<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________ .
Commission file number 1-13664
THE PMI GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3199675
(State of Incorporation) (IRS Employer Identification No.)
601 Montgomery Street,
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
(415) 788-7878
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class of Stock Par Value Date Number of Shares
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock $0.01 9/30/00 44,262,724
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
THE PMI GROUP, INC.
Index to Quarterly Report on Form 10-Q
September 30, 2000
<TABLE>
<CAPTION>
Page
------------
<S> <C>
Part I - Financial Information
Item 1. Interim Consolidated Financial Statements and Notes (Unaudited)
Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 30, 2000 and 1999 3
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Cautionary Statements and Investment Considerations 18-24
Part II - Other Information
Item 1. Legal Proceedings 25
Item 6. Exhibits and reports of Form 8-K 25
Signatures 26
Index to Exhibits 27
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
(In thousands except per share amounts) 2000 1999 2000 1999
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues
Premiums earned $162,395 $147,663 $467,944 $407,761
Investment income, less investment expense 29,524 24,050 85,642 67,579
Realized capital gains, net 1,420 168 2,558 512
Other income 1,707 6,313 6,213 13,767
-------------- -------------- -------------- ---------------
Total revenues 195,046 178,194 562,357 489,619
-------------- -------------- -------------- ---------------
Losses and expenses
Losses and loss adjustment expenses 22,413 31,217 77,346 83,934
Amortization of policy acquisition costs 19,189 19,004 59,191 60,971
Underwriting and other operating expenses 49,964 46,736 132,337 124,542
Interest expense 2,632 1,817 7,575 5,410
Distribution on preferred capital securities 2,077 2,077 6,232 6,232
-------------- -------------- -------------- ---------------
Total losses and expenses 96,275 100,851 282,681 281,089
-------------- -------------- -------------- ---------------
Income before income taxes 98,771 77,343 279,676 208,530
Income tax expense 29,515 22,840 85,451 60,916
-------------- -------------- -------------- ---------------
Net income $ 69,256 $ 54,503 $194,225 $147,614
============== ============== ============== ===============
Per common share data:
Basic net income $ 1.57 $ 1.22 $ 4.39 $ 3.28
============== ============== ============== ===============
Diluted net income $ 1.53 $ 1.21 $ 4.33 $ 3.26
============== ============== ============== ===============
Diluted operating income $ 1.51 $ 1.20 $ 4.29 $ 3.26
============== ============== ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 2000 1999
------------------- -------------------
<S> <C> <C>
(Unaudited)
Assets
Investments:
Available for sale, at fair value:
Fixed income securities (amortized cost $1,595,522 and $1,485,396) $1,634,586 $1,479,310
Equity securities
Common stock (cost $56,818 and $44,714) 94,955 83,890
Preferred stock (cost $108,490 and $17,660) 109,558 17,582
Common stock of affiliates, at underlying book value 120,587 91,453
Short term investments (at cost, which approximates fair value) 88,844 145,093
------------------- -------------------
Total investments 2,048,530 1,817,328
------------------- -------------------
Cash 16,902 28,076
Accrued investment income 24,829 22,058
Reinsurance recoverable and prepaid premiums 52,141 50,714
Premiums receivable 35,435 30,659
Receivable from affiliates 1,437 2,996
Deferred policy acquisition costs 63,839 69,579
Property and equipment, net 48,757 40,462
Other assets 45,063 38,890
------------------- -------------------
Total assets $2,336,933 $2,100,762
=================== ===================
Liabilities
Reserve for losses and loss adjustment expenses $ 295,297 $ 282,000
Unearned premiums 177,206 182,089
Long-term debt 140,221 145,367
Reinsurance balances payable 27,121 25,415
Deferred income taxes 92,030 75,640
Other liabilities and accrued expenses 92,969 73,908
------------------- -------------------
Total liabilities 824,844 784,419
------------------- -------------------
Company-obligated mandatorily redeemable preferred capital
securities of subsidiary trust holding solely junior subordinated
deferrable interest debenture of the Company 99,100 99,075
Shareholders' equity
Preferred stock -- $.01 par value; 5,000,000 shares authorized - -
Common stock -- $.01 par value; 187,500,000 shares
authorized; 52,794,004 and 52,793,777 issued 528 528
Additional paid-in capital 265,828 265,828
Accumulated other comprehensive income 45,517 20,186
Retained earnings 1,447,542 1,258,617
Treasury stock (8,531,280 and 8,091,924 shares at cost) (346,426) (327,891)
------------------- -------------------
Total shareholders' equity 1,412,989 1,217,268
------------------- -------------------
Total liabilities and shareholders' equity $2,336,933 $2,100,762
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
(In thousands) 2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net Income $ 194,225 $ 147,614
Adjustment to reconcile net income to net cash provided by
operating activities:
Realized capital gains, net (2,558) (512)
Equity in earnings of affiliates (7,636) (4,762)
Depreciation and amortization 9,024 11,005
Changes in:
Reserve for losses and loss adjustment expenses 13,297 64,462
Unearned premiums (4,883) 82,151
Deferred policy acquisition costs 5,740 (9,177)
Accrued investment income (2,771) (565)
Reinsurance balances payable 1,706 6,583
Reinsurance recoverable and prepaid premiums (1,427) (10,352)
Premiums receivable (4,776) (4,544)
Income taxes (614) 811
Receivable from affiliates 1,559 1,573
Receivable from Allstate - 23,657
Other 9,193 78,902
--------------- ---------------
Net cash provided by operating activities 210,079 386,846
--------------- ---------------
Cash flows from investing activities
Proceeds from sales of equity securities 38,945 19,040
Investment collections of equity securities 1,450 61
Investment collections of fixed income securities - 3,000
Proceeds from sales of fixed income securities 132,556 145,836
Investment purchases:
Fixed income securities (255,409) (346,459)
Equity securities (132,168) (39,396)
Net decrease (increase) in short-term investments 56,249 (48,468)
Investment in affiliates (20,738) (22,009)
Purchase of PMI Ltd. - (78,295)
Purchase of property and equipment (13,157) (13,008)
--------------- ---------------
Net cash used in investing activities (192,272) (379,698)
--------------- ---------------
Cash flows from financing activities
Proceeds from exercise of stock grants and options 5,482 327
Issuance of long-term debt - 45,825
Principal payments on long-term debt (5,146) -
Dividends paid to shareholders (5,300) (4,510)
Purchase of The PMI Group, Inc. common stock (24,017) (25,380)
--------------- ---------------
Net cash used in financing activities (28,981) 16,262
--------------- ---------------
Net increase (decrease) in cash (11,174) 23,410
Cash at beginning of period 28,076 9,757
--------------- ---------------
Cash at end of period $ 16,902 $ 33,167
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
THE PMI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of The PMI Group, Inc. ("TPG"), a Delaware corporation; its direct and
indirect wholly-owned subsidiaries, PMI Mortgage Insurance Co. ("PMI"), an
Arizona Corporation; Residential Guaranty Co. ("RGC"), an Arizona corporation;
American Pioneer Title Insurance Company ("APTIC"), a Florida corporation; and
PMI's wholly-owned subsidiaries, PMI Mortgage Insurance Ltd. ("PMI Ltd."), an
Australian mortgage insurance company, PMI Mortgage Services Co. ("MSC"), a
California corporation, and other insurance, reinsurance and non-insurance
subsidiaries of PMI and TPG. TPG and its subsidiaries are collectively referred
to as the "Company". All material intercompany transactions and balances have
been eliminated in consolidation. In addition, PMI has equity interests in CMG
Mortgage Insurance Company and CMG Reinsurance Company (collectively referred to
as "CMG"), both of which conduct residential mortgage insurance and reinsurance
business, and also Fairbanks Capital Holding Corp. ("Fairbanks"), a special
servicer of single-family residential mortgages. TPG has equity interests in RAM
Holdings Ltd. and RAM Holdings II Ltd. (collectively referred to as "RAM RE"), a
financial guaranty reinsurance company based in Bermuda. CMG, Fairbanks and Ram
Re are accounted for on the equity method in the Company's consolidated
financial statements.
The Company's unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) for interim
financial information and the requirements of Form 10-Q and Article 7 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation, have been included. Interim
results for the quarter and nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. The financial statements should be read in conjunction with
the audited consolidated financial statements and footnotes included in The PMI
Group, Inc. 1999 Annual Report to Shareholders.
Note 2 - Changes in Accounting Policy
Effective January 1, 2000 the Company changed its accounting policy for
international subsidiaries and affiliates to report operations on a one-month
lag from domestic operations. Accordingly, the results of foreign operations
for the nine months ended September 30, 2000 represent eight months of activity.
Note 3 - Earnings per Share
The weighted average common shares outstanding for computing basic earnings per
share ("EPS") were 44,213,298 and 44,773,670 for the three months ended
September 30, 2000 and 1999, respectively, and 44,240,198 and 44,962,512 for the
nine months ended September 30, 2000 and 1999, respectively. The weighted
average common shares outstanding for computing diluted EPS includes only stock
options issued by the Company that have a dilutive impact and are outstanding
for the period, and such options had the potential effect of increasing common
shares to 45,139,404 and 45,221,950 for the three months ended September 30,
2000 and 1999, respectively, and 44,896,795 and 45,231,483 for the nine months
ended September 30, 2000 and 1999, respectively. Net income available to common
shareholders does not change for computing diluted EPS.
6
<PAGE>
Note 4 - Comprehensive Income
The reconciliation of net income to comprehensive income for the three months
and nine months ended September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
(In thousands) 2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net income $69,256 $ 54,503 $194,225 $147,614
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 10,354 (17,391) 31,143 (45,544)
Less: reclassification adjustment for gains
included in net income (923) (109) (1,663) (333)
Currency translation adjustment 215 - (4,149) -
----------- ----------- ------------ ------------
Other comprehensive income (loss), net of tax 9,646 (17,500) 25,331 (45,877)
----------- ----------- ------------ ------------
Comprehensive income $78,902 $ 37,003 $219,556 $101,737
=========== =========== ============ ============
</TABLE>
Note 5 - Deferred Policy Acquisition Costs ("DAC")
The Company defers certain costs in its mortgage insurance operations relating
to the acquisition of primary mortgage insurance and amortizes these costs
against related premium revenue in order to match costs and revenues in
accordance with GAAP. These acquisition costs vary with, and are primarily
related to, the acquisition of new business. Specific costs that consolidated
mortgage insurance operations defers including all underwriting, contract
underwriting and sales related activities. To the extent the Company is
compensated by customers for contract underwriting, those underwriting costs are
not deferred.
The DAC asset is amortized and 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 following table reconciles beginning and ending DAC balance for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -------------------------------
(In thousands) 2000 1999 2000 1999
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Beginning DAC balance $ 68,769 $ 69,230 $ 69,579 $ 61,605
U.S. Acquisition costs incurred and deferred 16,602 20,556 53,109 70,148
U.S. Amortization of deferred costs (19,189) (19,004) (59,191) (60,971)
Net change in PMI Ltd. DAC balance (2,343) - 342 -
----------- ----------- ------------ -------------
Ending DAC balance $ 63,839 $ 70,782 $ 63,839 $ 70,782
=========== =========== ============ =============
</TABLE>
7
<PAGE>
Note 6 - Business Segments
The Company's reportable operating segments include Domestic Mortgage Insurance,
International Mortgage Insurance and Title Insurance. The Other segment
includes the income and expenses of the holding company, the results from MSC,
and the activity of an inactive broker-dealer. Intersegment transactions are
immaterial. The Company evaluates performance primarily based on segment net
income.
The following tables present information about reported segment income (loss)
and segment assets for the periods indicated:
<TABLE>
<CAPTION>
Domestic International
Quarter ended September 30, 2000 Mortgage Mortgage Title Intersegment Consolidated
(In thousands) Insurance Insurance Insurance Other Adjustments Total
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums earned $ 127,376 $ 7,439 $27,580 $ - $ - $ 162,395
=============================================================================================
Net underwriting income (expenses)
before tax--external customers $ 74,794 $ 2,990 $ 2,387 $ (7,636) $ - $ 72,535
Investment income (including
capital gains) 22,631 2,614 474 2,385 - 28,104
Equity in earnings of affiliates 2,237 (668) - 1,272 - 2,841
Interest expense (6) (762) - (1,864) - (2,632)
Distributions on preferred capital
securities - - - (2,077) - (2,077)
---------------------------------------------------------------------------------------------
Income (loss) before income tax
expense 99,656 4,174 2,861 (7,920) - 98,771
Income tax expense (benefit) 31,132 926 1,031 (3,574) - 29,515
---------------------------------------------------------------------------------------------
Net income (loss) $ 68,524 $ 3,248 $ 1,830 $ (4,346) $ - $ 69,256
=============================================================================================
Total assets $1,964,631 $180,354 $50,235 $141,713 $ - $2,336,933
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Domestic International
Quarter ended September 30, 1999 Mortgage Mortgage Title Intersegment Consolidated
(In thousands) Insurance Insurance Insurance Other Adjustments Total
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums earned $ 116,524 $ 4,786 $26,353 $ _ $ - $ 147,663
=============================================================================================
Net underwriting income (expenses)
before tax--external customers $ 51,116 $ 1,879 $ 3,066 $ 958 $ - $ 57,019
Investment income 20,117 1,419 422 624 - 22,582
Equity in earnings of affiliates - - - (267) 1,903 1,636
Interest expense - - - (1,817) - (1,817)
Distributions on preferred capital
securities - - - (2,077) - (2,077)
---------------------------------------------------------------------------------------------
Income (loss) before income tax
expense 71,233 3,298 3,488 (2,579) 1,903 77,343
Income tax expense (benefit) 21,114 1,117 1,281 (672) - 22,840
---------------------------------------------------------------------------------------------
Net income (loss) $ 50,119 $ 2,181 $ 2,207 $ (1,907) $1,903 $ 54,503
=============================================================================================
Total assets $1,713,925 $176,753 $45,597 $104,058 $ - $2,040,333
=============================================================================================
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Domestic International
Nine Months ended September 30, 2000 Mortgage Mortgage Title Intersegment Consolidated
(In thousands) Insurance Insurance Insurance Other Adjustments Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums earned $ 372,883 $ 20,114 $74,947 $ - $ - $ 467,944
==============================================================================================
Net underwriting income (expenses)
before tax--external customers $ 203,910 $ 10,218 $ 6,455 $(15,301) - $ 205,282
Investment income (including
capital gains) 65,250 9,408 1,388 5,179 - 81,225
Equity in earnings of affiliates 6,308 (877) - 1,296 249 6,976
Interest expense (19) (2,048) - (5,508) - (7,575)
Distributions on preferred capital
securities - - - (6,232) - (6,232)
----------------------------------------------------------------------------------------------
Income (loss) before income tax
expense 275,449 16,701 7,843 (20,566) 249 279,676
Income tax expense (benefit) 84,516 5,153 2,698 (6,916) - 85,451
----------------------------------------------------------------------------------------------
Net income (loss) $ 190,933 $ 11,548 $ 5,145 $(13,650) $ 249 $ 194,225
==============================================================================================
Total assets $1,964,631 $180,354 $50,235 $141,713 $ - $2,336,933
==============================================================================================
<CAPTION>
Domestic International
Nine Months ended September 30, 1999 Mortgage Mortgage Title Intersegment Consolidated
(In thousands) Insurance Insurance Insurance Other Adjustments Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums earned $ 329,100 $ 4,786 $73,875 $ $ - $ 407,761
==============================================================================================
Net underwriting income (expenses)
before tax--external customers $ 144,411 $ 1,879 $ 8,006 $ (2,215) $ - $ 152,081
Investment income 58,658 1,419 1,170 2,081 - 63,328
Equity in earnings of affiliates - - - 3,542 1,221 4,763
Interest expense - - - (5,410) - (5,410)
Distributions on preferred capital
securities - - - (6,232) - (6,232)
---------------------------------------------------------------------------------------------
Income (loss) before income tax
expense 203,069 3,298 9,176 (8,234) 1,221 208,530
Income tax expense (benefit) 60,032 1,117 3.352 (3,585) - 60,916
---------------------------------------------------------------------------------------------
Net income (loss) $ 143,037 $ 2,181 $ 5,824 $ (4,649) $1,221 $ 147,614
=============================================================================================
Total assets $1,713,925 $176,753 $45,597 $104,058 $ - $2,040,033
=============================================================================================
</TABLE>
The Company did not have any major customers that accounted for more than 10% of
its consolidated revenues for any of the periods presented.
Note 7 - New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, and is effective for the Company July 1,
2000. The statement, as amended, establishes accounting and reporting standards
for derivative instruments and for hedging activity. It requires that all
derivatives are measured at fair value and recognized as assets or liabilities
in the financial statements. Management does not anticipate the adoption of
SFAS 133 will have a material impact on the Company's financial condition or
results of operations due to its limited use of derivative instruments.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
Certain written and oral statements made or incorporated by reference from time
to time by the Company or its representatives in this document, other documents
filed with the Securities and Exchange Commission, press releases, conferences,
or otherwise that are not historical facts, or are preceded by, followed by or
that include the words "believes," "expects," "anticipates," "estimates," or
similar expressions, and that relate to future plans, events or performance are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements in this document
include: (i) management's anticipation that secondary market bulk transactions
will continue to be an increasing portion of MICA's total origination volume;
(ii) management's expectation of some volatility in the quarterly market share
of individual companies, including PMI, as a result of secondary market
transactions; (iii) management's expectation of higher delinquency and default
rates for non-traditional loans insured by PMI; (iv) management's belief that
the persistency rate may continue to increase moderately if interest rates
remain stable or rise during the remainder of 2000; (v) management's belief that
the percentage of NIW subject to captive reinsurance agreements and other risk-
sharing programs could continue to increase in 2000 and beyond and that the
continued growth of captive reinsurance is expected to reduce the Company's net
premiums written and net premiums earned over the long-term; (vi) management's
expectation that the amount of pool risk written in 2000 will be less than the
amount written in 1999; (vii) management's anticipation that, during 2000, the
percentage of PMI's risk related to risk-sharing programs will continue to
increase as a percentage of total risk; (viii) management's belief that PMI's
default rate may increase by year-end due to the maturation of insurance in
force and seasonality; (ix) management's expectation that California will
continue to account for a significant portion of total claims paid during 2000;
(x) management's belief 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
could continue to decline; and (xi) management's anticipation that contract
underwriting will continue to generate a significant percentage of PMI's NIW for
the foreseeable future and, therefore, remain a significant component of
acquisition costs. When a forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement, the Company
cautions that, while it believes such assumptions or bases to be reasonable and
makes them in good faith, assumed facts or bases almost always vary from actual
results, and the difference between assumed facts or bases and actual results
can be material, depending on the circumstances. Where, in any forward-looking
statement, the Company or its management expresses an expectation or belief as
to future results, such expectations or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The Company's actual results may differ materially from those expressed in any
forward-looking statements made by the Company. These forward-looking statements
involve a number of risks or uncertainties including, but not limited to, the
items addressed in the section titled "Cautionary Statements and Investment
Considerations" ("IC# 1-17") 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 the Investment Considerations set forth below and in
the Company's other periodic filings with the Securities and Exchange
Commission. 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.
10
<PAGE>
RESULTS OF CONSOLIDATED OPERATIONS:
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Consolidated net income was $69.3 million for the three months ended September
30, 2000, a 27.1% increase compared to the same period of 1999. The growth can
be attributed to increases in premiums earned of 10.0%, net investment income of
22.8%, realized capital gains of 746.1% and a decrease in losses and loss
adjustment expenses of 28.2%, partially offset by a decrease in other income of
73.0% and increases in interest expense of 44.8% and underwriting and other
operating expenses of 6.9%. Diluted net income per share increased by 26.4% to
$1.53 compared to the same period in 1999. Excluding capital gains, operating
earnings per share increased by 25.8% to $1.51 compared to the same period in
1999. Revenues for the third quarter of 2000 increased by 9.5% to $195.0
million compared to the third quarter of 1999.
U.S. MORTGAGE INSURANCE OPERATIONS
The Company's primary operating subsidiary, PMI, contributed approximately 78%
of total revenues for the quarter ended September 30, 2000 from mortgage
guaranty insurance written in the United States. PMI's new insurance written
("NIW") decreased by 5.9% to $6.9 billion in the third quarter of 2000 compared
to the same period of 1999, primarily as a result of a decline in total
residential mortgage origination activity and the corresponding decrease in
total volume of the private mortgage insurance industry, partially offset by an
increase in PMI's market share as discussed below.
The members of the private mortgage insurance industry, as reported by the
industry's trade association, Mortgage Insurance Companies of America ("MICA"),
experienced an 8.5% decrease in total new insurance written to $45.4 billion
during the third quarter of 2000 compared with the corresponding period of 1999.
This decrease was primarily due to a decline in total residential mortgage
originations, particularly in refinancing activity, resulted from the rising
interest rate environment. Total residential mortgage originations are estimated
at $280 billion for the third quarter of 2000 compared to $295 billion in the
same period of 1999, a decrease of 5.1%, as reported by Inside Mortgage Finance.
Refinancing as a percentage of PMI's NIW decreased to 7.9% in the third quarter
of 2000 from 13.7% in the same period of 1999. The private mortgage insurance
companies' market share increased to 60.2% of the total low down-payment market
(insurable loans) from 53.3% in the third quarter of 1999. Management believes
that the private mortgage insurance companies' increase in market share was the
result of increased secondary market bulk transactions. (See IC2)
PMI's market share of NIW increased to 15.2% in the third quarter of 2000
compared to 14.8% in the third quarter of 1999, and decreased from 15.6% in the
second quarter of 2000. On a combined basis with CMG, market share increased to
16.5% in the third quarter of 2000 compared with 16.1% in the corresponding
period of 1999. Management believes PMI's market share increase from the third
quarter of 1999 is primarily due to transactions involving Alternative A and A-
loans C (see below). PMI did not write mortgage finance on such loans during
1999. The decline in the third quarter of 2000 from the second quarter of 2000
is primarily due to increased secondary market transactions by PMI's
competitors. Management anticipates these secondary market bulk transactions to
continue to be an increasing portion of MICA's total origination volume over the
short term. Management expects volatility in quarterly market share of
individual companies, including PMI, as a result of these secondary market
transactions.
PMI's NIW for the third quarter of 2000 also includes Alternative A and A- loans
("non-traditional loans"), and involved transactions with mortgage lenders and
investors. This business accounted for approximately 17% of PMI's total third
quarter NIW. Loan characteristics, credit quality, loss development, pricing
structures and persistency on this book of business can be significantly
different than PMI's traditional prime business. Management expects higher
delinquency and default rates for the non-traditional loans and incorporates
these assumptions in its pricing. However, there can be no assurance that this
book of business will generate the same returns as PMI's standard business or
that the premiums will adequately compensate for the associated risk. (See IC10)
11
<PAGE>
PMI's cancellations of primary insurance in force decreased by 14.6% to $4.3
billion during the third quarter of 2000 compared with the corresponding period
of 1999, primarily due to the decrease in refinancing activity previously
discussed. As a result of the decrease in cancellation activity, PMI's
persistency rate increased to 80.8% as of September 30, 2000 compared with 71.9%
as of December 31, 1999 and 68.5% as of September 30, 1999. Management believes
that if interest rates remain stable or rise during 2000, the persistency rate
may continue to increase moderately.
Insurance in force increased by 10.9% to $93.8 billion at September 30, 2000
compared with September 30, 1999. On a combined basis with CMG, insurance in
force grew by 11.6% to $100.6 billion as of September 30, 2000. PMI's risk in
force increased by 11.0% to $22.8 billion at September 30, 2000 compared with
September 30, 1999. On a combined basis with CMG, risk in force increased by
11.9% to $24.5 billion as of September 30, 2000. The growth in insurance in
force and risk in force was primarily due to the decrease in cancellation
activity and the corresponding increase in persistency.
Net premiums written increased by 2.3% to $128.9 million for the third quarter
of 2000 compared to the same period of 1999. This increase was primarily due to
the growth of insurance and risk in force discussed above, offset by a one time
increase to net premiums written in the third quarter of 1999 due to a recapture
agreement of an old pool business reinsurance arrangement (see Note 7
"Reinsurance" of the Notes to the Consolidated Financial Statements included in
the PMI Group, Inc. 1999 Annual Report to Shareholders). The old pool risk in
force was $1.4 billion as of September 30, 2000 and 1999. Refunded premiums
decreased by 24.1% to $2.5 million as a result of the decrease in policy
cancellations in the third quarter of 2000. Ceded premiums written increased by
149.2% to $10.2 million for the quarter ended September 30, 2000, primarily due
to the effect of the recapture agreement on ceded premiums in the third quarter
of 1999 and the increased use of captive reinsurance arrangements in 2000.
Approximately 38% of new insurance written in the third quarter of 2000 was
subject to captive mortgage reinsurance agreements compared with approximately
28% in the corresponding period of 1999. Management believes that the
percentage of the NIW subject to captive mortgage reinsurance agreements and
other risk-share programs could 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
over the long-term. Mortgage insurance premiums earned increased by 9.3% to
$127.4 million in the third quarter of 2000 primarily due to the increase in
premiums written.
GSE pool risk written totaled $49.5 million during the third quarter of 2000
compared with $89.6 million in the corresponding period of 1999. Management
expects the amount of pool risk written in 2000 to be less than the amount of
pool risk written in 1999. GSE pool risk in force was $774.2 million as of
September 30, 2000, compared to $637.1 million as of September 30, 1999. Risk in
force under risk-share programs with PMI's customers represented approximately
25% of direct primary risk in force at September 30, 2000. During 2000,
management anticipates the percentage of PMI's risk related to risk-share
programs to continue to increase as a percent of total risk. (See ICI0)
Mortgage insurance losses and loss adjustment expenses decreased by 32.7% to
$20.4 million during the third quarter of 2000 compared to the same period of
1999, primarily due to the continuing improvement of the nationwide housing
markets, particularly California, and the corresponding decrease in claim
payments. Loans in default increased by 4.5% to 15,876 at September 30, 2000
compared with September 30, 1999, primarily due to the maturation of insurance
in force and to a higher level of defaults on the alternative A and A- book of
business. PMI's national default rate decreased by 0.08 percentage points to
1.99% at September 30, 2000 compared with September 30, 1999, primarily due to
the increase in policies in force. Management believes that PMI's default rate
may increase by year-end due to the continued maturation of insurance in force
and seasonality. (See ICI2)
Direct primary claims paid during the third quarter of 2000 decreased by 26.4%
to $15.0 million compared to the same period of 1999, due to an 11.0% decrease
in the average claim size to approximately $18,165 and a 21.1% decline in the
number of claims paid to 825. The reduction in the average claim size was the
result of
12
<PAGE>
a smaller percentage of claims originating from the California book of business
and increased loss mitigation efforts by PMI and investors.
Default rates on PMI's California policies decreased to 2.20% at September 30,
2000, from 2.61% at September 30, 1999. Claims paid for the policies written in
California accounted for 14.1% and 31.5% of the total dollar amount of claims
paid during the third quarter of 2000 and 1999, respectively. Management
expects that California will continue to account for a significant portion of
total claims paid during 2000. However, with continued improvement in the
California economy, increased benefits from loss mitigation efforts and improved
default reinstatement rates, California claims paid as a percentage of total
claims paid could continue to decline. (See ICI3)
Mortgage insurance policy acquisition costs incurred and deferred decreased by
12.7% to $16.6 million in the third quarter of 2000 compared to the same period
of 1999, due to the decrease in NIW and the decrease in contract underwriting.
Amortization of policy acquisition costs increased slightly to $19.2 million. A
significant portion of policy acquisition costs relate to contract underwriting.
New policies processed by contract underwriters represented 23.2% of PMI's NIW
for the third quarter of 2000 compared with 36.2% in the corresponding period of
1999. Management anticipates that contract underwriting will continue to
generate a significant percentage of PMI's NIW for the foreseeable future, and
accordingly, remain a significant component of acquisition costs. (See IC7)
Other mortgage insurance operating expenses decreased by 18.8% to $13.1 million
in the third quarter of 2000 compared to the same period of 1999, due to 1999
Y2K remediation costs and reengineering efforts implemented in 1999 and 2000.
The mortgage insurance loss ratio declined to 16.0% for the quarter ended
September 30, 2000 from 26.0% in the same period of 1999. The decline was
attributed primarily to the increase in premiums earned and the decrease in loss
expenses as discussed above. The gross expense ratio (GAAP basis) decreased to
23.0% from 27.9% in the third quarter of 1999, primarily due to the increase in
net premiums written along with the decrease in underwriting and other operating
expenses. The combined ratio decreased by 12.9 percentage points to 41.0% for
the third quarter of 2000 compared with the third quarter of 1999.
INTERNATIONAL MORTGAGE INSURANCE OPERATIONS
PMI Ltd. was acquired on August 6, 1999 and accordingly the third quarter
results were not necessarily comparable to the prior year. Net income for PMI
Ltd. was $3.2 million for the three months ended September 30, 2000 compared to
$2.2 million for the period from August 6 to September 30, 1999. PMI Ltd.
generated $9.6 million of net premiums written and $7.4 million in premiums
earned for the third quarter of 2000 compared with $4.0 million of net premiums
written and $4.8 million in premiums earned for the period from August 6 to
September 30, 1999. PMI Ltd.'s losses and loss adjustment expenses were $1.8
million and underwriting and other expenses were $3.4 million for the third
quarter of 2000, compared with losses and loss adjustment expenses of $0.7
million and underwriting and other expenses of $2.2 million for the period from
August 6 to September 30, 1999. Investment income for PMI Ltd. was $1.9 million
for the third quarter of 2000 compared to $1.4 million for the period from
August 6 to September 30, 1999. NIW for PMI Ltd. was $1.2 billion for the
quarter ended September 30, 2000 while insurance in force grew to $18.4 billion
as of September 30, 2000. Financial results for the operations in Hong Kong were
immaterial in the third quarter of 2000.
TITLE INSURANCE OPERATIONS
Net income for APTIC was $1.8 million for the three months ended September 30,
2000 compared to $2.2 million in the corresponding period of 1999. Title
insurance premiums earned increased by 4.7% to $27.6 million compared to the
third quarter a year ago, primarily due to continued geographic expansion
efforts offset by the decrease in residential mortgage originations as
previously noted. During the third quarter of 2000, approximately 65% of
APTIC's premiums earned were generated from the state of Florida, compared with
approximately 73% in the corresponding period of 1999. Underwriting and other
expenses increased by 8.2% to $24.9 million in the third quarter of 2000
compared to the same period of 1999 due to an increase in
13
<PAGE>
agency fees and commissions related to the increase in premiums earned and to
costs associated with expansion efforts. The title insurance combined ratio
increased by 3.0 percentage points to 91.4% in the third quarter of 2000
compared to the third quarter of 1999.
OTHER
Other income, which was generated primarily by MSC, decreased by 73.8% to $1.7
million in the third quarter of 2000 compared to the same period of 1999
primarily due to the decrease in contract underwriting services and to an IRS
tax refund in the third quarter of 1999. Other expenses increased by 73.2% to
$9.3 million primarily due to international expansion and diversification
efforts. (See IC7)
For the quarter ended September 30, 2000, the Company's net investment income
increased by 22.8% to $29.5 million compared to the same period of 1999,
primarily due to the growth in the investment portfolio of $292 million over the
third quarter of 1999 and the acquisition of PMI Ltd. In addition, the pre-tax
current portfolio book yield increased to 6.2% at September 30, 2000 from 5.8%
at September 30, 1999 primarily as a result of investment diversification
efforts. The Company's net realized gains were $1.4 million compared to $0.2
million for the quarter ended September 30, 1999.
The Company's effective tax rate increased to 29.9% for the third quarter of
2000 from 29.5% for the third quarter of 1999 as a result of the increase in
domestic and international underwriting operations relative to tax-exempt
investment income.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Consolidated net income was $194.2 million for the nine months ended September
30, 2000, a 31.6% increase compared to the same period of 1999. The growth can
be attributed to increases in premiums earned of 14.8%, net investment income of
26.7%, realized capital gains of 399.9% and a decrease in losses and loss
expenses of 7.8%, partially offset by a decrease in other income of 54.9% and
increases in interest expense of 40.0% and underwriting and other operating
expenses of 6.3%. Diluted net income per share increased by 32.8% to $4.33
during the first nine months of 2000. Excluding capital gains, operating
earnings per share increased by 31.6% to $4.29 during the first nine months of
2000. Revenues for the first nine months of 2000 increased by 14.9% to $562.4
million compared to the first nine months of 1999.
U.S. MORTGAGE INSURANCE OPERATIONS
The Company's primary operating subsidiary, PMI, contributed approximately 79%
of total revenues for the first nine months of 2000 from mortgage guaranty
insurance written in the United States. PMI's NIW decreased by 12.9% to $19.4
billion during the first nine months of 2000 compared to the same period of
1999, primarily as a result of a decline in total residential mortgage
origination activity and the corresponding decrease in total volume of the
private mortgage insurance industry, partially offset by an increase in PMI's
market share as discussed below.
The private mortgage insurance industry, as reported by Mortgage Insurance
Companies of America ("MICA"), experienced a 19.7% decrease in total new
insurance written to $119.8 billion for the nine months ended September 30, 2000
compared with the corresponding period of 1999. This decrease was primarily due
to a decrease in total residential mortgage originations, particularly in
refinancing activity, resulted from the rising interest rate environment. Total
residential mortgage originations are estimated at $763 billion for the first
nine months of 2000 compared to $1,055 billion in the same period of 1999, a
decrease of 27.7%. Refinancing as a percentage of PMI's NIW decreased to 8.7%
for the nine months ended September 30, 2000 from 25.5% in the same period of
1999. The private mortgage insurance companies' market share increased to 58.5%
of the total low down-payment market (insurable loans) from 51.7% during the
first nine months of 1999. Management believes that the private mortgage
insurance companies' increase in market share was
14
<PAGE>
the result of an expansion of the MICA market through increased secondary market
bulk transactions. (See IC2)
PMI's market share of NIW increased to 16.2% in the first nine months of 2000
compared to 14.9% in the same period of 1999. On a combined basis with CMG,
market share increased to 17.6% compared with 16.2% in the corresponding period
of 1999. Management believes the increase in PMI's market share was primarily
the result of bulk secondary market transactions insured by PMI. Management
expects continued volatility in market share of individual companies, including
PMI, as a result of these secondary market transactions.
Non-traditional loans accounted for approximately 17% of PMI's NIW in the nine
months ended September 30, 2000. Loan characteristics, credit quality, loss
development, pricing structures and persistency on this book of business can be
significantly different than PMI's traditional prime business. Management
expects higher delinquency and default rates for the non-traditional loans and
incorporates these assumptions in its pricing. However, there can be no
assurance that this book of business will generate the same returns as PMI's
standard business or that the premiums will adequately compensate for the
associated risk. (See IC10)
Net premiums written increased by 9.2% to $369.0 million in the first nine
months of 2000 compared to the same period of 1999. This increase was primarily
due to the growth of insurance and risk in force, offset by a one time increase
to net premiums written in third quarter of 1999 due to the recapture agreement
as discussed earlier. Refunded premiums decreased by 40.5% to $7.5 million as a
result of the decrease in policy cancellations compared to the first nine months
of 1999. Ceded premiums written increased by 27.6% to $26.3 million compared to
the first nine months of 1999, primarily due to the affect of the recapture
agreement on ceded premiums in the third quarter of 1999 and the increasing
popularity and usage of captive reinsurance arrangements in 2000. Approximately
34% of new insurance written in the nine months of 2000 was subject to captive
mortgage reinsurance agreements. Management believes that the percent of the
NIW subject to captive mortgage reinsurance agreements and other risk-share
programs could 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 over the long-
term. Mortgage insurance premiums earned increased 13.3% to $372.9 million
compared to the first nine months of 1999 primarily due to the increase in
premiums written.
GSE pool risk written totaled $93.8 million for the nine months ended September
30, 2000, compared with $192.6 million in the corresponding period of 1999.
Management expects the amount of pool risk written in 2000 to be less than the
amount of pool risk written in 1999.
Mortgage insurance losses and loss adjustment expenses decreased 12.0% to $72.6
million during the first nine months of 2000 compared to the same period in
1999, primarily due to the continuing improvement of the nationwide housing
markets, particularly California, and the corresponding decrease in claim
payments.
Direct primary claims paid during the first nine months of 2000 decreased by
20.0% to $49.6 million compared to the same period of 1999, due to a 6.6%
decrease in the average claims size to approximately $19,045 and a 14.3% decline
in the number of claims paid to 2,604. The reduction in the average claim size
was the result of a smaller percentage of claims originating from the California
book of business and to increase loss mitigation efforts by PMI and investors.
Mortgage insurance policy acquisition costs incurred and deferred decreased by
22.6% to $53.1 million for the nine months ended September 30, 2000 compared
with the same period in 1999 as a result of the decrease in NIW and the decrease
in contract underwriting. Amortization of policy acquisition costs decreased by
2.9% to $59.2 million compared to the first nine months of 1999. Contract
underwriting generated 22.9% of NIW for the nine months ended September 30, 2000
compared with 37.9% in the corresponding period of 1999. Management anticipates
that contract underwriting will continue to generate a
15
<PAGE>
significant percentage of PMI's NIW for the foreseeable future, and accordingly,
remain a significant componenet of acquisition costs. Other mortgage insurance
operating expenses increased by 9.4% to $37.3 million during the first nine
months of 2000 compared to the first nine months of 1999.
The mortgage insurance loss ratio declined to 19.5% for the nine months ended
September 30, 2000 from 25.1% in the same period of 1999. The decline was
attributed to the increase in premiums earned and the decrease in loss expenses
as discussed above. The gross expense ratio (GAAP basis) decreased to 24.5%
during the first nine months of 2000 from 32.5% in the same period of 1999,
primarily due to the increase in premiums written and the decrease in
underwriting and other operating expenses as discussed above. The combined ratio
decreased by 9.6 percentage points to 45.7% in the first nine months of 2000
compared to the first nine months of 1999.
INTERNATIONAL MORTGAGE INSURANCE OPERATIONS
PMI Ltd. was acquired on August 6, 1999 and accordingly 2000 results are not
comparable to the prior year. Net income for PMI Ltd. was $11.5 million for the
nine months ended September 30, 2000. PMI Ltd. generated $28.2 million of net
premiums written and $20.1 million in net premiums earned. PMI Ltd.'s losses and
loss adjustment expenses were $4.0 million and underwriting and other expenses
were $8.0 million for the first nine months of 2000. Investment income for PMI
Ltd. was $8.5 million for the first nine months of 2000. NIW for PMI Ltd. was
$4.1 billion during the first nine months of 2000 while insurance in force grew
to $18.4 billion as of September 30, 2000. Financial results for the operations
in Hong Kong were immaterial during the first nine months of 2000.
TITLE INSURANCE OPERATIONS
Net income for APTIC was $5.1 million for the nine months ended September 30,
2000 compared to $5.8 million in the corresponding period of 1999. Title
insurance premiums earned increased by 1.5% to $74.9 million for the nine months
ended September 30, 2000 compared to the same period a year ago, primarily due
to the continued geographic expansion and marketing efforts, which was offset by
the decrease in residential mortgage originations as previously noted. During
the first nine months of 2000, approximately 68% of APTIC's premiums earned were
generated from the state of Florida, compared with approximately 72% in the
corresponding of 1999. Underwriting and other expenses increased by 4.0% to
$67.8 million in the first nine months of 2000 compared to the same period in
1999, due to increased underwriting costs related to the increase in premiums
earned. The title insurance combined ratio increased by 2.2 percentage points
to 91.4% compared to the first nine months of 1999.
OTHER
Other income, which was generated primarily by MSC, decreased by 56.2% to $6.0
million in the first nine months of 2000 compared to the same period in 1999
primarily due to the decrease in contract underwriting services. Other expenses
increased by 33.7% to $21.3 million, primarily due to equity based compensation,
international expansion and diversification efforts. (See IC7)
For the nine months ended September 30, 2000, the Company's net investment
income increased by 26.7% to $85.6 million compared to the same period in 1999,
primarily due to the growth in the investment portfolio of $292 million over the
first nine months of 1999 are the acquisition of PMI Ltd. In addition, the pre-
tax current portfolio book yield increased to 6.2% at September 30, 2000 from
5.8% at September 30, 1999 primarily as a result of investment diversification
efforts. The Company's net realized gains increased by 399.9% to $2.6 million
compared to the first nine months of 1999.
The Company's effective tax rate increased to 30.6% for the first nine months of
2000 from 29.2% for the first nine months of 1999 as a result of the increase in
domestic and international underwriting operations relative to tax exempt
investment income.
16
<PAGE>
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Liquidity and capital resource considerations are different for TPG and PMI, its
principal insurance operating subsidiary. TPG's principal sources of funds are
dividends from PMI and APTIC, investment income and funds that may be raised
from time to time in the capital markets.
PMI's ability to pay dividends to TPG is limited by, among other restrictions,
state insurance laws including the laws of the state of Arizona. Arizona law
provides that PMI may pay out of any available surplus account without prior
approval of the Director of the Arizona Department of Insurance dividends during
any 12-month period not to exceed the lesser of 10% of policyholders' surplus as
of the preceding year end, or the last calendar year's investment income. Other
state insurance laws restrict the payment of dividends from the unassigned
surplus account only. The laws of Florida limit the payment of dividends by
APTIC to TPG in any one year to 10% of available and accumulated surplus derived
from realized net operating profits and net realized capital gains. In addition
to the dividend restrictions by state laws, the Company's credit agreements
limit the payment of dividends by PMI, and various credit rating agencies and
insurance regulatory authorities have broad discretion to limit the payment of
dividends to TPG by PMI or APTIC. During the first quarter of 2000, APTIC
declared a cash dividend of $3.0 million to TPG, substantially the full amount
of a dividend that can be paid by APTIC in 2000 without prior permission from
the Florida Department of Insurance. During July 2000, the Arizona Department of
Insurance approved a return of capital of $50 million to be paid by PMI to TPG
in the second half of 2000, of which $25 million was paid to TPG in the third
quarter of 2000 and the remaining $25 million to be paid in the fourth quarter
of 2000.
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 affiliates, and the payment of
interest and other expenses incurred by the holding company. The Company
announced a stock repurchase program in the amount of $100.0 million authorized
by the TPG Board of Directors in November 1998. During the first nine months of
2000, TPG purchased $24.0 million of the Company's common stock. As of
September 30, 2000, $45.3 million remained available under the 1998
authorization.
As of September 30, 2000, TPG had approximately $83.5 million of available
funds. This amount has decreased from the December 31, 1999 balance of $93.1
million primarily due to the common stock repurchases in 2000 and the investment
in Fairbanks, offset by the return of capital of $25 million by PMI. In
addition, TPG has two bank credit lines available totaling $50.0 million. As of
September 30, 2000, there were no outstanding borrowings under the credit lines.
The principal sources of funds for PMI are premiums received on new and renewal
business and amounts earned from the investment portfolio. 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
affiliates, and dividends to TPG. PMI generates positive cash flows from
operations as a result of premiums being received in advance of the payment of
claims. Cash flows generated from PMI's operating activities increased to
$192.0 million from $189.2 million for the nine months ended September 30, 1999,
due to decreases in receivable from affiliates and premiums receivable.
The Company's invested assets increased by $231 million at September 30, 2000
compared with December 31, 1999. This increase is primarily due to positive
cash flows from consolidated operations, the acquisition of PMI Ltd., and the
unrealized gain on investments.
Consolidated reserves for losses and loss adjustment expenses increased by 4.7%
to $295.3 million compared with December 31, 1999, primarily due to the
increases in the reserve balances for the primary and GSE pool books of
business, partially offset by a decrease in the old pool reserve balance.
17
<PAGE>
Consolidated shareholders' equity increased by 16.1% to $1.41 billion at
September 30, 2000 compared with December 31, 1999, due primarily to increases
of $194.2 million from net income, $25.3 million from other comprehensive income
and $5.5 million from equity based compensation and stock option exercises,
offset by the common stock repurchases of $24.0 million and dividends declared
of $5.3 million.
PMI's statutory risk-to-capital as of September 30, 2000 was 13.7 to 1, compared
with 14.8 to 1 as of December 31, 1999. (see IC9)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's borrowings under the credit facilities are subject to interest
rates that are variable. As of September 30, 2000, the effective duration of
the Company's investment portfolio was 6.1 years. The effect of a 1%
increase/decrease in market interest rates would result in an approximate 6.1%
decrease/increase in the value of the Company's investment bond portfolio. A
portion of the Company's long-term debt and invested assets are held by PMI Ltd.
and are denominated in Australian dollars, which has experienced significant
devaluation during 2000.
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/or 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 from lending institutions that choose not
to insure against borrower default, self-insure through affiliates, or offer
residential mortgage products that do not require mortgage insurance.
The mortgage insurance industry is highly competitive. Several of the Company's
competitors in the mortgage insurance industry have greater direct or indirect
capital reserves that provide them with potentially greater flexibility than the
Company.
PMI also competes directly with federal and state governmental and quasi-
governmental agencies, principally the FHA and, to a lesser degree, the VA. In
addition, the captive reinsurance subsidiaries of national banks, savings
institutions or bank holding companies could become significant competitors of
the Company in the future. Other mortgage lenders are also forming reinsurance
affiliates that compete with the Company. The Gramm-Leach-Bliley Act of 1999
could lead to additional significant competitors of the Company in the future.
In October 1999, the Federal Housing Finance Board ("FHF Board") adopted
resolutions which authorize each Federal Home Loan Bank ("FHLB") to offer
programs to fund or purchase single-family conforming mortgage loans originated
by participating member institutions under the single-family member mortgage
assets program. In July 2000, the FHF Board gave permanent authority to each
FHLB to purchase such loans from member institutions without any volume cap.
Under the FHF Board's rules, member institutions are also authorized to provide
credit enhancement for eligible loans. Any expansion of the FHLBs' ability to
issue mortgage insurance or use alternatives to mortgage insurance could reduce
the demand for private mortgage insurance and harm the Company's financial
condition and results of operations.
Certain lenders originate a first mortgage lien with an 80% LTV ratio, a 10%
second mortgage lien, and require the remaining 10% of the purchase price from a
borrower's funds ("80/10/10"). This 80/10/10 product and similar products
compete 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.
18
<PAGE>
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. In
January 2000, the maximum individual loan amount that FHA can insure was
increased to $219,849 from $208,800. In addition, the Omnibus Spending Bill of
1999 streamlined the FHA down-payment formula and made FHA insurance more
competitive with private mortgage insurance in areas with higher home prices. As
of January 1, 2001, FHA will reduce the up-front mortgage insurance premiums it
charges on loans from 2.25% to 1.5% of the original loan amounts. These and
other legislative and regulatory changes have caused, or may cause in the
future, demand for private mortgage insurance to decrease and this could harm
the Company's financial condition and results of operations.
FANNIE MAE AND FREDDIE MAC (IC3)
Fannie Mae and Freddie Mac (collectively, "government-sponsored enterprises" or
"GSEs") are permitted by charter to purchase conventional high-LTV mortgages
from lenders who obtain mortgage insurance on those loans. The GSEs 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. In 1999, the GSEs announced programs which allow lenders
that deliver loans approved by the GSEs' automated underwriting systems to
purchase reduced mortgage insurance coverage. Although management has not seen
any significant movement towards the reduced coverage programs offered by the
GSEs, if the reduction in required levels of mortgage insurance becomes widely
accepted by mortgage lenders and their customers, the Company's financial
condition and results of operations could be harmed. The GSEs also have
separately introduced new products pursuant to which the GSEs, upon receipt from
lenders of loans with traditional borrower paid mortgage insurance, restructure
the mortgage insurance coverage with reduced amounts of primary coverage, deeper
pool coverage, and, in some instances, payment of service fees to the GSE. Wide
acceptance by lenders of such products could reduce levels of primary coverage
traditionally provided by PMI and, therefore, could have a material adverse
affect upon the Company's financial condition and results of operations.
On April 13, 1999 the Office of Federal Housing Enterprise Oversight ("OFHEO")
announced proposed risk-based capital regulations, which could treat credit
enhancements issued by private mortgage insurance companies with claims-paying
ability ratings of AAA or higher more favorably than those issued by companies
with AA or lower ratings. The director of OFHEO has stated that the agency
expects to publish final regulations in early 2001. Shifts in the GSEs'
preference for private mortgage insurance to other forms of credit enhancement,
including a tiering of mortgage insurers based on their credit rating, could
harm the Company's financial condition and results of operations.
Freddie Mac has made several announcements that it would pursue a permanent
charter amendment that would allow it to utilize alternative forms of default
loss protection or otherwise forego the use of private mortgage insurance on
higher loan-to-value mortgages. In October 2000, the chairman of Fannie Mae
announced Fannie Mae's intention during the next three years to increase its
share of revenue associated with the management of mortgage credit risk and
interest rate risk ("mortgage risk") by retaining mortgage risk previously borne
by its "risk-sharing partners," including mortgage insurers. Part of any
attempt by Fannie Mae to increase its share of revenue associated with mortgage
risk could include a reduction in the use or level of mortgage insurance.
Accordingly, the GSEs' pursuit of charter amendment or greater revenue
associated with mortgage risk could have a material, adverse effect on the
Company's financial condition and results of operations.
PMI jointly develops mortgage products and partners with lenders and the GSEs to
make mortgage products and/or programs available to borrowers. These
arrangements involve the purchase of PMI's mortgage insurance products by one or
both of these parties and frequently feature cooperative arrangements between
the three parties. In 1999, a coalition of financial services and housing
related trade associations, including MICA and several large mortgage lenders,
formed FM Watch, a lobbying organization that supports expanded federal
oversight and legislation relating to the role of the GSEs in the secondary
mortgage market. The GSEs have criticized, and lobbied against, FM Watch. In
addition, the GSEs and other organizations are
19
<PAGE>
in the process of forming a coalition designed in part to counter activities of
FM Watch. These lobbying activities could, among other things, polarize the
GSEs, members of FM Watch, PMI and PMI's customers. As a result of this
polarization, PMI's relationships with the GSEs may limit its opportunities to
do business with some mortgage lenders, particularly the large mortgage lenders
that have formed FM Watch. Conversely, PMI's relationships with these large
mortgage lenders may limit its ability to do business with the GSEs. Either of
these outcomes could have a material adverse effect on the Company's financial
condition and results of operations.
Under the GSEs' respective eligibility requirements, PMI must 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 existing
insurance in force and not from new insurance written. The policy owner or
servicer of the loan may cancel insurance coverage at any time. A decline in
insurance in force as a result of a decrease in persistency due to policy
cancellations of older books of business could harm the Company's financial
condition and results of operations.
The Home Owners Protection Act of 1998 ("Act") provides for the automatic
termination or cancellation upon a borrower's request of private mortgage
insurance upon satisfaction of certain conditions. Management is uncertain of
the Act's impact on PMI's insurance in force, but believes any reduction in
premiums attributed to the Act's required cancellation of mortgage insurance
will not have a significant impact on the Company's financial condition and
results of operations.
During a period of falling interest rates, an increasing number of borrowers
refinance their mortgage loans and PMI generally experiences an increase in the
prepayment rate of insurance in force, resulting from policy cancellations of
older books of business with higher rates of interest. Although PMI has a
history of expanding business during periods of low interest rate, the resulting
increase of NIW may ultimately prove to be inadequate to compensate for the loss
of insurance in force arising from policy cancellations.
RATING AGENCIES (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. In October 2000, Moody's announced
that it changed PMI's and TPG's rating outlook from negative to stable, stating
that the change in rating outlook reflected the benefits to PMI of the continued
good economic environment, the Company's growth strategy and PMI's risk profile.
A reduction in PMI's claims-paying ratings below AA- would have a material,
adverse effect on 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
20
<PAGE>
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. 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 states limit the amount of insurance risk that may be written by PMI,
by a variety of financial factors, primarily risk-to-capital ratios. 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 policyholders surplus, contingency reserves, 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.
21
<PAGE>
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) capital
requirements necessary to maintain TPG's and PMI's credit and claims-paying
ability ratings. Generally, the methodology used by the rating agencies to
assign credit or claims-paying ability ratings permits less capital leverage
than under statutory requirements. Accordingly, statutory capital requirements
may be lower than the capital necessary to satisfy rating agency requirements.
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 LTV's in excess of 90% and less than or equal to 95% ("95s"). At September
30, 2000, 42.7% 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 LTV's equal to or less than 90% and over 85% ("90s"). PMI also offers
coverage for mortgages with LTV's in excess of 95% and up to 97% ("97s"). At
September 30, 2000, 6.5% of PMI's risk in force consisted of 97s that have even
higher risk characteristics than 95s and greater uncertainty as to pricing
adequacy. In June 2000, PMI introduced expanded coverage for certain mortgages
with LTV's in excess of 97%. This expanded coverage has commensurately higher
risk characteristics and pricing uncertainty. PMI's insurance in force 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.
PMI's 2000 NIW also includes non-traditional, Alternative A and A-minus loans
("non-traditional loans"). Loan characteristics, credit quality, loss
development, pricing structures and persistency on non-traditional loans can be
significantly different than PMI's traditional prime business and non-
traditional loans generally do not meet the standard underwriting guidelines of
the GSEs. As of September 30, 2000, non-traditional loans represented
approximately 17% of PMI's total year-to-date NIW. Management expects higher
delinquency rates and default rates for non-traditional loans and incorporates
these assumptions in its pricing.
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 $49.5 million
for the quarter ended September 30, 2000 and pool risk in force was $774.2
million as of September 30, 2000. This new pool insurance product provides
coverage to certain loans with non-conforming, and therefore higher risk,
characteristics.
Although PMI charges higher premium rates for loans that have higher risk
characteristics, including ARMs, 95s, 97s, non-traditional loans 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.
22
<PAGE>
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 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 14.9%, 7.7% and 7.1% of its risk in force concentrated and where the default
rate on all PMI policies in force is 2.20%, 2.65% and 1.87% compared with 1.99%
nationwide as of September 30, 2000.
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 net premiums written which may
negatively impact the yield obtained by the Company on 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.
INTERNATIONAL MORTGAGE INSURANCE; STRATEGIC INVESTMENTS (IC16)
As the Company expands its business internationally, it is subject to risks
associated with international operations, including: the need for regulatory and
third party approvals; challenges retaining key foreign-based employees and key
relationships with customers and business partners in international markets; the
economic strength of the foreign mortgage origination markets targeted; changes
in foreign regulations and laws; foreign currency exchange; potential increases
in the level of defaults and claims on policies insured by foreign-based
subsidiaries; and the need to integrate PMI's risk management technology systems
and products with those of its foreign operations. In particular, the
performance of the Company's Australian subsidiary could be materially and
adversely affected by various factors affecting the Australian economy
including, but not limited to, a weakening in the demand for housing, interest
rate volatility, and/or an increase in claims.
23
<PAGE>
The performance of the Company's other strategic investments could materially
and adversely be affected by changes in the real estate, mortgage lending,
mortgage servicing, title and financial guaranty markets; future movements in
interest rates; those operations' future financial condition and performance;
the ability of those entities to execute future business plans; and PMI's
dependence upon management to operate those companies in which PMI does not own
a controlling share.
E-COMMERCE (IC17)
Participants in the mortgage lending and mortgage insurance industries
increasingly rely on e-commerce and other technology to provide and expand their
products and services. A growing number of PMI's customers require that PMI
provide its products and services electronically via the Internet or electronic
data interchange. Many of these customers also require that PMI customize its
electronic delivery methods to their particular technology platforms. The
percentage of PMI's NIW delivered electronically is increasing. Management
expects these trends to continue and, accordingly, believes that it is essential
for PMI to continue to invest substantial resources on maintaining
"connectivity" with its customers and, more generally, on e-commerce and
technology. PMI's failure to keep pace with the technological demands of its
customers could have a material, adverse effect on the Company's financial
conditions and results of operations.
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Form 10-Q
(b) Reports on Form 8-K:
(i) On August 17, 2000, the Company filed a report on Form
8-K regarding the dismissal of the putative RESPA class
action lawsuit filed against PMI Mortgage Insurance Co.
on December 17, 1999.
(ii) On September 6, 2000, the Company filed a report on
Form 8-K regarding the Company's projected operating
earnings per share for 2000 and 2001 contained in a
September 6, 2000 press release.
(iii) On October 19, 2000, the Company filed a report on
Form 8-K regarding a disclosure of projected loss
reserves for the balance of 2000 and into 2001 made
during the Company's October 18, 2000 quarterly
earnings conference call.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on November 14, 2000.
The PMI Group, Inc.
/s/ John M. Lorenzen, Jr.
-------------------------
John M. Lorenzen, Jr.
Executive Vice President and
Chief Financial Officer
/s/ Brian P. Shea
-----------------
Brian P. Shea
Vice President and Controller,
Chief Accounting Officer
26
<PAGE>
INDEX TO EXHIBITS
(Part II, Item 6)
Exhibit
Number Description of Exhibit
------- ----------------------
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule
27
