KCBD, NewsChannel 11 Lubbock |The PMI Group, Inc. Reports Third Quarter 2009 Financial Results

WALNUT CREEK, Calif., Nov. 6 /PRNewswire-FirstCall/ -- The PMI Group, Inc. (NYSE: PMI) (the "Company") today reported a loss from continuing operations for the third quarter of 2009 of $87.9 million, or $1.06 per basic and diluted(1) share, compared with a loss from continuing operations of $149.3 million, or $1.83 per basic and diluted(1) share, for the same period one year ago. The loss from continuing operations for the third quarter of 2009 was primarily driven by losses and loss adjustment expenses (LAE) in U.S. Mortgage Insurance Operations, decreases in U.S. Mortgage Insurance Operations' premiums earned and investment income, and the change of the fair value of certain holding company senior debt.

                     The PMI Group, Inc. Third Quarter Results
                     -----------------------------------------
                                                       Three Months Ended
                                                          September 30,
     (Dollars in thousands, except per share
      data)                                            2009          2008
     ---------------------------------------           ----          ----

    Loss from continuing operations                $(87,920)    $(149,309)
    Loss from discontinued operations, net of
     income taxes*                                   (5,312)      (80,104)
                                                    -------      --------
    Net loss                                       $(93,232)    $(229,413)
                                                  =========    ==========

    Diluted loss from continuing operations per
     share                                           $(1.06)       $(1.83)
    Diluted loss from discontinued operations
     per share                                        (0.07)        (0.98)
                                                     ------        ------
    Diluted net loss per share                       $(1.13)       $(2.81)
    --------------------------                      =======       =======

    * Includes the results of PMI Australia, PMI Asia and PMI Guaranty.

                     The PMI Group, Inc. 2009 Year-to-Date Results
                     ---------------------------------------------
                                                           Nine Months Ended
                                                             September 30,
     (Dollars in thousands, except per share
      data)                                                2009          2008
     ---------------------------------------               ----          ----

    Loss from continuing operations                   $(425,808)    $(706,195)
    Loss from discontinued operations, net of
     income taxes*                                       (5,335)      (43,468)
                                                        -------      --------
    Net loss                                          $(431,143)    $(749,663)
                                                     ==========    ==========

    Diluted loss from continuing operations
     per share                                           $(5.18)       $(8.68)
    Diluted loss from discontinued operations
     per share                                            (0.06)        (0.54)
                                                         ------        ------
    Diluted net loss per share                           $(5.24)       $(9.22)
    --------------------------                          =======       =======

    * Includes the results of PMI Australia, PMI Asia and PMI Guaranty.

Key Financial Information

• Consolidated net premiums written for the third quarter and first nine months of 2009 totaled $167.4 million and $521.9 million, respectively, compared with $176.5 million and $591.4 million for the same period last year. The decreases were primarily due to lower levels of new insurance written and higher refunded premiums from rescissions of insurance previously written.
• Consolidated losses and LAE, which includes paid claims, loss adjustment expenses and additions to reserve for losses, for the third quarter and first nine months of 2009 were $336.8 million and $1.2 billion, respectively, compared with $382.7 million and $1.5 billion for the same periods one year ago. The decreases in the third quarter and first nine months of 2009 compared with the same periods one year ago were primarily due to reduced levels of reserve increases in the third quarter of 2009 driven by the negotiated acceleration of certain claims associated with modified pool insurance restructurings.
• Consolidated reserve for losses and LAE, gross of reinsurance recoverables, totaled $3.2 billion as of September 30, 2009 compared with $3.2 billion as of June 30, 2009 and $2.5 billion as of September 30, 2008. In the U.S. Mortgage Insurance Operations segment, ending reserves for losses and LAE for primary insurance increased in the third quarter of 2009 by $134.0 million to $2.7 billion. The increase in primary insurance reserves for losses and LAE was primarily due to higher default inventories and higher average claim rates, partially offset by lower average primary claim sizes and the continued effect from rescission activity. Ending reserves for losses and LAE for pool insurance decreased in the third quarter of 2009 by $181.1 to $421.2 million. The decrease in pool insurance loss reserves was due to the restructuring of certain modified pool policies.
• Consolidated other underwriting and operating expenses for the third quarter and first nine months of 2009 were $34.6 million and $114.3 million, respectively, compared with $59.4 million and $160.0 million from the same periods last year. The decrease in other underwriting and operating expenses in the third quarter of 2009 compared to the corresponding period in 2008 was primarily due to a decrease in payroll and related expenses.
• International Operations had net income from continuing operations for the third quarter and first nine months of 2009 of $27.4 million and $20.7 million, respectively, compared with a loss from continuing operations of $46.0 million and $56.8 million from the same periods last year. The increase in the third quarter of 2009 was primarily as a result of PMI Europe's net income of $27.9 million as a result of a net gain of $9.2 million from credit default swap transactions and a federal income tax benefit related to refinements to the Company's tax estimates in connection with the filing of the Company's 2008 tax return.
  

Capital and Liquidity Information at September 30, 2009

• On a consolidated basis, The PMI Group, Inc. had available funds, consisting of cash and cash equivalents and investments, of $3.7 billion and total shareholders' equity of $1.0 billion.
• PMI's holding company had available funds, consisting of cash and cash equivalents and investments, of $64.4 million.
• PMI Mortgage Insurance Co. ("MIC") had available funds, consisting of cash and cash equivalents and investments, of $3.4 billion and total assets in captive trust accounts of approximately $920.7 million.
• MIC's risk to capital was 18.5 to 1 and it held $215.2 million in excess of the required minimum policyholders position compared to 19.6 to 1 and $186.4 million, respectively, at June 30, 2009.
• During the third quarter of 2009, the Company completed the following capital relief initiatives: (1) restructurings (including commutation and other restructuring) of certain modified pool policies resulted in an acceleration of claims paid at a discount of the reserves established on such policies and the release of loss reserves, which resulted in positive statutory capital benefits of approximately $77.9 million, (2) interaffiliate excess of loss reinsurance agreements whereby MIC entered into three excess of loss reinsurance agreements with three affiliated reinsurance companies and resulted in an increase to MIC's excess MPP of approximately $41 million, and (3) realization of approximately $20 million in gains from the Company's investment portfolio, primarily municipal bonds.
• During the third quarter of 2009, the states Arizona and California adopted legislation effective November 24, 2009 and January 1, 2010, respectively, giving the respective state's insurance regulator discretion as to whether a mortgage insurer may continue writing new business if it does not meet a required minimum policyholder's position or it exceeds a maximum permitted risk-to-capital ratio (generally 25 to 1). The state of North Carolina had previously passed similar legislation which became effective on July 1, 2009.
• In the event that MIC is unable to write new mortgage insurance in a limited number of states, the Company is working on a plan to enable the writing of new mortgage insurance in those states through an existing subsidiary, currently known as Commercial Loan Insurance Corporation ("CLIC"), to be renamed PMI Mortgage Assurance Co. ("PMAC"). During the third quarter, the Company had preliminary discussions with the Arizona and Wisconsin Departments of Insurance and Fannie Mae and Freddie Mac regarding PMAC.
  

About The PMI Group, Inc.

The PMI Group, Inc. (NYSE: PMI), headquartered in Walnut Creek, CA, provides innovative credit, capital, and risk transfer solutions that expand homeownership and fund essential services for our customers and the communities they serve. Through its wholly owned subsidiaries, PMI offers residential mortgage insurance and credit enhancement products. For more information: www.pmi-us.com.

Cautionary Statement: Statements in this press release and supplements that are not historical facts, or that relate to future plans, events or performance are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that forward-looking statements by their nature involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Many factors could cause actual results and developments to differ materially from those expressed or implied by forward-looking statements. Such factors include, among others:

• Potential significant future losses as a result of changes in economic and market conditions, such as decreases in housing demand, mortgage originations or housing values; a further reduction in the liquidity in the capital markets or further contraction of credit markets; further increases in unemployment rates; changes in interest rates or consumer confidence; and/or changes in credit spreads;
• the potential that our actual losses may substantially exceed our current loss reserve estimates or that our underwriting policies may not anticipate all risks and/or the magnitude of potential loss;
• our expectation that, as a result of continued losses, we will need to raise significant additional capital and/or achieve significant statutory capital relief in 2009;
• the risk that we may be required to cease writing new business in some or all states due to our financial condition and/or our inability to maintain minimum regulatory risk-to-capital and policyholders surplus requirements;
  • Some states require a mortgage insurer to immediately cease writing new business if it fails to meet applicable capital adequacy requirements. In other states, including Arizona as of November 24, 2009, PMI's state of domicile, the applicable regulator has discretion as to whether the mortgage insurer may continue to write new business. The Arizona Department of Insurance is conducting a limited scope examination of PMI to determine, among other things, whether to exercise discretion and permit PMI to continue writing new business in the event that PMI fails to maintain Arizona's minimum policyholders position. If we fail to meet the minimum policyholders position required by Arizona law and the Arizona Department of Insurance does not exercise discretion to permit PMI to continue to write new business, we would be required to suspend writing new business in all states. Even if an insurance regulator were to exercise discretion in one state, we may be unable to write new business in other states.
  • We are in discussions with one state regarding its interpretation of that state's financially hazardous condition regulation generally applicable to licensed insurance companies and that state's interpretive position that PMI is in violation of that regulation. If we are unsuccessful in those discussions, we may be required to cease writing business in that state. Although no other state has taken a similar interpretative position to date, there can be no assurance that other states, most of which have similar regulations, will not take similar interpretative positions.
  • Under the terms of our runoff support agreement with Allstate Insurance Company, PMI is subject to restrictions that apply if its risk-to-capital ratio exceeds 23:1. Any failure to meet the capital requirements set forth in the runoff support agreement could, if pursued by Allstate, have a material adverse impact on our financial condition;
  • In the event that we are unable to write new mortgage insurance in a limited number of states for the reasons discussed above, we working on a plan to enable us to write new mortgage insurance in those states out of an existing subsidiary. There can be no assurance that we will be able to effectuate this plan.
• the limitations we have placed on new business;
• the potential litigation risk associated with our increased rescission activity and, in the event that we are unsuccessful in defending our rescission decisions, the need to establish loss reserves for, and reassume risk on, delinquent rescinded loans;
• the risk that loan modification and other similar programs may not provide material benefits to us;
• the aging of our mortgage insurance portfolio and changes in severity or frequency of losses associated with our mortgage insurance policies;
• the performance of our insured portfolio of higher risk loans, such as Alternative-A ("Alt-A") and less than-A loans, and adjustable rate and interest-only loans, which have resulted in increased losses in 2007 and 2008 and are expected to result in further losses;
• the risk that Fannie Mae and/or Freddie Mac (collectively, the "GSEs") determine that we are no longer an eligible provider of mortgage insurance;
• changes in persistency rates of our mortgage insurance policies caused by, among other things, changes in refinancing activity and home values;
• the risk that we are not able to timely satisfy certain obligations under our credit facility and an event of default occurs;
• the risk that the value of the contingent note we received in connection with the sale of PMI Australia is reduced and, therefore, reduces or eliminates the commitments of the lenders under our credit facility and requires us to repay amounts borrowed under the credit facility;
• further downgrades or other ratings actions with respect to our credit ratings or insurer financial strength ratings assigned by the major rating agencies;
• heightened competition from the Federal Housing Administration and the Veterans' Administration or other private mortgage insurers;
• potential changes in the charters or business practices of the GSEs, the largest purchasers of mortgages;
• the potential future impairment of the value of certain securities held in our investment portfolios as a result of the significant volatility in the capital markets;
• volatility in our earnings caused by changes in the fair value of our derivative contracts and our need to reevaluate the premium deficiencies in our mortgage insurance business on a quarterly basis; and
• heightened regulatory and litigation risks faced by the financial services industry, the mortgage insurance industry and PMI;
• potential additional losses in our European operations as a result of deteriorating economic conditions and the potential that we must make additional capital contributions to those operations, and/or CMG Mortgage Insurance Company, pursuant to capital support agreements.
  

Other risks and uncertainties are discussed in our SEC filings, including in Item 1A of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, and our Annual Report on Form 10-K for the year ended December 31, 2008. We undertake no obligation to update forward-looking statements.

                       THE PMI GROUP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      -------------------------------------

                               Three Months Ended       Nine Months Ended
                                   September 30,            Septemeber 30,
                                  -------------             ------------
                               2009         2008         2009         2008
                               ----         ----         ----         ----
                                  (Unaudited)               (Unaudited)
                               (Dollars and shares in thousands, except
                                           per share data)
     Net premiums written    $167,362     $176,497     $521,932      $591,352
                             ========     ========     ========      ========

     Revenues
       Premiums earned       $176,572     $183,581     $546,266      $602,037
       Net gain (loss)
        from credit
        default swaps           9,248       (9,911)      24,007           439
       Net investment
        income                 25,980       36,325       89,701       106,808
       Net realized
        investment
        gains (losses)         11,921      (49,903)      29,262       (21,977)
       Change in fair
        value of
        certain debt
        instruments             3,125       66,283      (17,478)      111,948
       Impairment of
        unconsolidated
        subsidiaries                -       (2,887)           -       (90,868)
       Other income                13        1,973        2,328         8,419
                                  ---        -----        -----         -----
         Total revenues       226,859      225,461      674,086       716,806
                              -------      -------      -------       -------

     Losses and expenses
       Losses and loss
        adjustment expenses   336,778      382,689    1,200,566     1,494,807
       Amortization of
        deferred policy
        acquisition costs       4,151        4,955       11,249        13,773
       Other underwriting
        and operating
        expenses               34,569       59,412      114,342       159,977
       Interest expense         9,338       11,423       32,921        29,698
                                -----       ------       ------        ------
         Total losses
          and expenses        384,836      458,479    1,359,078     1,698,255
                              -------      -------    ---------     ---------

     Loss before equity in
      (losses) earnings
      from unconsolidated
      subsidiaries and
      income taxes           (157,977)    (233,018)    (684,992)     (981,449)

     Equity in (losses)
      earnings from
      unconsolidated
      subsidiaries             (4,377)       9,103       (8,215)      (45,830)
                               ------        -----       ------       -------

     Loss from continuing
      operations before
      income taxes           (162,354)    (223,915)    (693,207)   (1,027,279)
     Income tax
      benefit from
      continuing
      operations              (74,434)     (74,606)    (267,399)     (321,084)
                              -------      -------     --------      --------

     Loss from
      continuing
      operations              (87,920)    (149,309)    (425,808)     (706,195)

     Loss from
      discontinued
      operations, net of
      taxes                    (5,312)     (80,104)      (5,335)      (43,468)

     Net loss                $(93,232)   $(229,413)   $(431,143)    $(749,663)
                             ========    =========    =========     =========

     Diluted loss from
      continuing operations
      per share                $(1.06)      $(1.83)      $(5.18)       $(8.68)
     Diluted loss
      from discontinued
      operations
      per share                 (0.07)       (0.98)       (0.06)        (0.54)

     Diluted
      net loss
      per share                $(1.13)      $(2.81)      $(5.24)       $(9.22)
                               ======       ======       ======        ======

                       THE PMI GROUP, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

                                    September 30,  December 31,  September 30,
                                        2009            2008          2008
                                     (Unaudited)     (Audited)     (Unaudited)

                                     (Dollars and shares in thousands, except
                                                 per share data)
    Assets
      Investments                   $2,814,061     $2,221,595      $2,243,908
      Cash and cash equivalents        844,265      1,483,313         713,241
      Investments
       in unconsolidated
       subsidiaries                    147,024        150,377         154,397
      Reinsurance recoverables         659,356        482,678         393,654
      Deferred policy
       acquisition costs                42,266         34,791          31,036
      Property,
       equipment and software,
       net of accumulated
       depreciation and
       amortization                    113,751        131,211         138,845
      Other assets                     315,295        320,434         360,637
      Assets - discontinued
       operations-
       held for sale                         -              -       1,324,795
                                           ---            ---       ---------
           Total assets             $4,936,018     $4,824,399      $5,360,513
                                    ==========     ==========      ==========

    Liabilities
      Reserve for
       losses and
       loss adjustment
       expenses                     $3,175,027     $2,709,286      $2,463,407
      Unearned premiums                 87,088        111,656         117,324
      Debt                             417,757        481,764         532,177
      Other liabilities                273,038        243,468         250,897
      Liabilities -
       discontinued
       operations -
       held for sale                         -              -         543,830
                                           ---            ---         -------
           Total liabilities         3,952,910      3,546,174       3,907,635

           Shareholders' equity        983,108      1,278,225       1,452,878
                                       -------      ---------       ---------

    Total liabilities
     and shareholders'
     equity                         $4,936,018     $4,824,399      $5,360,513
                                    ==========     ==========      ==========

    Basic shares
     issued and
     outstanding                        82,573         81,688          81,624
                                        ======         ======          ======

    Book value per share                $11.91         $15.65          $17.80
                                        ======         ======          ======

    Note: Please refer to The PMI Group, Inc. Third Quarter 2009 Financial
    Supplement for additional information.

(1) Due to the net loss in the quarter, dilutive components of shares outstanding such as stock options were not included in fully diluted shares outstanding as their inclusion would have been anti-dilutive.

SOURCE PMI Group, Inc.