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The PMI Group Inc. (NYSE: PMI)

The PMI Group Inc. (PMI), through its subsidiaries, provides residential mortgage insurance products that offer loss protection to mortgage lenders and investors in the event of borrower default in the United States. The Company offers mortgage insurance products to meet the capital and credit risk mitigation needs of its customers. Its products include primary mortgage insurance through primary flow channel that provide the insured with first-loss mortgage default protection on individual loans at specified coverage percentages; and mortgage insurance to credit unions through its 50% joint venture with CUNA Mutual Investment Corporation.

The Company divides its business into four segments: U.S. Mortgage Insurance Operations, International Operations, Financial Guaranty and Corporate and Other. The PMI’s customers primarily include mortgage lenders, depository institutions, commercial banks, and investors.

The Company was founded in 1972 and is headquartered in Walnut Creek, California.

Share Statistics Nov-13-09			2007	2008	%Chg	Q3 2008	Q3 2009	% Chg
Symbol	PMI	Revenue, Mn	923.2	907.8	-1.7%	225.5	226.9	0.6%
Current price	$2.36	Gross margin	-	-	n/m	-	-	n/m.
52wk Range:	$0.26-$4.96	Oper. profit, Mn	-1,255	-1,321	n/m	-149.3	-87.9	n/m
Avg Vol (3m):	3,913,690	Net profit, Mn	-915.3	-929.6	n/m	229.4	-93.2	n/m
Market Cap.	$194.8M
Dil. Shares Outst.	82.6M	EPS, $	-11.92	-10.90	n/m	-2.81	-1.13	n/m

Source: Reuters.com, SEC Filings.

Financial Summary

For the quarter ended September 30, 2009, the Company recorded consolidated net losses of $93.2 million or $1.13 a share compared to consolidated net losses of $229.4 million or $2.81 a share for the corresponding period in 2008. The decrease in the consolidated net losses in the quarter compared to the corresponding period in 2008 was primarily due to lower levels of losses and loss adjustment expenses in PMI’s U.S. Mortgage Insurance Operations in 2009 and net realized investment losses in 2008. PMI reported a loss from continuing operations for the third quarter of 2009 of $87.9 million, or $1.06 per basic and diluted share, compared with a loss from continuing operations of $149.3 million, or $1.83 per basic and diluted share, for the same period one year ago.

The Company’s 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.

On a consolidated basis, PMI had total liquidity of $3.7 billion, which comprised of cash and cash equivalents of $844 million and total investments of $2.8 billion. 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.

	# of Estimates	Mean	High	Low	1 Year Ago
SALES (in millions)
Quarter Ending Dec-09	2	197.18	197.50	196.86	298.30
Quarter Ending Mar-10	2	267.89	334.50	201.28	–
Year Ending Dec-09	2	867.17	870.94	863.40	1,168.95
Year Ending Dec-10	2	1,025.15	1,296.80	753.50	–
Earnings (per share)
Quarter Ending Dec-09	4	-1.39	-0.29	-2.45	-0.55
Quarter Ending Mar-10	2	-1.62	-1.40	-1.83	–
Year Ending Dec-09	4	-6.85	-6.01	-7.87	-3.42
Year Ending Dec-10	2	-4.15	-2.80	-5.50	1.58
LT Growth Rate (%)	2	6.50	9.00	4.00	9.00

Source: Yahoo! Finance, SEC Filings.

Analyst Consensus

Analysts polled by Thomson Reuters consider the “Hold” strategy for PMI.

Analyst Detail	Buy	Outperform	Hold	Underperform	Sell	No Opinion
Latest	0	0	3	1	0	0
4 weeks ago	0	0	3	1	0	0
2 months ago	0	0	3	1	0	0
3 months ago	0	0	3	1	0	0
Last year	0	0	4	1	0	1

Source: http://markets.ft.com/tearsheets/analysis.asp?s=pmi

Investment Highlights

For more than 35 years, PMI’s insurance products have supported the mortgage finance system by providing protection to lenders and investors in the event of borrower default. By protecting mortgage lenders and investors from credit losses, PMI helps to ensure mortgages are available to qualified homebuyers. When a qualified borrower cannot make a 20% down payment on a home, lenders will often permit a smaller down payment and purchase mortgage insurance. The Company applies research, analytics and pricing principles to manage risk concentration, and loss mitigation expertise to assist lenders and borrowers faced with possible foreclosures. PMI was the first mortgage insurer to join the HOPE NOW Alliance, works closely with many nonprofit counseling entities, and plays an active role in supporting borrower education events nationwide.

The significant and continuing weakening of the U.S. residential mortgage, housing, credit, and capital markets negatively affected the Company’s financial condition and results of operations. 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.

Despite these successes, PMI still requires additional capital. The Company continues to work with its financial advisor to evaluate market opportunities and to ensure that it is in a position to take advantage of favorable market opportunities, if and when they develop. Additionally, PMI continues to examine reinsurance, looking at both traditional structures, which would allow it to hold less capital on new writings and other risk transfer solutions that may allow the Company to free-up capital on existing policies in-force. It also continues to pursue legislative and regulatory changes in the 16 states that set specific minimum capital requirements for mortgage insurance. This summer and fall three of those states, Arizona, California and North Carolina, amended laws to provide the insurance department with discretion as to whether the mortgage insurer may continue writing new business.

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, to be renamed PMI Mortgage Assurance Co.. 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.

The Company`s MIC (the primary operating company) ended the third quarter of 2009 with statutory risk in-force of approximately $18 billion, and although not yet final, policyholder surplus and contingency reserves of approximately $963 million, resulting in a risk to capital ratio of 18.5-to-1 as of September 30, 2009. On an excess minimum policyholder position basis, PMI Mortgage Insurance Company ended the third quarter with $215.2 million in excess of the required minimum  policyholders position (MPP) compared to 19.6 to 1 and $186.4 million, respectively, at June 30, 2009. Both risk to capital and excess MPP benefited in the third quarter from PMI’s internal capital initiatives.

In June, Standard & Poor’s has upgraded the Company by two-notches to B-, removed it from CreditWatch developing with the outlook stable. The ratings upgrade returns the rating differential between the Company and PMI Mortgage Insurance Co. to the standard three-notch gap. The S&P action came as PMI had concluded the renegotiation of its credit agreement.

The Company’s “Economic and Real Estate Trends” quarterly report projects the likelihood that the nation’s housing prices will be lower in two years. As many as 324 – approximately 85% – of the nation’s 381 MSAs (Metropolitan Statistical Areas) are now facing increased risk of lower home prices in 2011. Florida, California, Nevada and Arizona continue to have the highest risk scores – 36 of the most risky MSAs are located in these four states – but an increased risk of lower future prices is now spreading across all regions of the nation, due to the significant increases in unemployment and foreclosure rates. Among the nation’s fifty most populous MSAs, 28 of the Top 50 are now in the highest risk category, signifying the greatest probability of lower house prices by the first quarter of 2011, relative to the first quarter of 2009. Although the Risk Index does not measure the magnitude of declines, the forecast remains consistent with the outlook for moderating price declines in some of the largest MSAs for the remainder of 2009 and into 2010.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

PMI is below its 13 day moving average. This bearish sign is even more significant because the moving average is also trending lower.

The Company’s MACD is currently indicating a weak bullish signal. Although the MACD is trending above the signal line, the indicator is still below 0, which suggests that the underlying moving averages are bearish.

PMI has been relatively stable recently. This is evidenced by the width of its Bollinger Bands which are tighter than normal. Additionally,  PMI is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

Comparative Analysis

The Company is traded with significant discount to peer P/S margins.

The Company is executing on or exploring a number of initiatives to internally build capital and it continues to explore all external capital options. Additionally, PMI is actively engaged in seeking regulatory change at the state level to permit continued writings of business. The Company`s liquidity and claims paying ability remains strong at its primary Mortgage Insurance Company and PMI`s management believes that Holding Company will have sufficient liquidity through the end of 2012. Finally, the new business PMI is writing is of high credit quality and could be very profitable for the Company.

Company Name	Ticker	Price per	Mrkt. Cap.	P/E		P/S
Nov-13-2009	symbol	Share, $	$ Mn	2009	2010	2009	2010
Radian Group Inc.	RDN	5.84	483.4	n/m	n/m	0.44	0.41
MGIC Investment Corp.	MTG	4.18	522.9	n/m	26.13	0.31	0.33
Texas Instruments Inc.	AIG	36.75	4,950	n/m	6.05	0.05	0.05
MBIA Inc.	MBA	2.10	779.8	n/m	1.00	0.58	0.67
Old Republic International Corp.	ORI	11.07	2,660	n/m	39.54	0.73	0.74
Assured Guaranty Ltd.	AGO	18.30	2,870	10.46	6.25	2.79	2.21
Employers Holdings Inc.	EIG	15.21	669.3	10.28	11.44	1.33	1.35
Median				10.37	8.84	0.58	0.67
The PMI Group Inc.	PMI	2.36	194.8	n/m	n/m	0.22	0.19

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Net Share Purchase Activity

Insider Purchases – Last 6 Months Shares Trans Purchases N/A 0 Sales 300 1 Net Shares Purchased (Sold) (300) 1 Total Insider Shares Held 9.40M N/A % Net Shares Purchased (Sold) 0.0% N/A

Net Institutional Purchases – Prior Qtr to Latest Qtr Shares Net Shares Purchased (Sold) (21,162,900) % Change in Institutional Shares Held (77.3%)

Data provided by Thomson Financial

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