The PMI Group, Inc. Reports Third Quarter 2010 Financial Results

Quarterly Results Include a Non-Cash Charge for Deferred Taxes of $1.24 per share

Oct 28, 2010, 10:52 ET from The PMI Group, Inc.

WALNUT CREEK, Calif., Oct. 28 /PRNewswire-FirstCall/ --

  • The PMI Group, Inc. (the "Company") reported a loss from continuing operations in the third quarter of 2010 of $281.1 million, or $1.74 per share.  
  • Third quarter results included a non-cash provision of $200.2 million as a result of an increase in the Company's deferred tax asset valuation allowance.  The provision was recorded as an increase in tax expense in the Company's GAAP financial statements. However, it did not affect its statutory financial statements.      
  • The Company realized net investment gains of approximately $83.2 million (pre-tax), or $0.34 per share (after tax), primarily as a result of municipal bonds sales during the third quarter of 2010 in connection with the strategic repositioning of its investment portfolio from tax exempt securities to securities that provide taxable investment income.  
  • New insurance written increased for the third consecutive quarter to approximately $2.0 billion in the third quarter of 2010.
  • U.S. Mortgage Insurance's primary loans in default declined to 131,891 as of September 30, 2010 from 138,431 as of June 30, 2010 due primarily to an increase in the number of primary claims paid and continued cures.  
  • Consolidated reserves for losses and loss adjustment expenses at September 30, 2010 declined to $3.0 billion compared to $3.1 billion at June 30, 2010 due to higher paid claims and a decline in the default inventory, offset by an increase in reserves due to lower than expected cure rates and the aging of defaults in the portfolio.  
  • The Company had consolidated cash and cash equivalents and investments of $3.3 billion and total assets in captive trust accounts of approximately $833.1 million at September 30, 2010.
  • PMI Mortgage Insurance Co. ("MIC") ended the third quarter of 2010 with excess minimum policyholders' position of approximately $332 million and a risk to capital ratio of approximately 17.2 to 1.  

The PMI Group, Inc. (NYSE: PMI) today reported a loss from continuing operations for the third quarter of 2010 of $281.1 million, or $1.74 per basic and diluted(1) share, compared with a loss from continuing operations of $87.9 million, or $1.06 per basic and diluted share, for the same period one year ago.  For the first nine months of 2010, the Company reported a loss from continuing operations of $588.7 million, or $4.64 per basic and diluted share, compared to a loss from continuing operations of $425.8 million, or $5.18 per basic and diluted share in the first nine months of 2009.    

The PMI Group, Inc. Third Quarter Results

Three Months Ended September 30,  

(Dollars in thousands, except per share data)

2010

2009

Loss from continuing operations

$(281,103)

$(87,920)

Loss from discontinued operations, net of income taxes*

--

(5,312)

Net loss

$(281,103)

$(93,232)

Diluted loss from continuing operations per share

$(1.74)

$(1.06)

Diluted loss from discontinued operations per share*

--

(0.07)

Diluted net loss per share

$(1.74)

$(1.13)

* Includes the 2009 effects of former subsidiaries PMI Australia, PMI Asia and PMI Guaranty.

The PMI Group, Inc. Year-to-Date Results

Nine Months Ended September 30,  

(Dollars in thousands, except per share data)

2010

2009

Loss from continuing operations

$(588,650)

$(425,808)

Loss from discontinued operations, net of income taxes*

--

(5,335)

Net loss

$(588,650)

$(431,143)

Diluted loss from continuing operations per share

$(4.64)

$(5.18)

Diluted loss from discontinued operations per share*

--

(0.06)

Diluted net loss per share

$(4.64)

$(5.24)

* Includes the 2009 effects of former subsidiaries PMI Australia, PMI Asia and PMI Guaranty.

U.S. Mortgage Insurance Operations  

U.S. Mortgage Insurance Operations had a net loss of $251.6 million in the third quarter of 2010 compared to a net loss of $110.6 million in the third quarter of 2009.  The loss in the third quarter of 2010 was due primarily to an increase in the valuation allowance with respect to deferred tax assets and continued high loss and loss adjustment expenses ("LAE") which were partially offset by realized investment gains.  

The deferred tax asset valuation allowance increased by $181.0 million in the third quarter of 2010 to $434.0 million.  The increase in the third quarter of 2010 was primarily due to the Company's loss development in recent periods that has been more adverse than its expectations. In light of the recent adverse loss development and future uncertainties, the Company evaluated its deferred tax asset and determined that it was necessary under current accounting guidance to increase the valuation allowance.

Total revenues were $235.9 million in the third quarter of 2010 compared to $207.6 million in the third quarter of 2009.  The increase in the third quarter of 2010 was primarily due to the net realized investment gains which offset lower premiums earned.

New insurance written in the third quarter of 2010 was $2.0 billion, compared to $1.2 billion in the third quarter of 2009.  At September 30, 2010, primary insurance in force was $104.6 billion compared to $116.9 billion at September 30, 2009.  

U.S. Mortgage Insurance Operations' losses and LAE were $317.1 million in the third quarter of 2010 compared to $334.6 million in the third quarter of 2009.  During the third quarter of 2010, the Company paid total claims including LAE of $322.7 million and, as a result, the ending reserves for losses and LAE, gross of reinsurance recoverables, was $3.0 billion compared to $3.1 billion at June 30, 2010.

The number of primary loans in default decreased to 131,891 at September 30, 2010 from 150,925 at December 31, 2009 and 141,261 at September 30, 2009.  New notices of default received in the third quarter of 2010 totaled 29,715 compared to 37,835 in the fourth quarter of 2009 and 41,359 in the third quarter of 2009.  The primary default rate, measured as a percentage of primary policies in force (which have declined in recent quarters), was 20.37% at September 30, 2010 compared to 21.40% at December 31, 2009 and 19.48% at September 30, 2009.  

The total number of pool loans in default decreased to 15,970 at September 30, 2010 from 51,104 at December 31, 2009 and 52,158 at September 30, 2009.  The decline compared to the fourth quarter of 2009 and the one year ago period was due primarily to the restructuring of certain modified pool policies.    

Rescission and claim denial of delinquent risk in force totaled $208.8 million in the third quarter of 2010 compared to $217.0 million in the fourth quarter of 2009 and $228.5 million in the third quarter of 2009.

The Company's Homeownership Preservation Initiatives (HPI) enabled 9,674 borrowers, representing $451.1 million of risk in force, to retain their homes through loan modifications and payment plans in the third quarter of 2010.  As of September 30, 2010, approximately 10,739 loans insured by PMI were in a Home Affordable Modification Program (HAMP) trial period compared to 18,079 loans as of June 30, 2010.  In addition, HPI enabled 2,492 homeowners in the third quarter of 2010 to avoid foreclosure through alternatives such as short sales. In total, 18% of primary loans in default were enrolled in HAMP or non-HAMP workout programs.    

International Operations  

International Operations, which include PMI Europe and PMI Canada, had net income from continuing operations for the third quarter of 2010 of $2.6 million compared to net income from continuing operations of $27.4 million in the third quarter of 2009.  Net income for the third quarter of 2009 was higher due to a net gain from credit default swap transactions and certain income tax benefits.  PMI Europe's risk in force was $2.0 billion at September 30, 2010 compared to $5.3 billion at September 30, 2009.    

Corporate and Other  

The Corporate and Other segment had a net loss of $32.2 million in the third quarter of 2010 compared to a net loss of $4.7 million in the same period one year ago.  The results for the third quarter of 2010 include an increase in the valuation allowance associated with deferred taxes of approximately $19 million and a loss (representing an increase in fair market value) of $5.1 million (pre-tax) related to the fair value measurement of certain corporate debt obligations compared to a gain (representing a decrease in fair market value) of $3.1 million (pre-tax) in the third quarter of 2009.    

Capital and Liquidity Information as of September 30, 2010  

  • On a consolidated basis, the Company had available funds, consisting of cash and cash equivalents and investments of $3.3 billion and total shareholders' equity of $661.9 million.  
  • At the holding company level, The PMI Group, Inc., had available cash and cash equivalents and investments of $78.5 million.
  • MIC had available funds, consisting of cash and cash equivalents and investments, of $2.6 billion and total assets in captive trust accounts of approximately $833.1 million.
  • During the third quarter of 2010, MIC restructured certain modified pool policies resulting in the acceleration of approximately $27.0 million for a payment to the counterparty and the elimination of the remaining $183.7 million of risk in force under the policies.  The amount of the payment to the counterparty was included in third quarter 2010 losses and LAE.

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 supplement 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 a variety of factors that are outside our control and difficult to predict.  Among other factors affecting future losses and that could cause losses to increase more rapidly or to higher levels than expected are the following:
    • Future economic conditions, including unemployment rates, interest rates and home prices.  
    • The level of new delinquencies, the cure and claim rates of delinquencies (including the level of future modifications of delinquent loans) and the claim severity within MIC's mortgage insurance portfolio.
    • The level of future rescissions and claim denials and future reversals of rescissions and claim denials.
    • The timing of future claims paid.
    • Future levels of new insurance written (and the profitability of such business), which will impact future premiums written and earned and future losses.
  • Increased losses or an acceleration of expected losses could cause PMI to be out of compliance with applicable regulatory requirements.
    • In sixteen states, so long as a mortgage insurer does not meet a required minimum policyholders' position or exceeds a maximum permitted risk-to-capital ratio (generally 25 to 1), it may be prohibited from writing new business.   In some states, including Arizona, MIC's state of domicile, the applicable regulator has discretion as to whether the mortgage insurer may continue to write new business.  
    • In the event that we are unable to write new mortgage insurance in a limited number of states for the reasons discussed above, we have a plan to enable us to write new mortgage insurance in those states out of an existing subsidiary, PMI Mortgage Assurance Co.  There can be no assurance that we will be able to effectuate this plan.
  • Our expectation that, because our loss reserves are not intended to be an estimate of total future losses, our ultimate actual losses will be higher than, and could substantially exceed, our loss reserve estimates;
  • The risk that our underwriting policies may not anticipate all risks and/or the magnitude of potential loss;
  • The limitations we have placed on new business writings and certain mortgage and private mortgage insurance market conditions, which have negatively impacted the private mortgage insurance industry;
  • The potential litigation risk associated with our rescission activity and, in the event that we are unsuccessful in defending our rescissions, the need to establish loss reserves for, and reassume risk on, delinquent rescinded loans;
  • The risk that we overestimate the number of loans that ultimately cure, which management factors in when establishing loss reserve estimates, and which could result in loss reserves that are insufficient to cover our losses on existing delinquent loans;
  • 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 quality loans, and adjustable rate and interest-only loans, which have resulted in increased losses in prior periods and are expected to result in further losses;
  • The risk that we may not be able to realize all of our deferred tax assets and may be required to record a full valuation allowance or increase the current partial valuation allowance against our remaining net deferred tax assets;
  • The risk that Fannie Mae and/or Freddie Mac (collectively, the "GSEs") determine that we are no longer an eligible provider of mortgage insurance;
  • 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 equity or other 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;
  • Heightened regulatory and litigation risks faced by the financial services industry, the mortgage insurance industry and the Company and MIC; and
  • 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 Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010, and our Annual Report on Form 10-K for the year ended December 31, 2009.  We undertake no obligation to update forward-looking statements.

(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.  

THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended September 30,

Nine Months Ended September 30,

2010

2009

2010

2009

(Unaudited)

(Unaudited)

(Dollars and shares in thousands, except per share data)

Net premiums written

$  139,357

$  167,362

$  443,723

$  521,932

Revenues

Premiums earned

$  139,831

$  176,572

$  451,047

$  546,266

Net gain from credit default swaps

2,249

9,248

4,429

24,007

Net investment income

13,637

25,980

64,186

89,701

Equity in losses from unconsolidated subsidiaries

(3,059)

(4,377)

(11,386)

(8,215)

Net realized investment gains

83,151

11,921

90,981

29,262

Change in fair value of certain debt instruments

(5,125)

3,125

(93,625)

(17,478)

Other income

2,209

13

4,437

2,328

    Total revenues  

232,893

222,482

510,069

665,871

Losses and expenses

Losses and loss adjustment expenses

314,784

336,778

986,098

1,200,566

Amortization of deferred policy acquisition costs

4,637

4,151

12,676

11,249

Other underwriting and operating expenses

31,420

34,569

93,186

114,342

Interest expense

13,393

9,338

35,163

32,921

    Total losses and expenses

364,234

384,836

1,127,123

1,359,078

Loss from continuing operations before income taxes

(131,341)

(162,354)

(617,054)

(693,207)

Income tax expense (benefit) from continuing operations

149,762

(74,434)

(28,404)

(267,399)

Loss from continuing operations

(281,103)

(87,920)

(588,650)

(425,808)

Loss from discontinued operations, net of taxes

--

(5,312)

--

(5,335)

Net loss

$  (281,103)

$  (93,232)

$  (588,650)

$  (431,143)

Diluted loss from continuing operations per share

$  (1.74)

$  (1.06)

$  (4.64)

$  (5.18)

Diluted loss from discontinued operations per share

--

(0.07)

--

(0.06)

Diluted net loss per share

$  (1.74)

$  (1.13)

$  (4.64)

$  (5.24)

THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30,

December 31,

September 30,

2010

2009

2009

(Unaudited)

(Audited)

(Unaudited)

(Dollars and shares in thousands, except per share data)

Assets

Investments

$  2,216,026

$  2,572,533

$  2,814,061

Cash and cash equivalents

1,098,940

686,891

844,265

Investments in unconsolidated subsidiaries

132,064

139,775

147,024

Reinsurance recoverables

522,116

703,550

659,356

Deferred policy acquisition costs

46,115

41,289

42,266

Property, equipment and software,   net of accumulated depreciation and amortization

89,176

101,893

107,886

Deferred tax assets

142,000

178,623

110,701

Other assets

366,683

216,963

213,403

    Total assets

$  4,613,120

$  4,641,517

$  4,938,962

Liabilities

Reserve for losses and loss adjustment expenses

$  3,015,166

$  3,253,820

$  3,175,027

Unearned premiums

63,490

72,089

87,088

Debt

588,453

389,991

417,757

Other liabilities

284,147

198,530

275,982

    Total liabilities

3,951,256

3,914,430

3,955,854

Shareholders' equity

661,864

727,087

983,108

Total liabilities and shareholders' equity

$  4,613,120

$  4,641,517

$  4,938,962

Basic shares issued and outstanding

161,162

82,580

82,573

Book value per share

$  4.11

$  8.80

$  11.91

Note: Please refer to The PMI Group, Inc. Third Quarter 2010 Financial Supplement for additional information.  

SOURCE The PMI Group, Inc.



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