at any time, shall not exceed a restricted
amount, that shall equal, at any measurement date, the excess of the
distributions the Employee has received over the amount that the Employee
would have received had distributions commenced in a manner that would
have not violated the provisions of Section 6.02, both accumulated at a
reasonable rate of interest from the date payment was (or would have been)
made to the measurement date. The Employee's obligation to repay must be
secured by either: (a) an escrow account with an initial value at the date
of distribution of at least 125 percent of the restricted amount, and at
all times thereafter a value of at least 110 percent of the restricted
amount, (b) a bond, issued by a surety approved by the U.S. Treasury as an
acceptable surety for federal bonds, of 100 percent of the restricted
amount, or (c) a bank letter of credit equal to 100 percent of the
restricted amount.
6.05 Plan Termination Limit. In the event of Plan termination the benefit of
----------------------
any Highly Compensated Employee or Highly Compensated Former Employee
shall be limited to a benefit that is nondiscriminatory under Section
401(a)(4) of the Code.
6.06 Highly Compensated Employee or Former Employee. The term "Highly
----------------------------------------------
Compensated Employee" shall mean an Employee who performs service during
the Determination Year and is described in one or more of the following
groups in accordance with IRS regulations:
(a) An Employee who is or was a 5-percent owner (within the meaning of
Section 414(q)(2) of the Code), at any time during the Determination
Year or the Look-Back Year; or
(b) An Employee who received Compensation during the Look-Back Year in
excess of $80,000 (as adjusted for such Year pursuant to Sections
414(q)(1) and 415(d) of the Code) and was a member of the Top-Paid
Group for such Year.
The term "Highly Compensated Former Employee" shall mean a former Employee
who has a separation year prior to the Determination Year and was a Highly
Compensated active Employee for either: (1) such Employee's separation
year or (2) any Determination Year ending on or after the Employee's 55th
birthday.
-22-
<PAGE>
A separation year is the Determination Year in which the Employee separates
from Service. Notwithstanding the foregoing, an Employee who separated
from Service before January 1, 1987, is a Highly Compensated Employee only
if he was a five-percent owner or received Compensation in excess of
$50,000 during (1) the Employee's separation year (or the year preceding
such separation year), or (2) any year ending on or after such Employee's
55th birthday (or the last year ending before such Employee's 55th
birthday).
Notwithstanding anything to the contrary in this Plan, Sections 414(b),
(c), (m), (n), and (o) of the Code are applied prior to determining whether
an Employee is a Highly Compensated Employee.
The above provisions of this Section 6.06 shall be effective as of January
1, 1997.
6.07 Definitions. For purposes of this Section and Section 6.06,
-----------
(a) "Compensation" shall mean compensation as defined in Section
414(q)(4) and the regulations thereunder.
(b) "Determination Year" shall mean the Plan Year for which the
determination of who is Highly Compensated is being made.
(c) "Look-Back Year" shall mean the 12-month period preceding the
Determination Year.
(d) "Top-Paid Group" shall mean the top twenty percent (20%) of all
Employees when ranked on the basis of Compensation paid to such
Employees during the year under consideration. The number and
identity of Employees in the group will be determined in accordance
with Section 414(q).
(e) The Employer shall have the right to elect to determine Highly
Compensated Employees by reference to calendar-year Compensation, in
accordance with IRS regulations. If the Employer so elects, the
Employer must make such election with respect to all qualified plans
it or any Affiliated Employer maintains.
-23-
<PAGE>
ARTICLE 7
VESTING
-------
7.01 General Rule. A Participant who incurs a Break in Service at a time when
------------
he is not entitled to an Early, Normal or Postponed Retirement Benefit
under the provisions of Article 5 shall not be entitled to benefits under
this Plan except as provided under the provisions of this Article.
7.02 Vesting at Normal Retirement Age. A Participant who has attained Normal
--------------------------------
Retirement Age shall be fully vested in his Accrued Benefit.
7.03 Vesting Before Normal Retirement Age. A Participant who incurs a
------------------------------------
Termination at a time when he is not entitled to an Early, Normal or
Postponed Retirement Benefit under the provisions of Article 5 shall be
entitled to a Deferred Vested Benefit, payable as provided under Article
5, provided the Participant has attained five Years of Vesting Service at
the time of Termination.
For each Participant who both (a) became an Eligible Employee after April
1, 1995, and (b) prior to April 1, 1995, was employed by PMI for at least
twelve (12) months, his or her Period of Service for such employment also
shall be counted for purposes of determining his or her Years of Vesting
Service.
7.04 Vesting Upon Plan Termination. In the event of termination or partial
-----------------------------
termination of this Plan, each affected Participant shall be 100 percent
vested in his Accrued Benefit, but only to the extent funded. The
foregoing sentence shall not apply to a former Participant who has been
cashed out (including those deemed cashed out under Section 7.05(c)) or
who has incurred five consecutive One-Year Breaks in Service after his
Termination Date. Such a former Participant shall not be entitled to any
additional vested benefit upon Termination or partial Termination.
7.05 Vesting Service Disregarded. The Years of Vesting Service of a terminated
---------------------------
Participant who is reemployed shall be determined in accordance with the
following rules.
(a) Prior Service Disregarded. If a Participant incurs a One-Year Break
-------------------------
in Service, and his or her vested percentage interest in his or her
Accrued Benefit under the Plan was 0% when the One-Year Break in
Service began, and the number of his or her consecutive One-Year
Breaks in Service exceeds the greater of (1) the number of his or her
Years of Vesting Service, or (2) five, then his or her Years of
Vesting Service credited before the One-Year Break in Service shall
be disregarded.
(b) Prior Service Counted. If a Participant does not incur a One-Year
---------------------
Break in Service, or incurs a One-Year Break in Service, and:
-24-
<PAGE>
(1) his or her vested percentage interest in his or her Accrued
Benefit under the Plan was greater than 0% when the One-Year
Break in Service began, or
(2) the number of his or her consecutive One-Year Breaks in Service
does not exceed the greater of (A) the number of his or her
Years of Vesting Service, or (B) five,
then the Years of Vesting Service credited before the Participant's
termination shall be reinstated, effective as of his or her Reemployment
Date.
(c) Future Service Disregarded. In determining a Participant's Accrued
--------------------------
Benefit and Years of Vesting Service for purposes of the Plan, if the
Participant incurs a Termination Date and the nonforfeitable
percentage of his or her Accrued Benefit at that time is zero, he
shall be deemed to have received a complete distribution of the
nonforfeitable portion of his or her Accrued Benefit at the time of
his or her Termination Date, and shall immediately forfeit his or her
Accrued Benefit. However, such forfeited Accrued Benefit shall be
restored if the Participant has a Reemployment Date within five
consecutive One-Year Breaks in Service following such Termination
Date. The portion of a Participant's Accrued Benefit and Years of
Vesting Service previously disregarded by a prior application of this
paragraph shall not be counted for the purpose of the preceding
sentences.
7.06 Repayment of Cash-Out. If an Employee shall have received a full
---------------------
distribution of his nonforfeitable interest in this Plan following his
Termination Date, he shall be entitled to repay the amount of that
distribution to the Plan together with compound interest at the rate of
five percent per annum for any period prior to the first day of the Plan
Year beginning on or after January 1, 1988, and at the rate of 120 percent
of the applicable federal midterm rate as in effect for the first month of
the Plan Year for any Plan Year or portion of a Plan Year that commences
on or after January 1, 1988. Any such repayment shall be made prior to the
earlier of:
(a) The fifth anniversary of the date on which the Employee was rehired
by the Employer, or
(b) The close of the first period of five consecutive One-Year Breaks in
Service following the Participant's Termination Date.
A Participant who is deemed to have been cashed out under Section
7.05(c) because he was not entitled to a Deferred Vested Benefit on
his Termination Date shall be deemed to have properly made a
repayment upon again becoming a Participant. Such a deemed repayment
will not restore Years of Service which would not be counted under
the provisions of Section 7.05(c) (the Rule of Parity).
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7.07 Vesting Service. A Participant shall be credited with a Year of Vesting
---------------
Service as provided in Sections 1.66, 7.05 and 7.06, except that Vesting
Service shall not include any Year of Service completed prior to the date
of establishment of this Plan or the Predecessor to this Plan other than a
Participant's service completed with Allstate prior to April 1, 1995, if
the Participant was employed by Allstate on March 31, 1995 and by the
Employer or an Affiliated Employer on April 1, 1995.
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ARTICLE 8
QUALIFIED PRERETIREMENT SURVIVOR ANNUITY
----------------------------------------
8.01 Automatic Preretirement Spousal Death Benefit
---------------------------------------------
(a) Except as provided in subsection (b) below, in the event a
Participant with a vested right to his Accrued Benefit under the Plan
dies before his Benefit Commencement Date, a death benefit shall be
provided to the Participant's Spouse as follows:
(1) If the Participant at the date of death was eligible to retire
and receive a benefit under the Plan at an Early, Normal or
Postponed Retirement Date, then his surviving Spouse shall
automatically receive a death benefit in an amount equal to one-
half of the amount of the retirement benefit that would have
been payable to the Spouse if the Participant had retired on the
day preceding his death, receiving a benefit in the form of a
Joint & Survivor Annuity with a 50 percent survivor annuity to
the Spouse.
(2) If the Participant at the date of death was not eligible to
retire under the Plan and receive a benefit under the Plan at an
Early, Normal, or Postponed Retirement Date, then the
Participant's surviving Spouse shall receive an Automatic
Preretirement Spousal Death Benefit in an amount equal to the
amount that would have been payable to the spouse under the
normal form of payment under Section 9.01, assuming:
(A) the Participant had separated from service on the earlier of
his Termination Date or date of his death,
(B) the Participant had survived to the earliest date he could
have retired and received a benefit under the Plan pursuant
to Article 5,
(C) the Participant retired on such date with a benefit in the
form of a Joint & Survivor Annuity with a 50 percent
survivor annuity to the Spouse but calculated using only
actual Benefit Accrual Service as of the Participant's date
of death, (and if the Participant was only partially vested
on his date of death, multiplied by the Participant's vested
percentage as determined under Section 7.03 on the date of
death), and
(D) the Participant died on the day after his Benefit
Commencement Date.
The Automatic Preretirement Spousal Death Benefit under this Section
8.01(a)(2) shall commence to be paid to the Spouse, unless the Spouse
elects otherwise, as of the first day of the month coinciding with or
next following the earliest date the
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Participant could have retired and received a benefit under the Plan
pursuant to Article 4, had he not died, and shall be paid up to the
first day of the month in which such spouse dies. The Spouse may not
delay commencement of the Automatic Preretirement Spousal Death
Benefit beyond the Participant's Normal Retirement Date.
(b) The Automatic Preretirement Spousal Death Benefit payable under this
Article 8 shall be payable after the death of the Participant only if
the Spouse had been married to the Participant throughout the one-
year period ending on the date of the Participant's death.
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ARTICLE 9
FORMS OF BENEFIT
----------------
9.01 Qualified Joint & Survivor Annuity. At the earliest time a Participant
----------------------------------
could become entitled to commence receiving payments of an Early, Normal
or Postponed Retirement Benefit or of a Deferred Vested Benefit, other
than an involuntary lump sum payment under the provisions of Section 9.02,
benefits shall commence in the form of a Qualified Joint & Survivor
Annuity (which, for a Participant who has no Spouse, includes a single
life annuity) unless the Participant, with the consent of his Spouse, if
any, elects otherwise. Any consent of the Participant's Spouse shall be
made within 90 days of the date the Qualified Joint & Survivor Annuity
would otherwise commence, and shall be executed in accordance with the
rules of Section 9.04.
9.02 Involuntary Lump Sum Payment. If at any time a Participant has incurred a
----------------------------
Termination but has not begun to receive benefit payments, and is entitled
to a benefit (whether Early, Normal, or Postponed) or to a Deferred Vested
Benefit, or a Beneficiary is entitled to a death benefit hereunder, that
has an Actuarial Equivalent value of less than $5,000, the Actuarial
Equivalent value shall be paid to such Participant or Beneficiary in a
lump sum in lieu of, and in full satisfaction of, his benefit under this
Plan. Neither the consent of the Beneficiary, the Participant nor of his
Spouse shall be necessary to make such payment. Upon the making of such
payment, neither the Beneficiary, the Participant nor his Spouse shall
have any further benefit under this Plan. Participants deemed to have a
zero accrued account benefit at Termination shall be deemed to have been
cashed out under this Section 9.02.
9.03 Right to Elect. In lieu of the benefits provided by Section 9.01, the
--------------
Participant shall have the right to elect, prior to his Benefit
Commencement Date, an alternate form of benefit provided under the terms
of this Article 9. If the Participant is married, any such election may be
made only with the consent of his Spouse, executed as provided under
Section 9.04. Any alternative form of benefit shall be the Actuarial
Equivalent of the Participant's Accrued Benefit.
9.04 Election of Forms. A Participant may make or revoke an election of any
-----------------
form of benefit to which the Participant is entitled under this Article 9
in writing to the Committee, and such election or revocation shall be
subject to the following conditions:
(a) The Committee shall furnish to each Participant a general written
explanation in nontechnical terms of the availability of the various
optional forms of payment under the Plan within a reasonable period
of time prior to the earliest date the Participant could retire under
the Plan. A Participant has a right to receive, within 30 days after
filing a written request with the Committee, a written explanation of
the terms and conditions of the Qualified Joint & Survivor Annuity,
the Participant's right to make and the effect of an election to
waive the Qualified Joint & Survivor Annuity, the
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<PAGE>
rights of the Participant's Spouse (if any), the right to make, and
the effect of, a revocation of a previous election to waive the
Qualified Joint & Survivor Annuity, and the financial effect upon the
Participant, given in terms of dollars per annuity payment. Requests
for additional information may be made by the Participant at any time
before the 90th day prior to the Benefit Commencement Date.
(b) An election to receive an optional form of benefit may be made at
any time during the election period. The election period is a period
of 90 days prior to the Participant's Benefit Commencement Date.
Subject to subsection (c) below, a Participant may make an election
not to receive the Qualified Joint & Survivor Annuity, revoke any
previous election, and if the Participant so desires, make a new
election, until the expiration of the election period.
(c) If a Participant is married, an election of a form of benefit
other than the Qualified Joint & Survivor Annuity will require the
written consent of the Spouse, and such written consent must be
witnessed by a notary public (or a representative of the Plan).
(d) Any consent by a Spouse obtained under this Section 9.04 shall be
effective only with respect to the specific form of benefit elected.
Additionally, a married Participant's designation of a Beneficiary
other than his or her Spouse shall not be effective unless the
election designates a specific Beneficiary which may not be changed
without spousal consent.
(e) Notwithstanding any provision of the Plan to the contrary, a
Participant's Benefit Commencement Date may be less than 30 days
after the written explanation described in subsection (a) above is
furnished to the Participant, provided that: (1) the Participant has
been provided with information that clearly indicates that the
Participant has at least 30 days to consider whether to waive the
Qualified Joint & Survivor Annuity and elect (with spousal consent,
if applicable) a form of distribution other than a Qualified Joint &
Survivor Annuity, (2) the Participant is permitted to revoke any
affirmative distribution election at least until the Benefit
Commencement Date or, if later, at any time prior to the expiration
of the 7-day period that begins the day after the explanation of the
Qualified Joint & Survivor Annuity is provided to the Participant,
(3) the Benefit Commencement Date is a date after the date that the
written explanation was provided to the Participant, but may be a
date before the date that an affirmative distribution election is
made by the Participant, and (4) the distribution must not actually
commence before the expiration of the foregoing 7-day period.
9.05 Optional Forms of Retirement Benefit. The optional forms which a
------------------------------------
Participant may elect are any one of the following:
(a) 50 Percent or 100 Percent Joint & Survivor Annuitant Option -- An
-----------------------------------------------------------
Actuarial Equivalent monthly benefit payable to the Participant for
life, and after his death in the amount of 50 percent or 100 percent
of such amount (as specified by the
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Participant prior to commencement of benefits) to the Joint Annuitant
for life. Should the Joint Annuitant die prior to the Participant's
Benefit Commencement Date, any election of this option shall be
automatically canceled. If the Participant should die prior to the
Benefit Commencement Date, no payments shall be made under this
option to the Joint Annuitant, but if the Joint Annuitant is the
Spouse of the Participant, such Spouse will be entitled to the death
benefit provided under Article 8.
The factor to convert the life annuity to the 50 percent Joint &
Survivor Annuitant Option above is 94 percent plus 0.3 percent for
each full year that the Joint Annuitant is more than five years older
than the Participant not to exceed 99 percent or minus 0.3 percent
for each full year that the Joint Annuitant is more than five years
younger than the Participant. The factor to convert the life annuity
to the 100 percent Joint & Survivor Annuitant Option above is 89
percent plus 0.5 percent for each full year that the Joint Annuitant
is more than five years older than the Participant not to exceed 99
percent or minus 0.5 percent for each full year that the Joint
Annuitant is more than five years younger than the Participant.
(b) Ten-Year Certain and Life Income Option -- An Actuarial Equivalent
---------------------------------------
monthly benefit that provides retirement benefit payments to the
Participant for his lifetime with a guaranteed minimum period of at
least ten. In the event of the death of the Participant after the
Benefit Commencement Date, but prior to the Participant's receiving
retirement benefit payments for the whole Ten-Year Certain period,
the remaining payments for the minimum term of years will be paid to
the Participant's Beneficiary. In the event of the death of the
Participant prior to the Participant's Benefit Commencement Date, the
election of this option shall be void and of no effect.
The factor to convert the life annuity to the above option will be 95
percent at age 65 plus 0.4 percent for each full year that the
benefit commencement date precedes age 65 or minus 0.7 percent for
each full year that the benefit commencement date is postponed past
age 65.
(c) Straight Life Annuity Option -- A Participant who has a Spouse may
----------------------------
elect to have the Participant's retirement benefit payable in equal,
unreduced monthly payments during the Participant's lifetime, with no
further payments to any other person after the Participant's death.
If this option is elected, the retirement benefit payable to the
Participant shall be the amount of retirement benefit determined
under the applicable Section(s) of Article 5.
(d) Lump Sum Payment Option -- A single payment equal to the Actuarial
-----------------------
Equivalent of the Participant's accrued retirement benefit.
9.06 Beneficiary. A Participant may name a Joint Annuitant who is an individual
-----------
for a Joint & Survivor Annuity option. For a Ten-Year Certain and Life
Income Option, the Participant may elect, in writing, an individual or
individuals, or any entity or entities, including
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<PAGE>
corporations, partnerships or trusts, provided that such individuals and
entities are ascertainable, and the shares of each are clearly set forth.
In the event any Beneficiary predeceases the Participant or is not in
existence, not ascertainable, or cannot be located at the date benefits
become payable to such beneficiary, benefits shall be paid to such
contingent Beneficiary or Beneficiaries as shall have been named by the
Participant on the Participant's original beneficiary election, and, if
none, the contingent Beneficiary shall be the Participant's estate.
9.07 Eligible Rollover Distributions.
-------------------------------
(a) Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a distributee's election under this Section, a
distributee may elect, at the time and in the manner prescribed by
the Committee, to have any portion of an eligible rollover
distribution paid directly to an eligible retirement plan specified
by the distributee in a direct rollover.
(b) Definitions.
(1) Eligible rollover distribution -- An eligible rollover
------------------------------
distribution is any distribution of all or any portion of the
balance to the credit of the distributee, except that an
eligible rollover distribution does not include: any
distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the distributee or the joint
lives (or joint life expectancies) of the distributee and the
distributee's designated Beneficiary, or for a specified period
of ten years or more; any distribution to the extent such
distribution is required under Section 401(a)(9) of the Code;
and the portion of any distribution that is not includable in
gross income (determined without regard to the exclusion for net
unrealized appreciation with respect to Employer securities).
(2) Eligible retirement plan -- An eligible retirement plan is an
------------------------
individual retirement account described in Section 408(a) of the
Code, an individual retirement annuity described in Section
408(b) of the Code, an annuity plan described in Section 403(a)
of the Code, or a qualified trust described in Section 401(a) of
the Code, that accepts the distributee's eligible rollover
distribution. However, in the case of an eligible rollover
distribution to the surviving spouse, an eligible retirement
plan is an individual retirement account or individual
retirement annuity.
(3) Distributee -- A distributee includes an Employee or former
-----------
Employee. In addition, the Employee's or former Employee's
surviving Spouse and the Employee's or former Employee's Spouse
or former Spouse who is the alternate payee under a Qualified
Domestic Relations Order, as defined in Section 414(p) of the
Code, are distributees with regard to the interest of the Spouse
or former Spouse.
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<PAGE>
(4) Direct rollover -- A direct rollover is a payment by the Plan to
---------------
the eligible retirement plan specified by the distributee.
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ARTICLE 10
FUNDING
-------
10.01 Funding Agreement. The Employer has entered into a funding arrangement
-----------------
with one or more Funding Agents providing for the administration of the
Fund or Funds in which the assets of this Plan are held. The Employer may
at any time or from time to time appoint one or more investment managers,
as defined under Section 3(38) of ERISA, each of which shall direct the
Funding Agent in the investment or reinvestment of all or part of the
Fund.
10.02 Non-Diversion of the Fund. To the extent required by law, the principal
-------------------------
or income of any Fund shall be used solely for the exclusive benefit of
Participants or Beneficiaries, or to meet the necessary expenses of the
Plan, except that upon termination of the Plan, after all the liabilities
under the Plan have been satisfied, any property remaining in a Fund
after satisfaction of all liabilities under this Plan shall be considered
the result of erroneous actuarial computation and shall be distributed by
the Funding Agent to the Employer.
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<PAGE>
ARTICLE 11
PLAN ADMINISTRATION
-------------------
11.01 Appointment of Committee.-- A Committee consisting of at least three
------------------------
members shall be appointed by the Board to administer the Plan on behalf
of the Board. Vacancies in the Committee shall be filled from time to
time by appointment of a new Committee member by the Board. A member of
the Committee shall hold office until he gives written notice of his
resignation to the Board, until death, or until removal by the Board.
11.02 Powers and Duties.
-----------------
(a) The Committee shall have full power and discretion to administer the
Plan and to construe and apply all of its provisions on behalf of
the Employer. The Committee is the Named Fiduciary within the
meaning of Section 402(a) of ERISA for purposes of Plan
administration. The Committee's powers and duties, unless properly
delegated, shall include, but shall not be limited to:
(1) Designating agents to carry out responsibilities relating to
the Plan, other than fiduciary responsibilities.
(2) Deciding questions relating to eligibility, continuity of
employment, and amounts of benefits.
(3) Deciding disputes that may arise with regard to the rights of
Employees, Participants and their legal representatives, or
Beneficiaries under the terms of the Plan. Decisions by the
Committee will be deemed final in each case.
(4) Obtaining information from the Employer with respect to its
Employees as necessary to determine the rights and benefits of
Participants under the Plan. The Committee may rely
conclusively on such information furnished by the Employer.
(5) Compiling and maintaining all records necessary for the Plan.
(6) Authorizing the Funding Agent to make payment of all benefits
as they become payable under the Plan.
(7) Engaging such legal, administrative, consulting, actuarial,
investment, accounting, and other professional services as the
Committee deems proper.
(8) Adopting rules and regulations for the administration of the
Plan that are not inconsistent with the Plan. The Committee
may, in a nondiscriminatory
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<PAGE>
manner, waive the timing requirements of any notice or other
requirements described in the Plan. Any such waiver will not
obligate the Committee to waive any subsequent timing or other
requirements for other Participants.
(9) Interpreting and approving Qualified Domestic Relations Orders,
as defined in Section 414(p) of the Code.
(10) Making nonsubstantive amendments for the purpose of maintaining
the qualified status of the Plan only.
(11) Performing other actions provided for in other parts of this
Plan.
(b) The Employer shall have responsibility for, and shall be the Named
Fiduciary for, the following purposes:
(1) Selection of the funding media for the Plan, including the power
to direct investments and to appoint an investment manager or
managers pursuant to Section 402(c) of ERISA.
(2) Allocating fiduciary responsibilities, other than trustee
responsibilities as defined in Section 405(c) of ERISA, among
fiduciaries, and designation of additional fiduciaries.
(3) Selection of insurance contracts to provide benefits hereunder,
or, if all assets are not held under insurance contracts, the
Trustee.
(c) The Trustee, if any, shall have responsibility for, and shall be the
Named Fiduciary for the care and custody of, and, to the extent
investment managers are not appointed by the Employer, management of
Plan assets held by such Trustee other than insurance contracts.
11.03 Actions by the Committee. A majority of the members composing the
------------------------
Committee at any time will constitute a quorum. The Committee may act at a
meeting, or in writing without a meeting, by the vote or assent of a
majority of its members. The Committee will appoint a Committee
Chairperson and a Secretary. The Secretary will record all action taken by
the Committee. The Committee will have authority to designate in writing
one of its members or any other person as the person authorized to execute
papers and perform other ministerial duties on behalf of the Committee.
11.04 Interested Committee Members. No member of the Committee will participate
----------------------------
in an action of the Committee on a matter that applies solely to that
member. Such matters will be determined by a majority of the remainder of
the Committee.
11.05 Indemnification. The Employer, by the adoption of this Plan, indemnifies
---------------
and holds the members of the Committee, jointly and severally, harmless
from the effects and
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<PAGE>
consequences of their acts, omissions, and conduct in their official
capacities, except to the extent that the effects and consequences result
from their own willful misconduct, breach of good faith, or gross
negligence in the performance of their duties. The foregoing right of
indemnification will not be exclusive of other rights to which each such
member may be entitled by any contract or other instrument or as a matter
of law.
11.06 Conclusiveness of Action. Any action on matters within the discretion of
------------------------
the Committee will be conclusive, final, and binding upon all Participants
in the Plan and upon all persons claiming any rights, including
Beneficiaries.
11.07 Payment of Expenses. The members of the Committee will serve without
-------------------
compensation for their services. The compensation or fees of consultants,
actuaries, accountants, counsel and other specialists and any other costs
of administering the Plan or Fund, including any premiums due to the
Pension Benefit Guaranty Corporation (PBGC), will be paid by the Fund
unless, at the discretion of the Employer, paid by the Employer.
11.08 Claim Procedure. Any Participant or Beneficiary may submit a written
---------------
application to the Committee for payment of any benefit that may be due
him under the Plan. Such application shall set forth the nature of the
claim and any information as the Committee may reasonably request. Upon
receipt of any such application, the Committee shall determine whether or
not the Participant or Beneficiary is entitled to the benefit hereunder.
If a claim is denied, in whole or in part, the Committee shall give
written notice to any Participant or Beneficiary of the denial of a claim
for the commencement, continuation or calculation of amount of retirement
benefits under the Plan. The notice shall be given within 90 days after
receipt of the Participant's or Beneficiary's application unless special
circumstances require an extension for processing the claim. In no event
shall such extension exceed a period of 90 days from the end of such
initial review period. The notice will be delivered to the claimant or
sent to the claimant's last known address, and will include the specific
reason or reasons for the denial, a specific reference or references to
pertinent Plan provisions on which the denial is based, a description of
any additional material or information for the claimant to perfect the
claim, which will indicate why such material or information is needed, and
an explanation of the Plan's claims review procedure. If the claimant
wishes to appeal the claim's denial, the claimant or a duly authorized
representative will file a written request with the Committee for a
review. This request must be made by the claimant within 60 days after
receiving notice of the claim's denial. The claimant or representative may
review pertinent documents relating to the claim and its denial and may
submit issues and comments in writing to the Committee. Within 60 days
after receipt of such a request for review, the Committee shall reconsider
the claim and make a decision on the merits of the claim. If circumstances
require an extension of time for processing the claim, the 60-day period
may be extended but in no event more than 120 days after the receipt of a
request for review. The decision on review will be in writing and include
specific reasons and references to the pertinent Plan provisions on which
the decision is based.
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<PAGE>
ARTICLE 12
FUNDING POLICY AND CONTRIBUTIONS
--------------------------------
12.01 Employer Contributions. The Employer intends to make contributions to fund
----------------------
this Plan at such times and in such amounts as the Actuary shall certify
to the Employer as being no less than the amounts required to be
contributed under Section 412 of the Code. Any actuarial gains arising
under the Plan shall be used to reduce future Employer contributions to
the Plan and shall not be applied to increase retirement benefits with
respect to remaining Participants.
12.02 Participant Contributions. Participant contributions to the Fund are not
-------------------------
permitted.
12.03 Contingent Nature of Contributions. Unless the Employer notifies the
----------------------------------
Committee and the Funding Agent in writing to the contrary, all
contributions made to this Plan are conditioned upon their deductibility
under Section 404 of the Code.
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<PAGE>
ARTICLE 13
AMENDMENT, TERMINATION AND MERGER OF THE PLAN
---------------------------------------------
13.01 Right to Amend the Plan. The Employer reserves the right to modify, alter
-----------------------
or amend this Plan from time to time to any extent that it may deem
advisable including, but without limiting the generality of the foregoing,
any amendment deemed necessary to ensure the continued qualification of
the Plan under Section 401 of the Code or the appropriate provisions of
any subsequent revenue law. No such amendment shall increase the duties or
responsibilities of a Funding Agent without its consent thereto in
writing. No such amendment(s) shall have the effect of reinvesting in the
Employer the whole or any part of the principal or income of the Fund or
to allow any portion of the principal or income of the Fund to be used for
any purposes other than for the exclusive benefit of Participants or
Beneficiaries at any time prior to the satisfaction of all the liabilities
under the Plan with respect to such persons. No amendment shall (a) reduce
a Participant's Accrued Benefit on the effective date of the Plan
amendment, (b) eliminate or reduce an early retirement benefit, retirement
type subsidy or an optional form of benefit under the Plan with respect to
the Participant's Accrued Benefit on the date of the amendment, or (c)
reduce a retired Participant's retirement benefit as of the effective date
of the amendment.
13.02 Right to Terminate the Plan. The Employer shall have the right to
---------------------------
terminate this Plan at any time. In the event of such termination all
affected Participants shall be vested as provided in Section 7.04.
13.03 Allocation of Assets and Surplus. In the event the Plan shall be
--------------------------------
terminated as provided in Section 13.02 above, the then present value of
retirement benefits vested in each Participant shall be determined as of
the discontinuance date, and the assets then held by the Funding Agents as
reserves for benefits for Participants, Joint Annuitants or Beneficiaries
under this Plan shall, subject to any necessary approval by the PBGC be
allocated, to the extent that they shall be sufficient, after providing
for expenses of administration, in the order of precedence provided for
under Section 4044 of ERISA, as modified by the provisions of Treasury
Regulation Section 1.414(l)-l(f) or (h) if a special schedule of benefits
(as defined in such regulations) is in effect as a result of a plan merger
within the five-year period prior to the date of termination. The
retirement benefits for which funds have been allocated in accordance with
Section 4044 of ERISA shall be provided through the continuance of the
existing Fund arrangements or through a new instrument entered into for
that purpose and shall be paid either in a lump sum or in equal monthly
installments through the purchase of a nontransferable annuity
contract(s). After all liabilities of the Plan have been satisfied with
respect to all Participants so affected by the Plan's termination, the
Employer shall be entitled to any balance of Plan assets that shall
remain.
13.04 Plan Mergers, Consolidations, and Transfers. The Plan shall not be
-------------------------------------------
automatically terminated by the Employer's acquisition by or merger into
any other company, trade or business, but the
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<PAGE>
Plan shall be continued after such merger provided the successor employer
agrees to continue the Plan with respect to affected Participants herein.
All rights to amend, modify, suspend or terminate the Plan with respect
to Participants of the Employer shall be transferred to the successor
employer, effective as of the date of the merger or acquisition. The
merger or consolidation with, or transfer of the allocable portion of the
assets and liabilities of the Fund to any other qualified retirement plan
trust shall be permitted only if the benefit each Plan Participant would
receive, if the Plan were terminated immediately after such merger or
consolidation, or transfer of the allocable portion of the assets and
liabilities, would be at least as great as the benefit he would have
received had this Plan been terminated immediately before the date of
merger, consolidation, or transfer.
13.05 Amendment of Vesting Schedule. If the vesting provisions of this Plan are
-----------------------------
amended, including an amendment caused by the expiration of top-heavy
status under the terms of Article 14, Participants with three or more
Years of Service, or three or more years of employment, whether or not
consecutive, at the later of the date the amendment is adopted or becomes
effective, shall automatically be vested, from that point forward, in the
greater of the amount vested under the vesting schedule as amended or the
amount vested under the vesting schedule prior to amendment.
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ARTICLE 14
TOP-HEAVY PLAN PROVISIONS
-------------------------
14.01 General Rule. For any Plan Year for which this Plan is a "Top-Heavy Plan"
------------
as defined in Section 14.06 below this Plan shall be subject to the
provisions of this Article 14.
14.02 Vesting Provision. Each Participant who has completed an Hour of Service
-----------------
during the Plan Year in which the Plan is top-heavy and has completed the
number of Years of Vesting Service specified in the following table,
shall have a vested right to the percentage of his Accrued Benefit under
this Plan, correspondingly shown in the following table:
Years of Percentage of
Vesting Service Accrued Benefit
Less than 2 years 0%
2 years 20%
3 years 40%
4 years 60%
5 years 80%
6 or more 100%
Each Participant's Deferred Vested Benefit shall not be less than his
vested Accrued Benefit determined as of the last day of the last Plan
Year in which the Plan was not a Top-Heavy Plan. If the Plan ceases to be
a Top-Heavy Plan, an Employee with three or more years of employment,
whether or not consecutive, shall have his Deferred Vested Benefit
determined either in accordance with this Section 14.02 or Section 7.03,
as provided in Section 13.05. Each such Participant shall have the right
to elect the applicable schedule within 60 days after the day he is
issued written notice by the Committee, or as otherwise provided in
accordance with regulations issued under the provisions of the Code
relating to changes in the vesting schedule.
14.03 Minimum Benefit Provision. If the Plan is a Top-Heavy Plan in any Plan
-------------------------
Year, each Participant who is a Non-Key Employee shall, as of the end of
that Plan Year, be entitled to an Accrued Benefit that is at least equal
to the Applicable Percentage of the Participant's Average Compensation
for Years in the Testing Period. For purposes of this Section:
(a) "Applicable Percentage" shall mean the lesser of two percent
multiplied by Years of Service of the Participant, or 20 percent;
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<PAGE>
(b) "Average Compensation for Years in the Testing Period" shall mean
average annual compensation for that period of five consecutive
years that produces the highest average. In determining
consecutive years, any year not included as a Year of Service
under the provisions of Article 2 shall be ignored. In calculating
Average Compensation for Years in the Testing Period, the amount
of compensation taken into account shall not exceed $150,000 times
the Adjustment Factor applicable at the date such benefits are
calculated.
14.04 Change in 415(e) Limits. For any Limitation Year beginning prior to
-----------------------
December 31, 1999, if the Plan is a Top-Heavy Plan the combined plan
limit of Section 415(e) of the Code shall be applied by substituting
"1.0" for "1.25" in Sections 415(e)(2)(b) and 415(e)(3)(b) of the Code.
The first sentence of this Section 14.04 will not apply if the Plan is
not a Super Top-Heavy Plan, as defined in Section 14.06, and if the
Accrued Benefit of each Participant would meet the requirements of
Section 14.03 if the Applicable Percentage under that Section were the
lesser of (a) or (b) where:
(a) is three percent multiplied by Years of Service, and
(b) is 20 percent increased by one percent for each year the Plan was
subject to the change in 415(e) limits under this Section 14.04,
but not to more than 30 percent.
14.05 Coordination With Other Plans. In the event that another defined
-----------------------------
contribution or defined benefit plan maintained by the Employer or an
Affiliated Employer provides contributions or benefits on behalf of
Participants in this Plan, such other plan shall be treated as part of
this Plan pursuant to applicable principles (such as Rev. Rul. 81-202 or
any successor ruling) in determining whether this Plan satisfies the
requirements of Sections 14.02 and 14.03. Such determination shall be
made upon the advice of counsel by the Committee.
14.06 Top-Heavy and Super Top-Heavy Plan Definition. This Plan shall be a
---------------------------------------------
"Top-Heavy Plan" for any Plan Year if, as of the determination date (as
defined in subsection 14.06(a)) the present value of the cumulative
Accrued Benefits under the Plan for Participants (including former
Participants) who are Key Employees (as defined in Section 14.07) exceeds
60 percent of the present value of the cumulative Accrued Benefits under
the Plan for all Participants, excluding former Key Employees, or if this
Plan is required to be in an aggregation group (as defined in Section
14.06(c)) which for such Plan Year is a top-heavy group (as defined in
Section 14.06(d)). This Plan shall be a "Super Top-Heavy Plan" for any
Plan Year if it meets the above definition after substituting "90
percent" for "60 percent." For purposes of this Section:
(a) "Determination date" means for any Plan Year the last day of the
immediately preceding Plan Year (Except that for the first Plan
Year of this Plan the determination date means the last day of
such Plan Year).
(b) The present value shall be determined as of the most recent
valuation date that is within the 12-month period ending on the
determination date and as described in the
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<PAGE>
regulations under the Code. Present values for purposes of
determining whether this Plan is a Top-Heavy Plan shall be based
on the following interest and mortality rates:
(1) Interest Rate -- eight percent annually.
(2) Mortality Rate -- 1983 Group Annuity Mortality Table for
Males.
(c) "Aggregation group" means the group of plans, if any, that
includes both the group of plans that are required to be
aggregated and the group of plans that are permitted to be
aggregated.
(1) The group of plans that are required to be aggregated (the
"required aggregation group") includes:
(A) Each plan of an Affiliated Employer in which a Key
Employee is a participant, including collectively
bargained plans.
(B) Each other plan, including collectively bargained
plans of an Affiliated Employer, which enables a plan
in which a Key Employee is a participant to meet the
requirements of the Code prohibiting discrimination
as to contributions or benefits in favor of Employees
who are officers, shareholders or the highly
compensated or prescribing the minimum participation
standards.
(2) The group of plans that are permitted to be aggregated (the
"permissive aggregation group") includes the required
aggregation group plus one or more plans of an Affiliated
Employer that is not part of the required aggregation group
and that the Committee certifies as constituting a plan
within the permissive aggregation group. Such plan or plans
may be added to the permissive aggregation group only if,
after the addition, the aggregation group as a whole
continues not to discriminate as to contributions or
benefits in favor of officers, shareholders, or the highly-
compensated and to meet the minimum participation standards
under the Code.
(d) "Top-heavy group" means the aggregation group, if as of the
applicable determination date, the sum of the present value of the
cumulative accrued benefits for Key Employees under all defined
benefit plans included in the aggregation group plus the aggregate
of the accounts of Key Employees under all defined contribution
plans included in the aggregation group exceeds 60 percent of the
sum of the present value of the cumulative accrued benefits for
all Employees, excluding former Key Employees, under all such
defined benefit plans plus the aggregate accounts for all
Employees, excluding former Key Employees, under such defined
contribution plans. If the aggregation group that is a top-heavy
group is a required aggregation group, each plan in the group will
be top-heavy. If the aggregation group that is a top-heavy group
is a permissive aggregation group, only those plans that are part
of the required
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<PAGE>
aggregation group will be treated as top-heavy. If the aggregation
group is not a top-heavy group, no plan within such group will be
top-heavy.
(e) In determining whether this Plan constitutes a "Top-Heavy Plan,"
the Committee (or its agent) shall make the following adjustments
in connection therewith:
(1) When more than one plan is aggregated, the Committee shall
determine separately for each plan as of each plan's
determination date the present value of the accrued
benefits or account balance. The results shall then be
aggregated adding the results of each plan as of the
determination dates for such plans that fall within the
same calendar year.
(2) In determining the present value of the cumulative Accrued
Benefit or the amount of the account of any Employee, such
present value or account shall include the amount in dollar
value of the aggregate distributions made to such Employee
under the applicable plan during the five-year period
ending on the determination date, unless reflected in the
value of the Accrued Benefit or account balance as of the
most recent valuation date. Such amounts shall include
distributions to Employees that represented the entire
amount credited to their accounts under the applicable
plan.
(3) Further, in making such determination, such present value
or such account shall include any rollover contribution (or
similar transfer), as follows:
(A) If the rollover contribution (or similar transfer)
is initiated by the employee and made to or from a
plan maintained by another employer, the plan
providing the distribution shall include such
distribution in the present value or such account;
the plan accepting the distribution shall not
include such distribution in the present value or
such account unless the plan accepted it before
December 31, 1983.
(B) If the rollover contribution (or similar transfer)
is not initiated by the Employee or made from a plan
maintained by another employer, the plan accepting
the distribution shall include such distribution in
the present value or such account, whether the plan
accepted the distribution before or after December
31, 1983; the plan making the distribution shall not
include the distribution in the present value or
such account.
(4) Further, in making such determination, in any case where an
individual is a "Non-Key Employee," as defined in Section
14.08 with respect to an applicable plan, but was a Key
Employee with respect to such plan for any prior plan year,
any accrued benefit and any account of such Employee shall
be altogether disregarded. For this purpose, to the extent
that a Key Employee is deemed to be a key employee if he
met the definition of Key Employee
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<PAGE>
within any of the four preceding plan years, this provision
shall apply following the end of such period of time.
14.07 Key Employee. The term "Key Employee" means any Employee or former
------------
Employee under this Plan who, at any time during the Plan Year containing
the determination date or during any of the four preceding Plan Years, is
or was one of the following:
(a) An officer of the Employer having annual compensation greater than
50 percent of the amount in effect under Section 415(b)(1)(A) of
the Code for such Plan Year. Whether an individual is an officer
shall be determined by the Committee on the basis of all the facts
and circumstances, such as an individual's authority, duties and
term of office, not on the mere fact that the individual has the
title of an officer. For any such Plan Year, there shall be
treated as officers no more than the lesser of:
(1) 50 Employees, or
(2) the greater of three Employees or 10 percent of the
Employees.
For this purpose, the highest-paid officers shall be selected.
(b) One of the ten Employees owning (or considered as owning, within
the meaning of the constructive ownership rules of the Code) the
largest interests in an Affiliated Employer. An Employee who has
some ownership interest is considered to be one of the top ten
owners unless at least ten other Employees own a greater interest
than the Employee. However, an Employee will not be considered a
top ten owner for a Plan Year if the Employee earns less than the
amount in effect under Section 415(c)(1)(A) of the Code as in
effect for the calendar year in which the determination date
falls.
(c) Any person who owns (or is considered as owning within the meaning
of the constructive ownership rules of the Code) more than five
percent of the outstanding stock of an Affiliated Employer or
stock possessing more than five percent of the combined total
voting power of all stock of the Employer.
(d) A one-percent owner of an Affiliated Employer having an annual
compensation from the Employer of more than $150,000, and
possessing more than five percent of the combined total voting
power of all stock of an Affiliated Employer. For purposes of this
Section, Compensation means Compensation as defined in Section 415
of the Code.
For purposes of parts (a), (b), (c), and (d) of this definition, a
Beneficiary of a Key Employee shall be treated as a Key Employee. For
purposes of parts (c) and (d), each Affiliated Employer is treated
separately in determining ownership percentages; but, in determining the
amount of Compensation, each Affiliated Employer is taken into account.
-45-
<PAGE>
14.08 Non-Key Employee. The term "Non-Key Employee" means any Participant who
----------------
is not a Key Employee.
14.09 Collective Bargaining Rules. The provisions of Sections 14.02, 14.03, and
---------------------------
14.04 do not apply with respect to any Employee included in a unit of
Employees covered by a collective bargaining agreement unless the
application of such Sections has been agreed upon with the collective
bargaining agent.
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<PAGE>
ARTICLE 15
MISCELLANEOUS
-------------
15.01 Limitation on Distributions. Notwithstanding any provision of this Plan
---------------------------
regarding payment to Beneficiaries or Participants, or any other person,
the Committee may withhold payment to any person if the Committee
determines that such payment may expose the Plan to conflicting claims
for payment. As a condition for any payments, the Committee may require
such consent, representations, releases, waivers or other information as
it deems appropriate. The Committee may, in its discretion, comply with
the terms of any judgment or other judicial decree, order, settlement or
agreement including, but not limited to, a Qualified Domestic Relations
Order as defined in Section 414(p) of the Code.
15.02 Limitation on Reversion of Contributions. Except as provided in
----------------------------------------
subsections (a) through (c) below, Employer contributions made under the
Plan will be held for the exclusive benefit of Participants, Joint
Annuitants or Beneficiaries and may not revert to the Employer.
(a) A contribution made by the Employer under a mistake of fact may be
returned to the Employer within one year after it is contributed
to the Plan, to the extent that it exceeds the amount that would
have been contributed, absent the mistake in fact.
(b) A contribution conditioned on the Plan's initial qualification
under Sections 401(a) and 501(a) of the Code may be returned to
the Employer, if the Plan does not qualify, within one year after
the date the Plan is denied qualification.
(c) A contribution conditioned upon its deductibility under Section
404 of the Code, may be returned, to the extent the deduction is
disallowed, to the Employer within one year after the
disallowance.
Compensation attributable to amounts that may be returned to the Employer
pursuant to this Section may not be distributed, but, in the event that
there are losses attributable to such amounts, the amount returned to the
Employer shall be reduced by the amount of such losses.
15.03 Voluntary Plan. The Plan is purely voluntary on the part of the Employer
---------------
and neither the establishment of the Plan nor any Plan amendment nor the
creation of any fund or account, nor the payment of any benefits will be
construed as giving any Employee or any person legal or equitable right
against the Employer, any trustee or other Funding Agent, or the
Committee unless specifically provided for in this Plan or conferred by
affirmative action of the Committee or the Employer according to the
terms and provisions of this Plan. Such actions will not be construed as
giving any Employee or Participant the right to be retained in the
service of the Employer. All Employees and/or Participants will remain
subject to discharge to the same extent as though this Plan had not been
established.
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<PAGE>
15.04 Nonalienation of Benefits. Participants and Beneficiaries are entitled to
-------------------------
all the benefits specifically set out under the terms of the Plan, but
neither those benefits nor any of the property rights in the Plan are
assignable or distributable to any creditor or other claimant of a
Participant or Beneficiary. A Participant will not have the right to
anticipate, assign, pledge, accelerate, or in any way dispose of or
encumber any of the monies or benefits or other property that may be
payable or become payable to such Participant or his Beneficiary
provided, however, the Committee shall recognize and comply with a valid
Qualified Domestic Relations Order as defined in Section 414(p) of the
Code.
15.05 Inability to Receive Benefits. If the Committee receives evidence that a
-----------------------------
person entitled to receive any payment under the Plan is physically or
mentally incompetent to receive payment and to give a valid release, and
another person or any institution is maintaining or has custody of such
person, and no guardian, committee, or other representative of the estate
of such person has been duly appointed by a court of competent
jurisdiction, then any distribution made under the Plan may be made to
such other person or institution. The release of such other person or
institution will be a valid and complete discharge for the payment of
such distribution.
15.06 Missing Persons. If the Committee is unable, after reasonable and
---------------
diligent effort, to locate a Participant, Joint Annuitant, or Beneficiary
where no contingent beneficiary is provided under the Plan, who is
entitled to a distribution under the Plan, the distribution due such
person will be forfeited after five years. If, however, such a person
later files a claim for such benefit, it will be reinstated without any
interest earned thereon. In the event that a distribution is due to a
Beneficiary where a contingent beneficiary is provided under the Plan
(including the situation in which the contingent beneficiary is the
Participant's estate), and the Committee is unable, after reasonable and
diligent effort, to locate the Beneficiary, the benefit shall be payable
to the contingent beneficiary, and such nonlocatable Beneficiary shall
have no further claim or interest hereunder. Notification by certified or
registered mail to the last known address of the Participant or
Beneficiary will be deemed a reasonable and diligent effort to locate
such person.
15.07 Military Service. Notwithstanding any provision of this Plan to the
----------------
contrary, contributions, benefits and service credit with respect to
qualified military service will be provided in accordance with Section
414(u) of the Code.
15.08 Limitation of Third-Party Rights. Nothing expressed or implied in the
--------------------------------
Plan is intended or will be construed to confer upon or give to any
person, firm, or association other than the Employer, the Participants or
Beneficiaries, and their successors in interest, any right, remedy, or
claim under or by reason of this Plan except pursuant to a Qualified
Domestic Relations Order as defined in Section 414(p) of the Code.
15.09 Invalid Provisions. In case any provision of this Plan is held illegal or
------------------
invalid for any reason, the illegality or invalidity will not affect the
remaining parts of the Plan. The Plan will be construed and enforced as
if the illegal and invalid provisions had never been included.
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<PAGE>
15.10 One Plan. This Plan may be executed in any number of counterparts, each
--------
of which will be deemed an original and the counterparts will constitute
one and the same instrument and may be sufficiently evidenced by any one
counterpart.
15.11 Use and Form of Words. Whenever any words are used herein in the
---------------------
masculine gender, they will be construed as though they were also used in
the feminine gender in all cases where that gender would apply, and vice
versa. Whenever any words are used herein in the singular form, they will
be construed as though they were also used in the plural form in all
cases where the plural form would apply, and vice versa.
15.12 Headings. Headings to Articles and Sections are inserted solely for
--------
convenience and reference, and in the case of any conflict, the text,
rather than the headings, shall control.
15.13 Governing Law. The Plan will be governed by and construed according to
-------------
the federal laws governing employee benefit plans qualified under the
Code and according to the laws of the state of California where such laws
are not in conflict with the federal laws.
IN WITNESS WHEREOF, The PMI Group, Inc. has adopted this amended and
restated Plan effective as of January 1, 1998 (except as otherwise
specified herein).
THE PMI GROUP, INC.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
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<PAGE>
THE PMI GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
(Amended and Restated as of August 16, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
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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
6.1 Exercise of Option................................................................................ 4
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TABLE OF CONTENTS
(continued)
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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
12.8 Construction and Applicable Law.................................................................................. 8
12.9 Captions......................................................................................................... 8
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TABLE OF CONTENTS
(continued)
<TABLE>
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<S> <C> <C>
12.10 EXECUTION............................................................................................. 8
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<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.
The Plan is hereby amended and restated on the occasion of the Company's 3-for-2
stock split, effective as of August 16, 1999.
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
1
<PAGE>
date (or such lesser period of time as may be determined by the Committee in its
discretion), (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 300,000 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
2
<PAGE>
Eligible Employee must complete, sign and submit to the Company an enrollment
form in such 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;
3
<PAGE>
(b) purchase of shares upon exercise of the option will be
accomplished only in accordance with Section 6.1;
(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
4
<PAGE>
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 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;
5
<PAGE>
(c) To cause an account or accounts to be maintained for each
Participant;
(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>
EXHIBIT 11.1
------------
THE PMI GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF RESTATED NET INCOME PER SHARE (1)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- --------
(In thousands, except for per share data)
<S> <C> <C> <C>
Basic net income per common share:
Net income $204,466 $190,360 $175,309
Average common shares outstanding 44,893 47,091 50,079
-------- -------- --------
Basic net income per common share $ 4.55 $ 4.04 $ 3.50
======== ======== ========
Diluted net income per common share:
Net income $204,466 $190,360 $175,309
-------- -------- --------
Average common shares outstanding 44,893 47,091 50,079
Net shares to be issued upon exercise of dilutive
stock options after applying treasury stock method 351 208 186
-------- -------- --------
Average shares outstanding 45,244 47,299 50,265
-------- -------- --------
Diluted net income per common share $ 4.52 $ 4.02 $ 3.49
======== ======== ========
</TABLE>
(1) Restated to conform with Statement of Financial Accounting
Standards No. 128, Earnings per Share.
<PAGE>
EXHIBIT 12.1
THE PMI GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF PROFIT TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ --------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Income from continuing operations before
income taxes $ 290,086 $ 266,948 $ 242,867 $ 222,106 $ 180,541
============ ============ ============ =============== =============
Fixed Charges:
Rentals-- at computed interest* $ 2,760 $ 2,959 $ 2,549 $ 2,459 $ 2,046
Interest expense 8,554 7,029 6,766 907 -
Distributions on redeemable capital securities 8,311 8,311 7,617 - -
------------ ------------ ------------ --------------- -------------
Total fixed charges $ 19,625 $ 18,299 $ 16,932 $ 3,366 $ 2,046
============ ============ ============ =============== =============
Profit before taxes plus fixed charges $ 309,711 $ 285,247 $ 259,799 $ 225,472 $ 182,587
============ ============ ============ =============== =============
Ratio of adjusted profit to fixed charges 15.8 15.6 15.3 x 67.0 89.2
============ ============ ============ =============== =============
</TABLE>
* Those portions of rent expense that are representative of interest cost
<PAGE>
EXHIBIT 13.1
Item 6. Selected Financial Data
Eleven Year Summary of Financial and Operating Data
(Dollars in thousands, except per share data or otherwise noted)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Summary of Consolidated Operations:
Net premiums written ................... $ 571,253 $ 489,100 $ 432,052 $ 403,020 $ 314,021 $ 277,747
=========== =========== =========== =========== =========== ===========
Premiums earned ........................ $ 558,623 $ 491,226 $ 453,948 $ 412,738 $ 328,756 $ 296,345
Investment income, less
investment expense ................... 95,142 84,681 83,136 67,442 62,041 56,774
Realized capital gains, net ............ 509 24,636 19,584 14,296 11,934 3,064
Other income ........................... 15,850 20,366 7,979 6,948 2,309 3,802
----------- ----------- ----------- ----------- ----------- -----------
Total revenues ......................... 670,124 620,909 564,647 501,424 405,040 359,985
Total losses and expenses (1) .......... 380,038 353,961 321,780 279,318 224,499 221,434
----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations before taxes .............. 290,086 266,948 242,867 222,106 180,541 138,551
Income (loss) from
discontinued operations .............. -- -- -- -- -- --
Income tax expense (benefit) (2) ....... 85,620 76,588 67,558 64,188 45,310 32,419
----------- ----------- ----------- ----------- ----------- -----------
Net income ............................. $ 204,466 $ 190,360 $ 175,309 $ 157,918 $ 135,231 $ 106,132
=========== =========== =========== =========== =========== ===========
U.S. Mortgage Insurance Operating Ratios:
Loss ratio ............................. 24.7% 32.8% 38.2% 41.9% 38.5% 40.5%
Expense ratio .......................... 29.2% 25.5% 22.7% 18.4% 24.9% 30.1%
----------- ----------- ----------- ----------- ----------- -----------
Combined ratio ......................... 53.9% 58.3% 60.9% 60.3% 63.4% 70.6%
=========== =========== =========== =========== =========== ===========
Consolidated Balance Sheet Data:
Total assets ........................... $ 2,101,762 $ 1,777,870 $ 1,686,603 $ 1,509,919 $ 1,304,440 $ 1,097,421
Reserve for losses and loss
adjustment expenses .................. $ 282,000 $ 215,259 $ 202,387 $ 199,774 $ 192,087 $ 173,885
Long-term debt ......................... $ 145,367 $ 99,476 $ 99,409 $ 99,342 $ -- $ --
Preferred capital securities
of subsidiary trust .................. $ 99,075 $ 99,040 $ 99,006 $ -- $ -- $ --
Shareholders' equity ................... $ 1,217,268 $ 1,097,515 $ 1,061,180 $ 986,862 $ 870,503 $ 687,178
Shares Outstanding (thousands).......... 44,702 45,418 48,692 51,765 52,515 52,500
Per Share Data:
Net income
Operating ........................... $ 4.51 $ 3.69 $ 3.23 $ 2.83 $ 2.43 $ 1.98
Basic ............................... $ 4.55 $ 4.04 $ 3.50 $ 3.01 $ 2.58 $ 2.02
Diluted (3) ......................... $ 4.52 $ 4.02 $ 3.49 $ 3.00 $ 2.57 $ 2.02
Shareholders' equity ................... $ 27.23 $ 24.16 $ 21.79 $ 19.06 $ 16.58 $ 13.09
Price/Earnings Ratio (4) ............... 10.8 8.9 14.9 13.0 12.5 --
Stock Price(5): Close ................. 48 13/16 32 59/64 48 13/64 36 59/64 30 11/64 --
High .................. 55 1/2 57 49 21/64 40 35 43/64 --
Low ................... 26 43/64 22 31 53/64 26 37/64 24
Cash dividends declared ................ $ 0.14 $ 0.13 $ 0.13 $ 0.13 $ 0.10 $ --
PMI Operating and Statutory Data:
Number of policies in force ............ 749,985 714,210 698,831 700,084 657,800 612,806
Default rate ........................... 2.12% 2.31% 2.38% 2.19% 1.98% 1.88%
Persistency ............................ 71.9% 68.0% 80.8% 83.3% 86.4% 83.6%
Direct primary insurance
in force (in millions) ............... $ 86,729 $ 80,682 $ 77,787 $ 77,312 $ 71,430 $ 65,982
Direct primary risk in force
(in millions) ........................ $ 21,159 $ 19,324 $ 18,092 $ 17,336 $ 15,130 $ 13,243
Statutory capital ...................... $ 1,372,273 $ 1,193,899 $ 1,114,342 $ 988,475 $ 824,156 $ 659,402
Risk-to-capital ratio .................. 14.8:1 14.9:1 14.6:1 15.9:1 15.8:1 17.7:1
New insurance written (NIW) ............ $28,732,505 $27,820,065 $15,307,147 $17,882,702 $14,459,260 $18,441,612
Policies issued ........................ 219,038 211,161 119,190 142,900 119,631 156,055
Return on Equity ....................... 18.5% 19.0% 18.3% 17.8% 18.1% 17.3%
Tax Rate ............................... 29.5% 28.7% 27.8% 28.9% 25.1% 23.4%
NIW market share ....................... 16.3% 14.8% 12.7% 14.1% 13.2% 14.0%
Total PMI Employees ...................... 1,113 1,016 916 586 578 586
</TABLE>
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Summary of Consolidated Operations:
Net premiums written ................... $ 291,089 $ 208,602 $ 143,305 $ 120,532 $ 102,940
============ ============ ========== =========== ===========
Premiums earned ........................ $ 268,554 $ 173,039 $ 120,195 $ 101,913 $ 91,447
Investment income, less
investment expense ................... 45,733 40,847 40,402 38,261 35,943
Realized capital gains, net ............ 1,229 686 1,335 (524) (437)
Other income ........................... -- -- -- -- --
------------ ------------ ---------- ----------- -----------
Total revenues ......................... 315,516 214,572 161,932 139,650 126,953
Total losses and expenses (1) .......... 202,543 119,912 39,879 78,979 86,572
------------ ------------ ---------- ----------- -----------
Income from continuing
operations before taxes .............. 112,973 94,660 122,053 60,671 40,381
Income (loss) from
discontinued operations .............. (28,863) 6,726 3,709 1,562 974
Income tax expense (benefit) (2) ....... 24,305 (10,911) 69,661 9,649 2,535
------------ ------------ ---------- ----------- -----------
Net income ............................. $ 59,805 $ 112,297 $ 56,101 $ 52,584 $ 38,820
============ ============ ========== =========== ===========
U.S. Mortgage Insurance Operating Ratios:
Loss ratio ............................. 41.4% 33.2% 3.1% 47.4% 61.8%
Expense ratio .......................... 28.2% 27.0% 25.3% 25.5% 29.2%
------------ ------------ ---------- ----------- -----------
Combined ratio ......................... 69.6% 60.2% 28.4% 72.9% 91.0%
============ ============ ========== =========== ===========
Consolidated Balance Sheet Data:
Total assets ........................... $ 985,129 $ 815,136 $ 663,215 $ 569,550 $ 493,853
Reserve for losses and loss
adjustment expenses .................. $ 135,471 $ 94,002 $ 78,045 $ 115,805 $ 125,210
Long-term debt ......................... $ -- $ -- $ -- $ -- $ --
Preferred capital securities
of subsidiary trust .................. $ -- $ -- $ -- $ -- $ --
Shareholders' equity ................... $ 575,300 $ 513,583 $ 399,489 $ 338,632 $ 286,591
Shares Outstanding ..................... $ 52,500 $ 52,500 $ 52,500 $ 52,500 $ 52,500
Per Share Data:
Net income
Operating ........................... $ 1.12 $ 2.13 $ 1.05 $ 1.01 $ 0.74
Basic ............................... $ 1.14 $ 2.14 $ 1.07 $ 1.00 $ 0.74
Diluted (3) ......................... $ 1.14 $ 2.14 $ 1.07 $ 1.00 $ 0.74
Shareholders' equity ................... $ 10.96 $ 9.78 $ 7.61 $ 6.45 $ 5.46
Price/Earnings Ratio (4) ............... $ -- $ -- $ -- $ -- $ --
Stock Price(5): Close ................. $ -- $ -- $ -- $ -- $ --
High .................. $ -- $ -- $ -- $ -- $ --
Low ................... $ -- $ -- $ -- $ -- $ --
Cash dividends declared ................ $ -- $ -- $ -- $ -- $ --
PMI Operating and Statutory Data:
Number of policies in force ............ 543,924 428,745 347,232 313,035 300,429
Default rate ........................... 1.81% 2.03% 2.38% 2.38% 2.46%
Persistency ............................ 70.0% 74.6% 85.2% 86.5% 85.9%
Direct primary insurance
in force (in millions) ............... $ 56,991 $ 43,698 $ 31,982 $ 26,938 $ 24,448
Direct primary risk in force
(in millions) ........................ $ 11,267 $ 8,676 $ 6,481 $ 5,554 $ 5,152
Statutory capital ...................... $ 494,621 $ 456,931 $ 372,568 $ 314,037 $ 272,687
Risk-to-capital ratio .................. 20.8:1 19.0:1 18.8:1 18.6:1 19.5:1
New insurance written (NIW) ............ $ 25,469,907 $ 19,463,000 $8,663,000 $ 5,795,000 $ 5,117,000
Policies issued ........................ 207,356 161,893 75,095 49,943 45,134
Return on Equity ....................... 11.0% 24.6% 15.2% 16.8% 13.5%
Tax Rate ............................... 21.5% -11.5% 57.1% 15.9% 6.3%
NIW market share ....................... 18.6% 19.4% 15.9% 14.9% 13.7%
Total PMI Employees ...................... 632 529 410 400 379
</TABLE>
(1) In 1991, the Company significantly revised its estimate for losses and loss
adjustment expense, reducing total losses by $42.1 million and the loss
ratio by 35 percentage points, and increasing income from continuing
operations by $27.8 million
(2) During 1991, the Company increased its tax liabilities and income tax
expense by $40.9 million in light of an unfavorable judgment by the U. S.
Tax Court. In 1992, the 1991 judgement was overturned, and the Company re-
evaluated its tax balances and reduced its tax liabilities and income tax
expense by $30.9 million.
(3) Diluted earning per share per Statement of Financial Accounting Standards
No. 128. "Earnings per Share
(4) Based on closed price as of 12/31 on trailing twelve month operating.
(5) Close price as of 12/31. High and Low price for trailing twelve month period
adjusted for 3-for-2 stock split.
(6) Dividends adjusted to reflect 3-for-2 stock split.
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ITEM 7. 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) that statement that management believes this shift from refinance
activity to purchase money generally increases the private mortgage insurance
penetration rate; (ii) the statement that management anticipates that with
stable to increasing interest rates, the refinancing trend will continue to
decrease in 2000; (iii) the statement that management believes any increase in
the maximum FHA loan amount could 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; (iv) the statement that
during 2000, management expects the percentage of PMI's risk related to risk-
share programs, excluding pool risk, to continue to increase as a percentage of
total risk; (v) the statement that management is uncertain about the amount of
new pool risk that will be written in 2000, but believes total new 2000 pool
risk will be less than in 1999; (vi) the statement that management expected the
Fannie Mae and Freddie Mac reduction in mortgage insurance coverage requirements
would have negatively impacted the growth rate of direct risk in force; however,
PMI's percentage of insurance in force with higher coverage percentages
continues to increase as mortgage lenders and investors continue to prefer MI
policies with higher coverage percentages; (vii) the statement that management
anticipates that the percentage of new insurance written ("NIW") subject to
captive mortgage reinsurance agreements and other risk-share programs will
continue to increase in 2000 and beyond. In addition, the anticipated continued
growth of captive reinsurance arrangements is expected to reduce the Company's
net premiums written and net premiums earned; (viii) the statement that
management anticipates the percentage of insurance in force with higher coverage
percentages will continue to increase due to greater acceptance of this product
by mortgage lenders and investors; (ix) the statement that although management
expects that California should continue to account for a significant portion of
total claims paid, management anticipates that with a continuing vibrant
California economy, loss mitigation efforts and improved default reinstatement
rates, California claims paid as a percentage of total claims paid should
continue to decline; (x) the statement that management believes that PMI's total
default rate could increase in 2000 due to the continued maturation of insurance
in force; (xi) the statement that management anticipates that contract
underwriting will continue to generate a significant, but
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decreasing percentage of PMI's NIW in 2000; and (xii) the statement that
management expects international mortgage insurance operations to generate a
greater percentage of consolidated net income in 2000 and beyond. 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 captioned "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.
RESULTS OF CONSOLIDATED OPERATIONS:
1999 versus 1998
Consolidated net income was $204.5 million in 1999, a 7.4% increase over 1998.
The growth can be attributed to increases in premiums earned of 13.7%, net
investment income of 12.4% and to a decrease in losses and loss adjustment
expenses of 17.0%, partially offset by an increase in acquisition, underwriting
and other operating expenses of 23.5% and a decrease in realized capital gains
of $24.1 million. These results include the operations of PMI Mortgage Insurance
Ltd. ("PMI Ltd.", see Footnote 3, "Acquisitions", of the Consolidated Financial
Statements) from the acquisition date of August 6 through December 31, 1999,
which contributed $6.7 million to net income. Diluted net earnings per share
(including realized capital gains) increased by 12.4% to $4.52 in 1999.
Excluding capital gains, diluted operating earnings per share increased by 22.2%
to $4.51. Consolidated revenues in 1999 increased by 7.9% to $670.1 million.
U.S. Mortgage Insurance Operations
The Company's primary operating subsidiary, PMI Mortgage Insurance Co. ("PMI"),
generated over 90% of consolidated net income, which was derived from mortgage
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guaranty insurance written in the United States. During 1999, PMI's new
insurance written ("NIW") increased by 1.7% to $28.3 billion primarily as a
result of the growth in volume of the private mortgage insurance industry and
the increase in PMI's market share. During 1999, PMI wrote an additional $0.5
billion of seasoned insurance (mortgages insured over one year after the closing
date) not included in NIW.
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 0.8% to a new record level of $188.9
billion. This increase was the result of the second highest year of total
residential mortgage originations, estimated at $1.3 trillion compared with $1.5
trillion in 1998 (Source: Inside Mortgage Finance). Total mortgage originations
were driven primarily by continued low interest rates in the first half of the
year. During the second half of the year, interest rates began to rise, which
decreased refinance activity and increased the percentage of "purchase money"
originations. This shift from refinance activity to purchase money generally
increases the private mortgage insurance penetration rate (the percent of total
mortgage originations insured by MICA). MICA's penetration rate increased to
14.7% in 1999 from 12.4% in 1998. Management anticipates that with stable to
increasing interest rates, the refinancing trend will continue to decrease in
2000. The increase in new insurance written was partially offset by decline in
the private mortgage insurance companies' market share to 52.4% of the total low
downpayment market (insurable loans) from 56.3% in 1998. Management believes
the decrease resulted in part from the increase in the maximum individual loan
amount the FHA can insure. Any increase in the maximum FHA loan amount could
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.
PMI's market share of NIW increased to 15.0% in 1999 from 14.8% in 1998 (Source:
Inside Mortgage Finance). On a combined basis with CMG Mortgage Insurance
Company ("CMG"), market share increased to 16.3% in 1999 compared with 16.1% in
1998. The increases in market share were primarily due to the acceptance by its
customers of PMI's value added, risk sharing and GSE pool products. GSE pool
risk in force totaled $681.4 million and $450.0 million as of December 31, 1999
and 1998, respectively. Primary risk in force under risk-share programs with
PMI's customers, excluding pool insurance, represented 20.2% of total risk in
force at December 31, 1999, compared with 10.2% at December 31, 1998. During
2000, management expects the percentage of PMI's risk related to risk-share
programs, excluding pool risk, to continue to increase as a percent of total
risk. Management is uncertain about the amount of new pool risk that will be
written in 2000, but believes total new 2000 pool risk will be less than in
1999. Management expected the Fannie Mae and Freddie Mac reduction in mortgage
insurance coverage requirements would have negatively impacted the growth rate
of direct risk in force. However, PMI's percentage of insurance in force with
higher coverage percentages continues to increase as mortgage lenders and
investors continue to prefer MI policies with higher coverage percentages.
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PMI's cancellations of insurance in force decreased by 10.8% to $22.2 billion in
1999 primarily due to the increase in interest rates during the second half of
the year causing the decrease in refinancing activity. As a result of the
decrease in policy cancellations, PMI's persistency rate increased to 71.9% as
of December 31, 1999, compared with 68.0% as of December 31, 1998.
Insurance in force increased by 7.4% to $86.7 billion at December 31, 1999. On a
combined basis with CMG, insurance in force grew by 9.0% to $92.5 billion at
December 31, 1999. PMI's market share of combined insurance in force increased
by 0.2 percentage points to 15.5% (Source: Inside Mortgage Finance). PMI's risk
in force increased by 9.5% and, when combined with CMG, grew by 10.8% to $22.6
billion. The growth rate of risk in force is greater than insurance in force and
is due to terminating policies being replaced by new policies with higher
coverage percentages.
Consolidated U.S. mortgage insurance net premiums written (which includes net
cessions and refunds) grew by 12.0% to $459.1 million in 1999. This increase was
primarily due to the growth of risk in force of both primary and pool insurance
and the continued shift to deeper coverage for primary insurance, the increase
in the persistency rate and to the recapture agreement of the Old Pool business
reinsured by Forestview Mortgage Insurance Company ("Forestview", see Footnote 7
"Reinsurance" of the Consolidated Financial Statements). The Forestview old pool
risk in force was $1.4 billion at December 31, 1999. Refunded premiums decreased
by 28.8% to $15.6 million as a result of the decrease in policy cancellations.
Ceded premiums written increased by 32.5% to $22.3 million due to the increasing
popularity and usage of captive reinsurance arrangements. Approximately 25% of
new insurance written in 1999 was subject to captive mortgage reinsurance
agreements. Management anticipates that the percent of NIW subject to captive
mortgage reinsurance agreements and other risk-share programs will continue to
increase in 2000 and beyond. In addition, the anticipated continued growth of
captive reinsurance arrangements is expected to reduce the Company's net
premiums written and net premiums earned. Mortgage insurance premiums earned
increased 8.6% to $447.2 million in 1999 primarily due to the increase in
premiums written, partially offset by an increase in unearned premiums related
to Forestview.
As discussed above, the percentage of PMI's insurance in force with deeper
coverage continued to increase despite new product offerings by Fannie Mae and
Freddie Mac. Mortgages with original loan-to-value ratios greater than 95% and
equal to or less than 97% ("97s") with 35% insurance coverage increased to 4.5%
of risk in force as of December 31, 1999, from 2.9% as of December 31, 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 37.6% of risk in
force as of December 31, 1999, from 34.4% as of December 31, 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 31.8% of risk in force as
of December 31, 1999, compared with 29.2% as of December 31, 1998. Management
anticipates the percentage of insurance in force with higher
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coverage percentages will continue to increase due to greater acceptance of this
product by mortgage lenders and investors.
Mortgage insurance losses and loss adjustment expenses decreased 18.2% to $110.5
million in 1999 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 3.8% to 15,893 at December 31,
1999. PMI's national default rate decreased by 0.19 percentage points to 2.12%
at December 31, 1999, primarily due to an increase in policies in force, along
with the decrease in loans in default.
Direct primary claims paid decreased by 32.8% to $79.6 million due to a 13.3%
decrease in the average claim size to approximately $20,200 and a 22.3% decline
in the number of claims paid to 3,945 in 1999. The reduction in average claims
size 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. If interest rates continue to rise in 2000, loss mitigation
opportunities may decrease. The decrease in the number of claims paid is due to
the improvement in nationwide housing markets and the overall national economic
expansion.
The default rate on PMI's California portfolio decreased to 2.59% (representing
2,382 loans in default) at December 31, 1999, from 3.15% (representing 3,067
loans in default) at December 31, 1998. Policies written in California accounted
for approximately 29.3% and 48.2% of the total dollar amount of claims paid in
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 a continuing vibrant California economy, loss mitigation
efforts and improved default reinstatement rates, California claims paid as a
percentage of total claims paid should continue to decline. Management believes
that PMI's total default rate could increase in 2000 due to the maturation of
insurance in force.
Mortgage insurance policy acquisition costs incurred and deferred (including,
among other field expenses, contract underwriting expenses) increased by 2.3% to
$85.9 million in 1999 primarily as a result of the 3.3% increase in NIW.
Amortization of policy acquisition costs increased 33.2% to $80.3 million
primarily due to 1998 and 1999 deferrals (See Note 6 "Deferred Acquisition
Costs" of Notes to Consolidated Financial Statements). A significant portion of
policy acquisition costs relates to contract underwriting. New policies
processed by contract underwriters represented 28.8% of PMI's NIW in 1999
compared with 35.0% 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, but
decreasing, percentage of PMI's NIW in 2000. Underwriting and other mortgage
insurance operating expenses increased by 21.9% to $54.0 million in 1999 due
primarily to an increase in the amortization of certain obsolete computer
equipment and operating
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systems associated with Y2K remediation efforts, and secondarily to increases in
payroll and related costs.
The mortgage insurance loss ratio declined by 8.1 percentage points to 24.7% in
1999. 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 3.7 percentage points to 29.2% primarily due to
the increase in the amortization of policy acquisition costs and the increase in
underwriting and other mortgage insurance expenses, partially offset by the
increase in net premiums written. In addition, the increase in captive
reinsurance premium cessions negatively affected the expense ratio. The combined
ratio decreased by 4.4 percentage points to 53.9% in 1999.
International Mortgage Insurance Operations
During 1999, the Company commenced operations in Australia and Hong Kong. The
Company's Australian affiliate, PMI Ltd., was acquired on August 6, 1999. For
the period beginning August 6, 1999 through December 31, 1999, PMI Ltd.
generated $12.1 million of net premiums written and $11.3 million in net
premiums earned. Mortgage insurance loss expenses since the acquisition were
$1.2 million and underwriting and other expenses were $4.5 million. Financial
results for the operations in Hong Kong were immaterial during 1999. Management
expects international mortgage insurance operations to generate a greater
percentage of consolidated net income in 2000 and beyond.
Title Insurance Operations
Title insurance premiums earned increased 26.2% to $100.1 million in 1999
primarily due to American Pioneer Title Insurance Company's ("APTIC") expansion
into new states. APTIC was licensed in 41 states at December 31, 1999. In 1999,
72.9% of APTIC's premiums earned came from its Florida operations, compared with
77.3% in 1998. Underwriting and other expenses increased 27.6% to $88.2 million
because of an increase in agency fees and commissions related to the increase in
premiums earned. The title insurance combined ratio increased by 1.2 percentage
points to 89.1%.
Other
In 1999, the Company's consolidated net investment income (excluding realized
capital gains) increased by $10.4 million to $95.1 million. This increase is
primarily due to an increase in the investment portfolio of approximately $250
million (including $160.9 million as a result of PMI Ltd.) and secondarily to an
increase in equity earnings of $3.8 million. Investments in affiliates
increased to $91.5 million at year-end 1999 from $60.5 million at year-end 1998.
The average book yield of the investment portfolio decreased from 6.1% in 1998
to 5.9% in 1999 due to a higher percentage of the portfolio invested in tax-free
municipal bonds. Realized capital gains decreased by $24.1 million to $0.5
million due to the restructuring of the investment portfolio in 1998.
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Other income, primarily contract underwriting revenues generated by PMI Mortgage
Services Co. ("MSC"), decreased by 22.1% to $15.9 million in 1999. Contract
underwriting revenues decreased by 39.6% as a result of the decrease in
refinance activity in the second half of 2000. Operating expenses incurred by
MSC decreased by 35.6% to $18.3 million as a result of the decrease in refinance
activity in the second half of 2000.
The Company's effective tax rate increased to 29.5% in 1999 from 28.7% in 1998
as a result of a decrease in the proportion of tax-exempt investment income
relative to total income.
1998 Versus 1997
Consolidated net income was $190.4 million in 1998, an 8.6% increase over 1997.
The growth can be attributed to increases in premiums earned of 8.2% and other
income of 155.2% and to a decrease in losses and loss adjustment expenses of
10.9%, partially offset by an increase in other operating expenses, including
policy acquisition costs, of 30.8%. Including capital gains, diluted earnings
per share increased by 15.5% to $6.04 in 1998. Excluding capital gains, diluted
operating earnings per share increased by 14.0% to $5.53. Revenues in 1998
increased by 10.0% to $620.9 million.
Mortgage Insurance Operations
PMI's NIW increased by 81.7% 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 and secondarily to a 2.6% increase in the average insured loan size to
$131,700.
The members of the private mortgage insurance industry, as reported by the
industry's trade association, MICA, experienced an increase in total new
insurance written of 55.0% to $187.4 billion, benefiting from the record year of
total residential mortgage originations, estimated at $1.5 trillion. (Source:
Inside Mortgage Finance) The increase was caused primarily by low interest
rates, which produced record levels of both refinance activity as well as new
and existing home sales. Refinancing as a percentage of PMI's NIW increased to
31.0% in 1998 from 13.8% in 1997. In addition, the private mortgage insurance
companies' market share increased to 56.3% of the total low downpayment market
(insurable loans) from 54.5% in 1997. (Source: Inside Mortgage Finance)
PMI's market share of NIW increased to 14.8% in 1998 from 12.7% in 1997. On a
combined basis with CMG, market share increased to 16.1% in 1998 compared with
13.8% in 1997. In the fourth quarter of 1998, combined market share increased to
16.4% compared with 13.7% in the fourth quarter of 1997. The increases in market
share were primarily due to contract underwriting services, pool insurance
products, and risk sharing programs offered by PMI. Pool risk totaled $450.3
million for the year. There was no pool risk written in 1997. Risk in force
under risk-share programs with PMI's customers,
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represented approximately two percent of the $19.3 billion total primary risk in
force at December 31, 1998. Risk in force under risk-share programs with PMI's
customers, excluding pool insurance, represented 10.2% of total risk in force at
December 31, 1998, compared with 3.1% at December 31, 1997. During 1999,
management expects the percentage of PMI's risk related to risk-share programs
and represented by pool risk 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.
PMI's cancellations of insurance in force increased by 68.2% to $24.9 billion in
1998 primarily due to mortgage prepayments as a result of low interest rates
which caused high levels of refinancing activity. As a result of the higher
cancellation activity, PMI's persistency rate decreased to 68.0% as of December
31, 1998, compared with 80.8% as of December 31, 1997.
Insurance in force increased by 3.7% in 1998. On a combined basis with CMG,
insurance in force grew by 5.9% to $84.9 billion at December 31, 1998. PMI's
market share of insurance in force grew by 0.5 percentage points to 15.3%. PMI's
risk in force increased by 6.8% and, when combined with CMG, grew by 8.9% to
$20.4 billion. 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 grew by 10.1% to $409.8 million in 1998
primarily due to the growth of risk in force of both primary and pool insurance
and the continued shift to deeper coverage for primary insurance partially
offset by an increase in refunded premiums of 39.2% to $21.9 million as a result
of the increase in policy cancellations. Mortgage insurance premiums earned
increased 4.5% to $411.9 million in 1998 primarily due to the increase in
premiums written. Ceded premiums were $18.3 million in 1998, increasing 15.2%
from prior year. Management anticipates ceded premiums will increase
substantially in the future as a result of the expected increase in risk-share
programs.
PMI's monthly product represented 71.6% of risk in force at December 31, 1998,
compared with 58.2% at December 31, 1997. Mortgages with original loan-to-value
ratios greater than 90% and equal to or less than 95% ("95s") with 30% insurance
coverage increased to 34.4% of risk in force as of December 31, 1998, from 28.8%
as of December 31, 1997. Mortgages with original loan-to-value ratios greater
than 85% and equal to or less than 90% ("90s") with 25% insurance coverage
increased to 29.2% of risk in force as of December 31, 1998, compared with 23.6%
as of December 31, 1997. Management anticipates the percentage of insurance in
force with higher coverage percentages will begin to 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.
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Mortgage insurance losses and loss adjustment expenses decreased 10.2% to $135.1
million in 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 less than one percent to 16,526 at
December 31, 1998. PMI's national default rate decreased by 0.07 percentage
points to 2.31% at December 31, 1998, primarily due to an increase in policies
in force.
Direct primary claims paid decreased by 19.5% to $118.4 million due to an 11.6%
decrease in the average claim size to approximately $23,300 and an 8.9% decline
in the number of claims paid to 5,077 in 1998. 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 3.15% (representing
3,067 loans in default) at December 31, 1998, from 3.73% (representing 3,987
loans in default) at December 31, 1997. Policies written in California accounted
for approximately 48.2% and 64.5% of the total dollar amount of claims paid in
1998 and 1997, 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. Management believes that PMI's total default rate could increase in
1999 due to the continued maturation of its 1994 and 1995 books of business.
Mortgage insurance policy acquisition costs incurred and deferred (including,
among other field expenses, contract underwriting expenses) increased by 69.3%
as a result of the 81.7% increase in NIW. Amortization of policy acquisition
costs increased 38.9%. (See Note 6 "Deferred Acquisition Costs" of Notes to
Consolidated Financial Statements) New policies processed by contract
underwriters represented 35.0% of PMI's NIW in 1998 compared with 21.6% in 1997.
Contract underwriting has become 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.
Other mortgage insurance operating expenses increased by 8.0% to $44.3 million
in 1998 from $41.0 million in 1997 resulting from Year 2000 remediation costs of
$3.9 million, compared with $0.3 million of such costs in 1997. The mortgage
insurance loss ratio declined by 5.4 percentage points to 32.8% in 1998 due to
the growth in premiums earned coupled with the decrease in losses and loss
adjustment expenses, as discussed above. The expense ratio increased by 2.8
percentage points to 25.5% primarily due to the increase in policy acquisition
costs resulting from the growth in NIW and secondarily to Year 2000 remediation
costs. Excluding Year 2000 remediation expenses, the expense ratio was 24.6% for
1998 compared with 22.6% for 1997. The combined ratio decreased by 2.6% to
58.3% in 1998.
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Title Insurance Operations
Title insurance premiums earned increased 32.3% to $79.3 million 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
licensed in 39 states at December 31, 1998, a 14.7% increase from December 31,
1997. In 1998, 77.3% of APTIC's premiums earned came from its Florida
operations, compared with 81.6% in 1997. Underwriting and other expenses
increased 30.1% to $69.1 million because of an increase in agency fees and
commissions related to the increase in premiums earned. The title insurance
combined ratio decreased by 3.9 percentage points to 87.9%.
Other
In 1998, the Company's net investment income increased by $1.5 million to $84.7
million primarily due to a $1.8 million increase in equity earnings. Investments
in affiliates increased to $60.5 million at year-end 1998 from $17.0 million at
year-end 1997. The average book value of the investment portfolio increased 1.2%
and the yield decreased from 6.14% in 1997 to 6.06% in 1998.
Other income, primarily contract underwriting revenues generated by MSC,
increased by 155.0% to $20.4 million in 1998 while other expenses, primarily
expenses incurred by MSC, increased by 27.6% to $142.6 million. These increases
are the result of increased contract underwriting services provided to the
Company's mortgage insurance customers.
The Company's effective tax rate increased to 28.7% in 1998 from 27.8% in 1997
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 The PMI Group,
Inc. ("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
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 the lesser of 10% of the policyholder surplus as of the preceding year
or the last calendar year's net income, not including realized capital gains.
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The terms of the $45.8 million credit agreement dated August 3, 1999 executed
among TPG, PMI Mortgage Insurance Australia (Holdings) Pty Limited, and Bank of
America, N.A., ("Credit Agreement") in connection with the Company's acquisition
of PMI Ltd, provide in part that: (i) TPG's consolidated net worth shall not be
less than $600 million; (ii) PMI's statutory capital (as defined) 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. 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.
Further, pursuant to the terms of an indenture for $100 million 6 3/4% senior
notes ("Note") issued by TPG on November 15, 1996; and the terms of two lines of
credit agreements each in the amount of $25 million ("Credit Lines"), in the
event of default under any indebtedness, all outstanding amounts under the
Credit Lines and Note may be accelerated and become immediately payable by TPG.
At December 31, 1999, there were no outstanding borrowings under the credit
lines.
In addition to the dividend restrictions described above, the Company's Credit
Lines 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 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. PMI declared and paid extraordinary dividends of $94.4
million to TPG in 1999.
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 1999, TPG purchased
$24.8 million of the Company's common stock.
As of December 31, 1999, TPG had approximately $95 million of available funds.
This amount has increased from the December 31, 1998 balance of $55 million due
to the receipt of dividends from PMI and APTIC, partially offset by an increase
in the investment of RAM Reinsurance Company Ltd. ("RAM Re") and common stock
repurchases.
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
11
<PAGE>
advance of the payment of claims. Cash flows generated from PMI's operating
activities totaled $237.3 million and $154.0 million in 1999 and 1998,
respectively.
The Company's invested assets increased by $285.1 million at December 31, 1999
due to cash flows from consolidated operations of $314.8 million and the
addition of PMI Ltd's investment portfolio of $160.9 million. This increase was
offset by a net unrealized loss of $80.2 million, the funds used in the
acquisition of PMI Ltd., the common stock repurchases and dividends paid of $5.2
million.
Consolidated reserves for losses and loss adjustment expenses increased by 31.0%
in 1999 to $282.0 million primarily due to the addition of Old Pool loss
reserves of $42.5 million in connection with the recapture agreement with
Forestview, and to increases in primary and GSE pool loss reserves.
Consolidated shareholders' equity increased by $119.8 million in 1999,
consisting of increases of $204.5 million from net income and $1.0 million from
stock option activity, offset by $54.3 million from other comprehensive losses
net of unrealized gains on investments, common stock repurchases of $24.8
million, and dividends declared of $6.6 million.
PMI's statutory risk-to-capital ratio at December 31, 1999 was 14.8:1, compared
with 14.9:1 at December 31, 1998.
CAUTIONARY STATEMENTS AND INVESTMENT CONSIDERATIONS
GENERAL ECONOMIC CONDITIONS (IC1)
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 reduce the demand for mortgage
insurance, cause claims on policies issued by PMI to increase, and increase
PMI's loss experience.
MARKET SHARE AND COMPETITION (IC2)
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 of lending institutions that
choose to remain uninsured, self-insure through affiliates, or offer residential
mortgage products that do not require mortgage insurance.
12
<PAGE>
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.
On October 4 1999, the Federal Housing Finance Board adopted resolutions which
authorizes 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
program. Under this program, each FHLB is 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 10% of the purchase price from 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 the increase in the maximum
individual loan amount the FHA can insure. The Department of Housing and Urban
Development has announced a proposed increase in the maximum individual loan
amount that FHA can insure to $219,849 from $208,800. If this increase is
approved, demand for private mortgage insurance could decrease. In addition,
the Omnibus Spending Bill of 1999, signed into law on October 21, 1998,
streamlined the FHA down-payment formula and made FHA insurance more competitive
with private mortgage insurance in areas with higher home prices.
13
<PAGE>
FANNIE MAE AND FREDDIE MAC (IC3)
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
were to become widely accepted by mortgage lenders and their customers, the
reduction could harm the Company's financial condition and results of
operations.
On April 13, 1999 the Office of Federal Housing Enterprise Oversight announced
proposed risk-based capital regulations, which 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 an AA or
lower rating. 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 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.
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.
14
<PAGE>
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. 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, 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. Management is
uncertain about the impact of this 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 operations.
During an environment 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 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
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. 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-would seriously harm effect
the Company's financial condition and results of operations (See IC3).
15
<PAGE>
LIQUIDITY (IC6)
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 (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. 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 (IC8)
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
16
<PAGE>
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. PMI is reviewing the Illinois Letter. 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 (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.
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 (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 December
31, 1999, 46.7% of PMI's risk in force consisted of 95s, which, in PMI's
experience, have had a
17
<PAGE>
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 December 31, 1999, 4.9% 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,
which is generally used as an additional credit enhancement for certain
secondary market mortgage transactions. New pool risk written was $231 million
for the year ended December 31, 1999 and $450 million for the year ended
December 31, 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 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 (IC11)
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 (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 AND INTERNATIONAL RISKS (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 15.6%, 7.5% and 7.3% of its risk in force concentrated and where the default
rate on all PMI policies in force is 2.6%, 3.0% and 2.1% compared with 2.1%
nationwide as of December 31, 1999.
18
<PAGE>
As the Company seeks to expand its business internationally, it will
increasingly be subject to risks associated with international operations,
including the need for regulatory and third party approvals, challenges
retaining key foreign-based employees and maintaining key relationships with
customers and business partners in international markets, the economic strength
of the mortgage origination markets in targeted foreign markets, including
Australia, New Zealand, and Hong Kong, changes in foreign regulations and laws,
foreign currency exchange and translation issues, potential increases in the
level of defaults and claims on policies insured by foreign-based subsidiaries,
and the need to integrate PMI's risk management technology systems and products
with those of its foreign operations.
CAPTIVE REINSURANCE ARRANGEMENTS; RISK-SHARING TRANSACTIONS (IC14)
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 (IC15)
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.
19
<PAGE>
Consolidated Statements of
O p e r a t i o n s
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands, except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues Premiums earned $ 558,623 $ 491,226 $ 453,948
Investment income, less investment expense 95,142 84,681 83,136
Realized capital gains 509 24,636 19,584
Other income 15,850 20,366 7,979
-----------------------------------------------
Total revenues 670,124 620,909 564,647
-----------------------------------------------
Losses and Losses and loss adjustment expenses 112,682 135,716 152,257
Expenses Amortization of policy acquisition costs 80,252 60,280 43,395
Underwriting and other operating expenses 170,239 142,625 111,745
Interest expense 8,554 7,029 6,766
Distributions on preferred capital securities 8,311 8,311 7,617
-----------------------------------------------
Total losses and expenses 380,038 353,961 321,780
-----------------------------------------------
Income before income taxes 290,086 266,948 242,867
Income tax expense 85,620 76,588 67,558
-----------------------------------------------
Net income $ 204,466 $ 190,360 $ 175,309
==============================================
Per Share Basic net income per common share $ 4.55 $ 4.04 $ 3.50
===============================================
Diluted net income per common share $ 4.52 $ 4.02 $ 3.49
==============================================
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
Consolidated
B a l a n c e S h e e t s
<TABLE>
<CAPTION>
As of December 31,
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets Investments:
Available for sale, at fair value:
Fixed income securities (amortized
cost $1,485,396 and $1,268,625) $ 1,479,310 $ 1,356,869
Equity securities:
Common (cost $44,714 and $34,129) 83,890 58,785
Preferred (cost $17,660 and $17,240) 17,582 17,706
Common stock of affiliates, at underlying book value 91,453 60,450
Short-term investments 145,093 38,414
-------------------------------
Total investments 1,817,328 1,532,224
Cash 28,076 9,757
Accrued investment income 22,058 20,150
Reinsurance recoverable and prepaid premiums 50,714 42,102
Premiums receivable 30,659 24,367
Receivable from affiliate 2,996 2,229
Receivable from Allstate - 23,657
Deferred policy acquisition costs 69,579 61,605
Property and equipment, net 40,462 37,630
Other assets 38,890 24,149
-------------------------------
Total assets $ 2,100,762 $ 1,777,870
===============================
Liabilities Reserve for losses and loss adjustment expenses $ 282,000 $ 215,259
Unearned premiums 182,089 94,886
Long-term debt 145,367 99,476
Reinsurance balances payable 25,415 14,764
Deferred income taxes 75,640 96,730
Other liabilities and accrued expenses 73,908 60,200
-------------------------------
Total liabilities 784,419 581,315
-------------------------------
Commitments and contingent liabilities (Note 12) - -
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trust holding solely
junior subordinated deferrable interest debenture of
the Company 99,075 99,040
Shareholders' Preferred stock - $.01 par value; 5,000,000 shares
authorized - none issued - -
Equity Common stock - $.01 par value; 187,500,000 shares
authorized, 52,793,777 and 35,196,002 issued 528 352
Additional paid-in capital 265,828 265,040
Accumulated other comprehensive income 20,186 74,462
Retained earnings 1,258,617 1,060,724
-------------------------------
1,545,159 1,400,578
Less treasury stock (8,091,924 and 4,917,401 shares at cost) 327,891 303,063
-------------------------------
Total shareholders' equity 1,217,268 1,097,515
-------------------------------
Total liabilities and shareholders' equity $ 2,100,762 $ 1,777,870
===============================
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
Consolidated Statements of
S h a r e h o l d e r s' E q u i t y
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Balance, beginning of year $ 352 $ 351 $ 350
Stock 3 for 2 stock split in the form of a stock dividend 176 - -
Stock grants and exercise of stock options - 1 1
------------------------------------------
Balance, end of year 528 352 351
------------------------------------------
Additional Balance, beginning of year 265,040 262,448 258,059
Paid-in 3 for 2 stock split in the form of a stock dividend (176) - -
Capital Stock grants and exercise of stock options 964 2,592 4,389
------------------------------------------
Balance, end of year 265,828 265,040 262,448
------------------------------------------
Accumulated Balance, beginning of year 74,462 71,936 50,709
Other Unrealized gains on investments:
Comprehensive Income Unrealized holding gains (losses) arising during
period [net of tax (tax benefits) of ($29,047),
$9,982, and $18,285] (53,945) 18,539 33,957
Less: reclassification adjustment for gains
included in net income
(net of tax of $178, $8,623, and
$6,854) (331) (16,013) (12,730)
------------------------------------------
Other comprehensive income (loss), not of tax (54,276) 2,526 21,227
------------------------------------------
Balance, end of year 20,186 74,462 71,936
------------------------------------------
Retained Balance, beginning of year 1,060,724 876,588 707,885
Earnings Net income 204,466 190,360 175,309
Dividends declared (6,573) (6,224) (6,606)
-------------------------------------------
Balance, end of year 1,258,617 1,060,724 876,588
-------------------------------------------
Treasury Balance, beginning of year (303,063) (150,143) (30,141)
Stock Purchases of The PMI Group, Inc.
Common stock (24,828) (152,920) (120,002)
-------------------------------------------
Balance, end of year (327,891) (303,063) (150,143)
-------------------------------------------
Total shareholders' equity $1,217,268 $1,097,515 $ 1,061,180
===========================================
Comprehensive Net income $ 204,466 $ 190,360 $ 175,309
Income Other comprehensive income (loss), net of tax (54,276) 2,526 21,227
-------------------------------------------
Comprehensive income $ 150,190 $ 192,886 $ 196,536
===========================================
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
Consolidated Statements of
C a s h F l o w s
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Net income $ 204,466 $ 190,360 $ 175,309
Flows Reconciliation of net income to net cash provided by
from operating activities:
Operating Realized capital gains, net (509) (24,636) (19,584)
Activities Equity in earnings of affiliates (7,061) (3,225) (1,455)
Depreciation and amortization 13,243 6,282 4,679
Changes in:
Reserve for losses and loss adjustment
expenses 8,142 12,872 2,613
Unearned premiums 13,526 736 (22,801)
Deferred policy acquisition costs (7,973) (23,741) (6,231)
Accrued investment income (1,903) 644 (1,355)
Reinsurance balances payable 4,495 2,936 (1,467)
Reinsurance recoverable and prepaid premiums 53,616 (10,426) 51,703
Premiums receivable (6,292) (4,611) (5,109)
Income taxes 7,539 19,444 14,179
Receivable from affiliate 3,170 (1,778) 127
Receivable from Allstate 23,657 (6,835) -
Other 6,649 20,079 (4,070)
-------------------------------------------
Net cash provided by operating activities 314,765 178,101 186,538
-------------------------------------------
Cash Proceeds from sales of equity securities 42,647 75,181 82,008
Flows Investment collections of fixed income securities 3,000 54,374 13,590
from Proceeds from sales of fixed income securities 228,673 120,404 367,865
Investing Purchases of fixed income securities (332,046) (207,686) (573,627)
Activities Purchases of equity securities (31,940) (53,092) (33,010)
Net (decrease) increase in short-term investments (84,508) 40,476 2,986
Purchase of PMI Ltd. (78,295) - -
Purchase of Pinebrook Insurance Company (22,577) - -
Investment in affiliates (25,634) (40,024) (3,600)
Purchases of property and equipment (12,528) (12,417) (13,687)
-------------------------------------------
Net cash used in investing activities (313,208) (22,784) (157,475)
-------------------------------------------
Cash Issuance of redeemable preferred capital securities - - 99,000
Flows Issuance of long-term debt 45,825 - -
from Proceeds from exercise of stock options 964 2,592 3,181
Financing Dividends paid to shareholders (5,199) (6,333) (6,733)
Activities Purchases of The PMI Group, Inc. common stock (24,828) (152,920) (120,002)
-------------------------------------------
Net cash provided by (used in) financing
activities 16,762 (156,661) (24,554)
-------------------------------------------
Net increase (decrease) in cash 18,319 (1,344) 4,509
Cash at beginning of year 9,757 11,101 6,592
-------------------------------------------
Cash at end of year $ 28,076 $ 9,757 $ 11,101
===========================================
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
NOTE 1. BASIS OF PRESENTATION
Basis of Presentation - The accompanying consolidated financial statements
include the accounts of The PMI Group, Inc. ("TPG"), its wholly owned
subsidiaries, PMI Mortgage Insurance Co. ("PMI"), Residential Guaranty Co.
("RGC"), American Pioneer Title Insurance Company ("APTIC"), PMI Mortgage
Guaranty Co. ("PMG"), Residential Insurance Co. ("RIC"), TPG Insurance Co.
("TIC"), TPG Segregated Portfolio Co. (Cayman) ("TSPC") and PMI Capital I
("PCI"), PMI's wholly owned subsidiaries PMI Mortgage Insurance Australia
(Holdings) Pty Limited ("PMI Holdings"), PMI Mortgage Services Co. ("MSC"),
Pinebrook Mortgage Insurance Company (PBK) and PMI Securities Co. ("SEC"),
collectively referred to as the "Company." All material intercompany
transactions and balances have been eliminated in consolidation.
Formation of Company - TPG was incorporated in December 1993. After obtaining
the required regulatory approvals, on November 28, 1994, Allstate Insurance
Company ("Allstate") contributed all of the outstanding common stock of PMI to
TPG. Allstate had previously been the direct owner of all of the common stock of
PMI. Allstate is a wholly owned subsidiary of The Allstate Corporation
("Allstate Corp.").
On April 18, 1995, Allstate, which had been the sole shareholder of the Company,
sold 36.75 million shares of the Company's common stock, representing 70% of the
outstanding shares of common stock, for approximately $784.0 million (net of
related underwriting discount) in an underwritten public offering registered
under the Securities Act of 1933. Concurrent with the stock offering, Allstate
Corp. sold a new issue of 6.76% exchangeable notes due in April 1998. On April
15, 1998, Allstate Corp. exchanged 12,903,975 shares of TPG common stock to
redeem the 6.76% exchangeable notes due April 15, 1998. After the exchange,
Allstate held approximately 2,846,025 shares of TPG common stock, which have
subsequently been sold by Allstate.
NOTE 2. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business -The Company, through PMI, primarily writes residential mortgage
guaranty insurance ("primary insurance"). During 1997, PMI also began offering a
mortgage pool insurance product, which differs in a number of respects from the
pool insurance products offered through 1993 ("Old Pool"--See Note 7). In
addition, the Company writes title insurance through APTIC. Primary mortgage
insurance provides protection to mortgage lenders against losses in the event of
borrower default and assists lenders in selling mortgage loans in the secondary
market. Pool insurance is generally used as an additional credit enhancement for
certain secondary market mortgage transactions. Title insurance protects the
insured party against losses resulting from title defects, liens and
encumbrances existing as of the effective date of the policy.
Basis of Accounting - The financial statements have been prepared on the basis
of generally accepted accounting principles ("GAAP"), which vary from statutory
accounting practices prescribed or permitted by insurance regulatory authorities
(See Note 15). The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Investments - The Company has designated its entire portfolio of fixed income
and equity securities as available for sale. Such securities are carried at
market value with unrealized gains and losses, net of deferred income taxes,
reported as a component of accumulated other comprehensive income.
In September 1994, PMI acquired 45% of the common stock of CMG Mortgage
Insurance Company ("CMG") from CUNA Mutual Investment Corp. ("CMIC"). CMG offers
mortgage guaranty insurance for loans originated by credit unions. On October 1,
1998, PMI increased its equity investment in CMG to 50% through the purchase of
additional shares of common stock at a total cost of $4.8 million. CMIC
continues to own the remaining 50% of the common stock of CMG. On August 31,
1999, PMI and CMIC capitalized CMG Reinsurance Company ("CMG Re") with each
party investing $1.5 million for a 50% ownership interest. In addition, TPG owns
22.3% of RAM Holdings Ltd. and RAM Holdings II Ltd. (collectively referred to as
"RAM Re"). Such affiliated investments are reported in accordance with the
equity method of accounting.
5
<PAGE>
Investment income consists primarily of interest and dividends. Interest is
recognized on an accrual basis and dividends are recorded on the date of
declaration. Realized capital gains and losses are determined on a
specific-identification basis.
Property and Equipment - Property and equipment (including software) is carried
at cost less accumulated depreciation. The Company provides for depreciation
using the straight-line method over the estimated useful lives of the assets,
generally 3 to 10 years. Accumulated depreciation on property and equipment was
$51.4 million and $38.9 million at December 31, 1999 and 1998, respectively.
Capitalized Software - Effective in 1999, the Company adopted American Institute
of Certified Public Accountants Statement of Position ("SOP") 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use, which
requires capitalization of external and internal direct software development
costs incurred during the application development stage. Adoption of this SOP
did not have a significant effect as the Company's previous software
capitalization policy was substantially consistent with this guidance.
Insurance Accounting -Primary mortgage insurance policies are contracts that are
non-cancelable by the insurer, are renewable at a fixed price at the insured's
option, and provide for the payment of premiums on either a monthly, annual or
single payment basis. Upon renewal by the insured, the Company is not able to
re-underwrite or re-price its policies. Statement of Financial Accounting
Standards ("SFAS") No. 60, Accounting and Reporting for Insurance Enterprises,
specifically excludes mortgage guaranty insurance from its guidance relating to
the earning of insurance premiums. Consistent with generally accepted accounting
principles and industry accounting practices, premiums written on a single
premium and an annual premium basis are initially deferred as unearned premiums
and earned over the policy term. Premiums written on policies covering more than
one year (single premium plans) are amortized over the policy life in relation
to the expiration of risk. Premiums written on annual payment policies are
earned on a monthly pro rata basis. Premiums written on monthly payment policies
are earned in the period to which they relate, and any unreceived portion is
recorded in premiums receivable. Title insurance premiums are recognized as
revenue on the effective date of the title insurance policy. Fee income of the
non-insurance subsidiaries is earned as the services are provided.
Costs associated with the acquisition of mortgage insurance business, consisting
of compensation, premium taxes and other policy issuance and underwriting
expenses, are initially deferred and reported as deferred acquisition costs
("DAC"). Because SFAS 60 specifically excludes mortgage guaranty insurance from
its guidance relating to the amortization of deferred policy acquisition costs,
amortization of these costs for each underwriting year book of business are
charged against revenue in proportion to estimated gross profits over the life
of the policies using the guidance provided by SFAS No. 97, Accounting and
Reporting by Insurance Enterprises For Certain Long Duration Contracts and for
Realized Gains and Losses From the Sale of Investments. The estimate for each
underwriting year is updated annually to reflect actual experience and any
changes to key assumptions such as persistency or loss development. (See Note 6)
The reserve for losses and loss adjustment expenses is the estimated cost of
settling claims related to notices of default on insured loans that have been
reported to the Company as well as loan defaults that have occurred but have not
been reported. Estimates are based on an evaluation of claim rates, claim
amounts, and salvage recoverable. SFAS 60 specifically excludes mortgage
guaranty insurance from its guidance relating to the reserve for losses.
Consistent with generally accepted accounting principles and industry accounting
practices, the Company does not establish loss reserves for future claims on
insured loans that are not currently in default. Reserves for title insurance
claims are based on estimates of the amounts required to settle such claims,
including expenses for defending claims for which notice has been received and
an amount estimated for claims not yet reported.
Management believes that the reserve for losses and loss adjustment expenses at
December 31, 1999 is appropriately established in the aggregate and is adequate
to cover the ultimate net cost of reported and unreported claims arising from
losses which had occurred by that date. The establishment of appropriate
reserves is an inherently uncertain process. Such reserves are necessarily based
on estimates and the ultimate net cost may vary from such estimates. These
estimates are regularly reviewed and updated using the most current information
available. Any resulting adjustments, which may be material, are reflected in
current operations.
6
<PAGE>
Stock split - The Company had a three-for-two stock split in 1999 in the form of
a 50% stock dividend. All earnings per share amounts and stock option
information prior to the stock split have been restated to reflect post-split
amounts.
Income per Common Share - Basic earnings per share (EPS) excludes dilution and
is computed by dividing net income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The weighted average common shares outstanding for computing basic EPS were
44,893,250 for 1999, 47,090,673 for 1998 and 50,078,742 for 1997. The weighted
average common shares outstanding for computing diluted EPS includes only stock
options issued by the Company which have a dilutive impact and are outstanding
for the period, and had the potential effect of increasing common shares to
45,244,060 for 1999, 47,299,065 for 1998 and 50,265,392 for 1997. Net income
available to common shareholders does not change for computing diluted EPS.
Income Taxes - The Company accounts for income taxes using the liability method,
whereby deferred tax assets and liabilities are recorded based on the difference
between the financial statement and tax bases of assets and liabilities at the
currently enacted tax rates. The principal assets and liabilities giving rise to
such differences are presented in Note 8.
Derivatives - In 1999, the Company entered into an interest rate swap to hedge
interest rate risk associated with the acquisition debt described in Note 3 and
11. During 1999, the Company also entered into a foreign currency exchange
contract to hedge the foreign currency exchange risk associated with the
purchase price of PMI Holdings, the Australia acquisition described in Note 3.
The gain on this contract, which was not material, was recognized as an
adjustment of the purchase price of the acquired company.
Foreign currency translation - The financial statements of foreign subsidiaries
have been translated into U.S. dollars in accordance with SFAS No. 52, Foreign
Currency Translation Assets and liabilities denominated in non-U.S. dollar
currencies are translated into U.S. dollar equivalents using year-end spot
foreign exchange rates. Revenues and expenses are translated monthly at amounts
which approximate weighted average exchange rates, with resulting gains and
losses included in income. The effects of translating operations with a
functional currency other than the U.S. dollar are included in accumulated other
comprehensive income. Such effects were not material in 1999.
Concentration of Risk - A substantial portion of PMI's business is generated
within the State of California. For the year ended December 31, 1999, 14.8% of
new insurance written was in California. In addition, California's book of
business represented 15.6% of total risk in force at December 31, 1999.
Stock-Based Compensation - The Company accounts for stock-based awards to
employees and directors using the intrinsic value method in accordance with
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees (See Note 14).
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 is effective for fiscal quarters beginning
after June 15, 2000. Because of the Company's minimal use of derivatives,
management anticipates that the adoption of this new statement will not have a
significant effect on earnings or the financial position of the Company.
Reclassification - Certain prior year amounts have been reclassified to conform
to current year presentation.
7
<PAGE>
NOTE 3. ACQUISITIONS
On August 6, 1999, the Company, through PMI Holdings, a newly formed, wholly
owned subsidiary of PMI, acquired all of the outstanding common stock of PMI
Mortgage Insurance Ltd. ("PMI Ltd.") for approximately $78.3 million in cash.
PMI Ltd. (formerly MGICA, Ltd) is the second largest mortgage guaranty insurer
in Australia, as measured by annual insurance written. Substantially all of PMI
Ltd.'s mortgage insurance in force consists of single premium payment policies.
The acquisition was financed in part by the issuance of PMI Holdings debt of
$45.8 million (see Note 11). The acquisition was accounted for under the
purchase method of accounting and, accordingly, the consolidated financial
statements include the results of PMI Ltd.'s operations from the date of
acquisition. The excess of the estimated fair value of net assets acquired over
the purchase price of approximately $31.8 million first reduced the value of
noncurrent assets acquired, with the remaining $9.6 million of negative goodwill
being amortized over approximately 8 years.
On December 31, 1999, the Company acquired all of the outstanding common stock
of Pinebrook Mortgage Insurance Company ("Pinebrook"), which was a wholly owned
subsidiary of Allstate for $22.6 million cash. The purchase price approximates
the book value of Pinebrook, which does not differ significantly from fair
value. This transaction has been accounted for under the purchase method.
Proforma unaudited results of operations for 1999 and 1998 assuming the
acquisitions had occurred at the beginning of 1998 are as follows:
(In thousands, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------
Revenues $692,585 $583,298
Net income 220,679 215,212
Basic net income per common share 4.92 4.57
Diluted net income per common share 4.87 4.55
NOTE 4. INVESTMENTS
Fair Values - The amortized cost and estimated fair values (based on quoted
market values) for fixed income securities are shown below:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Market
----------------
(In thousands) Cost Gains (Losses) Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1999
U.S. government and agencies $ 87,223 $ 387 $ (3,563) $ 84,047
Municipals 1,260,409 31,337 (30,438) 1,261,308
Corporate bonds 137,764 49 (3,858) 133,955
----------- --------- --------- -----------
Total $ 1,485,396 $ 31,773 $ (37,859) $ 1,479,310
=========== ========= ========= ===========
At December 31, 1998
U.S. government and agencies $ 53,918 $ 2,060 $ -- $ 55,978
Municipals 1,110,665 83,363 (290) 1,193,738
Corporate Bonds 104,042 3,451 (340) 107,153
----------- --------- --------- -----------
Total $ 1,268,625 $ 88,874 $ (630) $ 1,356,869
=========== ========= ========= ===========
</TABLE>
8
<PAGE>
Scheduled Maturities - The scheduled maturities for fixed income securities are
as follows at December 31, 1999:
<TABLE>
<CAPTION>
Amortized Market
(In thousands) Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 13,218 $ 13,027
Due after one year through five years 154,726 151,460
Due after five years through ten years 202,274 204,500
Due after ten years 1,069,226 1,066,322
Other 45,952 44,001
---------------------------------------
Total $ 1,485,396 $ 1,479,310
---------------------------------------
</TABLE>
Actual maturities may differ from those scheduled as a result of calls by the
issuers prior to maturity.
Investment Concentration and Other Items - The Company maintains a diversified
portfolio of municipal bonds. At December 31, 1999 and 1998, the following
states represented the largest concentrations in the portfolio (expressed as a
percentage of the carrying value of all municipal bond holdings). Holdings in no
other state exceed 5.0% of the portfolio at December 31, for the respective
years.
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Illinois 13.2% 13.2%
Texas 12.2 12.0
Washington 11.5 12.0
New York 9.2 8.6
Massachusetts 6.3 7.3
California 6.1 6.5
Indiana - 6.1
Pennsylvania 5.5 5.5
</TABLE>
At December 31, 1999, fixed income and short term securities with a market value
of $14.1 million were on deposit with regulatory authorities as required by law.
Unrealized Net Gains on Investments - Unrealized net gains on investments
included in accumulated other comprehensive income at December 31, 1999, are as
follows:
<TABLE>
<CAPTION>
Gross Unrealized Net
Market ---------------------- Unrealized
(In thousands) Cost Value Gains (Losses) Gains
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed income securities $ 1,485,396 $ 1,479,310 $ 31,773 $ (37,859) $ (6,086)
Common stocks 44,714 83,890 40,812 (1,636) 39,176
Preferred stocks 17,660 17,582 157 (235) (78)
Short term 145,087 145,093 20 (14) 6
Investment in affiliates 93,283 91,453 - (1,830) (1,830)
------------------------------------------------------------------------------
Total $ 1,786,140 $ 1,817,328 $ 72,762 $ (41,574) 31,188
---------------------------------------------------------------
Less defered income taxes 11,002
------------
Total $ 20,186
------------
</TABLE>
The difference between cost and market value of the investment in affiliates
reflects net unrealized gains on the affiliates' investment portfolio. The
stated market value does not necessarily represent the fair value of the
affiliates' common stock held by the Company.
The change in net unrealized gains (losses), net of deferred income taxes,
included in other comprehensive income for fixed income securities and equity
securities are as follows:
9
<PAGE>
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed income securities $ (61,372) $ 8,874 $ 20,572
Equity securities 8,758 (6,565) 517
Investment in affiliates (1,662) 217 138
------------------------------------------------------
Total $ (54,276) $ 2,526 $ 21,227
------------------------------------------------------
</TABLE>
Investment Income - Investment income by investment type is as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed income securities $ 82,256 $ 76,427 $ 74,641
Equity securities 2,400 2,466 1,476
Common stock of affiliates 7,061 3,225 1,455
Short-term 4,793 3,442 6,332
------------------------------------------------------
Investment income, before expenses 96,510 85,560 83,904
Less investment expense 1,368 879 768
------------------------------------------------------
Investment income, less investment expense $ 95,142 $ 84,681 $ 83,136
------------------------------------------------------
</TABLE>
Realized Capital Gains and Losses.
Net realized capital gains and (losses) on investments are as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed income securities $ (4,547) $ 1,481 $ (777)
Equity securities 5,046 23,155 20,188
Short-term 10 - 173
------------------------------------------------------
Realized capital gains -- net, before taxes 509 24,636 19,584
Less income taxes 178 8,623 6,854
------------------------------------------------------
Realized capital gains, net of taxes $ 331 $ 16,013 $ 12,730
------------------------------------------------------
</TABLE>
Gross realized capital gains and losses on investments are as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized capital gains $ 8,171 $ 27,810 $ 26,167
Gross realized capital losses (7,662) (3,174) (6,583)
------------------------------------------------------
Net realized capital gains $ 509 $ 24,636 $ 19,584
------------------------------------------------------
</TABLE>
10
<PAGE>
NOTE 5. LOSS RESERVES
The following table is a reconciliation of the beginning and ending reserve for
losses and loss adjustment expenses for each of the last three years:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $ 215,259 $ 202,387 $ 199,774
Less reinsurance recoverable 6,782 6,067 5,287
------------------------------------------------
Net balance, January 1 208,477 196,320 194,487
------------------------------------------------
Losses and loss adjustment expenses incurred (principally
in respect of defaults occurring in)
Current year 159,293 146,884 158,147
Prior years (46,611) (11,168) (5,890)
------------------------------------------------
Total losses and loss adjustment expenses 112,682 135,716 152,257
------------------------------------------------
Losses and loss adjustment expense payments (principally in respect
of defaults occurring in)
Current year 1,798 12,503 27,700
Prior years 95,797 111,056 122,724
------------------------------------------------
Total payments 97,595 123,559 150,424
------------------------------------------------
Plus acquisition of Forestview Reserves 42,528 - -
Plus acquisition of Pinebrook Reserves 1,093 - -
Plus acquisition of PMI Ltd 4,473 - -
------------------------------------------------
Net balance, December 31 270,565 208,477 196,320
Plus reinsurance recoverable 10,342 6,782 6,067
------------------------------------------------
Balance, December 31 $ 282,000 $ 215,259 $ 202,387
------------------------------------------------
</TABLE>
As a result of changes in estimates of ultimate losses resulting from insured
events in prior years, the provision for losses and loss adjustment expenses
(net of reinsurance recoverable) decreased by $46.6 million in 1999 due the
impact of a favorable interest rate environment on loss mitigation activities
and to lower than expected claims in California. The provision for losses and
loss adjustment expenses decreased by $11.2 million and $5.9 million in 1998 and
1997, respectively, due primarily to lower than expected losses in California.
Such estimates were based on management's analysis of various economic trends
(including the real estate market and unemployment rates) and their effect on
recent claim rate and claim severity experience.
NOTE 6. DEFERRED ACQUISITION COSTS ("DAC")
DAC is amortized against revenue in proportion to the estimated gross profits
for each underwriting year book of business over the life of the underlying
policies included in each book year. This amortization method is consistent with
the methodology outlined in SFAS No. 97, as described in Note 2.
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 new business (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 years ended
December 31, 1999, 1998 and 1997:
11
<PAGE>
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning DAC balance $ 61,605 $ 37,864 $ 31,633
Accquisition costs incurred and deferred 88,226 84,021 49,626
Amortization of deferred costs (80,252) (60,280) (43,395)
------------ ------------ -------------
Ending DAC balance $ 69,579 $ 61,605 $ 37,864
============ ============ =============
</TABLE>
NOTE 7. REINSURANCE
PMI cedes reinsurance to reduce net risk in force to meet regulatory
risk-to-capital requirements and to comply with the regulations that limit the
maximum coverage to 25% for any single risk. Certain of the Company's
reinsurance arrangements have adjustable features, such as contingent
commissions or sliding scale commission. Commission adjustments are dependent
upon the loss experience of the underlying business. Estimates are based on the
Company's actuarial analysis of the applicable business; amounts the Company
will ultimately recover could differ materially from amounts recorded in
reinsurance recoverable.
The reinsurance agreement with Capital Mortgage Reinsurance Company of New York
was terminated effective December 31, 1997 for policies issued by the company
prior to January 1, 1998. The reinsurance on these policies is in run-off
through December 31, 2006. As a result of the treaty termination, PMI no longer
cedes primary reinsurance to third party reinsurers (except under captive
reinsurance arrangements) on policies written after December 31, 1997.
In December 1993, PMI decided to cease writing Old Pool business (except for
honoring certain commitments in existence prior to the discontinuation of this
business). Concurrently, PMI entered into a reinsurance agreement with
Forestview Mortgage Insurance Co. ("Forestview"), a wholly owned subsidiary of
Allstate, to cede all future Old Pool premiums and net losses from PMI to
Forestview. As a result of this ceding agreement, along with another Old Pool
ceding agreement with an unaffiliated reinsurer, the Old Pool business had no
significant impact on the Company's results of operations for the years ended
December 31, 1998 and 1997. In accordance with accounting for discontinued
operations, since 1993 Old Pool insurance assets (unpaid losses recoverable and
paid claims receivable) and liabilities (loss reserves and premiums payable)
have been netted in the consolidated balance sheet at December 31, 1998
resulting in a net Old Pool receivable of $2.7 million which is included in
other assets.
In July of 1999, PMI and Forestview received regulatory approval of a Recapture
Agreement executed in March 1999 to commute the Old Pool reinsurance arrangement
retroactive to January 1, 1999. The Recapture Agreement also included the
commutation of an insignificant second lien primary insurance arrangement
between the parties. On August 13, 1999, PMI received a payment of $45.3 million
covering the following (in thousands):
Recapture of ceded loss reserves $42,528
Recapture of ceded unearned premiums 1,100
Other settlements 1,672
-------
Total payment received $45,300
=======
PMI established the recaptured ceded loss reserves and ceded unearned premiums
as liabilities upon receipt of the cash payment. The other settlements, which
primarily represent service fees for administering the Forestview book of
business, were included in other income as PMI has no future obligations to
provide services to Forestview.
As a result of the above Old Pool commutation, all Old Pool assets and
liabilities are shown on a gross basis at December 31, 1999.
During 1999, PMI entered into a reinsurance arrangement with three reinsurers to
provide coverage for a 10- year period in the event of catastrophic losses. PMI
paid the reinsurers a total one-time premium of $16.4 million of which a
substantial portion will be recovered by PMI should losses not reach
catastrophic levels. This agreement does not transfer risk in accordance with
FAS113 and therefore is being reported in accordance with SOP 98-7, Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Risk.
12
<PAGE>
Reinsurance recoverable on paid losses from reinsurance was $11.4 million and
$6.8 million at December 31, 1999 and 1998 respectively. Prepaid reinsurance
premiums from non-affiliated reinsurers were $1.7 million and $2.1 million at
December 31, 1999 and 1998, respectively.
The effects of reinsurance on the primary premiums written, premiums earned and
losses and loss adjustment expenses of the Company's operations for the year
ended December 31 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums written
Direct $ 585,771 $ 498,828 $ 435,971
Assumed 8,999 7,141 1,383
Ceded (23,516) (16,869) (5,302)
---------- ---------- ---------
Premiums written, net of reinsurance $ 571,254 $ 489,100 $ 432,052
========== =========== =========
Premiums earned
Direct $ 574,451 $ 506,096 $ 458,972
Assumed 6,445 3,101 1,182
Ceded (22,273) (17,971) (6,206)
---------- ---------- ---------
Premiums earned net of reinsurance $ 558,623 $ 491,226 $ 453,948
========== =========== =========
Losses and loss adjustment expenses
Direct $ 124,704 $ 140,705 $ 157,012
Assumed 2,882 176 219
Ceded (14,904) (5,165) (4,974)
---------- ---------- ---------
Losses and loss adjustment expenses, net of reinsurance $ 112,682 $ 135,716 $ 152,257
========== =========== =========
</TABLE>
Reinsurance ceding arrangements do not discharge the Company from its
obligations as the primary insurer in the event of default by the reinsurer.
NOTE 8. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 6,942 $ 7,302 $ 3,859
Deferred 78,678 69,286 63,699
---------- ---------- ---------
Total income tax expense $ 85,620 $ 76,588 $ 67,558
========== ========== =========
</TABLE>
The components of the income tax expense for 1999 include a foreign provision
for current tax expense of $4.7 million and deferred tax benefit of $1.2
million related to PMI Ltd.
A reconciliation of the statutory federal income tax rate to the effective tax
rate reported on income before income taxes is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0 35.0%
Tax-exempt income (6.8) (7.2) (7.5)
State income tax (net) 0.5 0.4 0.2
Other 0.8 0.5 0.1
------ ----- -----
Effective income tax rate 29.5% 28.7% 27.8%
====== ===== =====
</TABLE>
On April 18, 1995 the Company and its subsidiaries separated from Allstate (See
Note 1). Effective April 11, 1995 the Company and its subsidiaries file a
consolidated income tax return. Prior to that date, the Company was part of the
consolidated return of Sears, Roebuck and Co. ("Sears"), the former parent
company of Allstate Corp. The Company's share of consolidated federal income tax
liability prior to April 11, 1995 was determined under a tax sharing agreement
as part of
13
<PAGE>
the Sears tax group. Under the tax sharing agreement, the Company has
continuing rights and obligations to Allstate and Sears for the tax effect of
any changes in taxable income relating to the periods during which the Company
was part of the Sears tax group. In July 1999, the Company received payment for
income taxes receivable of $16.8 million (plus interest) from Allstate related
to the filing of an amended return for prior years.
Section 832(e) of the Internal Revenue Code permits mortgage guaranty insurers
to deduct, within certain limitations, additions to statutory contingency
reserves (See Note 15). This provision was enacted to enable mortgage guaranty
insurers to increase statutory unassigned surplus through the purchase of
non-interest bearing "tax and loss bonds" from the federal government. The tax
and loss bonds purchased are limited to the tax benefit of the deduction for
additions to the contingency reserve. The Company purchased tax and loss bonds
of $73.5 million, $47.4 million and $50.7 million in 1999, 1998 and 1997,
respectively.
The Company paid income taxes of $10.5 million, $8.4 million and $8.4 million in
1999, 1998 and 1997, respectively.
The components of the deferred income tax assets and liabilities at December 31
are as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Discount on loss reserves $ 6,253 $ 4,422
Unearned premium reserves 4,867 4,181
Alternative minimum tax credit carryforward 39,911 31,870
Pension costs 4,406 3,131
Other assets 7,981 4,355
----------------------------
Total deferred tax assets 63,418 47,959
----------------------------
Deferred tax liabilities:
Statutory contingency reserves 89,092 72,817
Policy acquisition costs 23,549 21,562
Unrealized net gains on investments 11,001 39,631
Software development costs 7,570 7,423
Other liabilities 7,846 3,256
----------------------------
Total deferred tax liabilities 139,058 144,689
----------------------------
Net deferred tax liability $ 75,640 $ 96,730
----------------------------
</TABLE>
NOTE 9. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The estimated fair value
amounts of certain liabilities indicated below have been determined by using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value and, accordingly, the estimates presented herein are not
necessarily indicative of the amounts that could be realized in a current market
exchange.
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(In thousands) Value Fair Value Value Fair Value
- ---------------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C>
8.247% Long-term debt $ 99,542 $ 92,252 $ 99,476 $ 103,997
9.322% Redeemable preferred
capital securities $ 99,075 $ 90,041 $ 99,040 $ 107,075
7.00% Long-term debt $ 45,825 $ 47,300 $ - $ -
</TABLE>
A number of the Company's significant assets and liabilities, including deferred
policy acquisition costs, property and equipment, loss reserves, unearned
premiums and deferred income taxes are not considered financial instruments.
14
<PAGE>
NOTE 10. BENEFIT PLANS
As of April 18, 1995, all full-time employees and certain part-time employees of
the Company participate in The PMI Group, Inc. Retirement Plan ("Plan"), a
noncontributory defined benefit plan. The Plan has been funded by the Company to
the fullest extent permitted by federal income tax rules and regulations. Also,
certain employees earning in excess of $160,000 per year participate in The PMI
Group, Inc. Supplemental Employee Retirement Plan, a noncontributory defined
benefit plan. Benefits under both plans are based upon the employee's length of
service, average annual compensation and estimated social security retirement
benefits.
The Company provides certain health care and life insurance benefits for retired
employees ("OPEB Plan"). Generally, qualified employees may become eligible for
these benefits if they retire in accordance with the Company's established
retirement policy and are continuously insured under the Company's group plans
or other approved plans for 10 or more years prior to retirement. The Company
shares the cost of the retiree medical benefits with retirees based on years of
service with the Company's share being subject to a 5% limit on annual medical
cost inflation after retirement. The Company has the right to modify or
terminate these plans.
Remainder of Page to Remain Blank
15
<PAGE>
The following table presents certain information regarding the Plan and the OPEB
Plan as of December 31:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
(In thousands, except percentages) 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at January 1, $ 18,376 $ 11,381 $ 6,659 $ 4,219 $ 3,112 $ 2,782
Service cost 5,443 3,796 3,424 578 434 387
Interest cost 1,710 1,074 759 320 255 217
Actuarial loss (gain) 1,046 2,861 875 (1,139) 435 (269)
Benefits paid (1,038) (736) (336) (26) (17) (5)
------------------------------------------------------------------------
Benefit obligation at December 31, 25,537 18,376 11,381 3,952 4,219 3,112
------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at January 1, 8,877 5,204 2,896 - - -
Actual return on plan assets 2,397 366 180 - - -
Company contribution 3,658 4,043 2,464 26 17 5
Benefits paid (1,038) (736) (336) (26) (17) (5)
------------------------------------------------------------------------
Fair value of plan assets at December 31, 13,894 8,877 5,204 - - -
------------------------------------------------------------------------
Funded status
Funded status of plan at December 31, (11,643) (9,499) (6,177) (3,952) (4,219) (3,112)
Unrecognized actuarial loss (gain) 2,891 3,583 505 (1,460) (320) (781)
Unrecognized prior service cost - - - 245 265 284
------------------------------------------------------------------------
Accrued and recognized benefit cost $ (8,752) $ (5,916) $ (5,672) $ (5,167) $ (4,274) $ (3,609)
------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $ 5,443 $ 3,796 $ 3,424 $ 578 $ 434 $ 387
Interest cost 1,710 1,074 759 320 255 217
Expected return on assets (893) (515) (295) - - -
Prior service cost amortization - - - 20 20 20
Actuarial loss (gain) recognized 234 (68) (95) - (26) (28)
------------------------------------------------------------------------
Net periodic benefit cost $ 6,494 $ 4,287 $ 3,793 $ 918 $ 683 $ 596
------------------------------------------------------------------------
Weighted-average assumptions
Discount rate 8.00% 6.75% 7.25% 8.00% 6.75% 7.25%
Expected return on plan assets 8.50% 8.50% 8.50% N/A N/A N/A
Rate of compensation increase 5.50% 5.50% 5.50% N/A N/A N/A
Health care cost trend on covered charges N/A N/A N/A 6.00% 6.00% 6.00%
</TABLE>
Sensitivity of retiree welfare results. Assumed health care cost trend rates
have a significant effect on the amounts reported for the health care plans.
16
<PAGE>
A one-percentage-point change in assumed health care cost trend rates would have
the following effects:
<TABLE>
<CAPTION>
I-Percentage- I-Percentage-
(In thousands) Point Increase Point Decrease
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost components 226 $ 171
Effect on accumulated postretirement benefit obligations 1,163 892
</TABLE>
Savings and Profit Sharing Plans. As of April 18, 1995, certain employees of the
Company were eligible to participate in The PMI Group, Inc. Savings and Profit
Sharing Plan ("401K Plan") covering both salaried and hourly employees. Eligible
employees who participate in the 401K Plan receive, within certain limits,
matching Company contributions. Costs relating to the 401K Plan amounted to $2.7
million, $2.1 million, and $1.2 million for 1999, 1998 and 1997, respectively.
NOTE 11. DEBT AND CREDIT FACILITIES
Long-term Debt - On November 15, 1996, the Company issued unsecured debt
securities in the face amount of $100.0 million ("Notes"). The Notes mature and
are payable on November 15, 2006 and are not redeemable prior to maturity. No
sinking fund is required or provided for prior to maturity. Interest on the
Notes is 6.75% and is payable semiannually. Interest payments of $6.8 million
were made during 1999, 1998 and 1997.
On August 3, 1999, PMI Holdings, along with TPG as guarantor, entered into a
credit agreement with Bank of America, N.A. ("Bank"). PMI Holdings borrowed
$45.8 million ("Loan") at a six month adjustable rate which equals the Australia
Bank Bill Buying Rate plus a specified margin that is dependant on the TPG's
senior debt rating. The proceeds of the Loan were used to finance the purchase
of PMI Ltd. Principal payments in equal 10% installments are due annually
beginning August 3, 2001 and continue through August 3, 2005. The final 50%
principal payment is due August 3, 2006. Concurrently, on August 3, 1999, PMI
Holdings along with TPG as guarantor entered into a Swap Transaction ("Swap")
with the Bank. The Swap effectively fixed the interest rate on the Loan to 7.0%.
The net interest effect of the Swap is reported as an adjustment of interest
expense. The fair value of the Swap agreement is not recognized in the financial
statements. Other provisions of the Swap do not have a material effect on the
Loan. No interest payments were made during 1999.
The terms of the Loan, provide, in part, that (1) TPG's consolidated net worth
shall not be less than $600 million; (2) PMI's statutory capital (as defined)
shall not be less than $675 million; (3) the risk to capital ratio of PMI shall
not exceed 23 to 1; and (4) TPG's consolidated debt to capital ratio shall not
exceed 0.40 to 1.0. In addition, PMI's and PMI Ltd.'s ability to pay dividends
or incur additional indebtedness is 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 Loan, if an
event of default occurs under the Loan, or under any other indebtedness, all
outstanding amounts under the credit agreement may be accelerated and become
immediately payable by TPG.
Lines of Credit - The Company has two lines of credit agreements ("Lines"), each
in the amount of $25.0 million. The Lines have final maturities of February 2001
and December 2001 and commitment fees of 8.0 and 6.5 basis points, respectively.
Both Lines may be used for general corporate purposes. There were no amounts
outstanding on the Lines at December 31, 1999 or 1998.
17
<PAGE>
NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES
Leases - The Company leases certain office facilities and equipment. Minimum
rental commitments under non-cancelable operating leases with a remaining term
of more than one year as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
(In thousands) Amount
- -----------------------------------------------------------
Year ending December 31:
<S> <C>
2000 $ 8,842
2001 7,412
2002 6,416
2003 5,316
2004 4,550
-----------
Total $ 32,536
===========
</TABLE>
The Company renewed its corporate headquarters lease for 5 years in 1999 with a
5 year renewal option. Such minimum expected rentals are included in the above
amounts.
Total rent expense for all leases was $9.6 million, $9.0 million and $7.6
million in 1999, 1998 and 1997, respectively.
Legal Proceedings - On December 17, 1999, G. Craig Baynham and Linnie Baynham
(collectively, the "Plaintiffs") filed a putative class action suit against PMI.
The complaint captioned G. Craig Baynham and Linnie Baynham v. PMI Mortgage
Insurance Co., (case no. CV199-241) was filed in the United States District
Court For The Southern District of Georgia, State of Georgia and alleges that
PMI entered into agreements or understandings with mortgage lenders that PMI
would provide pool insurance or other benefits to the lenders at preferential,
below market rates, in return for the lenders' designation of PMI as the
mortgage insurer for mortgages originated by the lenders. Based on the alleged
conduct, Plaintiffs assert a cause of action on behalf of the proposed class of
mortgage insurees against PMI for violation of section 8 of the Real Estate
Settlement Procedures Act ("RESPA") 12 U.S.C. (S)2607(a). Plaintiffs seek relief
under RESPA's treble damage provision, along with injunctive relief and
attorneys' fees and expenses. The complaint also seeks to certify a class of
persons who, on or after January 1, 1996 obtained or obtain federally related
mortgage loans for single-to four family homes, whose loans include primary
mortgage insurance, reinsurance contracts, contract underwriting services, or
financing agreements from PMI.
The Company understands that several other mortgage insurance companies have
been named as defendants in lawsuits with similar allegations recently filed in
the same federal court as the case pending against PMI. The Company intends to
contest this action vigorously and based on information presently available to
the Company, management believes that the ultimate outcome of this matter will
not have a material adverse effect on the Company's financial position or
results of operations.
Various other legal actions and regulatory reviews are currently pending that
involve the Company and specific aspects of its conduct of business. In the
opinion of management, the ultimate liability in one or more of these actions is
not expected to have a material effect on the financial condition or results of
operations of the Company.
NOTE 13. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST
DEBENTURE OF THE COMPANY
On February 4, 1997, TPG, through a wholly-owned trust, privately issued $100.0
million of 8.309% preferred capital securities, Series A ("Capital Securities").
The Capital Securities are redeemable after February 1, 2007, at a premium or
upon occurrence of certain tax events, and mature on February 1, 2027. The net
proceeds, totaling $99.0 million, were used for general corporate purposes,
including common stock repurchases and additions to the investment portfolio.
The Capital Securities were issued by PMI Capital I ("Issuer Trust"). The sole
asset of the Issuer Trust consists of $103.1 million principal amount of a
junior subordinated debenture ("Debenture") issued by TPG to the Issuer Trust.
The Debenture bears interest at the rate of 8.309% per annum and matures on
February 1, 2027. The amounts due to the Issuer Trust under the Debenture and
the related income statement amounts have been eliminated in the Company's
consolidated financial statements. Distributions on the Capital Securities occur
on February 1 and August 1 of each year. The obligations of TPG
18
<PAGE>
under the Debenture and a related guarantee and expense agreement constitute a
full and unconditional guarantee by TPG of the Issuer Trust's obligations under
the Capital Securities. The Capital Securities are subject to mandatory
redemption under certain circumstances. Distribution payments of $8.3 million
were made in 1999 and 1998, respectively.
NOTE 14. DIVIDENDS AND SHAREHOLDERS' EQUITY
Shareholder Rights Plan - On January 13, 1998, the Company adopted a Shareholder
Rights Plan ("Rights Plan"). In general, rights issued under the plan will be
exercisable only if a person or group acquires 10% or more of the Company's
common stock or announces a tender offer for 10% or more of the common stock.
The Rights Plan contains an exception that would allow passive institutional
investors to acquire up to a 15% ownership interest before the rights would
become exercisable.
Dividends - The ability of the Company to pay dividends is dependent on business
conditions, income, cash requirements of the Company, receipt of dividends from
PMI, restrictions contained in the Company's credit agreements, indentures,
various credit rating agencies and other relevant factors. PMI's ability to pay
dividends to TPG is limited, among other restrictions, under Arizona law. The
payment of dividends by PMI without the prior approval of the Arizona State
Insurance Department is limited to formula amounts based on net income, net
investment income, and capital and surplus, including unassigned surplus,
determined in accordance with statutory accounting practices, as well as the
timing and amount of dividends paid in the preceding twelve months. Limitations
on PMI's risk-to-capital ratio also effectively limit PMI's ability to pay
dividends because the payment of dividends reduces statutory capital. Various
state regulatory authorities impose a limitation that the risk-to-capital ratio
may not exceed 25 to 1. In addition, under a support agreement with Allstate,
PMI is prohibited from paying any dividend that would cause its risk-to-capital
ratio to equal or exceed 23 to 1 (See Note 17). Management believes that PMI's
dividend restrictions have not had, and are not expected to have, a significant
impact on TPG's ability to meet its cash obligations. Under the most restrictive
dividend limitations, the maximum amount of dividends that PMI can distribute to
TPG at December 31, 1999, without prior regulatory approval is $13.4 million.
PMI paid ordinary and, after obtaining regulatory approval, extraordinary
dividends to TPG totaling $94.3 million and $100.0 million in the years ended
December 31, 1999 and 1998, respectively. APTIC paid ordinary dividends to TPG
totaling $3.0 million and $3.2 million in the years ended December 31, 1999 and
1998, respectively.
Preferred Stock - The Company's restated certificate of incorporation authorizes
the Board of Directors to issue up to 5,000,000 shares of preferred stock of TPG
in classes or series and to fix the designations, preferences, qualifications,
limitations or restrictions of any class or series with respect to the rate and
nature of dividends, the price and terms and conditions on which shares may be
redeemed, the amount payable in the event of voluntary or involuntary
liquidation, the terms and conditions for conversion or exchange into any other
class or series of the stock, voting rights and other terms. The Company may
issue, without the approval of the holders of common stock, preferred stock
which has voting, dividend or liquidation rights superior to the common stock
and which may adversely affect the rights of holders of common stock.
Pursuant to the Runoff Support Agreement (See Note 17), the Company has agreed
that, in the event that Allstate makes a payment contemplated by the Allstate
Support Agreements or the Runoff Support Agreement, Allstate will have the right
to receive preferred stock of TPG or PMI with a liquidation preference equal to
the amount of such payment. Such preferred stock will rank senior in right of
payment to the issuer's common stock and, so long as such preferred stock is
outstanding, the issuer thereof will be prohibited from paying any dividends or
making any other distributions on its common stock.
Equity Incentive Plan and Directors Plan - During 1998, the Company amended and
restated The PMI Group, Inc. Equity Incentive Plan ("Equity Incentive Plan") and
The PMI Group, Inc. Stock Plan for Non-Employee Directors ("Directors Plan") as
amended provide for an aggregate of 3,750,000 shares of common stock reserved
for issuance to directors, officers, and employees of TPG and its subsidiaries.
The Equity Incentive Plan provides for awards of both non-qualified stock
options and incentive stock options, stock appreciation rights, restricted stock
subject to forfeiture and restrictions on transfer, and performance awards
entitling the recipient to receive cash or common stock in the future following
the attainment of performance goals determined by the Board of Directors.
Generally, options are granted with an exercise price equal to the market value
on the date of grant, expire ten years from the date of grant and have a
three-year vesting period. The Directors Plan provides that each director who is
not an employee of the Company or its subsidiaries will receive an annual grant
of up to 450 shares of common stock and will receive stock options for 2,250
shares annually, after an initial option of up to 4,500 shares. The shares will
be granted on June 1 of each year or as soon as administratively practicable
after each anniversary of the director's commencement of service.
19
<PAGE>
The following is a summary of activity in the Equity Incentive Plan and the
Directors Plan during 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Option Exercise Price Under Option Exercise Price Under Option Exercise Price
------------ -------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 1,375,051 $ 35.83 924,582 $ 28.20 807,906 $ 24.27
Options granted 588,756 29.54 549,975 47.36 309,465 36.41
Options exercised (106,120) 25.07 (77,892) 23.78 (138,980) 22.89
Options forfeited (37,192) 42.93 (21,614) 42.81 (53,810) 28.79
----------------------------------- -------------------------------- ----------------------------
Outstanding at end of year 1,820,495 $ 34.26 1,375,051 $ 35.83 924,582 $ 28.20
----------------------------------- -------------------------------- ----------------------------
Exercisable at year end 746,398 $ 30.74 604,467 $ 26.05 345,497 $ 23.52
Reserved for future grants 45,654 - 597,218 - 1,115,159 -
- -------------------------------------------------------------------------------------------------------------------------------
Note: The weighted average remaining contractual life of shares under option was
8.0 years (for an exercise price between $19.66 and $50.83) in 1999, 8.0 years
($32.14 and $76.25) in 1998 and 8.0 years ($32.14 and $67.97) in 1997.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As discussed in Note 2, the Company accounts for stock-based compensation under
APB No. 25 and its related interpretations. SFAS No. 123, Accounting for
Stock-Based Compensation, requires the disclosure of pro-forma net income and
earnings per share using the fair value method. The fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which differ
significantly from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: dividend yield of 0.35% for the 1999
options, 0.26% and 0.28% for the 1998 options, and 0.29% to 0.37% for the 1997
options; expected volatility range of 30.77% and 32.52% for the 1999 options,
21.92% and 23.15% for the 1998 options, and 20.61% to 21.90% for the 1997
options; risk-free interest rates of 5.12%, 5.25%, 5.55%, 5.81% and 5.79% for
the 1999 options, 5.45% and 5.58% for the 1998 options, and 6.06%, 6.43%, 6.36%,
6.18% and 5.86% for the 1997 options; and an expected life of four years
following the vesting. Forfeitures are recognized as they occur.
If the computed fair values of the 1999, 1998 and 1997 awards had been amortized
to expense over the vesting period of the awards, the Company's net income,
basic net income per share and diluted net income per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1999 1998 1997
- -------------------------------------------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
Net income: As reported $ 204,466 $ 190,360 $ 175,309
Pro-forma 201,553 187,776 174,487
Basic earnings per share: As reported $ 4.55 $ 4.04 $ 3.50
Pro-forma 4.49 3.99 3.49
Diluted earnings per share: As reported $ 4.52 $ 4.03 $ 3.49
Pro-forma 4.45 3.97 3.47
</TABLE>
Equity Stock Purchase Plan - In February 1999, the Company's Board of Directors
adopted the 1999 PMI Group, Inc. Employee Stock Purchase Plan (the "ESPP") and
shareholder approval was granted during the Company's 1999 Annual Meeting. A
total of 300,000 shares of the Company's authorized but unissued common stock
has been made available under the ESPP. The ESPP allows eligible employees to
purchase shares of the Company's stock at a discount of 15 percent of the
beginning-of-period or end-of-period (each period being a six month enrollment
period) fair market value of the stock, whichever is lower. Under the ESPP, the
Company sold approximately 13,578 shares in 1999. The Company applies APB 25 in
accounting for the ESPP. The pro forma effect on the Company's net income and
earnings per share had compensation cost been determined under SFAS 123 was
deemed immaterial in 1999.
20
<PAGE>
NOTE 15. STATUTORY ACCOUNTING
The Company's domestic insurance subsidiaries prepare statutory financial
statements in accordance with the accounting practices prescribed or permitted
by their respective state's Department of Insurance, which is a comprehensive
basis of accounting other than GAAP. The principles used in determining
statutory financial amounts differ from GAAP primarily for the following
reasons:
Under statutory accounting practices, mortgage guaranty insurance companies
are required to establish each year a contingency reserve equal to 50% of
premiums earned in such year. Such amount must be maintained in the
contingency reserve for 10 years after which time it is released to
unassigned surplus. Prior to 10 years, the contingency reserve may be
reduced with regulatory approval to the extent that losses in any calendar
year exceed 35% of earned premiums for such year. Under GAAP, the
contingency reserve is not permitted.
Under statutory accounting practices, insurance policy acquisition costs
are charged against operations in the year incurred. Under GAAP, these
costs are deferred and amortized in proportion to the estimated gross
profits over the life of the policies. (See Note 6, "Deferred Acquisition
Costs.")
Statutory financial statements only include a provision for current income
taxes due, and purchases of tax and loss bonds are accounted for as
investments. GAAP financial statements provide for deferred income taxes
including the purchase of tax and loss bonds, which are recorded as a
deferral of the income tax provision.
Under statutory accounting practices, certain assets, designated as
nonadmitted assets, are charged directly against statutory surplus. Such
assets are reflected on the GAAP financial statements.
Under statutory accounting practices, fixed maturity investments in good
standing are valued at amortized cost. Under GAAP, those investments which
the Company does not have the ability or intent to hold to maturity are
considered to be available for sale and are recorded at market, with the
unrealized gain or loss recognized, net of tax, as an increase or decrease
to accumulated other comprehensive income.
The statutory net income, statutory surplus and contingency reserve liability of
PMI as of and for the years ended December 31 are as follows:
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------
Statutory net income $ 270,301 $ 214,040 $ 227,148
======================================
Statutory surplus $ 134,133 $ 165,459 $ 274,864
======================================
Contingency reserve liability $1,238,140 $1,028,440 $ 839,478
======================================
The differences between the statutory net income and equity presented above for
PMI and the consolidated net income and equity presented on a GAAP basis
primarily represent the differences between GAAP and statutory accounting
practices as well as the results of operations and equity of other Company
subsidiaries.
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). The Codification, which is intended to standardize
regulatory accounting and reporting for the insurance industry, is proposed to
be effective January 1, 2001. However, statutory accounting principles will
continue to be established by individual state laws and permitted practices and
it is uncertain when various states will require adoption of Codification for
the preparation of statutory financial statements. PMI has not finalized the
quantification of the effects of Codification on its statutory financial
statements.
NOTE 16. BUSINESS SEGMENTS
The Company's reportable operating segments include Mortgage Guaranty Insurance,
International Mortgage Guaranty Insurance, and Title Insurance. The Mortgage
Guaranty Insurance segment includes PMI, RGC,RIC,PMG,TIC and TSP. The Title
Insurance segment consists of the results for APTIC. The International Mortgage
Guaranty Insurance segment consists of PMI Holdings and PMI Ltd. The Other
segment includes TPG, MSC, PCI, and SEC. Key products for each of the
21
<PAGE>
reportable segments are disclosed in Note 2, "Business and Summary of
Significant Accounting Policies." 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.
The accounting policies of the segments are the same as disclosed in Note 2,
"Business and Summary of Significant Accounting Policies." 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 as of and for the periods indicated.
<TABLE>
<CAPTION>
International
Mortgage Mortgage
1999 Guaranty Guaranty Title Consolidated
(in thousands) Insurance Insurance Insurance Other Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums earned $ 447,214 $ 11,291 $ 100,118 $ - $ 558,623
------------ -------------- ---------- --------- ------------
Net underwriting income (expenses)
before tax-external customers $ 202,508 $ 6,910 $ 10,897 $ (9,015) $ 211,300
Investment income 79,020 4,611 1,633 3,326 88,590
Equity in earnings of affiliates - - - 7,061 7,061
Interest expense (3) (1,307) - (7,244) (8,554)
Distributions on preferred capital securities - - - (8,311) (8,311)
------------ -------------- ---------- --------- ------------
Income (loss) before income tax expense 281,525 10,214 12,530 (14,183) 290,086
Income tax expense (benefit) 88,628 3,469 4,422 (10,899) 85,620
------------ -------------- ---------- --------- ------------
Net income (loss) $ 192,897 $ 6,745 $ 8,108 $ (3,284) $ 204,466
------------ -------------- ---------- --------- ------------
Total assets $ 1,764,125 $ 182,586 $ 46,484 $ 107,567 $ 2,100,762
------------ -------------- ---------- --------- ------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mortgage
1998 Guaranty Title Consolidated
(in thousands) Insurance Insurance Other Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums earned $ 411,922 $ 79,304 $ - $ 491,226
---------- ---------- ------------ ------------
Net underwriting income (expenses)
before tax-external customers $ 172,414 $ 9,606 $ (9,049) $ 172,971
Investment income 97,989 1,427 6,676 106,092
Equity in earnings of affiliates - - 3,225 3,225
Interest expense (3) - (7,026) (7,029)
Distributions on preferred capital securities - - (8,311) (8,311)
---------- ---------- ------------ ------------
Income (loss) before income tax expense 270,400 11,033 (14,485) 266,948
Income tax expense (benefit) 78,732 4,182 (6,326) 76,588
---------- ---------- ------------ ------------
Net income (loss) $ 191,668 $ 6,851 $ (8,159) $ 190,360
---------- ---------- ------------ ------------
Total assets $1,643,482 $ 42,165 $ 92,223 $ 1,777,870
---------- ---------- ------------ ------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Mortgage
1997 Guaranty Title Consolidated
(in thousands) Insurance Insurance Other Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums earned $ 394,010 $ 59,938 $ - $ 453,948
------------- ------------- ------------ ---------------
Net underwriting income (expenses)
before tax-external customers $ 159,360 $ 4,992 $ (9,822) $ 154,530
Investment and other income 93,625 1,257 6,383 101,265
Equity in earnings of affiliates - - 1,455 1,455
Interest expense - - (6,766) (6,766)
Distributions on preferred capital securities - - (7,617) (7,617)
------------- ------------- ------------ ---------------
Income (loss) before income tax expense 252,985 6,249 (16,367) 242,867
Income tax expense (benefit) 72,099 2,218 (6,759) 67,558
------------- ------------- ------------ ---------------
Net income (loss) $ 180,886 $ 4,031 $ (9,608) $ 175,309
------------- ------------- ------------ ---------------
Total assets $ 1,503,596 $ 37,050 $ 145,957 $ 1,686,603
------------- ------------- ------------ ---------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The Company did not have any major customers that accounted for more than 10% of
its consolidated revenues for any of the years presented.
NOTE 17. CAPITAL SUPPORT AGREEMENTS
PMI's claims-paying ratings from certain national rating agencies have, in the
past, been based in significant part on various capital support commitments from
Allstate and Sears ("Allstate Support Agreements"). On October 27, 1994, the
Allstate Support Agreements were terminated with respect to policies issued
after October 27, 1994, but continue in modified form (as so modified, the
"Runoff Support Agreement") for policies written prior to such termination.
Under the terms of the Runoff Support Agreement, Allstate may, at its option,
either directly pay or cause to be paid, claims relating to policies written
during the terms of the respective Allstate Support Agreements if PMI fails to
pay such claims or, in lieu thereof, make contributions directly to PMI or TPG.
In the event any amounts were so paid or contributed (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. The Runoff Support Agreement provides PMI
with additional capital support for rating agency purposes.
The Runoff Support Agreement contains certain covenants, including covenants
that (i) PMI will write no new business after its risk-to-capital ratio equals
or exceeds 23 to 1; (ii) PMI will pay no dividends if, after the payment of any
such dividend, PMI's risk-to-capital ratio would equal or exceed 23 to 1; and
(iii) on the date that any of the following events occur: (A) PMI's
risk-to-capital ratio exceeds 24.5 to 1, (B) Allstate shall have paid any claims
relating to PMI policies directly to a policyholder or by paying an amount equal
to such claims to PMI (or to TPG for contribution to PMI) pursuant to the Runoff
Support Agreement, or (C) any regulatory order is issued restricting or
prohibiting PMI from making full or timely payments under policies, PMI will
transfer substantially all of its assets in excess of $50.0 million to a trust
account established for the payment of claims.
On September 30, 1999, a CMG Capital Support Agreement was executed by PMI and
CMIC whereby both parties agreed to contribute funds, under specified
conditions, so as to maintain CMG's risk-to-capital at or below 18.0 to 1. As a
50% owner of CMG, PMI's obligation under the agreement is limited to an
aggregate amount of $15 million, exclusive of capital contributions made prior
to September 30, 1999. The previous CMG Capital Support Agreement, dated June 6,
1996, was superceded by execution of the new agreement. On December 31, 1999,
CMG's risk-to capital ratio was 16.2 to 1.
On June 6, 1999 a Capital Support Agreement was entered into between PMI and PMI
Ltd, where by PMI agrees that it will provide funds necessary to ensure that PMI
Ltd is able to maintain a sufficient level of capital at all times. In addition,
the agreement states that in no event shall the net assets of PMI Ltd be less
than 2% of the net aggregate risk of PMI Ltd plus AUD $50,000,000.
As of December 31, 1999 the Company was in compliance with all covenants
included in its capital support agreements.
23
<PAGE>
NOTE 18. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------- -------------- ------------- ---------------
1999 1998 1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 155,251 150,634 156,173 147,469 178,194 167,409 180,506 155,397
-------------------------------------------------------------------------------
Net income 43,652 45,768 49,459 46,787 54,503 53,728 56,852 44,077
-------------------------------------------------------------------------------
Basic EPS 0.97 0.94 1.10 0.98 1.22 1.16 1.27 0.97
-------------------------------------------------------------------------------
Diluted EPS 0.96 0.94 1.09 0.97 1.21 1.15 1.26 0.97
-------------------------------------------------------------------------------
Diluted operating EPS * 0.96 0.83 1.09 0.94 1.20 0.96 1.26 0.96
-------------------------------------------------------------------------------
</TABLE>
* Diluted operating earnings per share represents diluted earnings per share
excluding realized capital gains and their related income tax effect.
Earnings per share is computed independently for the quarters presented.
Therefore, the sum of the quarterly earnings per share amounts may not equal the
total computed for the year. All period have been adjusted to reflect the
company's 3 for 2 stock split.
24
<PAGE>
EXHIBIT 21.1
THE PMI GROUP, INC. - SUBSIDIARIES
<TABLE>
<CAPTION>
Name Under Which
Subsidiary Does Jurisdiction of
Subsidiary Name Business (If Different) Incorporation
- --------------- ----------------------- --------------
<S> <C> <C>
PMI Mortgage Insurance Co. Arizona
Residential Guaranty Co. Arizona
American Pioneer Title
Insurance Company Chelsea Title Company Florida
PMI Mortgage Services Co. California
PMI Capital I Delaware
PMI Mortgage Guaranty Co. Arizona
PMI Securities Co. Delaware
Residential Insurance Co. Arizona
CLM Technologies, Ltd. California
PMI Capital Corporation Delaware
TPG Segregated Portfolio Company (Cayman) Cayman Islands
TPG Insurance Co. Vermont
PMI PAC Arizona
PMI Mortgage Insurance Co. Federal PAC Federal PAC
The PMI Foundation California
PMI Mortgage Insurance Australia (Holdings) Pty Limited Australia
PMI Mortgage Insurance Ltd Australia
</TABLE>
<PAGE>
EXHIBIT 23.1
------------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No. 333-
92636, No. 333-99378, No. 333-47473, No. 333-66829 No. 333-81679, and No. 333-
32190 of The PMI Group, Inc. (the "Company") on Form S-8 and Registration
Statements No. 333-48035, and No. 333-67125 of the Company on Form S-3 and
Registration Statement No. 333-29777 of the Company on Form S-4 of our report
dated January 20, 2000 appearing in and incorporated by reference in this Annual
Report on Form 10-K of the Company for the year ended December 31, 1999.
/s/ Deloitte & Touche LLP
San Francisco, California
March 20, 2000
65
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 1,479,310
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 192,925
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,817,328
<CASH> 28,076
<RECOVER-REINSURE> 50,714
<DEFERRED-ACQUISITION> 69,579
<TOTAL-ASSETS> 2,100,762
<POLICY-LOSSES> 282,000
<UNEARNED-PREMIUMS> 182,089
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 145,367
0
0
<COMMON> 528
<OTHER-SE> 1,216,740
<TOTAL-LIABILITY-AND-EQUITY> 2,100,762
558,623
<INVESTMENT-INCOME> 95,142
<INVESTMENT-GAINS> 509
<OTHER-INCOME> 15,850
<BENEFITS> 112,682
<UNDERWRITING-AMORTIZATION> 80,252
<UNDERWRITING-OTHER> 170,239
<INCOME-PRETAX> 290,086
<INCOME-TAX> 85,620
<INCOME-CONTINUING> 204,466
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 204,466
<EPS-BASIC> 4.55
<EPS-DILUTED> 4.52
<RESERVE-OPEN> 208,477
<PROVISION-CURRENT> 159,293
<PROVISION-PRIOR> (46,611)
<PAYMENTS-CURRENT> 1,798
<PAYMENTS-PRIOR> 95,797
<RESERVE-CLOSE> 270,565
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
