The Pmi Group, Inc. Business Information, Profile, and History

Company Perspectives:

PMI is a leader in mortgage risk management technology providing various products and services for the home mortgage finance industry as well as title insurance.

History of The Pmi Group, Inc.

Based in San Francisco, The PMI Group, Inc., operating through several wholly owned or partially owned subsidiaries, is one of the largest private mortgage insurers in the United States, Australia, New Zealand, and the European Union. PMI is also the largest mortgage guaranty reinsurer in Hong Kong. In recent years the company has looked to diversify beyond the private mortgage insurance market in the United States, expanding internationally as well as licensing its proprietary underwriting system, and providing contract underwriting and title insurance. PMI now portrays itself as an international provider of credit enhancement products and lender services that are designed to promote home ownership and to make mortgages more easily attainable.

Founding of PMI by Preston Martin: 1972

The founder of PMI, Preston Martin, is best known for his public service. The native Californian received a B.A. in finance as well as an M.B.A. from the University of Southern California. He then went on to earn a Ph.D. in monetary economics from the University of Indiana in 1952. During the 1950s he was a Professor of Finance and Director of Executive Programs at USC and went on to found graduate business schools in Italy and Pakistan. Martin also devoted his talents to private enterprise during the 1950s and 1960s, then in 1967 was named the Savings and Loan Commissioner for the State of California and was involved in the development of an important financial services product, the Adjustable Rate Mortgage (ARM). Two years later he gained a national appointment in the Nixon administration, becoming Chairman of the Federal Home Loan Bank Board, and was instrumental in the creation of the Federal Home Loan Mortgage Corporation, Freddie Mac. He held this post until 1972 when he returned to the private sector, securing $25 million in financing from the Allstate Insurance Company to establish a private mortgage insurance company. Drawing on the initials of the product, he named the new company PMI Investment Corporation. Private mortgage insurance protects against loss if a borrower, whose down payment is less than 20 percent of a home's purchase price, is forced to default. Because lenders and mortgage investors are insured, more money is made available to homebuyers, resulting in more people being able to buy a house.

With its first headquarters located in San Francisco's Bank of America Building, PMI initiated operations in April 1973. Also in that year Allstate acquired the company, making it a subsidiary. Martin served as CEO of PMI until 1980, the company's first years devoted to opening regional offices around the country and building a national business. It was the first firm to develop a means to pool insured loans in order to spread risk. Martin left PMI to assume the top position at Seraco Corporation, a venture of Sears Roebuck, the parent corporation of Allstate. He would soon return to public service, becoming vice-chairman of the Federal Reserve Board of Governors during the Reagan Administration.

PMI suffered through a difficult period during the early 1980s, the result of poor economic conditions and difficulties in the oil industry that led to an unusually high number of home loan defaults in such states as Texas, Colorado, and Alaska. The situation became so difficult that PMI was paying out two dollars for every dollar it was collecting in premiums. By 1985, however, the business recovered and the company entered what it called "The New Era," which lasted until 1990. During this period, PMI was reorganized and an Actuary Department developed. PMI also established itself as a company willing to take advantage of high technology, launching a pair of innovative financial tools. In 1987 PMI introduced AURA, or Automated Underwriting Risk Analysis, a system that used claim and risk statistical models to predict the chances of a borrower defaulting on a mortgage. In 1988 PMI debuted Economic Real Estate Trends, which was used to analyze local and regional market conditions.

In the early 1990s PMI initiated a strategy to expand beyond the domestic mortgage insurance market. The first step in providing additional mortgage-related services came in 1992 when the company acquired American Pioneer Title Insurance Co., a Florida-based title insurance company. Although APTIC was licensed to conduct business in a number of states, its primary market was Florida, where it offered real estate title insurance on residential property. Its policies protected against loss due to title defects. Also in 1992 PMI agreed to a joint venture with CUNA Mutual Group, creating CMG Mortgage Insurance Company, which provided mortgage insurance for credit union loans. In addition, a Customer Technology department was established to license the use of such technical products as AURA.

Early in 1993 Roger Haughton was named PMI's president and chief executive officer. He had been with PMI since 1985, coming over from Allstate. Under his leadership, PMI continued to make changes in 1993. It stopped writing new business in its mortgage pool segment and entered into an agreement with Forestview, an Allstate subsidiary, to reinsure all its liabilities in connection with its mortgage pool insurance business. Furthermore, in 1993 PMI launched PMI Mortgage Services Co., providing technical products and mortgage underwriting services through 19 field offices. With Haughton at the helm, PMI became deeply involved in the advancement of affordable housing, beginning in 1994 when Haughton was approached by a human resources executive about sponsoring a project with Habitat for Humanity, part of the Jimmy Carter Work Project in South Dakota. Only agreeing to the idea with some reluctance, Houghton later publicly expressed that the project had a profound effect on his life. He told the Contra Costa Times, "That was a real hit between the eyes; there was a commitment born in me that moment." PMI would become further involved in affordable housing efforts for Native Americans as well as other housing initiatives.

Spinoff from Allstate: 1995

After more than 20 years operating as an Allstate subsidiary, PMI gained its independence because of events at Sears. In November 1994 Sears announced that it was refocusing on retailing and planned to spin off Allstate to shareholders. In anticipation of the move, Allstate in turn decided to spin off PMI in order to focus on its core property/casualty and life insurance businesses and realize a return on its 20-year investment in the subsidiary. As a result, PMI became the fourth publicly traded mortgage insurer, along with Mortgage Guaranty Insurance Corp., Commonwealth Mortgage Assurance Corp., and Triad Guaranty Corp. Two separate offerings were completed in April 1995, netting over $1.1 billion. Allstate retained a 30 percent stake, which it would sell off two years later. The initial offering raised $784 million on the sale of 24.5 million common shares at $34 each, which subsequently began trading on the New York Stock Exchange. At the same time, Allstate sold a new issue of 6.7 percent exchangeable notes due 1998, raising an additional $340 million. Haughton remained as president and CEO of PMI, and became a director of the corporation as well. In May 1998 he was elected chairman of the board.

Now an independent, publicly traded company, PMI continued to grow revenues and profits and diversify its business. In 1996 the company topped the $500 million mark in annual revenues while generating record net income of nearly $158 million. PMI also continued to demonstrate an innovative spirit, especially in the leveraging of its technology. In 1995 it created an 800 telephone number to assist both lenders and borrowers, in the process increasing the total volume of mortgage business, a situation clearly to its benefit. The lenders advertised an 800 number assigned by PMI, which prospective borrowers then called to determine how large a loan they would likely receive. Lenders, now possessing a considerable amount of financial information and a credit report, were able to call on the borrower and provide greater assistance, such as connecting the borrower with appropriate real estate agents or builders. PMI Mortgage Connection service was successful enough to warrant the addition of a Spanish language module a few months later. Moreover, this enhancement was an acknowledgment that the demographics of home ownership was changing and that Spanish-speaking Americans were a market with great potential. In 1997 PMI along with Norwest Mortgage Inc. turned to the Internet, taking an important first step in sending encrypted mortgage insurance applications over the Web.

In 1997 private mortgage insurers saw the dollar amount of loans insured drop from the double-digit levels earlier in the decade to just 5 percent. With that amount expected to soon fall to just 3 percent, PMI accelerated its efforts at diversification. PMI acquired CLM Technologies, which developed Reason automated appraisal software. In 1998 it became a principal investor in Bermuda-based startup RAM Reinsurance Company, a reinsurer of investment grade asset-backed and municipal securities. PMI split most of the $80 million capitalization with partners Greenwich Street Capital Partners and Continental Illinois. A year later PMI invested a further $15 million, increasing its stake in RAM to 25 percent.

Entering Hong Kong: 1999

The landscape for private mortgage insurance changed in 1998 when Congress passed legislation that required mortgage insurance to be automatically canceled after borrowers reached 22 percent equity in their homes. A few months later Freddie Mac sought congressional approval to enter the mortgage insurance business. Although the request was rejected, these events concerned investors, driving down the stock prices of firms like PMI. As a result PMI was even more motivated to look overseas in the late 1990s, targeting Asia, Australia, and Europe as the most desirable markets to penetrate. It turned first to Asia and Australia as opportunities became available. In April 1999 PMI entered the Hong Kong market, opening an office after signing an agreement with Honk Kong Mortgage Corp. to provide residential mortgage reinsurance. HKMC had been established several years earlier by the Hong Kong government with help from Fannie Mae to introduce residential mortgage insurance to the market. As a result, home ownership rose substantially in the previous three or four years. PMI's role would be to reinsure HKMC's total risk in guaranteeing Hong Kong mortgages. In June 1999 PMI penetrated the Australian and New Zealand markets by establishing a Sydney holding company, PMI Mortgage Insurance Australia, to acquire MGICA Ltd. from AMP General Insurance Holdings Ltd., the country's largest insurance and financial services company, for $77.6 million. MGICA, in business since 1965, was Australia's second largest private mortgage insurer with a 25 percent market share, and generated $3.7 billion of new insurance in 1998. It also controlled as much as 45 percent of the New Zealand market. AMP had decided to divest itself of the insurer in order to concentrate on its core financial services business. For PMI, MGICA was an ideal opportunity to gain access to the second most active mortgage capital market in the world in Australia, which along with Canada and Great Britain were the only non-U.S. countries with a mortgage insurance market. Moreover, PMI looked to leverage its superior technology in the region, which had yet to see mortgage scoring or automated underwriting.

PMI's entry into Asia and Australia quickly proved to be a success, and by the end of 1999 the company was looking aggressively at Europe, in particular targeting the Netherlands, Germany, and Sweden where well-developed mortgage markets already existed and databases on borrowers and credit characteristics were already firmly established. In general, Europe was a large, underserved market for private mortgage insurance. PMI estimated that Europe's outstanding mortgage debt topped $3 trillion, in contrast to the United States' $4 trillion. Because homeownership was lower there and with no mortgage insurance company operating outside of Ireland and the United Kingdom, the continent was especially inviting. PMI entered Europe early in 2000, opening a marketing office in London because of the major financial institutions located there, but after completing some preliminary groundwork, PMI elected to base its European headquarters in Dublin, in large part because the United Kingdom was not part of the European Monetary Union, countries agreeing to a common currency, despite being a part of the European Union. The Dublin unit, PMI Mortgage Insurance Co. Ltd., "PMI Europe," was established in 2001 and capitalized at $75 million. It was licensed by the Irish Department of Enterprise Trade & Employment to offer traditional primary insurance, structured portfolio products, and reinsurance products for loans and securitizations to all of the European Union member states. PMI's products, furthermore, would be tailored to meet the particular needs of lenders and mortgage securitizers in each country.

PMI also strengthened previous expansion efforts in 2001. It acquired Australia's fourth largest mortgage insurance company, Sydney-based CGU Lenders Mortgage Insurance Ltd., paying $40 million to British insurer CGNU PLC. Although CGU controlled just 7 percent of the mortgage insurance market in Australia, it was New Zealand's top insurer. Overall, PMI was now the largest mortgage insurer in both countries. In addition, PMI increased its stake to 45 percent in Fairbanks Capital Holding, which it originally invested in two years earlier. Acquiring, servicing, and resolving nonperforming and underperforming single-family residential mortgages, Salt Lake City-based Fairbanks offered diversification in PMI's domestic market.

Despite a downturn in the economy in 2001 and 2002, PMI remained strong. Its superior technology continued to pay dividends. In 2001, for instance, some 60 percent of PMI's loans were received in an electronic format, resulting in a 30 percent drop in the cost per application over the previous year. PMI continued to emphasize its international efforts, looking to eventually further its business in Asia, but the company was especially optimistic about Europe. PMI Europe had already engaged in a number of mortgage credit default swap agreements, including a major deal in the German market. In all, PMI was well positioned for continued growth in the foreseeable future.

Principal Subsidiaries: American Pioneer Title Insurance Company; CLM Technologies; PMI Mortgage Insurance Australia; PMI Mortgage Insurance Company Limited.

Principal Competitors: Mortgage Guaranty Insurance Corporation; GE Capital Mortgage Insurance Corporation; United Guaranty Residential Insurance Company; Radian Guaranty Inc.; Republic Mortgage Insurance Co.; Triad Guaranty Insurance Corp.

Chronology

• Key Dates:
• 1972: Preston Marton founds company.
• 1973: Company is acquired by Allstate.
• 1980: Martin resigns from the company.
• 1987: AURA, or Automated Underwriting Risk Analysis, system is introduced to help predict borrower defaults.
• 1995: Allstate spins off PMI.
• 1999: Company enters Hong Kong, Australia, and New Zealand markets.
• 2001: PMI Europe is established.