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 June 30, 2011
OR
¨
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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)
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Delaware
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94-3199675
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(State of Incorporation)
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(IRS Employer Identification No.)
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3003 Oak Road,
Walnut Creek, California
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94597
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(Address of principal executive offices)
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(Zip Code)
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(925) 658-7878
(Registrants 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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of large accelerated
filer and accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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¨
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Accelerated filer
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x
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Non-accelerated filer
|
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¨
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Smaller Reporting Company
|
|
¨
|
Indicate by check mark whether the registration is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
¨
No
x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
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Class of Stock
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Par Value
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Date
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Number of Shares
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Common Stock
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$0.01
|
|
July 29, 2011
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162,050,405
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TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
ITEM 1.
|
INTERIM CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
|
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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Three Months Ended June 30,
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Six Months Ended June 30,
|
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|
2011
|
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|
2010
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|
|
2011
|
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|
2010
|
|
|
|
(Dollars in thousands, except per share data)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
125,603
|
|
|
$
|
147,082
|
|
|
$
|
245,909
|
|
|
$
|
300,112
|
|
Net investment income
|
|
|
16,837
|
|
|
|
23,861
|
|
|
|
33,559
|
|
|
|
50,549
|
|
Equity in losses from unconsolidated subsidiaries
|
|
|
(1,433
|
)
|
|
|
(3,917
|
)
|
|
|
(2,732
|
)
|
|
|
(8,327
|
)
|
Net realized investment gains
|
|
|
194
|
|
|
|
397
|
|
|
|
113
|
|
|
|
7,830
|
|
Change in fair value of certain debt instruments
|
|
|
75,625
|
|
|
|
(47,687
|
)
|
|
|
97,281
|
|
|
|
(88,500
|
)
|
Other income
|
|
|
2,608
|
|
|
|
2,685
|
|
|
|
5,312
|
|
|
|
4,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
219,434
|
|
|
|
122,421
|
|
|
|
379,442
|
|
|
|
266,072
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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LOSSES AND EXPENSES
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
Losses and loss adjustment expenses
|
|
|
441,186
|
|
|
|
317,920
|
|
|
|
682,296
|
|
|
|
660,209
|
|
Amortization of deferred policy acquisition costs
|
|
|
4,467
|
|
|
|
4,163
|
|
|
|
8,623
|
|
|
|
8,039
|
|
Other underwriting and operating expenses
|
|
|
25,839
|
|
|
|
28,032
|
|
|
|
53,518
|
|
|
|
61,992
|
|
Interest expense
|
|
|
13,577
|
|
|
|
12,247
|
|
|
|
27,088
|
|
|
|
21,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
485,069
|
|
|
|
362,362
|
|
|
|
771,525
|
|
|
|
752,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(265,635
|
)
|
|
|
(239,941
|
)
|
|
|
(392,083
|
)
|
|
|
(485,938
|
)
|
Income tax expense (benefit) from continuing operations
|
|
|
19,651
|
|
|
|
(89,381
|
)
|
|
|
20,027
|
|
|
|
(178,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(285,286
|
)
|
|
|
(150,560
|
)
|
|
|
(412,110
|
)
|
|
|
(307,547
|
)
|
Gain on sale of discontinued operations, net of taxes of $81,049
|
|
|
150,520
|
|
|
|
|
|
|
|
150,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(134,766
|
)
|
|
$
|
(150,560
|
)
|
|
$
|
(261,590
|
)
|
|
$
|
(307,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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PER SHARE DATA
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Basic net loss from continuing operations
|
|
$
|
(1.76
|
)
|
|
$
|
(1.11
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
(2.81
|
)
|
Basic gain from discontinued operations
|
|
|
0.93
|
|
|
$
|
|
|
|
|
0.93
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss
|
|
$
|
(0.83
|
)
|
|
$
|
(1.11
|
)
|
|
$
|
(1.62
|
)
|
|
$
|
(2.81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss from continued operations
|
|
$
|
(1.76
|
)
|
|
$
|
(1.11
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
(2.81
|
)
|
Diluted gain from discontinued operations
|
|
|
0.93
|
|
|
$
|
|
|
|
|
0.93
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss
|
|
$
|
(0.83
|
)
|
|
$
|
(1.11
|
)
|
|
$
|
(1.62
|
)
|
|
$
|
(2.81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 30,
2011
|
|
|
December 31,
2010
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
(Dollars in thousands, except per share data)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investments - available-for-sale, at fair value:
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
2,538,271
|
|
|
$
|
2,651,206
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Common
|
|
|
23,539
|
|
|
|
30,664
|
|
Preferred
|
|
|
74,516
|
|
|
|
120,421
|
|
Short-term investments
|
|
|
6,813
|
|
|
|
17,867
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
2,643,139
|
|
|
|
2,820,158
|
|
Cash and cash equivalents
|
|
|
259,302
|
|
|
|
267,705
|
|
Investments in unconsolidated subsidiaries
|
|
|
119,853
|
|
|
|
121,040
|
|
Related party receivables
|
|
|
6,490
|
|
|
|
6,355
|
|
Accrued investment income
|
|
|
20,173
|
|
|
|
19,783
|
|
Premiums receivable
|
|
|
42,751
|
|
|
|
46,336
|
|
Reinsurance receivables and prepaid premiums
|
|
|
59,768
|
|
|
|
65,357
|
|
Reinsurance recoverables, net
|
|
|
391,974
|
|
|
|
459,671
|
|
Deferred policy acquisition costs
|
|
|
49,557
|
|
|
|
46,372
|
|
Property, equipment and software, net of accumulated depreciation and amortization
|
|
|
81,368
|
|
|
|
85,186
|
|
Prepaid and recoverable income taxes
|
|
|
1,748
|
|
|
|
48,042
|
|
Deferred income tax assets
|
|
|
44,804
|
|
|
|
142,899
|
|
Note receivable
|
|
|
206,569
|
|
|
|
|
|
Other receivables
|
|
|
68,987
|
|
|
|
66,335
|
|
Other assets
|
|
|
17,987
|
|
|
|
23,748
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,014,470
|
|
|
$
|
4,218,987
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Reserve for losses and loss adjustment expenses
|
|
$
|
2,994,795
|
|
|
$
|
2,869,765
|
|
Reserve for premium refunds
|
|
|
110,785
|
|
|
|
88,696
|
|
Unearned premiums
|
|
|
68,113
|
|
|
|
64,298
|
|
Debt (includes $229,902 and $327,181 measured at fair value)
|
|
|
522,128
|
|
|
|
616,158
|
|
Reinsurance payables
|
|
|
23,753
|
|
|
|
28,206
|
|
Related party payables
|
|
|
1,809
|
|
|
|
1,786
|
|
Other liabilities and accrued expenses
|
|
|
102,580
|
|
|
|
134,808
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,823,963
|
|
|
|
3,803,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 7 and 9)
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock - $0.01 par value; 5,000,000 shares authorized; none issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock - $0.01 par value; 500,000,000 and 350,000,000 shares authorized; 197,078,767 and 197,078,767 shares issued;
161,647,907 and 161,167,542 shares outstanding
|
|
|
1,971
|
|
|
|
1,971
|
|
Additional paid-in capital
|
|
|
1,359,902
|
|
|
|
1,370,757
|
|
Treasury stock, at cost (35,430,860 and 35,911,225 shares)
|
|
|
(1,282,990
|
)
|
|
|
(1,295,644
|
)
|
Retained earnings
|
|
|
70,111
|
|
|
|
331,700
|
|
Accumulated other comprehensive income, net of deferred taxes
|
|
|
41,513
|
|
|
|
6,486
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
190,507
|
|
|
|
415,270
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
4,014,470
|
|
|
$
|
4,218,987
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(412,110
|
)
|
|
$
|
(307,547
|
)
|
Gain on sale of discontinued operations, net of taxes
|
|
|
125,520
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Equity in losses from unconsolidated subsidiaries
|
|
|
2,732
|
|
|
|
8,327
|
|
Net realized investment gains
|
|
|
(713
|
)
|
|
|
(7,958
|
)
|
Change in fair value of certain debt instruments
|
|
|
(97,281
|
)
|
|
|
88,500
|
|
Depreciation and amortization
|
|
|
28,277
|
|
|
|
16,732
|
|
Deferred income taxes
|
|
|
98,592
|
|
|
|
(136,108
|
)
|
Compensation expense related to share-based payments
|
|
|
1,995
|
|
|
|
1,536
|
|
Deferred policy acquisition costs incurred and deferred
|
|
|
(11,808
|
)
|
|
|
(11,269
|
)
|
Amortization of deferred policy acquisition costs
|
|
|
8,623
|
|
|
|
8,039
|
|
Amortization of debt discount and debt issuance cost
|
|
|
4,520
|
|
|
|
2,155
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Accrued investment income
|
|
|
(272
|
)
|
|
|
6,515
|
|
Premiums receivable
|
|
|
3,679
|
|
|
|
2,581
|
|
Reinsurance receivables, and prepaid premiums net of reinsurance payables
|
|
|
1,136
|
|
|
|
(36,897
|
)
|
Reinsurance recoverables
|
|
|
67,697
|
|
|
|
89,904
|
|
Prepaid and recoverable income taxes
|
|
|
46,287
|
|
|
|
1,349
|
|
Reserve for losses and loss adjustment expenses
|
|
|
122,898
|
|
|
|
(146,507
|
)
|
Reserve for premium refunds
|
|
|
22,089
|
|
|
|
11,105
|
|
Unearned premiums
|
|
|
3,546
|
|
|
|
(7,346
|
)
|
Related party receivables, net of payables
|
|
|
(109
|
)
|
|
|
14,212
|
|
Liability for pension benefit
|
|
|
(2,406
|
)
|
|
|
10,784
|
|
Note receivable
|
|
|
(206,569
|
)
|
|
|
|
|
Other receivables
|
|
|
(2,652
|
)
|
|
|
(121,030
|
)
|
Other
|
|
|
(24,869
|
)
|
|
|
(7,887
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities from continuing operations
|
|
|
(221,198
|
)
|
|
|
(520,810
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
Proceeds from sales of fixed income securities
|
|
|
203,784
|
|
|
|
513,743
|
|
Proceeds from maturities of fixed income securities
|
|
|
3,596
|
|
|
|
765
|
|
Proceeds from sales of equity securities
|
|
|
55,230
|
|
|
|
25,101
|
|
Investment purchases: Fixed income securities
|
|
|
(81,772
|
)
|
|
|
(329,863
|
)
|
Equity securities
|
|
|
(3,957
|
)
|
|
|
(4,243
|
)
|
Net change in short-term investments
|
|
|
10,737
|
|
|
|
1,088
|
|
Distributions from unconsolidated subsidiaries, net of investments
|
|
|
818
|
|
|
|
(45
|
)
|
Capital expenditures and capitalized software, net of dispositions
|
|
|
(4,570
|
)
|
|
|
(1,277
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities from continuing operations
|
|
|
183,866
|
|
|
|
205,269
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible notes, net of issuance costs of $6,109
|
|
|
|
|
|
|
278,961
|
|
Proceeds from issuance of common stock, net of issuance costs of $28,199
|
|
|
|
|
|
|
453,183
|
|
Repayment of credit facility
|
|
|
|
|
|
|
(75,000
|
)
|
Proceeds from issuance of treasury stock
|
|
|
264
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities from continuing operations
|
|
|
264
|
|
|
|
657,419
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
Net cash provided by sale of discontinued operations
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by sale of discontinued operations
|
|
|
25,000
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash and cash equivalents from continuing operations
|
|
|
3,665
|
|
|
|
(6,928
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(8,403
|
)
|
|
|
334,950
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
267,705
|
|
|
|
686,891
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations at end of period
|
|
$
|
259,302
|
|
|
$
|
1,021,841
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURES:
|
|
|
|
|
|
|
|
|
Cash paid during the year:
|
|
|
|
|
|
|
|
|
Interest paid, net of capitalization
|
|
$
|
22,246
|
|
|
$
|
17,066
|
|
Income taxes refunds, net of payments
|
|
$
|
45,924
|
|
|
$
|
|
|
Income taxes payments, net of refunds
|
|
$
|
|
|
|
$
|
1
|
|
See accompanying notes to consolidated financial statements.
5
THE PMI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of The PMI Group, Inc. (The PMI
Group or TPG), a Delaware corporation and its direct and indirect wholly-owned subsidiaries, including: PMI Mortgage Insurance Co. (MIC), an Arizona corporation, and its direct wholly-owned subsidiary, PMI Mortgage
Assurance Company (PMAC), and its other affiliated U.S. mortgage insurance and reinsurance companies (collectively PMI); PMI Mortgage Insurance Company Limited and its holding company, PMI Europe Holdings Limited, the Irish
insurance companies (collectively PMI Europe); PMI Mortgage Insurance Company Canada and its holding company, PMI Mortgage Insurance Holdings Canada Inc. (collectively PMI Canada); and other insurance, reinsurance and
non-insurance subsidiaries. The PMI Group and its subsidiaries are collectively referred to as the Company. All material inter-company transactions and balances have been eliminated in the consolidated financial statements.
The Company has equity ownership interests in CMG Mortgage Insurance Company and CMG Mortgage Assurance Company (collectively CMG
MI), which conduct residential mortgage insurance business for credit unions. In addition, the Company owns 100% of PMI Capital I (Issuer Trust), an unconsolidated wholly-owned trust that privately issued debt in 1997. The Company
also has ownership interests in several limited partnerships.
In the third quarter of 2010, the Company sold its equity
ownership interest in FGIC Corporation, the holding company of Financial Guaranty Insurance Company (collectively FGIC), a New York-domiciled financial guaranty insurance company.
Impact of Current Economic Environment
The Company has undergone
significant changes since 2007. Weaker than expected job creation and U.S. home prices continue to negatively affect the Companys financial condition and results of operations. The Companys consolidated net loss was $134.8 million and
$261.6 million for the second quarter and first six months of 2011, respectively, compared to net losses of $150.6 million and $307.5 million for the corresponding periods in 2010.
The Company continues to focus on its core U.S. Mortgage Insurance Operations. In 2010 and the first half of 2011, the private mortgage
insurance industry continued to be significantly challenged by the slow pace of economic recovery and instability in the housing and mortgage markets. PMIs new business writings in 2010 were limited as a result of continued competition with
the Federal Housing Administration (FHA), which has become a significant competitor. PMIs new business writings were negatively impacted in the first half of 2011 as a result of lower than expected residential mortgage originations
and continued high demand for mortgage insurance from the FHA.
At June 30, 2011, MICs policyholders position
was below the minimum required by Arizona law and its risk-to-capital ratio exceeded the regulatory maximum 25:1 set by various other states. In sixteen states, if a mortgage insurer does not meet a required minimum policyholders position
(calculated in accordance with statutory formulae) or exceeds a maximum permitted risk-to-capital ratio of 25 to 1, it may be prohibited from writing new business. In two of those states, mortgage insurers are required to cease writing new business
immediately if and so long as they fail to meet capital requirements. In the remaining fourteen states (including Arizona), regulators exercise discretion as to whether the mortgage insurer may continue writing new business. MIC is currently
operating under regulatory waivers or discretion in the majority of the fourteen states. Four of MICs waivers expire on December 31, 2011 or earlier. Each of the waivers issued to MIC may be withdrawn at any time by the applicable
insurance department. In light of the Companys results in the second quarter of 2011, the Company expects that the number of states in which MIC is precluded from writing new business will significantly increase. It is not clear what actions,
if any, the insurance regulators in states that do not have capital adequacy requirements may take as a result of MIC failing to meet capital adequacy requirements established by one or more states.
6
MICs principal regulator is the Arizona Department of Insurance (the
Department). The Company has advised the Department of MICs second quarter results and its non-compliance with the required minimum policyholders position. In the near future, the Company expects to further discuss with the
Department MICs financial condition and the capital initiatives it is pursuing. To date, the Department has neither limited MICs ability to transact new business nor provided it with a timetable of required action by MIC. If the
Department were to determine that MICs financial condition warranted regulatory action, it could, among other actions, issue an administrative corrective order requiring MIC to suspend writing new business in all states. In the event MIC
either does not obtain significant capital relief or does not demonstrate to the Department significant progress in connection therewith, the Company believes it is likely that the Department will require MIC to cease writing new business. In
addition, Arizona law provides for mandatory suspension of an insurers license if the insurers statutory capital declines below $1.5 million.
The Department also has the authority, if it were to make a finding that MIC was in a hazardous financial condition, to issue a corrective order and place MIC under supervision.
Under supervision, MIC would likely be prohibited from writing new business and from engaging in transactions (including disposing of assets) out of the ordinary course of business unless it has the prior approval of the Director of the Department
or the Directors designated supervisor. Further, the Department at any time could initiate state court receivership proceedings for the rehabilitation or liquidation of MIC. In a court-ordered receivership, the Director would be appointed
receiver of MIC and would have full and exclusive power of management and control of MIC. The Company cannot predict if, or under what circumstances or timing, the Department will take any of the above steps.
In the third quarter, the Company began writing new mortgage insurance through PMAC, a subsidiary of MIC, in states in which MIC either
did not obtain, or exceeded the terms of, a waiver or other regulatory forbearance. Fannie Mae and Freddie Mac (collectively, the GSEs) approved the use of PMAC as a limited, direct issuer of mortgage guaranty insurance in certain states
in which MIC is unable to continue to write new business. The GSEs approvals of PMAC currently expire on December 31, 2011. The Company expects that the number of states in which it seeks to utilize PMAC for new business will
significantly increase. While the Company has requested extensions, there can be no assurance that the GSEs will grant them or that the GSEs will not revoke the PMAC approvals prior to December 31, 2011. The GSEs approvals of PMAC are
subject to restrictions. If the Company is unable to satisfy any of the GSE eligibility requirements for PMAC, if the GSEs do not extend PMACs approvals, or if the GSEs revoke PMACs approvals, the Company would be unable to offer
mortgage insurance through PMAC. If this were to occur, the Company would not be able to offer mortgage insurance through its combined insurance subsidiaries in all fifty states.
The Company believes that it has sufficient assets at the insurance company level to meet its non-holding company obligations through
2011. Provided that an event of default with respect to the Companys debt securities does not occur (see Note 9, Commitments and Contingencies
Other Contingencies
), the Company believes that it has sufficient liquidity at its
holding company to pay holding company expenses (including interest expense on its outstanding debt) through 2011.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with U.S. generally accepted accounting principles
(GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair
presentation for the periods presented have been included.
Significant accounting policies are as follows:
Investments
The Company has designated its entire portfolio of fixed income and equity securities as
available-for-sale. These securities are recorded at fair value based on quoted market prices with unrealized gains and losses, net of deferred income taxes, accounted for as a component of accumulated other comprehensive income (AOCI)
in shareholders equity. The Companys short-term investments have maturities of greater than three and less than 12 months when purchased and are carried at fair value.
The Company evaluates its portfolio of equity securities regularly to determine whether there are declines in value and whether such
declines meet the definition of other-than-temporary impairment (OTTI) in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 320
Investments-Debt and
Equity Securities
(Topic 320) and Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 59,
Accounting for Noncurrent Marketable Equity Securities.
When the Company
determines that an equity security has suffered an OTTI, the impairment loss is recognized as a realized investment loss in the consolidated statement of operations. See Note 4,
Investments
, for further discussion regarding criteria for
evaluating equity security impairments.
7
In accordance with Topic 320, the Company assesses whether it intends to sell or it is more
likely than not that it will be required to sell a debt security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that the Company does not
intend to sell and will not be required to sell prior to recovery of its amortized cost basis, the Company separates the amount of the impairment into the amount that is credit-related (referred to as the credit loss component) and the amount due to
all other factors. The credit loss component is recognized in net income and is the difference between the securitys amortized cost basis and the present value of its expected future cash flows. The remaining difference between the
securitys fair value and the present value of future expected cash flows is due to factors that are not credit-related and is recognized in AOCI. For debt securities that are intended to be sold, or that management believes are more likely
than not to be required to be sold prior to recovery, the full impairment is recognized immediately in earnings.
Realized
gains and losses on sales of investments are determined on a specific-identification basis. Investment income consists primarily of interest and dividends. Interest income is recognized on an accrual basis. Dividend income on common and preferred
stock investments is recognized on the date of declaration. Net investment income represents interest and dividend income, net of investment expenses.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Investments in Unconsolidated Subsidiaries
Investments in the Companys unconsolidated subsidiaries include
both equity investees and other unconsolidated subsidiaries. Investments in equity investees with ownership interests of 20-50% are generally accounted for using the equity method of accounting and investments of less than 20% ownership interest are
generally accounted for using the cost method of accounting if the Company does not have significant influence over the entity. Limited partnerships with ownership interests greater than 3% but less than 50% are primarily accounted for using the
equity method of accounting. The carrying value of the investments in the Companys unconsolidated subsidiaries also includes the Companys share of net unrealized gains and losses in the unconsolidated subsidiaries investment
portfolios, which is included in AOCI.
Periodically, or as events dictate, the Company evaluates potential impairment of its
investments in unconsolidated subsidiaries. FASB ASC Topic 323
Investments-Equity Method and Joint Ventures
(Topic 323) provides criteria for determining potential impairment. In the event a loss in value of an investment is
determined to be an other-than-temporary decline, an impairment charge would be recognized in the consolidated statements of operations. Evidence of a loss in value that could indicate impairment might include, but would not necessarily be limited
to, the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. Realized capital gains or losses resulting
from the sale of the Companys ownership interests of unconsolidated subsidiaries are recognized as net realized investment gains or losses in the consolidated statements of operations.
The Company reports the equity in (losses) earnings from CMG MI on a current month basis and the Companys interest in limited
partnerships are reported on a one-quarter lag basis.
Related Party Receivables and Payables
As of
June 30, 2011, related party receivables, which were comprised of non-trade receivables and payables from unconsolidated subsidiaries, were $6.5 million and related party payables were $1.8 million compared to $6.4 million and $1.8 million as
of December 31, 2010, respectively.
Deferred Policy Acquisition Costs
The Company defers certain
costs of its mortgage insurance operations relating to the acquisition of new insurance and consistent with industry accounting practice, amortizes these costs for each underwriting year book of business against revenue in proportion to estimated
gross profits over the estimated life of the policies in order to match costs and revenues. Estimated gross profits are comprised of earned premiums, interest income, losses and loss adjustment expenses. For each underwriting year, the Company
estimates the rate of amortization taking into consideration historical experiences. The rate of amortization is further evaluated for any changes to persistency or loss development. Deferred policy acquisition costs are reviewed periodically to
determine that they do not exceed recoverable amounts, after considering investment income.
8
Property, Equipment and Software
Property and equipment, including
software, are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to thirty nine years. Leasehold improvements are recorded at cost and amortized over the lesser of the
useful life of the assets or the remaining term of the related lease. The Companys accumulated depreciation and amortization was $211.0 million and $202.6 million as of June 30, 2011 and December 31, 2010, respectively.
The Company capitalizes costs incurred during the application development stage related to software developed for internal use and for
which it has no substantive plan to market externally in accordance with FASB ASC Topic 350
Intangibles-Goodwill and Other
. Capitalized costs are amortized beginning at such time as the software is ready for its intended use on a
straight-line basis over the estimated useful life of the asset, which is generally three to seven years. The Company capitalized $2.6 million in software costs incurred related to software developed for internal use in the first six months of 2011.
The Company did not capitalize any software costs incurred related to software developed for internal use in the first six months of 2010.
Other Receivables
In 2010, the Company restructured various modified pool policies whereby the Company paid a fee to be relieved of all of its remaining obligations to provide
insurance coverage under those policies. In certain of these transactions, the Company retained the right to continue to receive monthly premium payments as though the insurance had not been cancelled. The Company has determined that this stream of
payments, which is supported by an underlying pool of mortgage loans, is no longer part of an insurance contract and instead must be accounted for separately as a discounted receivable. Management determined that this stream of cash flows most
resembles a beneficial interest from a residential mortgage securitization (interest-only strips), which is also a stream of cash flows based on an underlying pool of mortgages.
To initially value this asset, management used observable market inputs from an active market with respect to interest-only strips for
mortgage securitizations with similar characteristics to those of the former modified pool policies (e.g., origination year, loan-to-value ratios, etc.) and applied these fair value inputs to the expected cash flows. Consistent with FASB ASC Topic
835
Interest
, a market discount of $26.0 million was calculated based on the excess of all cash flows attributable to the beneficial interest estimated at the acquisition date over the initial investment. The fair value of the asset upon
initial recognition was $82.3 million. On a monthly basis, the Company applies the cash received from this asset to the accretion of the discount with the excess cash reducing the value of the asset. The carrying value of the asset was $57.0 million
as of June 30, 2011 (net of a market discount of $15.5 million) compared to $66.3 million as of December 31, 2010 (net of a market discount of $19.2 million). The income recognition from the accretion of the discount is recognized as other
income and was $1.8 million and $3.7 million for the second quarter and first six months ended June 30, 2011, respectively, compared to $2.2 million and $2.2 million in the corresponding periods of 2010.
Derivatives
Certain credit default swap contracts entered into by PMI Europe are considered credit derivative
contracts under FASB ASC Topic 815
Derivatives and Hedging
(Topic 815). As of June 30, 2011, all of the Companys credit derivatives had been terminated.
Convertible Notes
In the second quarter of 2010, the Company issued 4.50% Convertible Senior Notes
(Convertible Notes) due April 15, 2020, in a public offering for an aggregate principal amount of $285 million. The Convertible Notes bear interest at a rate of 4.50% per year. Interest is payable semi-annually in arrears on
April 15 and October 15 of each year, beginning October 15, 2010. The Convertible Notes are senior unsecured obligations and rank senior in right of payment to the Companys existing and future indebtedness that is expressly
subordinated. Prior to January 15, 2020, the Convertible Notes are convertible only under certain circumstances. The initial conversion rate is 127.5307 shares of common stock per $1,000 principal amount of Convertible Notes, which represents
an initial conversion price of approximately $7.84 per share. Upon conversion, the Company may deliver cash, shares of common stock or a combination thereof, at its option. The Company evaluated the accounting treatment for the Convertible Notes in
accordance with FASB ASC Topic 470-20
Debt with Conversion and Other Options
to determine if the instruments should be accounted for as debt, equity, or a combination of both. As the Convertible Notes are debt with a conversion option, the
Company bifurcated the net proceeds between liability and equity components. A fair value was calculated for the debt component and the equity component is recorded net of that value. To initially value the debt component, management obtained the
present value of contractual cash flows using an interest rate without the conversion option as the discount rate, which was determined by using the yield on similar instruments as the benchmark and adding an indicative spread based on the
Companys credit spread at the time of issuance. At June 30, 2011, Additional Paid-in- Capital included $66.0 million related to the fair value of the conversion option.
9
Special Purpose Entities
Certain insurance transactions entered into by
PMI and PMI Europe require the use of foreign wholly-owned special purpose entities, principally for regulatory purposes. These special purpose entities are consolidated in the Companys consolidated financial statements.
Premium Deficiency Reserve
The Company performs an analysis for premium deficiency using assumptions based on
managements best estimate when the assessment is performed. The calculation for premium deficiency requires significant judgment and includes estimates of future expected premiums, expected claims, loss adjustment expenses and maintenance
costs as of the date of the analysis. The calculation of future expected premiums uses assumptions for persistency and termination levels on policies currently in force. Assumptions for future expected losses include future expected average claim
sizes and claim rates which are based on the current default rate and expected future defaults. Investment income is also considered in the premium deficiency calculation. The Company performs premium deficiency analyses quarterly. The Company
determined that there were premium deficiencies for PMI Europe and PMI Canada and recorded premium deficiency reserves in 2009. As of June 30, 2011, management determined that the premium deficiency reserve for PMI Canada was $0.9 million and
no premium deficiency reserve was necessary for PMI Europe. Premium deficiency reserves are included in reserves for losses and loss adjustment expenses on the consolidated balance sheets and losses and loss adjustment expenses in the consolidated
statements of operations. The Company determined there was no premium deficiency in its U.S. Mortgage Insurance Operations segment. To the extent premium levels and actual loss experience differ from the assumptions used, results could be negatively
affected in future periods.
Reserve for Losses and Loss Adjustment Expenses
The
consolidated reserves for losses and loss adjustment expenses (LAE) for the Companys U.S. Mortgage Insurance and International Operations are the estimated claim settlement costs on notices of default that have been received by the
Company, as well as loan defaults that have been incurred but have not been reported by the lenders. For reporting and internal tracking purposes, the Company does not consider a loan to be in default until the borrower has missed two payments.
Depending upon its scheduled payment date, a loan in default for two consecutive monthly payments could be reported to PMI between the 31
st
and the 60
th
day after the first missed payment due date. The Companys U.S. mortgage insurance primary master policy defines
default as the borrowers failure to pay when due an amount equal to the scheduled periodic mortgage payment under the terms of the mortgage. Generally, however, the master policy requires an insured to notify PMI of a default no
later than the last business day of the month following the month in which the borrower becomes three monthly payments in default. Consistent with industry accounting practices, the Company considers its mortgage insurance policies short-duration
contracts and, accordingly, does not establish loss reserves for future claims on insured loans that are not currently in default. The Company establishes loss reserves when insured loans are identified as currently in default using estimated claim
rates and claim amounts for each report year, net of recoverables. The Company also establishes loss reserves for defaults that it believes have been incurred but not yet reported to the Company prior to the close of an accounting period using
estimated claim rates and claim amounts applied to the estimated number of defaults not reported.
The Company establishes
loss reserves on a gross basis for losses and LAE for its deductible pool policies, which contain aggregate deductible and stop-loss limits, on a pool by pool basis. The gross reserves for each pool are based on reported delinquencies, claim rate
and claim size assumptions which are determined based on the loan characteristics of the pool, delinquency trends and historical performance as well as expected economic conditions. After determining the gross loss reserve, deductible and stop-loss
limits are applied to determine the net loss reserve.
Changes in loss reserves can materially affect the Companys
consolidated net income or loss. The process of estimating loss reserves requires the Company to forecast, among other things, the interest rate, employment and housing market environments, which are highly uncertain. Therefore, the process requires
significant management judgment and estimates. The use of different estimates would have resulted in the establishment of different reserves. In addition, changes in accounting estimates are reasonably likely to occur from period to period based on
economic conditions. The Company reviews the judgments made in its prior period estimation process and adjusts the current assumptions as appropriate. While the assumptions are based in part upon historical data, the loss provisioning process is
complex and subjective and, therefore, the ultimate liability may vary significantly from the Companys estimates.
10
Reinsurance
The Company uses reinsurance to reduce net risk-in-force
and enhance capital allocation. This is done primarily with captive reinsurance companies via both excess-of-loss (XOL) and quota share arrangements. Under a captive reinsurance agreement, the Company reinsures a portion of its risk
written on loans originated by a certain lender with the captive reinsurance company affiliated with such lender. PMIs captive reinsurance agreements primarily provide for XOL reinsurance, in which PMI retains a first loss position on a
defined set of mortgage insurance risk, reinsures a second loss layer of this risk with the captive reinsurance company and retains the remaining risk above the second loss layer. The Company cedes premiums pursuant to its captive reinsurance
arrangements in exchange for the reinsurance of a portion of the Companys risk less, in some instances, a ceding commission paid to the Company for underwriting and administering the business. Ceded premiums reduce premiums earned and ceded
loss reserves reduce losses and loss adjustment expenses in the consolidated statements of operations. Total loss reserves gross of reinsurance contracts are determined in accordance with the Companys loss reserving practices. After gross
reserves are established, reserves are allocated to reinsurance contracts consistent with the terms of the coverage provided and based on an actuarial analysis of the loans reinsured under each reinsurance agreement. The total ceded loss reserves
subject to reinsurance arrangements represent reinsurance recoverables in the consolidated balance sheets. Under the Companys XOL captive reinsurance arrangements, PMI generally cedes 100% of the losses within the reinsured loss layer to the
captive insurance company. PMI limits its recorded recoverable to the amount currently available in the trust account maintained by the captive insurance company for PMIs benefit, if that amount is less than PMIs ceded loss reserves.
Effective January 1, 2009, the Company ceased seeking reinsurance under XOL captive reinsurance agreements. On that date, in-force XOL contracts were placed into run-off and will mature pursuant to the existing terms and conditions. A small
percentage of the Companys existing captive reinsurance arrangements are under quota share agreements under which the Company continues to reinsure new insurance business.
Revenue Recognition
Mortgage guaranty insurance policies are contracts that are generally non-cancelable by the
insurer, are renewable at a fixed price, and provide for payment of premiums on a monthly, annual or single basis. Upon renewal, the Company is not able to re-underwrite or re-price its policies. Consistent with industry accounting practices,
premiums written on a monthly basis are earned as coverage is provided. Monthly premiums accounted for 92.0% and 90.2% of gross premiums written from the Companys mortgage insurance operations in the three and six months ended June 30,
2011, respectively, compared to 92.8% and 90.1% in the corresponding periods of 2010. Premiums written on an annual basis are amortized on a monthly pro rata basis over the year of coverage. Primary mortgage insurance premiums written on policies
covering more than one year are referred to as single premiums. A portion of the revenue from single premiums is recognized in premiums earned in the current period, and the remaining portion is deferred as unearned premiums and earned over the
expected life of the policy, a range of seven to fifteen years for the majority of the single premium policies. If single premium policies related to insured loans are cancelled due to repayment by the borrower, and the premium is non-refundable,
the remaining unearned premium related to each cancelled policy is recognized as earned premiums upon notification of the cancellation. Unearned premiums represent the portion of premiums written that is applicable to the estimated unexpired risk of
insured loans. A portion of premium payments may be refundable if the insured cancels coverage, which generally occurs when the loan is repaid, the loan amortizes to a sufficiently low amount to trigger a lender permitted or legally required
cancellation, or the value of the property has increased sufficiently in accordance with the terms of the contract.
In
addition, when the Company pays a claim on a delinquent loan, all premiums received on the delinquent loan covering any period after the default date will be refunded, in accordance with the terms of the contract. In the event the Company rescinds
insurance coverage of a loan as a result of an issue that occurred during the origination of the loan and/or prior to the effective date of coverage, it refunds all premiums associated with the rescinded loan to the insured, whether or not the loan
was delinquent. Premium refunds reduce premiums earned in the consolidated statements of operations. Premium refunds (including the changes in reserve for premium refunds) were $24.2 million and $57.2 million for the three and six months ended
June 30, 2011, respectively, compared to $20.9 million and $47.1 million in the corresponding periods of 2010.
Income Taxes
The Company accounts for income taxes using the liability method in accordance with FASB ASC Topic 740
Income Taxes
(Topic 740). The liability method measures the expected future tax effects of temporary differences at the enacted tax rates applicable for the period in which the deferred asset or liability is expected to be
realized or settled. Temporary differences are differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that will result in future increases or decreases in taxes owed on a cash
basis compared to amounts already recognized as tax expense in the consolidated statement of operations.
11
The Company evaluates the need for a valuation allowance against its deferred tax assets on
a quarterly basis. In the course of its review, the Company assesses all available evidence, both positive and negative, including future sources of income, tax planning strategies, future contractual cash flows and reversing temporary differences.
In 2010 and the first half of 2011, the Company experienced loss development in excess of its expectations. Based, in part, on the higher than expected loss development, the Company does not currently expect its U.S. Mortgage Insurance Operations
segment to report an operating profit in 2011. Primarily as a result of these factors, under Topic 740, the Company does not use forecasted taxable income from its mortgage insurance activities in determining whether or not the deferred tax assets
will be utilized. In 2011, the Company evaluated its deferred tax assets in light of these issues and determined that it was necessary to increase its valuation allowance by $161.6 million to $688.9 million with respect to its deferred tax assets of
$733.7 million. During the quarter ended June 30, 2011, the projected investment income on the conversion of the Companys tax-free municipal bond portfolio decreased as a result of projected changes in the timing of certain cash outflows. The
lower projected taxable investment income reduces the Companys ability to utilize certain deferred tax assets within a reasonable amount of time. As a result, the Company has recorded a tax expense of $20.3 million for the quarter related to
the decrease in projected investment income. The Company expects that the remaining net deferred tax assets of $44.8 million will be utilized based on contractual cash flow streams and tax strategies that are not dependent on generating taxable
income from the Company's mortgage insurance activities. Additional valuation allowance benefits or charges could be recognized in the future due to changes in managements expectations regarding the realization of tax benefits. (See Note 13,
Income Taxes
, for further discussion.)
On August 12, 2010, the Board of Directors of The PMI Group adopted a Tax
Benefits Preservation Plan (the Plan). In connection with its adoption of the Plan, the Board declared a dividend of one preferred stock purchase right for each outstanding share of The PMI Groups common stock payable to holders of
record of the common stock on August 23, 2010. On February 17, 2011, the Board adopted the Amended and Restated Tax Benefits Preservation Plan (as amended, the Amended Plan), which amends and restates the Plan in its entirety.
The purpose of the Amended Plan is to help protect the Companys ability to recognize certain tax benefits in future periods from net unrealized built in losses and tax credits, as well as any net operating losses that may be expected in future
periods (the Tax Benefits). The Companys use of the Tax Benefits in the future would be significantly limited if it experiences an ownership change for U.S. federal income tax purposes. In general, an ownership
change will occur if there is a cumulative change in the Companys ownership by 5-percent shareholders (as defined under U.S. income tax laws) that exceeds 50 percentage points over a rolling three-year period. The Amended
Plan is designed to reduce the likelihood that the Company will experience an ownership change by (i) discouraging any person or group from becoming a 5-percent shareholder and (ii) discouraging any existing 5-percent
shareholder from acquiring more than a minimal number of additional shares of the Company stock. There can be no assurance, however, that the Plan will prevent the Company from experiencing an ownership change. The Amended Plan was approved by
stockholders at the 2011 annual meeting.
Benefit Plans
The Company provides pension benefits through
noncontributory defined benefit plans to all eligible U.S. employees under The PMI Group, Inc. Retirement Plan (the Retirement Plan) and to certain employees of the Company under The PMI Group, Inc. Supplemental Employee Retirement Plan.
In addition, the Company provides certain health care and life insurance benefits for retired employees under another post-employment benefit plan. The Company applies FASB ASC Topic 715
Compensation-Retirement Benefits
(Topic
715) for its treatment of U.S. employees pension benefits. This topic requires the Company to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its defined
benefit postretirement plans, with a corresponding adjustment to AOCI. The net periodic benefit costs associated with the Retirement Plan are included in the operating expenses of the Companys consolidated statements of operations.
Foreign Currency Translation
The financial statements of the Companys foreign subsidiaries have been
translated into U.S. dollars in accordance with FASB ASC Topic 830,
Foreign Currency Matters
. Assets and liabilities denominated in non-U.S. dollar functional currencies are translated using the period-end spot exchange rates. Revenues and
expenses are translated at monthly-average exchange rates. The effects of translating financial results with a functional currency other than the reporting currency are reported as a component of AOCI included in total shareholders equity.
Foreign currency translation gains in AOCI net of taxes were $62.0 million as of June 30, 2011 compared with $51.1 million as of December 31, 2010. Gains and losses from foreign currency re-measurement for PMI Europe and PMI Canada are
reflected in income and represent the revaluation of monetary assets and liabilities denominated in non-functional currencies into the functional currency, the Euro and Canadian dollar, respectively.
Comprehensive Income (Loss)
Comprehensive income (loss) includes the net loss, the change in foreign currency
translation gains or losses, pension adjustments, changes in unrealized gains and losses on investments, accretion of cash flow hedges and reclassifications of realized gains and losses previously reported in comprehensive income (loss), net of
related tax effects.
12
Business Segments
The Companys reportable operating segments are
U.S. Mortgage Insurance Operations, International Operations and Corporate and Other. U.S. Mortgage Insurance Operations includes the results of operations of MIC, PMI Mortgage Assurance Co. (PMAC), formerly Commercial Loan Insurance
Co., PMI Insurance Co., affiliated U.S. insurance and reinsurance companies and the equity in earnings from CMG MI. International Operations includes the results of PMI Europe, PMI Canada and the gain on the sale of discontinued operations of PMI
Australia. The Corporate and Other segment includes other income and related operating expenses of PMI Mortgage Services Co., change in fair value of certain debt instruments, interest expense, intercompany eliminations and corporate expenses of the
Company, equity in earnings (losses) from certain limited partnerships and its former investment in FGIC.
Earnings
(Loss) Per Share
Basic earnings (loss) per share (EPS) excludes dilution and is based on consolidated net income (loss) available to common shareholders and the actual weighted-average common shares that are outstanding
during the period. Diluted EPS is based on consolidated net income (loss) available to common shareholders, adjusted for the effects of dilutive securities, and the weighted-average dilutive common shares outstanding during the period. The
weighted-average dilutive common shares reflect the potential increase of common shares if contracts to issue common shares, including stock options issued by the Company that have a dilutive impact, were exercised, or if outstanding securities were
converted into common shares. As a result of the Companys net loss for the three and six months ended June 30, 2011 and 2010, 9.5 million and 8.9 million share equivalents issued under the Companys share-based compensation
plans in the respective periods were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive. In addition, additional shares are considered for dilutive EPS purposes related to the Convertible
Notes issued in 2010. The method of determining which method to use for calculating dilutive EPS for the Convertible Notes depends on the facts and circumstances of the Companys liquidity position. At June 30, 2011, 36.3 million
share equivalents were excluded from the calculation of diluted earnings per share under the If Converted method as their inclusion would have been anti-dilutive. No share equivalents were excluded under the Treasury Stock method.
The following table presents for the periods indicated a reconciliation of the weighted average common shares used to calculate basic EPS
to the weighted-average common shares used to calculate diluted EPS from continuing and discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars and shares in thousands)
|
|
|
(Dollars and shares in thousands)
|
|
Loss from continuing operations as reported
|
|
$
|
(285,286
|
)
|
|
$
|
(150,560
|
)
|
|
$
|
(412,110
|
)
|
|
$
|
(307,547
|
)
|
|
|
|
|
|
Gain from discontinued operations as reported
|
|
|
150,520
|
|
|
|
|
|
|
|
150,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss adjusted for diluted EPS
|
|
$
|
(134,766
|
)
|
|
$
|
(150,560
|
)
|
|
$
|
(261,590
|
)
|
|
$
|
(307,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares for basic EPS
|
|
|
161,589
|
|
|
|
135,993
|
|
|
|
161,452
|
|
|
|
109,532
|
|
Weighted-average stock options and other dilutive components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares for diluted EPS
|
|
|
161,589
|
|
|
|
135,993
|
|
|
|
161,452
|
|
|
|
109,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-Based Compensation
The Company applies FASB ASC Topic 718
Compensation-Stock Compensation
(Topic 718) in accounting for share-based payments. This topic requires share based payments such as stock options, restricted stock units and employee stock purchase plan shares to be accounted for
using a fair value-based method and recognized as compensation expense in the consolidated statements of operations. Share-based compensation expense was $0.9 million (pre-tax) and $1.8 million (pre-tax) for the three and six months ended
June 30, 2011, respectively, compared to $0.8 million (pre-tax) and $1.9 million (pre-tax) for the corresponding periods in 2010.
13
Debt Instruments
The Company has elected the fair value option for
certain corporate debt as permitted by FASB ASC Topic 825
Financial Instruments
(Topic 825). The Company elected the fair value option for its 10 year and 30 year senior debt instruments as their market values are the most readily
available. The fair value option was elected with respect to the senior debt as changes in value were expected to generally offset changes in the value of credit default swap contracts that were also accounted for at fair value. The 6.000% Senior
Notes and the 6.625% Senior Notes bear interest at a rate of 6.000% and 6.625% per annum, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on March 15, 2007. In connection with the issuance of
these Senior Notes, the Company entered into two interest rate lock agreements which were designated as cash flow hedges. The fair value of the cash flow hedges was settled for $9.0 million and is amortized into interest expense over the terms of
the senior debt that was issued. As of June 30, 2011, the unamortized balance in the other comprehensive income related to these prior cash flow hedges was approximately $6.1 million (pre-tax).
In considering the initial adoption of the fair value option presented by ASC Topic 825, the Company determined that the change in fair
value of the 8.309% Junior Subordinated Debentures would not have a significant impact on the Companys consolidated financial results. Therefore, the Company did not elect to adopt the fair value option for the 8.309% Junior Subordinated
Debentures. As the fair value option is not available for financial instruments that are, in whole or in part, classified as a component of shareholders equity, the Convertible Notes are not remeasured at fair value.
Reclassifications
Certain items in the prior years consolidated financial statements have been
reclassified to conform to the current years consolidated financial statement presentation.
NOTE 3. NEW ACCOUNTING STANDARDS
In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04,
Amendments to Achieve
Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS,
(ASU 2011-04). ASU 2011-04 amended FASB ASC Topic 820,
Fair Value Measurements and Disclosures
, to converge the fair value measurement guidance
in U.S. GAAP and International Financial Reporting Standards (IFRS). Some of the amendments clarify the application of existing fair value measurement requirements, while other amendments change a particular principle in Topic 820. In addition, ASU
2011-04 requires additional fair value disclosures. The amendments are to be applied prospectively and are effective for annual periods beginning after December 15, 2011. The Company is currently evaluating the impact of ASU 2011-04 on its
consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05,
Comprehensive Income (Topic 220):
Presentation of Comprehensive Income
(ASU No. 2011-05). ASU No. 2011-05 provides guidance on the presentation of non owner changes in stockholders equity. The amendments in ASU No. 2011-05 require that the non
owner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-05 eliminates the option that permits the presentation of other
comprehensive income in the statement of changes in equity. ASU No. 2011-05 is effective for interim and annual reporting periods beginning after December 15, 2011. The Company is currently evaluating the impact of ASU No. 2011-05 on
its consolidated financial statements.
14
NOTE 4. INVESTMENTS
Fair Values and Gross Unrealized Gains and Losses on Investments
The cost or amortized cost,
estimated fair value and gross unrealized gains and losses on investments as of June 30, 2011 and December 31, 2010 are shown in the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
or
Amortized Cost
|
|
|
Gross Unrealized
|
|
|
Fair
Value
|
|
|
|
|
Gains
|
|
|
(Losses)
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
As of June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
225,521
|
|
|
$
|
1,393
|
|
|
$
|
(6,766
|
)
|
|
$
|
220,148
|
|
Foreign governments
|
|
|
110,803
|
|
|
|
736
|
|
|
|
(1
|
)
|
|
|
111,538
|
|
Corporate bonds
|
|
|
1,218,079
|
|
|
|
7,016
|
|
|
|
(9,909
|
)
|
|
|
1,215,186
|
|
FDIC corporate bonds
|
|
|
182,228
|
|
|
|
789
|
|
|
|
(428
|
)
|
|
|
182,589
|
|
U.S. governments and agencies
|
|
|
284,550
|
|
|
|
1,204
|
|
|
|
(2,231
|
)
|
|
|
283,523
|
|
Mortgage-backed securities
|
|
|
331,682
|
|
|
|
3,094
|
|
|
|
(1,613
|
)
|
|
|
333,163
|
|
Asset-backed securities
|
|
|
191,540
|
|
|
|
741
|
|
|
|
(157
|
)
|
|
|
192,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
2,544,403
|
|
|
|
14,973
|
|
|
|
(21,105
|
)
|
|
|
2,538,271
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
32,099
|
|
|
|
372
|
|
|
|
(8,932
|
)
|
|
|
23,539
|
|
Preferred stocks
|
|
|
56,538
|
|
|
|
18,606
|
|
|
|
(628
|
)
|
|
|
74,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
88,637
|
|
|
|
18,978
|
|
|
|
(9,560
|
)
|
|
|
98,055
|
|
Short-term investments
|
|
|
6,820
|
|
|
|
1
|
|
|
|
(8
|
)
|
|
|
6,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
2,639,860
|
|
|
$
|
33,952
|
|
|
$
|
(30,673
|
)
|
|
$
|
2,643,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
Amortized
Cost
|
|
|
Gross Unrealized
|
|
|
Fair
Value
|
|
|
|
|
Gains
|
|
|
(Losses)
|
|
|
|
|
(Dollars in thousands)
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
232,108
|
|
|
$
|
668
|
|
|
$
|
(12,665
|
)
|
|
$
|
220,111
|
|
Foreign governments
|
|
|
151,393
|
|
|
|
946
|
|
|
|
|
|
|
|
152,339
|
|
Corporate bonds
|
|
|
1,241,265
|
|
|
|
8,278
|
|
|
|
(17,726
|
)
|
|
|
1,231,817
|
|
FDIC corporate bonds
|
|
|
180,698
|
|
|
|
703
|
|
|
|
(631
|
)
|
|
|
180,770
|
|
U.S. governments and agencies
|
|
|
326,082
|
|
|
|
1,955
|
|
|
|
(4,914
|
)
|
|
|
323,123
|
|
Mortgage-backed securities
|
|
|
326,832
|
|
|
|
462
|
|
|
|
(5,120
|
)
|
|
|
322,174
|
|
Asset-backed securities
|
|
|
221,016
|
|
|
|
567
|
|
|
|
(711
|
)
|
|
|
220,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
2,679,394
|
|
|
|
13,579
|
|
|
|
(41,767
|
)
|
|
|
2,651,206
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
34,773
|
|
|
|
294
|
|
|
|
(4,403
|
)
|
|
|
30,664
|
|
Preferred stocks
|
|
|
105,410
|
|
|
|
16,766
|
|
|
|
(1,755
|
)
|
|
|
120,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
140,183
|
|
|
|
17,060
|
|
|
|
(6,158
|
)
|
|
|
151,085
|
|
Short-term investments
|
|
|
17,886
|
|
|
|
3
|
|
|
|
(22
|
)
|
|
|
17,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
2,837,463
|
|
|
$
|
30,642
|
|
|
$
|
(47,947
|
)
|
|
$
|
2,820,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 and December 31, 2010, the total fair value of the mortgage-backed
securities portfolio was $333.2 million and $322.2 million, with $325.7 million and $314.9 million invested in residential mortgage-backed securities and $7.5 million and $7.3 million invested in commercial mortgage-backed securities,
respectively. There were $0.3 million of other-than-temporary impairments on debt securities during the three and six months ended June 30, 2011. There were no other-than-temporary impairments on debt securities during the three and six months
ended June 30, 2010.
15
Aging of Unrealized Losses
The following table shows the gross
unrealized losses and fair value of the Companys investments, aggregated by investment category and the length of time the individual securities have been in a continuous unrealized loss position as of June 30, 2011 and December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
June 30, 2011
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
|
(Dollars in thousands)
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
78,899
|
|
|
$
|
(1,359
|
)
|
|
$
|
62,939
|
|
|
$
|
(5,407
|
)
|
|
$
|
141,838
|
|
|
$
|
(6,766
|
)
|
Foreign governments
|
|
|
2,446
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
2,446
|
|
|
|
(1
|
)
|
Corporate bonds
|
|
|
449,136
|
|
|
|
(9,908
|
)
|
|
|
796
|
|
|
|
(1
|
)
|
|
|
449,932
|
|
|
|
(9,909
|
)
|
FDIC corporate bonds
|
|
|
10,172
|
|
|
|
(428
|
)
|
|
|
|
|
|
|
|
|
|
|
10,172
|
|
|
|
(428
|
)
|
U.S. governments and agencies
|
|
|
124,111
|
|
|
|
(2,231
|
)
|
|
|
|
|
|
|
|
|
|
|
124,111
|
|
|
|
(2,231
|
)
|
Mortgage-backed securities
|
|
|
94,386
|
|
|
|
(710
|
)
|
|
|
280
|
|
|
|
(903
|
)
|
|
|
94,666
|
|
|
|
(1,613
|
)
|
Asset-backed securities
|
|
|
28,723
|
|
|
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
|
28,723
|
|
|
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
787,873
|
|
|
|
(14,794
|
)
|
|
|
64,015
|
|
|
|
(6,311
|
)
|
|
|
851,888
|
|
|
|
(21,105
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
1,166
|
|
|
|
(4
|
)
|
|
|
20,835
|
|
|
|
(8,928
|
)
|
|
|
22,001
|
|
|
|
(8,932
|
)
|
Preferred stocks
|
|
|
|
|
|
|
|
|
|
|
14,372
|
|
|
|
(628
|
)
|
|
|
14,372
|
|
|
|
(628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
1,166
|
|
|
|
(4
|
)
|
|
|
35,207
|
|
|
|
(9,556
|
)
|
|
|
36,373
|
|
|
|
(9,560
|
)
|
Short-term investments
|
|
|
6,789
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
6,789
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
795,828
|
|
|
$
|
(14,806
|
)
|
|
$
|
99,222
|
|
|
$
|
(15,867
|
)
|
|
$
|
895,050
|
|
|
$
|
(30,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
December 31, 2010
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
|
(Dollars in thousands)
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
131,919
|
|
|
$
|
(5,631
|
)
|
|
$
|
61,391
|
|
|
$
|
(7,034
|
)
|
|
$
|
193,310
|
|
|
$
|
(12,665
|
)
|
Corporate bonds
|
|
|
714,901
|
|
|
|
(17,721
|
)
|
|
|
758
|
|
|
|
(5
|
)
|
|
|
715,659
|
|
|
|
(17,726
|
)
|
FDIC corporate bonds
|
|
|
11,622
|
|
|
|
(430
|
)
|
|
|
2,057
|
|
|
|
(201
|
)
|
|
|
13,679
|
|
|
|
(631
|
)
|
U.S. governments and agencies
|
|
|
186,635
|
|
|
|
(4,914
|
)
|
|
|
|
|
|
|
|
|
|
|
186,635
|
|
|
|
(4,914
|
)
|
Mortgage-backed securities
|
|
|
293,266
|
|
|
|
(5,120
|
)
|
|
|
|
|
|
|
|
|
|
|
293,266
|
|
|
|
(5,120
|
)
|
Asset-backed securities
|
|
|
118,117
|
|
|
|
(711
|
)
|
|
|
|
|
|
|
|
|
|
|
118,117
|
|
|
|
(711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,456,460
|
|
|
|
(34,527
|
)
|
|
|
64,206
|
|
|
|
(7,240
|
)
|
|
|
1,520,666
|
|
|
|
(41,767
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
25,359
|
|
|
|
(4,403
|
)
|
|
|
|
|
|
|
|
|
|
|
25,359
|
|
|
|
(4,403
|
)
|
Preferred stocks
|
|
|
7,331
|
|
|
|
(150
|
)
|
|
|
40,981
|
|
|
|
(1,605
|
)
|
|
|
48,312
|
|
|
|
(1,755
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
32,690
|
|
|
|
(4,553
|
)
|
|
|
40,981
|
|
|
|
(1,605
|
)
|
|
|
73,671
|
|
|
|
(6,158
|
)
|
Short-term investments
|
|
|
17,405
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
17,405
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,506,555
|
|
|
$
|
(39,102
|
)
|
|
$
|
105,187
|
|
|
$
|
(8,845
|
)
|
|
$
|
1,611,742
|
|
|
$
|
(47,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011, the Companys investment portfolio included 337 securities in an
unrealized loss position compared to 629 securities as of December 31, 2010. At June 30, 2011, the Company had gross unrealized losses of $30.7 million on investment securities, including fixed maturity and equity securities that had a
fair value of $895.1 million. Improvement in unrealized losses of fixed income securities from December 31, 2010 to June 30, 2011 was due to the decline in the yields across the yield curve and the improvement in the valuation of the
municipal bonds. Gross unrealized losses in the equity security portfolio were $3.4 million higher at June 30, 2011 compared with December 31, 2010 due to the deterioration of the common stock market valuation partially offset by the
improvement of the preferred stock market valuation. As of June 30, 2011, there were certain equity securities in the Companys investment portfolio in an unrealized loss position for twelve months or more which were below cost by
approximately $9.0 million. However, these equity securities did not meet the Companys impairment criteria outlined below. At June 30, 2011 and December 31, 2010, the total preferred stock portfolio had a fair value of $74.5 million and
$120.4 million, with $29.4 million and $37.0 million invested in public utility companies and $45.1 million and $83.4 million invested in the financial services sector, respectively.
16
Evaluating Investments for Other-than-Temporary-Impairment
The Company reviews all of its fixed income and equity security investments on a periodic basis for impairment. The Company specifically
assesses all investments with declines in fair value and, in general, monitors all security investments as to ongoing risk.
The Company reviews on a quarterly basis, or as needed in the event of specific credit events, unrealized losses on all investments with
declines in fair value. These investments are then tracked to establish whether they meet the Companys established other than temporary impairment criteria. Under the Companys policy, a decline in fair value greater than 15% below cost
for six or more consecutive months or a decline in fair value greater than 10% below cost for twelve or more consecutive months requires impairment of an investment security unless significant mitigating factors exist and such factors are documented
and approved by management. This process involves monitoring market events and other items that could impact issuers. The Company considers relevant facts and circumstances in evaluating whether the impairment of a security is other-than-temporary.
Relevant facts and circumstances considered include, but are not limited to:
|
|
|
a decline in the market value of a security below cost or amortized cost for a continuous period of at least six or twelve months;
|
|
|
|
the severity and nature of the decline in market value below cost regardless of the duration of the decline;
|
|
|
|
recent credit downgrades of the applicable security or the issuer by the rating agencies;
|
|
|
|
the financial condition of the applicable issuer;
|
|
|
|
whether scheduled interest payments are past due; and
|
|
|
|
whether it is more likely than not the Company will hold the security for a sufficient period of time to allow for anticipated recoveries in fair
value.
|
Once a security is determined to have met certain of the criteria for consideration as being
other-than-temporarily impaired, further information is gathered and evaluated pertaining to the particular security. If the security is an unsecured obligation, the additional evaluation is a security specific approach with particular emphasis on
the likelihood that the issuer will meet the contractual terms of the obligation.
The Company assesses equity securities
using the criteria outlined above and also considers whether, in addition to these factors, it has the ability and intent to hold the equity securities for a period of time sufficient for recovery of cost. Where the Company lacks that ability or
intent, the equity securitys decline in fair value is deemed to be other than temporary, and the Company records the full difference between fair value and cost or amortized cost in earnings.
Once the determination is made that a debt security is other-than-temporarily impaired, an estimate is developed of the portion of such
impairment that is credit-related. The estimate of the credit-related portion of impairment is based upon a comparison of ratings at the time of purchase and the current ratings of the security, to establish whether there have been any specific
credit events during the time the Company has owned the security, as well as the outlook through the expected maturity horizon for the security. The Company obtains ratings from nationally recognized rating agencies for each security being assessed.
The Company also incorporates information on the specific securities from its management and, as appropriate, from its external investment advisors on their views on the probability of it receiving the interest and principal cash flows for the
remaining life of the securities.
17
This information is used to determine the Companys best estimate of what the credit
related portion of the impairment is, based on a probability-weighted estimate of future cash flows. The probability weighted cash flows for the individual securities are modeled using internal models, which calculate the discounted cash flows at
the implicit rate at purchase through maturity. If the cash flow projections indicate that the Company does not expect to recover its amortized cost basis, the Company recognizes the estimated credit loss in earnings. For debt securities that are
intended to be sold, or that management believes are more likely than not to be required to be sold prior to recovery, the full impairment is recognized immediately in earnings. For debt securities that management has no intention to sell and
believes it is more likely than not that they will not be required to be sold prior to recovery, only the credit component of the impairment is recognized in earnings, with the remaining impairment loss recognized in AOCI.
The total impairment for any debt security that is deemed to have an other-than-temporary impairment is recorded in the statement of
operations as a net realized loss from investments. The portion of such impairment that is determined to be non-credit-related is deducted from net realized losses in the statement of operations and reflected in other comprehensive income (loss) and
AOCI, the latter of which is a component of stockholders equity.
Other-than-temporary Impairment
During the three and six months ended June 30, 2010, the Company did not record other-than-temporary impairment losses in net realized investment gains (losses) in the consolidated statements of operations. The other-than-temporary
losses included in realized gains (losses) for the three and six months ended June 30, 2011 are as follows:
|
|
|
|
|
|
|
Three and Six Months Ended
June 30, 2011
|
|
|
|
(Dollars in thousands)
|
|
Total other-than-temporary impairment losses on debt securities which the Company does not intend to sell or it is
more-likely-than-not that it will not be required to sell
|
|
$
|
275
|
|
Less: portion of OTTI losses recognized in AOCI (before taxes)
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in net (loss) income for securities that the Company does not intend to sell or it is more
likely-than-not that it will not be required to sell
|
|
|
275
|
|
OTTI losses recognized in net (loss) income for debt securities that the Company intends to sell or more-likely-than-not will be
required to sell before recovery
|
|
|
|
|
Impairment losses related to equity securities
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in statement of operations
|
|
$
|
275
|
|
|
|
|
|
|
Activity related to the credit component recognized in net realized investment gains on debt securities
held by the Company for which a portion of other-than-temporary impairment was recognized in AOCI for the six months ended June 30, 2011 and June 30, 2010, respectively, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Other-Than-Temporary Impairment Credit Losses
Recognized in Net Realized Investment Gains for Debt Securities
|
|
|
|
January 1, 2011
Cumulative OTTI
credit losses
recognized
for
securities still held
|
|
|
Reductions
due to sales
of credit
impaired
securities
|
|
|
Adjustments to
book
value
of credit impaired
securities due
to changes
in
cash flows
|
|
|
June 30, 2011
Cumulative
OTTI
credit
losses recognized
for securities still held
|
|
|
|
(Dollars in thousands)
|
|
OTTI credit losses recognized for debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
$
|
1,717
|
|
|
$
|
(1,717
|
)
|
|
$
|
|
|
|
$
|
|
|
Corporate Bonds
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OTTI credit losses recognized for debt securities
|
|
$
|
1,859
|
|
|
$
|
(1,717
|
)
|
|
$
|
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Other-Than-Temporary Impairment Credit Losses
Recognized in Net Realized Investment Gains for Debt Securities
|
|
|
|
January 1, 2010
Cumulative
OTTI
credit losses
recognized for
securities still held
|
|
|
Reductions
due to sales
of credit
impaired
securities
|
|
|
Adjustments to
book
value
of credit impaired
securities due
to changes
in
cash flows
|
|
|
June 30, 2010
Cumulative
OTTI
credit
losses recognized
for securities still held
|
|
|
|
(Dollars in thousands)
|
|
OTTI credit losses recognized for debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
$
|
1,717
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,717
|
|
Corporate Bonds
|
|
|
789
|
|
|
|
(188
|
)
|
|
|
|
|
|
|
601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OTTI credit losses recognized for debt securities
|
|
$
|
2,506
|
|
|
$
|
(188
|
)
|
|
$
|
|
|
|
$
|
2,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Maturities
The following table sets forth the amortized cost and fair
value of fixed income securities by contractual maturity at June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
Due in one year or less
|
|
$
|
415,636
|
|
|
|
417,205
|
|
Due after one year through five years
|
|
|
1,007,973
|
|
|
|
1,011,533
|
|
Due after five years through ten years
|
|
|
571,908
|
|
|
|
564,231
|
|
Due after ten years
|
|
|
217,204
|
|
|
|
212,139
|
|
Mortgage-backed securities
|
|
|
331,682
|
|
|
|
333,163
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
$
|
2,544,403
|
|
|
|
2,538,271
|
|
|
|
|
|
|
|
|
|
|
Actual maturities may differ from those scheduled as a result of calls or prepayments by the issuers
prior to maturity.
Net Investment Income
Net investment income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Fixed income securities
|
|
$
|
16,204
|
|
|
$
|
20,068
|
|
|
$
|
32,274
|
|
|
$
|
43,687
|
|
Equity securities
|
|
|
1,533
|
|
|
|
2,768
|
|
|
|
3,228
|
|
|
|
5,869
|
|
Short-term investments, cash and cash equivalents and other
|
|
|
(21
|
)
|
|
|
1,766
|
|
|
|
(218
|
)
|
|
|
2,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income before expenses
|
|
|
17,716
|
|
|
|
24,602
|
|
|
|
35,284
|
|
|
|
52,139
|
|
Investment expenses
|
|
|
(879
|
)
|
|
|
(741
|
)
|
|
|
(1,725
|
)
|
|
|
(1,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
16,837
|
|
|
$
|
23,861
|
|
|
$
|
33,559
|
|
|
$
|
50,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Net Realized Investment Gains (Losses)
Net realized investment gains
(losses) consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
$
|
2,574
|
|
|
$
|
3,146
|
|
|
$
|
2,673
|
|
|
$
|
9,041
|
|
Gross losses
|
|
|
(1,790
|
)
|
|
|
(3,706
|
)
|
|
|
(1,805
|
)
|
|
|
(5,188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses)
|
|
|
784
|
|
|
|
(560
|
)
|
|
|
868
|
|
|
|
3,853
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
|
97
|
|
|
|
281
|
|
|
|
345
|
|
|
|
3,773
|
|
Gross losses
|
|
|
(227
|
)
|
|
|
|
|
|
|
(619
|
)
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (losses) gains
|
|
|
(130
|
)
|
|
|
281
|
|
|
|
(274
|
)
|
|
|
3,625
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
|
7
|
|
|
|
676
|
|
|
|
7
|
|
|
|
352
|
|
Gross losses
|
|
|
(467
|
)
|
|
|
|
|
|
|
(488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (losses) gains
|
|
|
(460
|
)
|
|
|
676
|
|
|
|
(481
|
)
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains before income taxes
|
|
|
194
|
|
|
|
397
|
|
|
|
113
|
|
|
|
7,830
|
|
Income tax expense
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
2,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains after income taxes
|
|
$
|
194
|
|
|
$
|
258
|
|
|
$
|
113
|
|
|
$
|
5,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains for the second quarter and first half of 2011 resulted primarily from the
sales of municipal, government and corporate bonds. Net realized investment gains for the first half of 2010 resulted primarily from sales of municipal bonds and preferred equity securities.
Other Items
At June 30, 2011, fixed income securities and short-term investments with an aggregate fair value
of $13.2 million were on deposit with regulatory authorities as required by law.
NOTE 5. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
Investments in the Companys unconsolidated subsidiaries include both equity investees and other unconsolidated
subsidiaries. The carrying values of the Companys investments in unconsolidated subsidiaries consisted of the following as of June 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2011
|
|
|
Ownership
Percentage
|
|
|
December 31, 2010
|
|
|
Ownership
Percentage
|
|
|
|
(Dollars in thousands)
|
|
CMG MI
|
|
|
106,037
|
|
|
|
50.0
|
%
|
|
|
106,470
|
|
|
|
50.0
|
%
|
Other*
|
|
|
13,816
|
|
|
|
various
|
|
|
|
14,570
|
|
|
|
various
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
119,853
|
|
|
|
|
|
|
$
|
121,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Other represents principally various limited partnership investments.
|
In the third quarter of 2010, the Company sold its equity ownership interest in FGIC, the holding company of Financial Guaranty Insurance Company. In the third quarter of 2010, CMG Mortgage Reinsurance
Company issued a $5.0 million Surplus Note to MIC and a $5.0 million Surplus Note to CUNA Mutual Insurance Society. The Surplus Notes are due September 30, 2020 and bear interest at a rate of 6.25% per year until October 15, 2015 and
9.00% per year thereafter. The interest is payable annually on September 30.
20
Equity in earnings (losses) from unconsolidated subsidiaries is shown for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
Ownership
Percentage
|
|
|
2010
|
|
|
Ownership
Percentage
|
|
|
2011
|
|
|
Ownership
Percentage
|
|
|
2010
|
|
|
Ownership
Percentage
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
CMG MI
|
|
$
|
(1,343
|
)
|
|
|
50.0
|
%
|
|
$
|
(3,856
|
)
|
|
|
50.0
|
%
|
|
$
|
(2,795
|
)
|
|
|
50.0
|
%
|
|
$
|
(8,145
|
)
|
|
|
50.0
|
%
|
Other
|
|
|
(90
|
)
|
|
|
various
|
|
|
|
(61
|
)
|
|
|
various
|
|
|
|
63
|
|
|
|
various
|
|
|
|
(182
|
)
|
|
|
various
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,433
|
)
|
|
|
|
|
|
$
|
(3,917
|
)
|
|
|
|
|
|
$
|
(2,732
|
)
|
|
|
|
|
|
$
|
(8,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the impairment of its FGIC investment in the first quarter of 2008 and the sale of FGIC during the
third quarter of 2010, the Company did not recognize any equity in earnings (losses) from FGIC in 2010 or 2011.
CMG MIs
condensed balance sheets as of June 30, 2011 and December 31, 2010, and condensed statements of operations for the three and six months ended June 30, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2011
|
|
|
December 31,
2010
|
|
|
|
(Dollars in thousands)
|
|
Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and investments, at fair value
|
|
$
|
375,924
|
|
|
$
|
383,399
|
|
Deferred policy acquisition costs
|
|
|
12,308
|
|
|
|
12,029
|
|
Other assets
|
|
|
19,470
|
|
|
|
26,767
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
407,702
|
|
|
$
|
422,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Reserve for losses and loss adjustment expenses
|
|
$
|
171,600
|
|
|
$
|
184,343
|
|
Unearned premiums
|
|
|
11,023
|
|
|
|
12,998
|
|
Debt
|
|
|
10,000
|
|
|
|
10,000
|
|
Other liabilities
|
|
|
9,713
|
|
|
|
8,622
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
202,336
|
|
|
|
215,963
|
|
Shareholders equity
|
|
|
205,366
|
|
|
|
206,232
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
407,702
|
|
|
$
|
422,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Condensed Statements of Operations
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Gross revenues
|
|
$
|
25,376
|
|
|
$
|
26,568
|
|
|
$
|
51,054
|
|
|
$
|
53,526
|
|
Total expenses
|
|
|
30,642
|
|
|
|
39,930
|
|
|
|
61,893
|
|
|
|
80,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(5,266
|
)
|
|
|
(13,362
|
)
|
|
|
(10,839
|
)
|
|
|
(27,058
|
)
|
Income tax benefit
|
|
|
(2,579
|
)
|
|
|
(5,650
|
)
|
|
|
(5,248
|
)
|
|
|
(10,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,687
|
)
|
|
|
(7,712
|
)
|
|
|
(5,591
|
)
|
|
|
(16,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PMIs ownership interest in common equity
|
|
|
50.0
|
%
|
|
|
50.0
|
%
|
|
|
50.0
|
%
|
|
|
50.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity in losses from CMG MI
|
|
$
|
(1,343
|
)
|
|
$
|
(3,856
|
)
|
|
$
|
(2,795
|
)
|
|
$
|
(8,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
NOTE 6. DEFERRED POLICY ACQUISITION COSTS
The following table summarizes deferred policy acquisition cost activity as of and for the periods set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Beginning balance
|
|
$
|
48,115
|
|
|
$
|
42,642
|
|
|
$
|
46,372
|
|
|
$
|
41,289
|
|
Policy acquisition costs incurred and deferred
|
|
|
5,909
|
|
|
|
6,040
|
|
|
|
11,808
|
|
|
|
11,269
|
|
Amortization of deferred policy acquisition costs
|
|
|
(4,467
|
)
|
|
|
(4,163
|
)
|
|
|
(8,623
|
)
|
|
|
(8,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30,
|
|
$
|
49,557
|
|
|
$
|
44,519
|
|
|
$
|
49,557
|
|
|
$
|
44,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE)
The Company establishes reserves for losses and LAE to recognize the estimated liability for potential losses and LAE
related to insured mortgages that are in default. The establishment of loss reserves is subject to inherent uncertainty and requires significant judgment by management. The following table provides a reconciliation of the beginning and ending
consolidated reserves for losses and LAE between January 1 and June 30:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Balance at January 1,
|
|
$
|
2,869,765
|
|
|
$
|
3,178,359
|
|
Less: reinsurance recoverables
|
|
|
(459,671
|
)
|
|
|
(703,550
|
)
|
|
|
|
|
|
|
|
|
|
Net balance at January 1,
|
|
|
2,410,094
|
|
|
|
2,474,809
|
|
Losses and LAE incurred, principally with respect to defaults occurring in:
|
|
|
|
|
|
|
|
|
Current year
|
|
|
371,079
|
|
|
|
490,168
|
|
Prior years
(1)
|
|
|
311,217
|
|
|
|
170,041
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
682,296
|
|
|
|
660,209
|
|
Losses and LAE payments, principally with respect to defaults occurring in:
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(1,225
|
)
|
|
|
(2,251
|
)
|
Prior years
|
|
|
(487,077
|
)
|
|
|
(714,628
|
)
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
|
(488,302
|
)
|
|
|
(716,879
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation effects
|
|
|
(1,267
|
)
|
|
|
(5,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net ending balance at June 30,
|
|
|
2,602,821
|
|
|
|
2,412,730
|
|
Reinsurance recoverables
|
|
|
391,974
|
|
|
|
613,646
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30,
|
|
$
|
2,994,795
|
|
|
$
|
3,026,376
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The $311.2 million net increase in prior years reserves in the first half of 2011 was driven primarily by increases in the Companys U.S.
Mortgage Insurance Operations reserves. The increase in the Companys U.S. Mortgage Insurance Operations reserves was due to decreases in expected future claim denials (net of reinstatements), re-estimations of ultimate claim rates
from those established at the original notices of defaults, updated through the periods presented, increasing the IBNR reserves and re-estimations of ultimate claim sizes from those established at the original notices of defaults, updated through
the periods presented. The decreases in expected future claim denials (net of
|
22
|
reinstatements) was due to a significant increase in the frequency with which servicers have produced documents for previously denied claims compared to prior periods and the frequency previously
estimated when the Company established its loss reserves. The increases in claim rates were due to fewer than expected loan modifications. The increase to the IBNR reserve was related to changes in estimates of future reinstatements of claim
denials. The increases in claim sizes were due to a higher proportion of pending delinquencies with lower average loan balances curing and the decreases in expected future claim denials.
|
The $170.0 million net increase in prior years reserves in the first half of 2010 was driven primarily by increases in claim rates
and claim sizes in the Companys U.S. Mortgage Insurance Operations primary portfolio, as well as an increase in claim rates in the pool portfolio. In the first half of 2010, the increase in the prior years reserves related to the
pool portfolio was due to increases in claim rates partially offset by decreases in pool claim sizes and restructurings related to negotiated early discounted claim payments for modified pool contracts completed in the first quarter of 2010. The
increases in pool claim rates were driven by fewer delinquencies curing than expected due to the significant weakening of the housing and mortgage markets, combined with an elevated percentage of Alt-A or limited documentation loans insured under
the pool contracts.
The decrease in total consolidated loss reserves at June 30, 2011 compared to June 30, 2010 was
primarily due to decreases in the reserve balances for U.S. Mortgage Insurance Operations primarily due to payments of claims on the Companys primary and pool insurance portfolios combined with fewer new notices of default. Upon receipt of
notices of default, future claim payments are estimated relating to those loans in default and a reserve is recorded. Generally, it takes approximately 12 to 36 months from the receipt of a notice of default to result in a primary claim payment.
Accordingly, almost all losses paid relate to notices of default received in prior years.
NOTE 8. FAIR VALUE DISCLOSURES
The following tables present the difference between fair values as of June 30, 2011 and December 31, 2010 and
the aggregate contractual principal amounts of the long-term debt for which the fair value option has been elected. Fluctuations in credit spreads and market yields drive changes in fair values of the long-term debt. Had the Company not adopted the
fair value option, the Companys diluted loss per share for the three and six months ended June 30, 2011 would have been $1.30 per share and $2.22 per share, respectively, compared to $0.83 per share and $1.62 per share as reported in the
2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value (including
accrued interest)
as of
June 30, 2011
|
|
|
Principal amount and
accrued interest
|
|
|
Difference
|
|
|
|
(Dollars in thousands)
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
6.000% Senior Notes
|
|
$
|
149,845
|
|
|
$
|
254,375
|
|
|
$
|
104,530
|
|
6.625% Senior Notes
|
|
$
|
80,057
|
|
|
$
|
152,898
|
|
|
$
|
72,841
|
|
|
|
|
|
|
|
Fair Value (including
accrued
interest)
as of
December 31, 2010
|
|
|
Principal amount and
accrued interest
|
|
|
Difference
|
|
|
|
(Dollars in thousands)
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
6.000% Senior Notes
|
|
$
|
215,158
|
|
|
$
|
254,375
|
|
|
$
|
39,217
|
|
6.625% Senior Notes
|
|
$
|
112,023
|
|
|
$
|
152,898
|
|
|
$
|
40,875
|
|
Topic 820 defines fair value as the exchange price that would be received for an asset or paid to
transfer a liability (referred to as an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Topic 820 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.
23
Level 1
Observable inputs with quoted prices in active markets for identical assets or
liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded
instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value
requires significant management judgment or estimation.
When determining the fair value of its debt, the Company has
considered the guidance in Topic 820 related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly.
Assets and liabilities measured at fair value on a recurring basis, including financial instruments for which the Company has elected the
fair value option, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
Assets/Liabilities at Fair
Value
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
|
|
|
$
|
220,148
|
|
|
$
|
|
|
|
$
|
220,148
|
|
Foreign governments
|
|
|
|
|
|
|
111,538
|
|
|
|
|
|
|
|
111,538
|
|
Corporate bonds
|
|
|
|
|
|
|
1,215,186
|
|
|
|
|
|
|
|
1,215,186
|
|
FDIC corporate bonds
|
|
|
|
|
|
|
182,589
|
|
|
|
|
|
|
|
182,589
|
|
U.S. governments and agencies
|
|
|
|
|
|
|
283,523
|
|
|
|
|
|
|
|
283,523
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
331,138
|
|
|
|
2,025
|
|
|
|
333,163
|
|
Asset-backed securities
|
|
|
|
|
|
|
192,124
|
|
|
|
|
|
|
|
192,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
|
|
|
|
2,536,246
|
|
|
|
2,025
|
|
|
|
2,538,271
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
23,395
|
|
|
|
|
|
|
|
144
|
|
|
|
23,539
|
|
Preferred stocks
|
|
|
|
|
|
|
74,516
|
|
|
|
|
|
|
|
74,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
23,395
|
|
|
|
74,516
|
|
|
|
144
|
|
|
|
98,055
|
|
Short-term investments
|
|
|
24
|
|
|
|
6,789
|
|
|
|
|
|
|
|
6,813
|
|
Cash and cash equivalents
|
|
|
259,302
|
|
|
|
|
|
|
|
|
|
|
|
259,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
282,721
|
|
|
$
|
2,617,551
|
|
|
$
|
2,169
|
|
|
$
|
2,902,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.000% Senior Notes
|
|
$
|
|
|
|
$
|
149,845
|
|
|
$
|
|
|
|
$
|
149,845
|
|
6.625% Senior Notes
|
|
|
|
|
|
|
80,057
|
|
|
|
|
|
|
|
80,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
|
|
|
$
|
229,902
|
|
|
$
|
|
|
|
$
|
229,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
Assets/Liabilities at Fair
Value
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
|
|
|
$
|
220,111
|
|
|
$
|
|
|
|
$
|
220,111
|
|
Foreign governments
|
|
|
|
|
|
|
152,339
|
|
|
|
|
|
|
|
152,339
|
|
Corporate bonds
|
|
|
|
|
|
|
1,231,817
|
|
|
|
|
|
|
|
1,231,817
|
|
FDIC corporate bonds
|
|
|
|
|
|
|
180,770
|
|
|
|
|
|
|
|
180,770
|
|
U.S. governments and agencies
|
|
|
|
|
|
|
323,123
|
|
|
|
|
|
|
|
323,123
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
320,192
|
|
|
|
1,982
|
|
|
|
322,174
|
|
Asset-backed securities
|
|
|
|
|
|
|
220,872
|
|
|
|
|
|
|
|
220,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
|
|
|
|
2,649,224
|
|
|
|
1,982
|
|
|
|
2,651,206
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
30,192
|
|
|
|
|
|
|
|
472
|
|
|
|
30,664
|
|
Preferred stocks
|
|
|
|
|
|
|
116,734
|
|
|
|
3,687
|
|
|
|
120,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
30,192
|
|
|
|
116,734
|
|
|
|
4,159
|
|
|
|
151,085
|
|
Short-term investments
|
|
|
462
|
|
|
|
17,405
|
|
|
|
|
|
|
|
17,867
|
|
Cash and cash equivalents
|
|
|
267,705
|
|
|
|
|
|
|
|
|
|
|
|
267,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
298,359
|
|
|
$
|
2,783,363
|
|
|
$
|
6,141
|
|
|
$
|
3,087,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,366
|
|
|
$
|
5,366
|
|
6.000% Senior Notes
|
|
|
|
|
|
|
215,158
|
|
|
|
|
|
|
|
215,158
|
|
6.625% Senior Notes
|
|
|
|
|
|
|
112,023
|
|
|
|
|
|
|
|
112,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
|
|
|
$
|
327,181
|
|
|
$
|
5,366
|
|
|
$
|
332,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PMI Europe terminated its remaining credit default swap (CDS) contracts in the second quarter
of 2011. These contracts contained collateral support provisions which, in certain circumstances required PMI Europe to post collateral for the benefit of the counterparty. As of June 30, 2011, the Company had posted collateral of $5.0 million
in respect of these terminated transactions, which amount was returned to the Company in July 2011 under the terms of the termination agreements.
25
The table below presents a reconciliation for all assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value Measurements
|
|
|
|
Six Months Ended June 30, 2011
|
|
|
|
(Dollars in thousands)
|
|
Level 3 Instruments Only
|
|
Fixed
Income
Securities
|
|
|
Equity
Securities
|
|
|
Credit Default
Swaps (Liabilities)
|
|
Balance, January 1, 2011
|
|
|
1,982
|
|
|
|
4,159
|
|
|
|
(5,366
|
)
|
Total gains or (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
(1)
|
|
|
|
|
|
|
40
|
|
|
|
1,614
|
|
Included in other comprehensive income
(2)
|
|
|
43
|
|
|
|
|
|
|
|
(283
|
)
|
Settlements
(3)
|
|
|
|
|
|
|
|
|
|
|
4,035
|
|
Transfers out of Level 3
(4)
|
|
|
|
|
|
|
(4,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2011
|
|
$
|
2,025
|
|
|
$
|
144
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010
|
|
|
|
(Dollars in thousands)
|
|
Balance, January 1, 2010
|
|
|
3,148
|
|
|
|
3,970
|
|
|
|
(17,331
|
)
|
Total gains or (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
(1)
|
|
|
|
|
|
|
(61
|
)
|
|
|
2,180
|
|
Included in other comprehensive income
(2)
|
|
|
(1,087
|
)
|
|
|
|
|
|
|
2,404
|
|
Settlements
(3)
|
|
|
|
|
|
|
|
|
|
|
(325
|
)
|
Purchases
(5)
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2010
|
|
$
|
2,061
|
|
|
$
|
4,159
|
|
|
$
|
(13,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The gain on equity securities of $40 thousand for the six months ended June 30, 2011 and the loss on equity securities of $61 thousand for the six months ended
June 30, 2010 are included in net investment income in the Companys consolidated statement of operations. The gains on credit default swaps of $1.6 million and $2.2 million for the six months ended June 30, 2011 and 2010,
respectively, are included in other income in the Companys consolidated statement of operations.
|
(2)
|
The gain on fixed income securities of $43 thousand for the six months ended June 30, 2011 is included in other comprehensive income. The loss on fixed income
securities of $1.1 million for the six months ended June 30, 2010 is a result of the adjustment of certain corporate bonds to fair value and is included in other comprehensive income. The loss on credit default swaps of $0.3 million for the six
months ended June 30, 2011 and the gain on credit default swaps of $2.4 million for the six months ended June 30, 2010 are a result of the translation from the Euro to the U.S. dollar and are included in other comprehensive income.
|
(3)
|
The settlements of $4.0 million for the six months ended June 30, 2011 represent cash paid on credit default swaps. The settlements on credit default swaps of $0.3
million for the six months ended June 30, 2010 represent cash received on credit default swaps.
|
(4)
|
The equity securities transferred out of Level 3 of $4.1 million for the six months ended June 30, 2011 represent a transfer of common and preferred stock
securities to Level 1 in accordance with the fair value hierarchy described above, as the securities began to be traded in active markets in the second quarter of 2011 following an initial public offering of the investees securities. The
transferred equity securities were valued at the beginning of the reporting period in accordance with the Companys policy and Topic 820.
|
(5)
|
The purchases of equity securities of $0.3 million for the six months ended June 30, 2010 represent purchases of equity securities classified in the Level 3 fair
value hierarchy.
|
NOTE 9. COMMITMENTS AND CONTINGENCIES
Income Taxes
As of June 30, 2011, no tax issues from the most recently closed or current IRS
audit would, in the opinion of management, give rise to a material assessment or have a material effect on the consolidated financial condition, results of operations or cash flows of the Company.
26
Guarantees
The PMI Group has guaranteed certain payments to the holders
of the privately issued debt securities (Capital Securities) issued by PMI Capital I, an unconsolidated subsidiary of the Company. Payments with respect to any accrued and unpaid distributions payable, the redemption amount of any
Capital Securities that are called and amounts due upon an involuntary or voluntary termination, winding up or liquidation of the Issuer Trust are subject to the guarantee. In addition, the guarantee is irrevocable, is an unsecured obligation of the
Company and is subordinate and junior in right of payment to all senior debt of the Company. The principal amount of the Junior Subordinated Debentures is $51.6 million.
Funding Obligations
As of June 30, 2011, the Company had committed to fund, if called upon to do so, $2.7 million of additional equity in certain limited partnership investments.
Legal Proceedings
The Company is engaged in litigation and alternative dispute resolution with respect
to its rescission activity. These proceedings, discussed below, are complex and their outcomes are subject to substantial uncertainty.
|
|
|
In March 2011, the Company and a customer participated in a voluntary mediation with respect to contested rescissions on a group of what the Company
believes to be approximately 1,200 loans, with disputed risk of approximately $100 million. The Company believes that the significant majority of the disputed risk is delinquent. The mediation did not result in a resolution of the matter.
|
|
|
|
In February 2011, the Company was advised by a customer that it desired to engage in arbitration with respect to or otherwise resolve approximately 190
rescinded loans with disputed risk of approximately $14.6 million. The Company and the customer are discussing the timing and structure of any such arbitration.
|
In addition to the above matters, other customers have challenged the legal and factual bases of the Companys rescission decisions.
The Company is in discussions with such customers and, to date, such matters have not resulted in litigation or other formal dispute resolution proceedings initiated against the Company.
The above matters are generally in the early stages and the Company intends to defend against these claims vigorously. The Companys
contractual rescission rights have not been subject to judicial or arbitral decisions. As a result, and as the above matters represent aggregations of multiple rescission decisions based upon review of individual loan files, the ultimate resolution
of these matters is inherently uncertain and impossible to ascertain. While the Company considers potential future reinstatements of rescinded policies as a result of its rescission reconsideration process when it establishes the IBNR portion of its
reserve for losses and loss adjustment expenses, these reserves are not intended to include the possibility that the Company may be unsuccessful in defending its rescissions in the above litigation or other dispute resolution processes.
If the Company were wholly unsuccessful in defending its rescission decisions in one or more of the above matters, it would likely be
required to reinstate coverage on the disputed, rescinded loans, pay claims (including accrued interest) on those rescinded loans that were delinquent, and pay additional contractual or extra-contractual damages, if any, awarded by the court or
arbiter. An adverse judgment or the settlement of such matters could have a material adverse effect on the Companys consolidated results of operations, financial position or cash flows.
MIC, in its capacity as an alleged shareholder of MERSCORP, is a defendant in two putative class actions in the U.S. District Court for
the Eastern District of Michigan in which plaintiffs assert various claims based on their contention that foreclosure actions undertaken in the name of Mortgage Electronic Registration Systems, Inc. (MERS) were invalid. PMI denies the
allegations and will vigorously defend the actions.
27
In addition to the matters described above, the Company is engaged in other legal
proceedings in the ordinary course of business. In its opinion, based upon the facts known at this time, the ultimate resolution of these legal proceedings will not have a material adverse effect on the Companys consolidated results of
operations, financial position or cash flows.
The Minnesota Department of Commerce (MNDOC) has been conducting an
examination since 2006 of the mortgage insurance industry, focusing on the use of captive reinsurers. The Company continues to respond to requests from MNDOC and the Office of the Inspector General of the United States Department of Housing and
Urban Development (HUD OIG) for information regarding its captive reinsurance arrangements among other matters. To date, there has been no allegation of wrongdoing by MNDOC or HUD OIG, and no written report or letters of findings have
been issued.
Other Contingencies
MICs principal regulator is the Arizona Department of Insurance
(the Department). The Company has advised the Department of MICs second quarter results and its non-compliance with the required minimum policyholders position. In the near future, the Company expects to further discuss with
the Department MICs financial condition and the capital initiatives it is pursuing. To date, the Department has neither limited MICs ability to transact new insurance business nor provided us with a timetable of required action by MIC.
If the Department were to determine that MICs financial condition warranted regulatory action, it could, among other actions, issue an administrative order requiring MIC to suspend writing new business in all states. In the event MIC either
does not obtain significant capital or capital relief or does not demonstrate to the Department significant progress in connection therewith, the Company believes it is likely that the Department will require MIC to cease writing new business.
Arizona law provides for the mandatory suspension of an insurers license if the insurers statutory capital declines below $1.5 million.
The Department also has the authority, if it were to make a finding that MIC was in a hazardous financial condition, to issue a corrective order and place MIC under supervision.
Under supervision, MIC would likely be prohibited from writing new business and from engaging in transactions (including disposing of assets) out of the ordinary course of business unless it has the prior approval of the Director of the Department
or the Directors designated supervisor. The Department at any time could initiate state court receivership proceedings for the rehabilitation or liquidation of MIC. In a court-ordered receivership, the Director would be appointed receiver of
MIC and would have full and exclusive power of management and control of MIC. The Company cannot predict if, or under what circumstances or timing, the Department will take any of the above steps.
The indenture governing an aggregate of $685 million in principal amount of the Companys outstanding debt securities provides that
it will be an event of default with respect to those debt securities if, among other things, a court were to enter an order appointing a custodian, receiver, liquidator or similar official of MIC or a substantial part of its property and such order
were to continue unstayed and in effect for a period of 60 consecutive days, or if MIC were to consent to such an appointment. Accordingly, although an order by the Department requiring MIC to cease writing new business would not itself constitute
an event of default, if the Department were to seek and obtain a court order appointing a receiver of MIC, and such order were to remain in effect unstayed for 60 consecutive days, an event of default would occur with respect to these debt
securities. In addition, it is possible that other actions that the Department might take or to which MIC might consent involving the appointment of other officials with authority over MIC or its assets would also constitute such an event of
default. If such an event of default were to occur, these debt securities would become immediately due and payable. The Company does not have access to sufficient funds or other sources of liquidity sufficient to enable it to repay such debt
securities if they were to become due and payable.
NOTE 10. RESTRICTED INVESTMENTS, CASH AND CASH EQUIVALENTS
Effective June 2008, PMI Guaranty, FGIC and Assured Guaranty Re Ltd (AG Re) executed an agreement pursuant
to which all of the direct FGIC business reinsured by PMI Guaranty was recaptured by FGIC and ceded by FGIC to AG Re. Pursuant to the Agreement, with respect to two of the exposures ceded to AG Re, PMI Guaranty agreed to reimburse AG Re for any
losses it pays, subject to an aggregate limit of $22.9 million. PMI Guaranty secured its obligation by depositing $22.9 million into a trust account for the benefit of AG Re and, to the extent AG Res obligations are less than $22.9
million, the remaining funds will be returned to the Company. As of June 30, 2011, $20.5 million remains on deposit in the trust account and is included in cash and cash equivalents with a corresponding liability in losses and LAE reserves in
the Companys U.S. Mortgage Insurance Operations segment.
28
In the second quarter of 2011, PMI Europe executed agreements to terminate all CDS and
reinsurance transactions that contained collateral support provisions. As of June 30, 2011, PMI Europe had posted collateral of $5.0 million on CDS transactions accounted for as derivatives and $9.1 million related to insurance and certain U.S.
sub-prime related reinsurance transactions. The collateral of $14.1 million is included in investments and cash and cash equivalents in the Companys International Operations segment as of June 30, 2011.
NOTE 11. COMPREHENSIVE LOSS
The following table shows the components of comprehensive loss for the three and six months ended June 30, 2011
and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Net loss
|
|
$
|
(134,766
|
)
|
|
$
|
(150,560
|
)
|
|
$
|
(261,590
|
)
|
|
$
|
(307,547
|
)
|
Unrealized gains (losses) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in unrealized gains (losses) arising during the period, net of tax expense
|
|
|
33,145
|
|
|
|
14,767
|
|
|
|
24,382
|
|
|
|
28,613
|
|
Less: realized investment gains (losses), net of tax expense
|
|
|
654
|
|
|
|
(181
|
)
|
|
|
594
|
|
|
|
4,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains arising during the period, net of tax (benefit) expense of $(899), $5,270, $(426) and $7,844,
respectively
|
|
|
32,491
|
|
|
|
14,948
|
|
|
|
23,788
|
|
|
|
23,752
|
|
Accretion of cash flow hedges, net of tax expense of $0, $54, $0 and $107, respectively
|
|
|
153
|
|
|
|
100
|
|
|
|
306
|
|
|
|
199
|
|
Change in unrealized gains (losses) on foreign currency translation, net of tax expense of $0, $3,958, $0 and $7,485,
respectively
|
|
|
3,798
|
|
|
|
(7,512
|
)
|
|
|
10,933
|
|
|
|
(10,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
36,442
|
|
|
|
7,536
|
|
|
|
35,027
|
|
|
|
13,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(98,324
|
)
|
|
$
|
(143,024
|
)
|
|
$
|
(226,563
|
)
|
|
$
|
(293,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in unrealized gains in the second quarter and first half of 2011 was primarily due to the fall
in yields across the yield curve and the improvement in the market values of the municipal bonds. The change in unrealized gains/losses in the second quarter and first half of 2010 was primarily due to improved valuation of the municipal, government
and corporate bond portfolios partially offset by deterioration in the valuation of the preferred and common stock securities. The improvement in foreign currency translation adjustment in the second quarter and first half of 2011 was primarily due
to the strengthening of the Euro and Canadian dollar relative to the U.S. dollar. Conversely, the deterioration in foreign currency translation adjustment in the second quarter and first half of 2010 was driven by the weakening of the Euro relative
to the U.S. dollar, offset in part by the strengthening of the Canadian dollar relative to the U.S. dollar.
29
The following table shows the accumulated balances for each component of AOCI net of tax
for the six months ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains
(losses) on investments
|
|
|
Defined benefit
plans
|
|
|
Accretion of cash
flow hedges
|
|
|
Foreign currency
translation gains
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balance, December 31, 2009
|
|
|
28,444
|
|
|
|
(8,557
|
)
|
|
|
(4,554
|
)
|
|
|
50,075
|
|
|
|
65,408
|
|
Current period change
|
|
|
23,752
|
|
|
|
|
|
|
|
199
|
|
|
|
(10,079
|
)
|
|
|
13,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2010
|
|
$
|
52,196
|
|
|
$
|
(8,557
|
)
|
|
$
|
(4,355
|
)
|
|
$
|
39,996
|
|
|
$
|
79,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
(28,852
|
)
|
|
|
(11,668
|
)
|
|
|
(4,103
|
)
|
|
|
51,109
|
|
|
|
6,486
|
|
Current period change
|
|
|
23,788
|
|
|
|
|
|
|
|
306
|
|
|
|
10,933
|
|
|
|
35,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2011
|
|
$
|
(5,064
|
)
|
|
$
|
(11,668
|
)
|
|
$
|
(3,797
|
)
|
|
$
|
62,042
|
|
|
$
|
41,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 12. BENEFIT PLANS
The following table provides the components of net periodic benefit cost for the pension and other post-retirement
benefit plans for the three and six months ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Pension benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,473
|
|
|
$
|
1,485
|
|
|
$
|
2,708
|
|
|
$
|
2,985
|
|
Interest cost
|
|
|
1,138
|
|
|
|
1,141
|
|
|
|
2,157
|
|
|
|
2,295
|
|
Expected return on plan assets
|
|
|
(863
|
)
|
|
|
(894
|
)
|
|
|
(1,684
|
)
|
|
|
(1,798
|
)
|
Amortization of prior service cost
|
|
|
(288
|
)
|
|
|
(293
|
)
|
|
|
(551
|
)
|
|
|
(588
|
)
|
Recognized net actuarial loss
|
|
|
546
|
|
|
|
336
|
|
|
|
875
|
|
|
|
676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
2,006
|
|
|
$
|
1,775
|
|
|
$
|
3,505
|
|
|
$
|
3,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Other post-retirement benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
150
|
|
|
$
|
107
|
|
|
$
|
272
|
|
|
$
|
214
|
|
Interest cost
|
|
|
277
|
|
|
|
261
|
|
|
|
518
|
|
|
|
522
|
|
Amortization of prior service cost
|
|
|
(190
|
)
|
|
|
(155
|
)
|
|
|
(385
|
)
|
|
|
(309
|
)
|
Recognized net actuarial loss
|
|
|
225
|
|
|
|
117
|
|
|
|
357
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic post-retirement benefit cost
|
|
$
|
462
|
|
|
$
|
330
|
|
|
$
|
762
|
|
|
$
|
660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company contributed $6.0 million and $6.2 million to the Retirement Plan in 2011 and 2010, respectively. The Company
generally makes contributions that are sufficient to fully fund its actuarially determined costs.
30
NOTE 13. INCOME TAXES
The components of the deferred income tax assets and liabilities as of June 30, 2011 and December 31, 2010
are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2011
|
|
|
December 31,
2010
|
|
|
|
(Dollars in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
AMT and other credits
|
|
$
|
195,277
|
|
|
$
|
194,974
|
|
Discount on loss reserves
|
|
|
35,901
|
|
|
|
34,342
|
|
Unearned premium reserves
|
|
|
4,480
|
|
|
|
4,090
|
|
Abnormal capital loss
|
|
|
245,511
|
|
|
|
245,511
|
|
Pension costs and deferred compensation
|
|
|
20,562
|
|
|
|
21,766
|
|
Net operating losses
|
|
|
418,276
|
|
|
|
244,269
|
|
Basis difference in foreign subsidiaries
|
|
|
37,741
|
|
|
|
28,272
|
|
Other assets
|
|
|
9,960
|
|
|
|
18,880
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
967,708
|
|
|
|
792,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
17,345
|
|
|
|
16,230
|
|
Unrealized net gains on investments
|
|
|
9,628
|
|
|
|
9,952
|
|
Convertible debt discount
|
|
|
32,940
|
|
|
|
34,072
|
|
Unrealized net gains on debt
|
|
|
77,760
|
|
|
|
35,113
|
|
Software development costs
|
|
|
875
|
|
|
|
2,638
|
|
Equity in earnings from unconsolidated subsidiaries
|
|
|
20,115
|
|
|
|
21,094
|
|
Gain on sale of discontinued operations
|
|
|
72,299
|
|
|
|
|
|
Other liabilities
|
|
|
3,028
|
|
|
|
2,819
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
233,990
|
|
|
|
121,918
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
733,718
|
|
|
|
670,186
|
|
Valuation allowance
|
|
|
(688,914
|
)
|
|
|
(527,287
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
44,804
|
|
|
$
|
142,899
|
|
|
|
|
|
|
|
|
|
|
The Company evaluates the need for a valuation allowance quarterly taking into consideration all
available evidence, both positive and negative, including future sources of income, tax planning strategies, future contractual cash flows and reversing temporary differences. The Company previously realized benefits from the use of tax and loss
bonds which, when redeemed, resulted in taxable income that offset the Companys operating losses. The Company redeemed its remaining tax and loss bonds in the first quarter of 2010 and there were no remaining benefits that the Company could
consider when it evaluated its deferred tax valuation allowance. As of June 30, 2011, the tax valuation allowance was $688.9 million against a $733.7 million net deferred tax asset. (See Note 2,
Summary of Significant Accounting
Policies
, for further discussion.)
The deferred tax asset of $245.5 million labeled abnormal capital loss
above represents the sale of capital assets which include FGIC and preferred stocks during a time where they would qualify as an abnormal loss under Internal Revenue Code § 832(c)(5) previously recorded as unrealized
losses. Capital losses qualifying under this section of the Internal Revenue Code are allowed to offset ordinary income to the extent they exceed capital gains and can be carried back three years and forward five years. Accordingly, when the tax
returns are filed for 2010, the abnormal losses will be carried back to 2008 where significant taxable income was generated due to the sale of our Australia and Asia subsidiaries, as well as the redemption of tax and loss bonds. While the carryback
of abnormal losses will not generate any tax refund on a consolidated level, certain credits that were used to offset the 2008 taxes will be released and available to offset future taxable income. Most of these credits are foreign tax credits which
will expire in 2018 if not utilized before that time.
As discussed in Note 17,
Discontinued Operations
, the total cash
proceeds from the contingent note which MIC received in connection with the sale of PMI Australia (the QBE Note) of approximately $208 million are due to TPG on September 30, 2011. As this gain is deferred for income tax reporting
purposes, a deferred tax liability of $72.3 million was established that represents a significant portion of the $81.0 million tax expense reflected in discontinued operations. The remaining tax expense in discontinued operations is related to
the $25.0 million profit-sharing arrangement tied to the performance of the PMI Australia insurance portfolio.
31
In accordance with Topic 740, the Company has recorded a contingent liability of $4.0
million and $2.3 million as of June 30, 2011 and December 31, 2010, respectively, which, if recognized, would affect the Companys future effective tax rate. When incurred, the Company recognizes interest and penalties related to
unrecognized tax benefits in tax expense. The Company accrued net interest and penalties of $0.8 million in the first half of 2011. As of June 30, 2011, there were no additional positions for which management believes it is reasonably possible
that the total amounts of tax contingencies will significantly increase or decrease within 12 months of the reporting date.
The Company remains subject to examination in the following major tax jurisdictions:
|
|
|
Jurisdiction
|
|
Years Affected
|
United States
|
|
From 2007 to present
|
California
|
|
From 2006 to present
|
Ireland
|
|
From 2007 to present
|
Canada
|
|
From 2007 to present
|
In 2007, the IRS closed its audit for taxable years 2001 through 2003 and the statute of limitations
lapsed for 2006 in 2010. The Company is currently under an IRS audit for the 2008 tax year and a Canadian Revenue Agency audit for the 2007 and 2008 tax years.
PMI has historically provided for U.S. federal income tax on the undistributed earnings from its foreign subsidiaries, except to the extent such earnings are reinvested indefinitely. During 2009, the
Company determined that earnings from foreign subsidiaries, principally PMI Europe, were no longer deemed permanently reinvested. As such, related income tax amounts have subsequently been recorded as components in the consolidated
statement of operations and AOCI.
The Company has domestic net operating loss carryforwards of approximately $1.1 billion
that will expire in 2030, if not utilized. The Company has foreign net operating loss carryforwards of approximately $67.9 million primarily related to the PMI Europe and Canada operations that will expire in 2012-2027.
The Company has tax credit carryforwards of approximately $195.3 million, primarily related to the payment of alternative minimum tax of
$106.3 million, foreign taxes of $61.1 million, and general business credits of $27.9 million. The alternative minimum tax credits do not expire and the foreign tax credits will expire if not utilized by 2018.
32
NOTE 14. REINSURANCE
The following table shows the effects of reinsurance on premiums written, premiums earned and losses and LAE of the
Companys operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Premiums written
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct, net of refunds
|
|
$
|
149,405
|
|
|
$
|
173,576
|
|
|
$
|
301,293
|
|
|
$
|
359,057
|
|
Assumed
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
|
|
8
|
|
Ceded
|
|
|
(24,623
|
)
|
|
|
(31,859
|
)
|
|
|
(51,539
|
)
|
|
|
(65,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
124,784
|
|
|
$
|
141,721
|
|
|
$
|
249,758
|
|
|
$
|
293,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct, net of refunds
|
|
$
|
150,376
|
|
|
$
|
179,142
|
|
|
$
|
297,765
|
|
|
$
|
366,358
|
|
Assumed
|
|
|
64
|
|
|
|
292
|
|
|
|
45
|
|
|
|
245
|
|
Ceded
|
|
|
(24,837
|
)
|
|
|
(32,352
|
)
|
|
|
(51,901
|
)
|
|
|
(66,491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
125,603
|
|
|
$
|
147,082
|
|
|
$
|
245,909
|
|
|
$
|
300,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
474,052
|
|
|
$
|
364,129
|
|
|
$
|
751,299
|
|
|
$
|
732,762
|
|
Assumed
|
|
|
156
|
|
|
|
107
|
|
|
|
197
|
|
|
|
117
|
|
Ceded
|
|
|
(33,022
|
)
|
|
|
(46,316
|
)
|
|
|
(69,200
|
)
|
|
|
(72,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE
|
|
$
|
441,186
|
|
|
$
|
317,920
|
|
|
$
|
682,296
|
|
|
$
|
660,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of the Companys existing reinsurance contracts are captive reinsurance agreements in
the U.S. Mortgage Insurance Operations. Under captive reinsurance agreements, a portion of the risk insured by PMI is reinsured with the mortgage originator or investor through a reinsurer that is affiliated with the mortgage originator or investor.
Ceded premiums for U.S. captive reinsurance accounted for 100.0% of total ceded premiums written in the first six months of 2011 and 2010. The Company recorded $392.0 million in reinsurance recoverables primarily from captive arrangements related to
PMIs gross loss reserves as of June 30, 2011, compared to $459.7 million as of December 31, 2010. These amounts have been reduced by a valuation allowance on reinsurance recoverables of $62.1 million and $75.1 million, to the extent
applicable, if they are in excess of captive trust account balances as of June 30, 2011 and December 31, 2010, respectively. The decrease in reinsurance recoverables from year end 2010 is due primarily to receipt of cash from captive trust
accounts related to the captives share of claims paid. As of June 30, 2011 and December 31, 2010, the total assets in captive trust accounts, including those for which a valuation allowance was established as the recoverables exceed
trust account balances, held for the benefit of PMI totaled approximately $634.7 million and $724.3 million, before quarterly net settlements, respectively.
NOTE 15. DEBT AND REVOLVING CREDIT FACILITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
December 31,
2010
|
|
|
|
Principal Amount
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Carrying Value
|
|
|
|
(Dollars in thousands)
|
|
6.000% Senior Notes, due September 15, 2016
(1)
|
|
$
|
250,000
|
|
|
$
|
149,845
|
|
|
$
|
149,845
|
|
|
$
|
215,158
|
|
6.625% Senior Notes, due September 15, 2036
(1)
|
|
|
150,000
|
|
|
|
80,057
|
|
|
|
80,057
|
|
|
|
112,023
|
|
Revolving Credit Facility, due October 24, 2011
|
|
|
49,750
|
|
|
|
49,750
|
|
|
|
49,750
|
|
|
|
49,750
|
|
8.309% Junior Subordinated Debentures, due February 1, 2027
|
|
|
51,593
|
|
|
|
18,831
|
|
|
|
51,593
|
|
|
|
51,593
|
|
4.50% Convertible Notes due April 15, 2020
|
|
|
285,000
|
|
|
|
146,275
|
|
|
|
190,883
|
|
|
|
187,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
786,343
|
|
|
$
|
444,758
|
|
|
$
|
522,128
|
|
|
$
|
616,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The fair value and carrying value of the Companys 6.000% Senior Notes and 6.625% Senior Notes include accrued interest.
|
33
The Company amended its revolving credit facility (the credit facility or
facility) effective May 29, 2009 following the satisfaction of certain conditions precedent agreed upon between the Company and the lenders under the facility on May 8, 2009. In connection with the Amended Agreement, MIC and
The PMI Group entered into a Note Purchase Agreement pursuant to which The PMI Group purchased the QBE Note from MIC. Upon the completion of the sale of the QBE Note to The PMI Group from MIC, The PMI Group granted a security interest in the QBE
Note in favor of the Administrative Agent, for the benefit of the lenders under the Amended Agreement.
In the second quarter
of 2010, The PMI Group used $75 million of the net proceeds from the concurrent common stock and Convertible Notes offerings to pay down the credit facility from $124.8 million to $49.8 million; the total maximum amount of the lenders
commitments is $50 million. In April 2010, in connection with the offerings, the Company amended its credit facility. As part of the amendment, the net worth requirement was removed as a financial covenant. The credit facility places certain
limitations on the Companys ability to pay dividends on its common stock, including a per year cap of $0.01 per share, subject to an annual aggregate limit of $5 million, and a prohibition from declaring any dividend at any time MIC is
prohibited from writing new mortgage insurance by any state in the U.S.
The Company received proceeds of $278.9 million after
the deduction of offering expenses of $6.1 million upon issuance of the 4.50% Convertible Notes due 2020. As the Convertible Notes are debt with a conversion option, the Company bifurcated the net proceeds between the liability and equity
components. A fair value was calculated for the debt component and the equity component is recorded net of that value. At June 30, 2011, the following summarizes the liability and equity components of the Convertible Notes:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Liability components:
|
|
|
|
|
|
|
|
|
4.50% Convertible Notes due 2020
|
|
$
|
285,000
|
|
|
$
|
285,000
|
|
Convertible Notes discount
|
|
|
(101,478
|
)
|
|
|
(101,478
|
)
|
Convertible Notes amortized discount
|
|
|
7,362
|
|
|
|
4,112
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes, net of discount
|
|
$
|
190,884
|
|
|
|
187,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity components:
|
|
|
|
|
|
|
|
|
Additional Paid in Capital:
|
|
|
|
|
|
|
|
|
Embedded conversion option
|
|
$
|
101,478
|
|
|
|
101,478
|
|
Less: Embedded conversion option tax effect
|
|
|
(35,517
|
)
|
|
|
(35,517
|
)
|
Less: Issuance Costs
|
|
|
(3,121
|
)
|
|
|
(3,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,840
|
|
|
$
|
62,840
|
|
|
|
|
|
|
|
|
|
|
The Company has allocated the Convertible Notes offering costs to liability and equity components in
proportion to the allocation of proceeds and accounted for them as debt issuance costs and equity issuance costs, respectively. At June 30, 2011, remaining unamortized debt issuance costs included in other assets were $5.4 million and are being
amortized to interest expense over the term of the Convertible Notes. At June 30, 2011 the remaining amortization period for the unamortized Convertible Notes discount and debt issuance costs was 8.8 years.
The components of interest expense resulting from the Convertible Notes for the three and six months ended June 30, 2011 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, 2011
|
|
|
Six months ended
June 30, 2011
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Contractual coupon interest
|
|
$
|
3,206
|
|
|
$
|
6,412
|
|
Amortization of Convertible Notes debt discount
|
|
|
1,659
|
|
|
|
3,250
|
|
Amortization of debt issuance costs
|
|
|
153
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
Interest expense on Convertible Notes
|
|
$
|
5,018
|
|
|
$
|
9,968
|
|
|
|
|
|
|
|
|
|
|
34
For the period ended June 30, 2011, the amortization of the Convertible Notes debt
discount and debt issuance costs are based on an effective interest rate of 10.3%.
Holders may convert their Convertible
Notes prior to January 15, 2020, only in specified circumstances, and holders may convert their Notes at any time thereafter until the second business day preceding maturity. The Convertible Notes will be convertible at an initial conversion
rate of 127.5307 shares of common stock per $1,000 principal amount of Convertible Notes, which represents an initial conversion price of approximately $7.84 per share. Upon conversion, the Company may deliver cash, shares of common stock or a
combination thereof, at its option. The Convertible Notes If-Converted value did not exceed the principal amount of $285 million at June 30, 2011.
On or after January 15, 2020 until the close of business on the second business day immediately preceding the maturity date, holders may convert their Convertible Notes, in multiples of $1,000
principal amount, at the option of the holder.
The Company may redeem the Notes in whole or in part on or after
April 15, 2015, if the last reported sale price of common stock exceeds 130% of the conversion price then in effect for 20 or more trading days in a period of 30 consecutive trading days ending on the trading day immediately prior to the date
of redemption notice. The redemption price will be equal to the principal amount of the Convertible Notes to be redeemed plus accrued but unpaid interest plus a specified make whole premium.
NOTE 16. BUSINESS SEGMENTS
Reporting segments are based upon the Companys internal organizational structure, the manner in which the
Companys operations are managed, the criteria used by the Companys management to evaluate segment performance, the availability of separate financial information and overall materiality considerations.
35
The following tables present segment income or loss and balance sheets as of and for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2011
|
|
|
|
U.S. Mortgage
Insurance
Operations
|
|
|
International
Operations
|
|
|
Corporate and
Other
|
|
|
Consolidated Total
|
|
|
|
(Dollars in thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
125,516
|
|
|
$
|
87
|
|
|
$
|
|
|
|
$
|
125,603
|
|
Net investment income
|
|
|
15,995
|
|
|
|
727
|
|
|
|
115
|
|
|
|
16,837
|
|
Equity in losses from unconsolidated subsidiaries
|
|
|
(1,343
|
)
|
|
|
|
|
|
|
(90
|
)
|
|
|
(1,433
|
)
|
Net realized investment gains (losses)
|
|
|
1,051
|
|
|
|
(856
|
)
|
|
|
(1
|
)
|
|
|
194
|
|
Change in fair value of certain debt instruments
|
|
|
|
|
|
|
|
|
|
|
75,625
|
|
|
|
75,625
|
|
Other income (losses)
|
|
|
1,782
|
|
|
|
827
|
|
|
|
(1
|
)
|
|
|
2,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
143,001
|
|
|
|
785
|
|
|
|
75,648
|
|
|
|
219,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
429,635
|
|
|
|
11,551
|
|
|
|
|
|
|
|
441,186
|
|
Amortization of deferred policy acquisition costs
|
|
|
4,467
|
|
|
|
|
|
|
|
|
|
|
|
4,467
|
|
Other underwriting and operating expenses
|
|
|
23,785
|
|
|
|
1,018
|
|
|
|
1,036
|
|
|
|
25,839
|
|
Interest expense
|
|
|
3,213
|
|
|
|
|
|
|
|
10,364
|
|
|
|
13,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
461,100
|
|
|
|
12,569
|
|
|
|
11,400
|
|
|
|
485,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(318,099
|
)
|
|
|
(11,784
|
)
|
|
|
64,248
|
|
|
|
(265,635
|
)
|
Income tax expense (benefit) from continuing operations
|
|
|
20,272
|
|
|
|
262
|
|
|
|
(883
|
)
|
|
|
19,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(338,371
|
)
|
|
|
(12,046
|
)
|
|
|
65,131
|
|
|
|
(285,286
|
)
|
Gain on sale of discontinued operations, net of taxes of $81,049
|
|
|
|
|
|
|
150,520
|
|
|
|
|
|
|
|
150,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(338,371
|
)
|
|
$
|
138,474
|
|
|
$
|
65,131
|
|
|
$
|
(134,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010
|
|
|
|
U.S. Mortgage
Insurance
Operations
|
|
|
International
Operations
|
|
|
Corporate and
Other
|
|
|
Consolidated Total
|
|
|
|
(Dollars in thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
145,847
|
|
|
$
|
1,235
|
|
|
$
|
|
|
|
$
|
147,082
|
|
Net investment income
|
|
|
21,330
|
|
|
|
2,400
|
|
|
|
131
|
|
|
|
23,861
|
|
Equity in losses from unconsolidated subsidiaries
|
|
|
(3,856
|
)
|
|
|
|
|
|
|
(61
|
)
|
|
|
(3,917
|
)
|
Net realized investment (losses) gains
|
|
|
(1
|
)
|
|
|
122
|
|
|
|
276
|
|
|
|
397
|
|
Change in fair value of certain debt instruments
|
|
|
|
|
|
|
|
|
|
|
(47,687
|
)
|
|
|
(47,687
|
)
|
Other income
|
|
|
2,226
|
|
|
|
459
|
|
|
|
|
|
|
|
2,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues (expenses)
|
|
|
165,546
|
|
|
|
4,216
|
|
|
|
(47,341
|
)
|
|
|
122,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
318,551
|
|
|
|
(631
|
)
|
|
|
|
|
|
|
317,920
|
|
Amortization of deferred policy acquisition costs
|
|
|
4,163
|
|
|
|
|
|
|
|
|
|
|
|
4,163
|
|
Other underwriting and operating expenses
|
|
|
25,487
|
|
|
|
1,269
|
|
|
|
1,276
|
|
|
|
28,032
|
|
Interest expense
|
|
|
2,175
|
|
|
|
|
|
|
|
10,072
|
|
|
|
12,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
350,376
|
|
|
|
638
|
|
|
|
11,348
|
|
|
|
362,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(184,830
|
)
|
|
|
3,578
|
|
|
|
(58,689
|
)
|
|
|
(239,941
|
)
|
Income tax benefit
|
|
|
(69,195
|
)
|
|
|
(1,045
|
)
|
|
|
(19,141
|
)
|
|
|
(89,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(115,635
|
)
|
|
$
|
4,623
|
|
|
$
|
(39,548
|
)
|
|
$
|
(150,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2011
|
|
|
|
U.S. Mortgage
Insurance
Operations
|
|
|
International
Operations
|
|
|
Corporate and
Other
|
|
|
Consolidated Total
|
|
|
|
(Dollars in thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
244,560
|
|
|
$
|
1,349
|
|
|
$
|
|
|
|
$
|
245,909
|
|
Net investment income
|
|
|
32,055
|
|
|
|
1,257
|
|
|
|
247
|
|
|
|
33,559
|
|
Equity in (losses) earnings from unconsolidated subsidiaries
|
|
|
(2,795
|
)
|
|
|
|
|
|
|
63
|
|
|
|
(2,732
|
)
|
Net realized investment gains (losses)
|
|
|
977
|
|
|
|
(863
|
)
|
|
|
(1
|
)
|
|
|
113
|
|
Change in fair value of certain debt instruments
|
|
|
|
|
|
|
|
|
|
|
97,281
|
|
|
|
97,281
|
|
Other income (losses)
|
|
|
3,699
|
|
|
|
1,614
|
|
|
|
(1
|
)
|
|
|
5,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
278,496
|
|
|
|
3,357
|
|
|
|
97,589
|
|
|
|
379,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
668,629
|
|
|
|
13,667
|
|
|
|
|
|
|
|
682,296
|
|
Amortization of deferred policy acquisition costs
|
|
|
8,623
|
|
|
|
|
|
|
|
|
|
|
|
8,623
|
|
Other underwriting and operating expenses
|
|
|
48,817
|
|
|
|
2,448
|
|
|
|
2,253
|
|
|
|
53,518
|
|
Interest expense
|
|
|
6,436
|
|
|
|
|
|
|
|
20,652
|
|
|
|
27,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
732,505
|
|
|
|
16,115
|
|
|
|
22,905
|
|
|
|
771,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(454,009
|
)
|
|
|
(12,758
|
)
|
|
|
74,684
|
|
|
|
(392,083
|
)
|
Income tax expense (benefit) from continuing operations
|
|
|
20,648
|
|
|
|
262
|
|
|
|
(883
|
)
|
|
|
20,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(474,657
|
)
|
|
|
(13,020
|
)
|
|
|
75,567
|
|
|
|
(412,110
|
)
|
Gain on sale of discontinued operations, net of taxes of $81,049
|
|
|
|
|
|
|
150,520
|
|
|
|
|
|
|
|
150,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(474,657
|
)
|
|
$
|
137,500
|
|
|
$
|
75,567
|
|
|
$
|
(261,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010
|
|
|
|
U.S. Mortgage
Insurance
Operations
|
|
|
International
Operations
|
|
|
Corporate and
Other
|
|
|
Consolidated Total
|
|
|
|
(Dollars in thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
297,475
|
|
|
$
|
2,637
|
|
|
$
|
|
|
|
$
|
300,112
|
|
Net investment income
|
|
|
46,363
|
|
|
|
3,925
|
|
|
|
261
|
|
|
|
50,549
|
|
Equity in losses from unconsolidated subsidiaries
|
|
|
(8,145
|
)
|
|
|
|
|
|
|
(182
|
)
|
|
|
(8,327
|
)
|
Net realized investment gains
|
|
|
7,169
|
|
|
|
385
|
|
|
|
276
|
|
|
|
7,830
|
|
Change in fair value of certain debt instruments
|
|
|
|
|
|
|
|
|
|
|
(88,500
|
)
|
|
|
(88,500
|
)
|
Other income
|
|
|
2,225
|
|
|
|
2,183
|
|
|
|
|
|
|
|
4,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues (expenses)
|
|
|
345,087
|
|
|
|
9,130
|
|
|
|
(88,145
|
)
|
|
|
266,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
660,088
|
|
|
|
121
|
|
|
|
|
|
|
|
660,209
|
|
Amortization of deferred policy acquisition costs
|
|
|
8,039
|
|
|
|
|
|
|
|
|
|
|
|
8,039
|
|
Other underwriting and operating expenses
|
|
|
55,577
|
|
|
|
3,069
|
|
|
|
3,346
|
|
|
|
61,992
|
|
Interest expense
|
|
|
2,249
|
|
|
|
|
|
|
|
19,521
|
|
|
|
21,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
725,953
|
|
|
|
3,190
|
|
|
|
22,867
|
|
|
|
752,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(380,866
|
)
|
|
|
5,940
|
|
|
|
(111,012
|
)
|
|
|
(485,938
|
)
|
Income tax (benefit) expense
|
|
|
(143,448
|
)
|
|
|
1,300
|
|
|
|
(36,243
|
)
|
|
|
(178,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(237,418
|
)
|
|
$
|
4,640
|
|
|
$
|
(74,769
|
)
|
|
$
|
(307,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
|
U.S. Mortgage
Insurance Operations
|
|
|
International
Operations
|
|
|
Corporate and
Other
|
|
|
Consolidated Total
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments, at fair value
|
|
$
|
2,703,008
|
|
|
$
|
126,633
|
|
|
$
|
72,800
|
|
|
$
|
2,902,441
|
|
Investments in unconsolidated subsidiaries
|
|
|
106,037
|
|
|
|
|
|
|
|
13,816
|
|
|
|
119,853
|
|
Reinsurance recoverables
|
|
|
391,974
|
|
|
|
|
|
|
|
|
|
|
|
391,974
|
|
Deferred policy acquisition costs
|
|
|
49,557
|
|
|
|
|
|
|
|
|
|
|
|
49,557
|
|
Property, equipment and software, net of accumulated depreciation and amortization
|
|
|
20,778
|
|
|
|
|
|
|
|
60,590
|
|
|
|
81,368
|
|
Deferred tax assets
|
|
|
44,804
|
|
|
|
|
|
|
|
|
|
|
|
44,804
|
|
Note receivable
|
|
|
|
|
|
|
|
|
|
|
206,569
|
|
|
|
206,569
|
|
Other assets (liabilities)
|
|
|
242,342
|
|
|
|
1,485
|
|
|
|
(25,923
|
)
|
|
|
217,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,558,500
|
|
|
$
|
128,118
|
|
|
$
|
327,852
|
|
|
$
|
4,014,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss adjustment expenses
|
|
$
|
2,960,472
|
|
|
$
|
34,323
|
|
|
$
|
|
|
|
$
|
2,994,795
|
|
Reserve for premium refunds
|
|
|
110,785
|
|
|
|
|
|
|
|
|
|
|
|
110,785
|
|
Unearned premiums
|
|
|
65,464
|
|
|
|
2,649
|
|
|
|
|
|
|
|
68,113
|
|
Debt
|
|
|
285,000
|
|
|
|
|
|
|
|
237,128
|
|
|
|
522,128
|
|
Other liabilities
|
|
|
124,158
|
|
|
|
1,129
|
|
|
|
2,855
|
|
|
|
128,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,545,879
|
|
|
|
38,101
|
|
|
|
239,983
|
|
|
|
3,823,963
|
|
Shareholders equity
|
|
|
12,621
|
|
|
|
90,017
|
|
|
|
87,869
|
|
|
|
190,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,558,500
|
|
|
$
|
128,118
|
|
|
$
|
327,852
|
|
|
$
|
4,014,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
U.S. Mortgage
Insurance Operations
|
|
|
International
Operations
|
|
|
Corporate and
Other
|
|
|
Consolidated Total
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments, at fair value
|
|
$
|
2,830,680
|
|
|
$
|
174,231
|
|
|
$
|
82,952
|
|
|
$
|
3,087,863
|
|
Investments in unconsolidated subsidiaries
|
|
|
106,470
|
|
|
|
|
|
|
|
14,570
|
|
|
|
121,040
|
|
Reinsurance recoverables
|
|
|
459,671
|
|
|
|
|
|
|
|
|
|
|
|
459,671
|
|
Deferred policy acquisition costs
|
|
|
46,372
|
|
|
|
|
|
|
|
|
|
|
|
46,372
|
|
Property, equipment and software, net of accumulated depreciation and amortization
|
|
|
22,769
|
|
|
|
|
|
|
|
62,417
|
|
|
|
85,186
|
|
Deferred tax assets
|
|
|
61,349
|
|
|
|
81,550
|
|
|
|
|
|
|
|
142,899
|
|
Other assets
|
|
|
263,019
|
|
|
|
6,895
|
|
|
|
6,042
|
|
|
|
275,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,790,330
|
|
|
$
|
262,676
|
|
|
$
|
165,981
|
|
|
$
|
4,218,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss adjustment expenses
|
|
$
|
2,846,580
|
|
|
$
|
23,185
|
|
|
$
|
|
|
|
$
|
2,869,765
|
|
Reserve for premium refunds
|
|
|
88,696
|
|
|
|
|
|
|
|
|
|
|
|
88,696
|
|
Unearned premiums
|
|
|
60,227
|
|
|
|
4,071
|
|
|
|
|
|
|
|
64,298
|
|
Debt
|
|
|
285,000
|
|
|
|
|
|
|
|
331,158
|
|
|
|
616,158
|
|
Other liabilities
|
|
|
154,099
|
|
|
|
6,920
|
|
|
|
3,781
|
|
|
|
164,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,434,602
|
|
|
|
34,176
|
|
|
|
334,939
|
|
|
|
3,803,717
|
|
Shareholders equity (deficit)
|
|
|
355,728
|
|
|
|
228,500
|
|
|
|
(168,958
|
)
|
|
|
415,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,790,330
|
|
|
$
|
262,676
|
|
|
$
|
165,981
|
|
|
$
|
4,218,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
NOTE 17. DISCONTINUED OPERATIONS
In connection with the sale of PMI Australia in 2008, MIC received a note (the QBE Note) in the principal
amount of $186.5 million. The interest bearing note matures on September 30, 2011. In May 2009, The PMI Group purchased the QBE Note from MIC. The actual amount owed under the QBE Note was subject to potential reduction based upon the
performance of PMI Australias policies in force at June 30, 2008.
On June 30 2011, QBE waived any right to
make deductions to the value of the QBE Note. The removal of the payment contingencies allowed the Company to recognize in the second quarter of 2011 $206.6 million (pre-tax), representing the notional amount of $186.5 million plus accrued interest
through June 30, 2011, as gain on sale of discontinued operations for the quarter ended June 30, 2011. The total cash proceeds from the QBE Note of approximately $208 million (pre-tax), representing the notional amount of $186.5
million plus accrued interest through September 30, 2011, are due to TPG on September 30, 2011.
Additionally, QBE made a
$25.0 million cash payment to MIC on June 30, 2011 related to a profit sharing arrangement tied to the performance of the PMI Australia insurance portfolio.
39
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
CAUTIONARY STATEMENT
Statements we make or incorporate by reference in this and other documents filed with the Securities and Exchange Commission that are not
historical facts, that are preceded by, followed by or include the words believes, expects, anticipates, estimates or similar expressions, or that relate to future plans, events or performance are
forward-looking statements within the meaning of the federal securities laws. Forward-looking statements in this report include discussions of future potential trends relating to state regulatory actions or requirements, losses, claims
paid, loss reserves, default inventories, claim rates, rescission and claim denial activity and the challenges thereto, customer response to our financial condition, persistency, premiums, new insurance written, refinance activity, the make-up of
our various insurance portfolios, utilization of our deferred tax assets, the impact of market and competitive conditions, unemployment, liquidity, capital requirements and initiatives, captive reinsurance agreements, fair value of debt instruments,
the performance of certain securities held in our investment portfolios, and potential litigation. When a forward-looking statement includes an underlying assumption, we caution that, while we believe the assumption to be reasonable and make it in
good faith, assumed facts almost always vary from actual results, and the difference between assumed facts and actual results can be material. Where, in any forward-looking statement, we express an expectation or belief as to future results, there
can be no assurance that the expectation or belief will result. Our actual results may differ materially from those expressed in our forward-looking statements. These uncertainties and other factors are described in more detail under the heading
Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010 and in Part II, Item 1A. of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 and in Part II, Item 1A.
herein.
Except as may be required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Financial Results for the Quarter and Six Months Ended June 30, 2011 and 2010
For the quarter and six months ended June 30, 2011, we recorded consolidated net losses of $134.8 million and $261.6 million,
respectively, compared to consolidated net losses of $150.6 million and $307.5 million for the corresponding periods in 2010. Our consolidated net losses in the second quarter and first half of 2011 included a $150.5 million gain on sale of
discontinued operations (net of tax) as a result of our recognition of the notional amount of the note issued to us in connection with the sale of our Australian mortgage insurance operations in 2008. Our consolidated net losses in the second
quarter and the first half of 2011 also included increases of $75.6 million and $97.3 million to revenues, respectively, as a result of decreases in the fair value of our corporate debt. Our consolidated net losses in the second quarter and the
first half of 2010 included decreases of $47.7 million and $88.5 million to revenues, respectively, as a result of increases in the fair value of our debt. Losses from continuing operations (which excluded the gain on sale but included the
changes in fair value of certain debt instruments) were $285.3 million and $412.1 million in the second quarter and first half of 2011 compared to $150.6 million and $307.5 million in the second quarter and first half of 2010.
Our results for the quarter and six months ended June 30, 2011 were driven by losses and loss adjustment expenses (LAE)
in our U.S. Mortgage Insurance Operations and, to a lesser degree, lower premiums earned. Losses and LAE increased from $318.6 million and $660.1 million in the second quarter and first half of 2010 to $429.6 million and $668.6 million in the second
quarter and first half of 2011. Premiums earned decreased from $145.8 million in the second quarter of 2010 to $125.5 million in the second quarter of 2011 and from $297.5 million in the first half of 2010 to $244.6 million in the first half of
2011.
Overview of Our Business
We provide residential mortgage insurance that protects mortgage lenders and investors from credit losses in the event of borrower default. We divide our business into the following segments:
|
|
|
U.S. Mortgage Insurance Operations
. The results of U.S. Mortgage Insurance Operations include PMI Mortgage Insurance Co. (MIC)
and its affiliated U.S. mortgage insurance and reinsurance companies (collectively, PMI), and equity in earnings (losses) from PMIs joint venture, CMG Mortgage Insurance Company and its affiliated companies (collectively, CMG
MI). Effective January 1, 2010, we include PMI Mortgage Assurance Co. (PMAC) in U.S. Mortgage Insurance Operations. U.S. Mortgage Insurance Operations recorded net losses
|
40
|
of $338.4 million and $474.7 million for the quarter and six months ended June 30, 2011, respectively, compared to $115.6 million and $237.4 million for the quarter and six months ended
June 30, 2010. U.S. Mortgage Insurance Operations recorded losses before income taxes of $318.1 million and $454.0 million for the quarter and six months ended June 30, 2011, respectively, compared to $184.8 million and $380.9 million for
the quarter and six months ended June 30, 2010.
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International Operations.
Our International Operations segment includes the results of our European and Canadian subsidiaries, PMI
Europe and PMI Canada, neither of which is writing new business and the gain on sale of PMI Australia. International Operations generated losses from continuing operations of $12.0 million and $13.0 million for the quarter and six
months ended June 30, 2011, respectively, compared to income from continuing operations of $4.6 million for the quarter and six months ended June 30, 2010. Our International Operations segment includes a gain on sale of discontinued
operations, net of taxes, of $150.5 million as a result of our recognition of the note issued to us in connection with the sale of our Australian mortgage insurance operations in 2008.
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Corporate and Other
. Our Corporate and Other segment consists of corporate debt and expenses of our holding company, contract underwriting
operations (which were discontinued in April 2009), our former investment in FGIC Corporation, and equity in earnings or losses from investments in certain limited partnerships. Our Corporate and Other segment generated net income of $65.1 million
and $75.6 million for the quarter and six months ended June 30, 2011, respectively, compared to net losses of $39.5 million and $74.8 million for the quarter and six months ended June 30, 2010.
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Conditions and Trends Affecting our Business
Losses in our U.S. Mortgage Insurance Operations in 2011 have increased from prior periods and have significantly exceeded our expectations. Losses in 2011 have been affected by a number of economic
factors, including weaker than expected job creation and U.S. home prices. In the second quarter of 2011, losses were driven by loss reserve increases relating to: (1) fewer claim denials (net of reinstatements), as a result of servicers
more frequent production of loan documents that we requested to process claims, and (2) higher claim rates, as a result of economic factors and lower than expected levels of modifications of loans in PMIs delinquent loan inventory.
Our U.S. Mortgage Insurance Operations will continue to incur significant losses. The ultimate amount of losses will
depend upon many factors, many of which are out of our control. Given the volatility of our results, there can be no assurance that our losses will decline in the second half of 2011. Losses have reduced, and will continue to reduce, PMIs
net assets. As a result:
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The Arizona Department of Insurance, MICs principal insurance regulator, could at any time require MIC to cease writing new business, take steps
that would substantially limit our control over MICs operations (including placing MIC under supervision or initiating receivership proceedings), and limit MICs ability to make payments to our holding company. One or more of these
actions, if taken by the Arizona Department, would have a material adverse effect on our financial condition and results of operations. See
MICs Capital Position and the Arizona Department of Insurance,
below.
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MIC is currently precluded from writing business in six states and we expect that number to significantly increase. MICs subsidiary, PMAC, is
currently writing new insurance business in those six states. Limitations on PMAC could render it unable to write business in the states in which MIC is precluded from writing business. See
State Regulatory Capital Requirements and PMAC,
below.
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Either or both of the GSEs could cease to treat MIC as an eligible mortgage insurer. See
GSE Eligibility,
below.
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Our customers could reduce or eliminate their allocations of business to us. See
New Insurance Written (NIW),
below.
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Our holding companys financial condition could be seriously harmed. See
Liquidity and Capital Resources -Sources and Uses of Funds,
below.
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41
We are exploring capital alternatives that, if successful, could provide capital or capital
relief to MIC or capital to other insurance subsidiaries so that they may replace MIC as our primary writer of new insurance. Such alternatives include the restructuring of MICs primary insurance portfolio, debt or equity offerings by our
insurance subsidiaries or TPG, and reinsurance. We may not be able to consummate any capital raising or capital relief transactions on favorable terms, in a timely manner or at all. See Item 1A.
Risk Factors We must procure
substantial capital to preserve our ability to continue to write new business and we may not be able to raise such capital on a timely basis and on favorable terms, or at all.
U.S. Mortgage Insurance Operations
. The financial performance of our U.S. Mortgage Insurance Operations segment is affected
by a number of factors, including:
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MICs Capital Position and the Arizona Department of Insurance (the Department).
As a result of continued losses, at
June 30, 2011, we estimate that: (1) MICs statutory capital (which is the sum of MICs policyholders surplus and contingency reserves) was $257.8 million, which was $320.3 million below the minimum set by Arizona law; and
(2) its risk-to-capital ratio was 58.1 to 1, above the regulatory maximum 25 to 1 set by various other states. Without significant additional capital or capital relief, MICs:
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statutory capital will continue to decline,
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risk-to-capital ratio will continue to increase, and
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policyholders surplus could become negative, and such event could occur as early as the second half of 2011.
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Arizona law provides for the mandatory suspension of an insurers license if the insurers policyholders surplus declines
below $1.5 million. In the event MIC either does not obtain significant capital or capital relief or does not demonstrate to the Department significant progress in connection therewith, we believe it is likely that the Department will require MIC to
cease writing new business and, in addition, could place MIC under supervision or initiate receivership proceedings, as described below.
We have advised the Department of MICs second quarter results and its non-compliance with its minimum policyholders position. In the near future, we expect to further discuss with the
Department MICs financial condition and the capital initiatives we are pursuing. To date, the Department has neither limited MICs ability to transact new business nor provided us with a timetable of required action by MIC. If the
Department were to determine that MICs financial condition warranted regulatory action, it could, among other actions, issue an administrative corrective order requiring MIC to suspend writing new business in all states. There can be no
assurance that the Department will not require MIC to cease writing new business.
The Department also has the authority, if it
were to make a finding that MIC was in a hazardous financial condition, to issue a corrective order and place MIC under supervision. Under supervision, MIC would likely be prohibited from writing new business and from
engaging in transactions (including disposing of assets) out of the ordinary course of business unless it has the prior approval of the Director of the Department or the Directors designated supervisor. Further, the Department at any time
could initiate state court receivership proceedings for the rehabilitation or liquidation of MIC. In a court-ordered receivership, the Director would be appointed receiver of MIC and would have full and exclusive power of management and control of
MIC. We cannot predict if, or under what circumstances or timing, the Department will take any of the above steps. One or more of these actions, if taken by the Arizona Department, would have a material adverse effect on our financial condition and
results of operations. See Item 1A.
Risk Factors Our primary mortgage insurance subsidiary, MIC, no longer complies with minimum regulatory capital requirements. MIC could be required to cease writing new business, placed under
regulatory supervision or ordered to enter into receivership.
In early 2011, the Department initiated a financial exam
and actuarial analysis of MIC for the years 2008 2010. That examination is ongoing.
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State Regulatory Capital Requirements and PMAC.
In sixteen states, if a mortgage insurer does not meet a required minimum policyholders
position (calculated in accordance with statutory formulae) or exceeds a
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42
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maximum permitted risk-to-capital ratio of 25 to 1, it may be prohibited from writing new business. In two of those states, mortgage insurers are required to cease writing new business
immediately if and so long as they fail to meet capital requirements. In the remaining fourteen states (including Arizona), regulators exercise discretion as to whether the mortgage insurer may continue writing new business. MIC is currently
precluded from writing new business in six states and is operating under regulatory waivers or discretion in ten states. Four of MICs waivers expire on December 31, 2011 or earlier. Each of the waivers issued to MIC may be withdrawn at
any time by the applicable insurance department. In light of our results for the second quarter of 2011, we expect that the number of states in which MIC is precluded from writing new business will significantly increase. It is not clear what
actions, if any, the insurance regulators in states that do not have capital adequacy requirements may take as a result of MIC failing to meet capital adequacy requirements established by one or more states.
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In the third quarter, we began writing new mortgage insurance through PMAC, a subsidiary of MIC, in six states in which MIC either did not
obtain, or exceeded the terms of, a waiver or other regulatory forbearance. Fannie Mae and Freddie Mac (collectively, the GSEs) approved the use of PMAC as a limited, direct issuer of mortgage guaranty insurance in certain states in
which MIC is unable to continue to write new business. The GSEs approvals of PMAC expire on December 31, 2011. While we have requested extensions, there can be no assurance that the GSEs will grant them or that the GSEs will not revoke
the PMAC approvals prior to December 31, 2011. We expect that the number of states in which we will seek to utilize PMAC for new business will significantly increase.
The GSEs approvals of PMAC are subject to restrictions. Fannie Maes approval is conditioned upon the requirements that: (1) the Department shall not have required MIC to cease transacting
new business; and (2) PMACs direct written premiums for a calendar quarter not exceed 20% of the combined direct written premiums of MIC and PMAC for such calendar quarter, unless Fannie Mae provides prior written consent, which it shall
not unreasonably withhold. If the Department requires MIC to cease transacting new business, under Fannie Maes approval, PMAC would no longer be an eligible mortgage insurer. If we are unable to satisfy any of the other GSE eligibility
requirements for PMAC, if the GSEs do not extend PMACs approvals, or if the GSEs revoke PMACs approvals, we would be unable to offer mortgage insurance through PMAC. If this were to occur, we would not be able to offer mortgage insurance
through our combined insurance subsidiaries in all fifty states. We have asked the GSEs to remove or amend these restrictions. There can be no assurance, however, that the restrictions will be removed or changed by either or both GSEs. Our inability
to write new mortgage insurance in one or more states could significantly harm our customer relationships, revenues and results of operations. See Item 1A.
Risk FactorsMIC is currently unable to write business in six states and we
expect this number to significantly increase. Our plan to write certain new mortgage insurance in a subsidiary of MIC may not be successful.
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GSE Eligibility.
In 2008, in order to maintain its eligibility with the GSEs, MIC was required to submit remediation plans to each of the GSEs.
To date, each of the GSEs continues to treat MIC as an eligible mortgage insurer. On May 25, 2011, we received a request from Freddie Mac to update MICs 2008 remediation plan. Among other things, Freddie Mac requested information
regarding MICs performance under the 2008 plan, capital enhancement initiatives, and financial projections. Freddie Mac also requested that MIC provide it with significant additional actuarial information under a variety of scenarios. On
July 1, 2011, we responded to Freddie Macs request to update MICs remediation plan and are currently in discussions with Freddie Mac regarding the timing of providing it with the requested actuarial information. There can be no
assurance that either or both of the GSEs will continue to be satisfied with MICs performance under its remediation plans or that MIC will continue to be treated by the GSEs as an eligible mortgage insurer. If MIC becomes ineligible to insure
loans purchased by one or both of the GSEs, our consolidated financial condition and results of operations would be significantly harmed. See Item 1A.
Risk Factors MICs inability to maintain its status with the GSEs as an
eligible provider of mortgage guaranty insurance would significantly harm our financial condition and results of operations.
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Losses and LAE
. PMIs losses and LAE includes net changes to loss reserves and expenses related to default, loss mitigation and claim
processing in the applicable period. Losses and LAE in a particular period reflects reserves with respect to new delinquencies received in the period and additional reserve amounts from any
re-
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43
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estimate of loss reserves associated with PMIs existing delinquent loan inventory. Of PMIs $429.6 million and $668.6 million losses and LAE in the second quarter and first half of
2011, respectively, approximately $187.0 million and $364.4 million were due to reserves on new (but, compared to the second quarter and first half of 2010, fewer) delinquencies, respectively. The remaining $242.6 million of losses and LAE in the
second quarter of 2011 were primarily caused by increases in our reserve estimates on previously reported defaults. These reserve estimate changes were driven by a significant decrease in expected future claim denials (net of reinstatements) and
actual reinstatements of past claim denials in the second quarter, and, to a lesser extent, from re-estimations of claim rates and claim sizes on PMIs reserves established at year-end 2010. For a discussion of our re-estimation of claim rates,
see
Claim Rates,
below
.
We decreased our expected future claim denials in the second quarter as a result of a significant increase in the frequency in 2011 with which servicers have produced documents for previously denied claims
compared to prior periods and the frequency previously estimated when we established our loss reserves. See
Claim Denials,
below.
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The process of estimating loss reserves is inherently uncertain and requires the forecast of complex factors, including future claim rates, future loan modification, rescission and claim denial activity,
and macroeconomic conditions. The losses and LAE PMI incurs in a period are subject to change in later periods as we review the estimations made in the prior period and determine that adjustments to our assumptions are appropriate. Changes in our
estimates significantly negatively impacted our losses in the first and second quarters of 2011. PMIs losses and LAE will be further negatively affected if notices of default, claim rates and/or claim sizes develop unfavorably compared to our
current estimates. Further worsening, or lack of improvement, in job creation, unemployment rates and home prices could continue to significantly impact our reserve estimates and, therefore, PMIs losses and LAE. For additional discussion of
our loss reserving process, see
Critical Accounting Estimates Reserves for Losses and LAE.
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Claim Rates.
A significant assumption within our loss reserving process is our estimate of the percentage of loans in PMIs delinquent loan
inventory that will result in a paid claim. Delinquent loans that do not result in a claim payment by PMI cure. Delinquent loans may cure as a result of, among other things, the borrower bringing the loan current, selling the home, or
refinancing or modifying the loan, or PMIs rescission of coverage with respect to the delinquent loan. In 2010, we increased PMIs claim rates primarily due to high levels of unemployment and declining home prices, diminished refinancing
opportunities, and the protracted implementation of modification programs such as the U.S. Treasury Home Affordable Modification Program (HAMP). Contrary to our expectations that economic conditions would improve and cures would
increase, continued weakness in the economy and real estate markets and low (or declining) levels of cures have caused us in 2011 to further increase claim rates associated with previously received delinquencies. Any future claim rate increases will
negatively affect our results of operations and financial condition. See
Critical Accounting Estimates Reserves for Losses and LAE.
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Loss Mitigation Activities
. We pursue retention and liquidation workout opportunities to mitigate loss on delinquent loans. Retention workouts
are often preceded by loans entering forbearance periods. Forbearance plans temporarily suspend all or part of a borrowers regularly scheduled payments for a specified time period. Forbearance plans include risk-in-force subject to HAMP and
non-HAMP trial modification periods. The following table shows risk-in-force that has been reported to us as being newly enrolled in forbearance plans as of each quarter end:
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Q2 2011
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Q1 2011
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Q4 2010
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Q3 2010
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Q2 2010
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Q1 2010
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Q4 2009
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Q3 2009
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Q2 2009
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(Dollars in millions)
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Risk-in-force subject to forbearance reported in the quarter
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$
|
143.0
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$
|
135.0
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|
$
|
148.1
|
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$
|
114.8
|
|
|
$
|
177.7
|
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|
$
|
513.4
|
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|
$
|
656.1
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|
|
$
|
646.0
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$
|
198.7
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As a result of a decreasing population of HAMP eligible borrowers, the amount of new risk-in-force
entering forbearance plans is generally declining. As of June 30, 2011, approximately $2.7 billion of our risk-in-force was in a forbearance plan. Because a significant number of loans subject to forbearance plans are in trial modification
periods, we believe that they are an indicator of risk-in-force that could ultimately cure as a result of retention workouts. Consequently, a portion of the loans subject to forbearance plans in a quarter may be re-characterized in a later period as
risk related to a retention workout.
44
Retention workouts are designed to result in borrowers curing, or satisfying in full, their
delinquent loans. Retention workouts include refinances, loan modifications and repayment plans. A liquidation workout is designed to mitigate PMIs loss on a paid claim through options such as a pre-foreclosure sale or a deed-in-lieu of
foreclosure. The following tables show mitigated risk resulting from retention and liquidation workouts completed in each of the quarters indicated:
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Q2 2011
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Q1 2011
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2011
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Q4 2010
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Q3 2010
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Q2 2010
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Q1 2010
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2010
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(Dollars in thousands)
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Retention workouts
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$
|
294,752
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$
|
257,626
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$
|
552,378
|
|
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$
|
345,048
|
|
|
$
|
462,727
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|
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$
|
542,405
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|
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$
|
543,035
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$
|
1,893,215
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Liquidation workouts
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$
|
108,970
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|
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$
|
121,336
|
|
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$
|
230,306
|
|
|
$
|
124,551
|
|
|
$
|
140,115
|
|
|
$
|
162,164
|
|
|
$
|
149,542
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|
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$
|
576,372
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Note:
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Year-end aggregate numbers may not total due to rounding.
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Risk-in-force subject to retention workouts is generally declining as a result of a decline in our delinquent loan inventory, the aging HAMP eligible inventory, and servicers having refined their HAMP
modification programs to require verification of income and other qualifying information during the initial stage of the modification process. Liquidation workouts of our delinquent risk, primarily pre-foreclosure sales, are declining primarily as a
result of the continued weak housing market driven by elevated property inventories, continued property depreciation in certain geographic locations and less consumer demand.
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Defaults.
As set out below in
Segment Results U.S. Mortgage Insurance Operations Defaults,
PMIs primary and pool
default inventories decreased in the second quarter of 2011. The decrease in PMIs primary default inventory was due to lower levels of new notices of default, delinquency cures and primary claims paid. The decrease in PMIs modified pool
default inventory was primarily due to claims paid. We believe that new delinquencies from our 2005 through 2008 primary book years have peaked. Factors affecting the size of PMIs default inventories in the second quarter of 2011 include:
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Declining Home Prices and High Unemployment
Elevated levels of unemployment and home price
depreciation negatively affect PMIs default inventories and default rates.
Aging
A
significant portion of loans in our delinquent loan inventory are those on which the borrowers are twelve or more payments in default. Historically, our claim rates have been higher as loans remain in our delinquency inventory
and progress into later stages of the foreclosure and claim process. This trend has negatively impacted PMIs loss reserves and will continue if the resolution of these pending delinquencies requires more time or is less favorable than we
expect.
Claims Paid
The number of primary claims paid (including claim denials) was 6,320 in the second quarter
of 2011 compared to 8,284 in the second quarter of 2010. The decrease in the number of primary claims paid in the second quarter of 2011 compared to the second quarter of 2010 was driven by increases in the length of time required for claims
processing and review and increases in the length of time to complete foreclosure proceedings in certain states. Claims processing and review periods lengthened due to, among other factors, delays in servicers abilities to produce documents
and perfect claims. We expect claims paid to increase in the second half of 2011 (both in number and aggregate dollar amounts) and continue to contribute to the reduction in the number of loans in PMIs default inventory.
Credit and Portfolio Characteristics and Geographic Factors
We have experienced higher than expected levels of delinquent
mortgages with respect to certain types of loans and risk characteristics. See
Segment Results U.S. Mortgage Insurance Operations Credit and portfolio characteristics.
Declining home prices and weak economic conditions,
particularly in California, Florida, Illinois, New Jersey and Georgia, have negatively affected the development of PMIs portfolio. See
Segment
45
ResultsU.S. Mortgage Insurance Operations Insurance and risk-in-force.
For certain geographic areas (principally metropolitan statistical areas (MSAs)) that are designated as
distressed, PMI caps the maximum insured loan-to-value ratio and/or prescribes additional limiting criteria and underwriting guidelines. PMI assesses MSAs on a regular basis.
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Rescission Activity.
PMI routinely investigates early payment default loans (loans that default prior to the thirteenth payment), or EPDs, and
also investigates certain other non-EPD loans, for misrepresentation, negligent underwriting and eligibility for coverage. Based upon PMIs investigations, industry data and other data, we believe that there were significantly higher levels of
mortgage origination fraud and decreases in the quality of mortgage origination underwriting in 2006 and 2007 when compared to historical levels. As a result, PMI continues to review and investigate a substantial volume of insured loans.
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PMIs mortgage insurance policies, certain endorsements, and certain of its lender-paid mortgage
insurance commitment agreements contain provisions giving PMI the right to unilaterally rescind coverage of an insured loan for breach of representations and warranties, material misrepresentation, negligent underwriting and/or ineligibility. PMI
may also have rescission rights under general principles of contract law. Generally, PMI exercises its contractual rights following an investigation and upon establishing a reasonable belief that, at loan origination, there was a material
misrepresentation by the originator or an agent of the originator, that the loan was negligently underwritten, or that the loan was not eligible for coverage under an approved loan program or set of underwriting guidelines. When PMI rescinds
coverage, we notify the insured in writing, identify the bases for the rescission, summarize the evidence supporting the rescission decision and refund all premiums associated with the rescinded loan to the insured, whether or not the loan was
delinquent. The tables below show the aggregate risk of delinquent and non-delinquent loans rescinded by PMI in each of the quarters presented:
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Q2 2011
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Q1 2011
|
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Q4 2010
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Q3 2010
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Q2 2010
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Q1 2010
|
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Q4 2009
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Q3 2009
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Q2 2009
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(Dollars in millions)
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Delinquent risk-in-force rescinded per quarter
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$
|
65.5
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$
|
77.3
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|
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$
|
93.2
|
|
|
$
|
85.3
|
|
|
$
|
78.7
|
|
|
$
|
109.2
|
|
|
$
|
123.6
|
|
|
$
|
148.4
|
|
|
$
|
170.3
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|
|
|
|
|
|
|
|
|
|
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|
Q2 2011
|
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Q1 2011
|
|
|
Q4 2010
|
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|
Q3 2010
|
|
|
Q2 2010
|
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Q1 2010
|
|
|
Q4 2009
|
|
|
Q3 2009
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|
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Q2 2009
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(Dollars in millions)
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Non-delinquent risk-in-force rescinded per quarter
|
|
$
|
|
|
|
$
|
0.6
|
|
|
$
|
2.4
|
|
|
$
|
0.8
|
|
|
$
|
0.3
|
|
|
$
|
1.3
|
|
|
$
|
4.8
|
|
|
$
|
9.5
|
|
|
$
|
66.3
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When PMI rescinds coverage of a loan, we remove it from our calculation of PMIs risk-in-force and
insurance in force. In addition, if the rescinded loan was delinquent, we cease to include that loan in our default inventory and, therefore, do not incorporate that loan into our loss reserve estimates. Accordingly, past rescissions of delinquent
loans have materially reduced our loss reserve estimates. In arriving at our loss reserve estimates, we also consider the effect of projected future rescission activity with respect to the existing inventory of delinquent insured loans. Projected
future rescissions are materially reducing our current loss reserve estimates, although to a lesser extent than in past periods. To the extent future rescission activity is lower than projected, we would increase loss reserves in future periods. Our
inventory of files under review peaked in 2010 and, as a result, rescission levels are generally declining.
Upon receiving
PMIs notice of rescission with respect to a loan, the insured, either directly or through its servicer, may seek additional information as to our rescission and/or request reconsideration by challenging the bases of our decision to rescind
coverage on specific loans (loan-level challenge). Although PMIs policies do not contain provisions addressing reconsideration requests, we review the loan-level challenges we receive. PMIs policies contain a three-year
contractual limitations period (subject to applicable state law), commencing from the earlier of the date a claim is filed or the rescission date, after which an insured may be barred from filing a lawsuit, or seeking arbitration or other redress,
for recovery of policy benefits. In some cases, insureds loan-level challenges include new or additional information and/or considerations. If we decide to reverse a rescission after consideration of a loan-level challenge, we reinstate
coverage of the loan after receipt of the
46
applicable premium (reinstatement). If we reinstate coverage of a loan that is delinquent at the time of reinstatement, regardless of its status at the time of the rescission, we
reassume the risk and include the loan in our delinquent loan inventory. If, as a result of our review, we affirm our initial rescission, we inform the customer of our decision. If levels of reinstatements exceed our expectations, our financial
condition and results of operations will be negatively impacted. We believe that insureds typically do not notify PMI in the event that they consider their loan-level challenge to be resolved. In some cases, insureds are also challenging our general
rights to rescind coverage of all or any loans under the terms of PMIs master policies (general challenges). These general challenges do not identify the specific loans believed to be at issue and may refer to broad categories of
rescissions.
If we are not able to informally resolve a disagreement with an insured regarding a rescission of coverage, the
insured may seek resolution of the disagreement by filing a lawsuit or requesting that PMI agree to an arbitration. PMIs mortgage insurance policies contain arbitration clauses providing for binding arbitration upon mutual consent of the
parties. The table below shows, for each year in which the risk was written (book year), the aggregate delinquent and non-delinquent rescinded risk to date, net of reinstatements, and the aggregate risk amount of previously rescinded
loans, net of reinstatements, which PMI believes may be subject to disagreement, either because PMI has received a loan-level challenge or because the loan is subject to pending litigation, arbitration or other dispute resolution process. As
discussed above, because insureds generally do not notify PMI when they agree with our decisions to defend rescissions, an unknown portion of what we categorize as disputed rescinded risk may not actually be subject to disagreement.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary and Pool*
(by book year**)
|
|
|
|
2005 and Prior
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
Delinquent Risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rescinded Risk (Net of Reinstatements)
|
|
$
|
212.1
|
|
|
$
|
360.1
|
|
|
$
|
923.2
|
|
|
$
|
121.8
|
|
|
$
|
1.8
|
|
|
$
|
1,619.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rescinded Risk Disputed and Subsequently
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Re-Affirmed by PMI
|
|
$
|
28.3
|
|
|
$
|
53.7
|
|
|
$
|
152.3
|
|
|
$
|
22.2
|
|
|
$
|
0.1
|
|
|
$
|
256.6
|
|
Rescinded Risk Disputed and Currently
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pending Investigation
|
|
|
1.8
|
|
|
|
22.4
|
|
|
|
61.8
|
|
|
|
7.3
|
|
|
|
0.1
|
|
|
|
93.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Rescinded Risk Disputed (Net of Reinstatements)
|
|
$
|
30.1
|
|
|
$
|
76.1
|
|
|
$
|
214.1
|
|
|
$
|
29.5
|
|
|
$
|
0.2
|
|
|
$
|
350.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Delinquent Risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rescinded Risk (Net of Reinstatements)
|
|
$
|
58.5
|
|
|
$
|
67.3
|
|
|
$
|
359.4
|
|
|
$
|
6.3
|
|
|
$
|
0.5
|
|
|
$
|
492.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rescinded Risk Disputed and Subsequently Re-Affirmed by PMI
|
|
$
|
4.2
|
|
|
$
|
7.7
|
|
|
$
|
11.8
|
|
|
$
|
1.1
|
|
|
$
|
|
|
|
$
|
24.8
|
|
Rescinded Risk Disputed and Currently Pending Investigation
|
|
|
0.1
|
|
|
|
7.7
|
|
|
|
34.5
|
|
|
|
0.1
|
|
|
|
|
|
|
|
42.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Rescinded Risk Disputed (Net of Reinstatements)
|
|
$
|
4.3
|
|
|
$
|
15.4
|
|
|
$
|
46.3
|
|
|
$
|
1.2
|
|
|
$
|
|
|
|
$
|
67.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Data excludes rescissions of modified pool risk subject to restructurings completed in 2009 and 2010.
|
**
|
There were no rescissions for the 2010 book year as of June 30, 2011.
|
Because insureds general challenges to PMIs rescission rights do not identify specific rescinded loans, the total population
of rescinded loans that may be subject to general challenges is uncertain. Accordingly, we are unable to quantify the aggregate risk amount of rescinded loans that may be subject to general challenges. As we have received general challenges from
several larger customers, the aggregate risk relating to general challenges would be material if we are unable to satisfactorily resolve such challenges. Moreover, because our or other mortgage insurers contractual rescission rights have been
subject to few judicial decisions, it is unclear whether a court or arbitrator would adopt the same interpretation of our contractual rescission rights as we do. Accordingly, there is a risk that we will not be successful in defending our
contractual bases of rescission against challenges. If this were to happen, we would likely be required to reinstate coverage on the disputed, rescinded loans, pay claims (including accrued interest) on those rescinded loans that were delinquent and
pay additional contractual or extra-contractual damages, if any, awarded by the court or arbiter, which would negatively impact our financial condition and results of operations. See Item 1A.
Risk Factors Rescission activity may not
materially reduce our loss reserve estimates at the same levels we have recently
47
experienced. Also, our loss reserves will increase if future rescission activity is lower than projected, if we reverse rescissions beyond expected levels, or if we are unable to defend our
rescissions in litigation and, therefore, are required to reassume risk and establish loss reserves on delinquent loans.
|
|
|
Claim Denials.
In some cases, our servicing customers do not produce documents necessary to perfect claims. This is often the result of the
servicers inability to provide the loan origination file or other servicing records for our review. If the requested documents are not produced after repeated requests by PMI, the claim will be denied (documentation claim denials).
Beginning in 2010, claim denial activity also included claims denied or curtailed as a result of servicers failure to, among other things, adhere to customary servicing standards applicable to delinquent loans (servicer-related claim
denials). PMIs mortgage insurance policies require servicers to mitigate loss by adhering to customary servicing standards relating to the servicing of delinquent loans. PMIs published Customary Servicing Standards Guide (the
Guide) sets out customary delinquent loan servicing procedures, including default reporting, early delinquency intervention, and the pursuit of retention and liquidation workouts. The Guide is based on PMIs mortgage insurance
policies and industry standards, including the GSEs and Treasurys servicing guidelines. A servicer-related claim denial may occur, for example, when a servicer fails to contact or makes insufficient contacts (as measured against
customary standards) with a delinquent borrower to determine whether a loan modification or other workout options are feasible prior to foreclosure. If our servicing customers ultimately produce documents we had previously requested or
sufficiently demonstrate that they have satisfied their loss mitigation obligations, PMI will reverse the claim denial and review the file for potential claim payment.
|
We consider our estimates of future claim denials and reversals of claim denials in establishing our loss reserves. In 2010, we increased
our assumptions of future claim denials, which reduced our loss reserve estimates. See
Critical Accounting Estimates Reserves for Losses and LAE.
If future claim denials are lower, or if reversals of denials are higher, than expected
when loss reserves are established, we would be required to increase our loss reserves. In the second quarter of 2011, the frequency with which servicers have produced documents for previously denied claims significantly increased compared to prior
periods and the frequency previously estimated when we established loss reserves. As a result, in the second quarter of 2011, we significantly decreased our estimate of future claim denials net of expected reversals, which increased our loss reserve
estimates. There can be no assurance that we will not significantly adjust our claim denial assumptions again in the future. See Item 1A.
Risk Factors Claim denials may not materially reduce our loss reserve estimates at the same
levels as we expect, and our loss reserves will increase if future claim denial activity is lower than projected or if we
reverse claim denials beyond expected levels.
The table below shows the risk-in-force of claim denials (including
primary and pool) in each of the quarters presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 2011
|
|
|
Q1 2011
|
|
|
Q4 2010
|
|
|
Q3 2010
|
|
|
Q2 2010
|
|
|
Q1 2010
|
|
|
Q4 2009
|
|
|
Q3 2009
|
|
|
Q2 2009
|
|
|
|
(Dollars in millions)
|
|
Claims denials per quarter delinquent risk-in-force
|
|
$
|
153.3
|
|
|
$
|
192.8
|
|
|
$
|
179.0
|
|
|
$
|
123.5
|
|
|
$
|
108.7
|
|
|
$
|
149.2
|
|
|
$
|
93.4
|
|
|
$
|
80.1
|
|
|
$
|
184.8
|
|
|
|
|
New Insurance Written (NIW)
. The table below shows PMIs primary NIW in each of the quarters presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 2011
|
|
|
Q1 2011
|
|
|
Q4 2010
|
|
|
Q3 2010
|
|
|
Q2 2010
|
|
Q1 2010
|
|
|
Q4 2009
|
|
|
Q3 2009
|
|
|
Q2 2009
|
|
|
|
(Dollars in millions )
|
|
Primary new insurance written
|
|
$
|
1,426
|
|
|
$
|
1,471
|
|
|
$
|
2,214
|
|
|
$
|
2,004
|
|
|
$
|
1,567
|
|
|
|
|
$
|
964
|
|
|
$
|
969
|
|
|
$
|
1,176
|
|
|
$
|
2,001
|
|
Lower than expected residential mortgage originations and the high demand for mortgage insurance from the
Federal Housing Administration (FHA) are negatively impacting PMIs NIW. The size of the U.S. mortgage origination market is influenced by many economic factors, including employment trends, interest rates, home prices and access to
credit markets. We believe that the size of the U.S. residential mortgage origination market
48
in 2011 will be smaller than in 2010. Within the total mortgage origination market, the distribution between purchase money and refinance originations also affects PMIs new insurance
writings. Historically, there has been greater demand for private mortgage insurance in connection with purchase loan originations than there has been with refinance transactions. In the first half of 2011, the purchase loan share of the origination
market was significantly lower than expected, which negatively impacted PMIs NIW in the quarter.
Although FHA adopted a
number of changes to its eligibility criteria and increased its premium rates in 2010, FHAs share of the insured loan market continues to be significantly higher than private mortgage insurers aggregate share. On April 18, 2011, FHA
increased its annual mortgage insurance premium by a quarter of a percentage point on all 30- and 15-year loans. While there can be no assurance of the effect of such increase, this and any future premium increase by FHA could positively affect the
demand for private mortgage insurance. Our ability to compete with FHA has also been negatively impacted by the GSEs risk-based pricing structures. These structures include additive loan level pricing adjustments (LLPA) that are
based on the risk characteristics of the particular loan and paid up-front by the lender to the GSE at the time of the loan sale transaction. Effective April 2011, the GSEs increased LLPAs on all loans with loan-to-value ratios in excess of 70%.
These and any future LLPA increases will negatively impact our ability to compete with FHA.
As a result of PMIs weakened
financial condition and lack of compliance with state minimum capital requirements, PMIs customers could immediately reduce or eliminate their allocations of business to PMI. In addition, some customers may choose not to purchase mortgage
insurance from us in any state unless we offer mortgage insurance through our combined companies in all fifty states. Losses of business could significantly negatively impact our results of operations and financial condition. See Item 1A.
Risk Factors Customers may reduce or eliminate their allocation of new business to PMI, which would negatively impact our revenues and results of operations.
Ongoing legislative and regulatory scrutiny of the GSEs and the residential mortgage market could impact the private mortgage insurance market and PMIs future insurance writings.
As required
by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd Frank Act), on February 11, 2011, Treasury published recommendations to Congress outlining several future proposed changes to the GSEs and the domestic
housing finance system, including a multi-year phase-out of the GSEs as participants in the mortgage finance industry. Federal legislation enacted in the future could reduce the level of private mortgage insurance coverage used by the GSEs as credit
enhancement or eliminate the requirement altogether.
The Dodd-Frank Act will require mortgage lenders and securitizers to
retain a portion of the risk on mortgage loans they sell or securitize, unless the mortgage loans are qualified residential mortgages or are insured by the FHA or another federal agency. On March 30, 2011, federal regulators
released a proposed rule that details the regulatory definition of a qualified residential mortgage, including a requirement that such mortgages include a cash down-payment equal to at least the sum of (i) the closing costs payable by the
borrower, (ii) 20% of the lesser of the applicable propertys estimated market value and its purchase price, and (iii) the difference, if a positive amount, between the applicable propertys purchase price and its estimated
market value. Regulators are seeking public comment and data regarding the credit risk mitigation effects of private mortgage insurance and an alternative definition that would include a down-payment of 10% (as opposed to 20%) of the lesser of the
applicable propertys estimated market value and its purchase price and take into account private mortgage insurance for higher loan-to-value (LTV) ratio maximum requirements. The proposed rule exempts the GSEs from the risk
retention requirement as long as they remain in conservatorship. We submitted comments to the proposed rule on August 1, 2011. See Item 1A.
Risk Factors Implementation of the Dodd-Frank Act could negatively impact private
mortgage insurers and PMI.
|
|
|
Captives
. As of June 30, 2011, 38.8% of PMIs primary risk-in-force was subject to excess of loss (XOL) captive
reinsurance agreements. In 2009, we placed those agreements into run-off and we no longer cede premiums on new business written to such captives. PMI continues, however, to cede premiums to the captives with respect to risk-in-force written prior to
run-off. Captive cessions, therefore, will decrease over time as the number of loans in PMIs portfolio subject to captives decreases. As of June 30, 2011, PMI ceded approximately $392.0 million of loss reserves primarily to captive
reinsurers compared to $459.7 million as of December 31, 2010. We record these ceded loss reserves as reinsurance recoverables. The decrease in reinsurance recoverables
|
49
|
is due primarily to receipt of cash from captive trust accounts related to the captives share of claims paid. Reinsurance recoverables do not exceed assets in captive trust accounts which,
as of June 30, 2011, totaled approximately $634.7 million, before quarterly net settlements. Because premium cessions are decreasing and paid claims ceded to captives are increasing, we expect that captive trust account balances will continue
to decline through 2011.
|
International Operations.
Factors affecting the financial performance of our
International Operations segment include:
|
|
|
PMI Europe.
PMI Europe is not writing new business. PMI Europes risk-in-force was $0.5 billion at June 30, 2011, $0.7 billion at
March 31, 2011, and $1.9 billion at June 30, 2010. Reductions in PMI Europes risk-in-force were primarily the result of negotiated contract terminations. PMI Europe terminated all of its remaining credit default swap
(CDS) transactions in the second quarter of 2011. In addition, effective June 30, 2011, PMI Europe commuted all of its U.S. subprime reinsurance risk in exchange for a termination payment, which was incurred and included as loss
reserves as of June 30, 2011. PMI Europe had posted collateral of $14.1 million related to its terminated transactions, all of which will be returned to PMI Europe in the third quarter of 2011 pursuant to the related termination agreements. PMI
Europe repatriated $43.3 million of capital to MIC in the second quarter of 2011. As a result of the continued significant reductions in PMI Europes risk-in-force, we expect, subject to regulatory prior-approval, PMI Europe to repatriate
additional capital to MIC in the second half of 2011. There is no assurance that we will obtain the necessary regulatory approval in the amounts proposed by PMI Europe, a lesser amount or any amount at all. Any returns of capital to MIC from PMI
Europe enhance MICs liquidity but do not change the current calculations of its risk-to-capital ratio and policyholders position, as those calculations already include MICs ownership of PMI Europe.
|
|
|
|
PMI Canada.
We are in the process of closing our operations in Canada. To fully close our operations in Canada, we must remove PMI Canadas
risk-in-force and obtain regulatory approvals. PMI Canadas risk-in-force was $15.6 million as of June 30, 2011.
|
|
|
|
Gain on Sale of Discontinued Operations.
In connection with the sale of PMI Australia, MIC received a note (the QBE Note) in the
principal amount of $186.5 million. The interest bearing note matures on September 30, 2011. In May 2009, The PMI Group purchased the QBE Note from MIC. The actual amount owed under the QBE Note was subject to potential reduction based upon the
performance of PMI Australias policies in force at June 30, 2008. On June 30, 2011, QBE waived any right to make deductions to the value of the QBE Note. The removal of payment contingencies allowed us to recognize $206.6 million
(pre-tax), representing the notional amount of $186.5 million plus accrued interest through June 30, 2011, as gain on sale of discontinued operations for the quarter ended June 30, 2011. The gain was reflected net of $81.0 million in
taxes. The total cash proceeds from the QBE Note of approximately $208 million are due to TPG on September 30, 2011. Upon receipt of payment of the QBE Note, TPG is required to make a $25 million payment to MIC under the terms of the agreement
pursuant to which MIC assigned and transferred the QBE Note to TPG. MIC recognized the $25 million receivable in the second quarter of 2011. Additionally, QBE made a $25.0 million cash payment to MIC on June 30, 2011 related to a profit sharing
arrangement tied to the performance of the PMI Australia insurance portfolio. TPG will also use proceeds of the note to repay all outstanding borrowings under its credit facility.
|
Corporate and Other
. Factors affecting the financial performance of our Corporate and Other segment include:
|
|
|
Holding Company Liquidity
. Our holding companys principal sources of liquidity include dividends from its insurance subsidiaries,
expected payment of the QBE Note discussed above, expected tax receivables and interest payments from PMI, tax refunds and income from its investment portfolio. MIC did not pay dividends to The PMI Group in 2010, and we do not expect that MIC will
be able to pay dividends in 2011.
|
In the second quarter of 2010, MIC issued $285 million of
interest-bearing surplus notes to TPG. Tax sharing and expense cost allocation agreements between TPG and MIC significantly reduce TPGs liquidity requirements. At any time, the Arizona Department of Insurance could require MIC to limit, or
cease, making payments to TPG pursuant to the surplus notes and tax sharing and cost allocation agreements with TPG. See
Liquidity and Capital
50
Resources Sources and Uses of Funds Tax and Expense Cost Allocation Agreements
and
Convertible Senior Notes due 2020
and Item 1A.
Risk
Factors Our holding company structure and certain regulatory and other constraints could affect our ability to satisfy our obligations.
Our holding companys available funds, consisting of cash and cash equivalents and investments,
were $69.7 million at June 30, 2011. Our holding company has $49.8 million in principal amount of debt under its revolving credit facility, with a $50.0 million maximum amount allowed. TPGs credit facility expires and the outstanding debt
must be repaid no later than the earlier of October 24, 2011 or the payment by QBE of amounts owed under the QBE Note. Provided an event of default with respect to our debt securities does not occur, we believe there is currently sufficient
liquidity at the holding company to pay holding company expenses (including interest expense on its outstanding debt) through 2011.
See Liquidity and Capital Resources Sources and Uses of Funds The PMI Group Liquidity
and
Credit Facility
.
The indenture governing an aggregate of $685 million in principal amount of TPGs
outstanding debt securities provides that it will be an event of default with respect to those debt securities if, among other things, a court were to enter an order appointing a custodian, receiver, liquidator or similar official of MIC or a
substantial part of its property and such order were to continue unstayed and in effect for a period of 60 consecutive days or if MIC were to consent to such an appointment. Accordingly, although an order by the Department requiring MIC to cease
writing new business would not itself constitute an event of default, if the Department were to seek and obtain a court order appointing a receiver of MIC, and such order were to remain in effect unstayed for 60 consecutive days, an event of default
would occur with respect to these debt securities. In addition, it is possible that other actions that the Department might take or to which MIC might consent involving the appointment of other officials with authority over MIC or its assets would
also constitute such an event of default. If such an event of default were to occur, these debt securities would become immediately due and payable. TPG does not have access to sufficient funds or other sources of liquidity sufficient to enable it
to repay such debt securities if they were to become due and payable.
|
|
|
Fair Value Measurement of Financial Instruments.
In the second quarter and first half of 2011, our total revenues included $75.6 million and
$97.3 million, respectively, as a result of decreases in the fair value of our debt. The decreases in fair value were due largely to the widening of credit spreads in the first half of 2011. (See Item 1, Note 8.
Fair Value Disclosures
.)
|
Additional Conditions and Trends.
Factors potentially affecting the financial results of all of our
segments include:
|
|
|
Deferred Tax Assets
. As of June 30, 2011, we had $733.7 million of net deferred tax assets. Our valuation allowance on our deferred tax
assets was $688.9 million. We expect to utilize the remaining net deferred tax assets of $44.8 million based on contractual cash flow streams and tax strategies that are not dependent on generating taxable income from our mortgage insurance
activities. In the second quarter, as a result of the removal of payment contingencies related to the QBE note, we utilized $81.0 million of our deferred tax assets through recording a tax expense and establishing a deferred tax liability. We will
not be able to realize our deferred tax asset for which we have established a valuation allowance until such time as we return to a period of sustained profitability. However, any future tax benefits may not be realized or, even if realized, may be
significantly delayed. Additional valuation allowance benefits or charges could be recognized in the future due to changes in managements expectations regarding the realization of tax benefits. In addition, in the event of an ownership
change for federal income tax purposes under Internal Revenue Code § 382, we may be restricted annually in our ability to use our deferred tax assets. See Item 1A.
Risk Factors We may be required to record a full valuation
allowance or increase the current partial valuation allowance against our net deferred tax assets and may not be able to realize all of our deferred tax assets in the future
and
Our Amended and Restated Tax Benefits Preservation Plan
may not be effective in preventing an ownership change as defined in Section 382 of the Internal Revenue Code and our deferred tax assets and other tax attributes could be significantly limited.
|
51
RESULTS OF OPERATIONS
Consolidated Results
The following table presents our consolidated
financial results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Percentage
Change
|
|
|
2011
|
|
|
2010
|
|
|
Percentage
Change
|
|
|
|
(Dollars in millions, except per
share data)
|
|
|
|
|
|
(Dollars in millions, except per
share data)
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
125.6
|
|
|
$
|
147.1
|
|
|
|
(14.6
|
)%
|
|
$
|
245.9
|
|
|
$
|
300.1
|
|
|
|
(18.1
|
)%
|
Net investment income
|
|
|
16.8
|
|
|
|
23.9
|
|
|
|
(29.7
|
)%
|
|
|
33.6
|
|
|
|
50.5
|
|
|
|
(33.5
|
)%
|
Equity in losses from unconsolidated subsidiaries
|
|
|
(1.4
|
)
|
|
|
(3.9
|
)
|
|
|
(64.1
|
)%
|
|
|
(2.7
|
)
|
|
|
(8.3
|
)
|
|
|
(67.5
|
)%
|
Net realized investment gains
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
(50.0
|
)%
|
|
|
0.1
|
|
|
|
7.8
|
|
|
|
(98.7
|
)%
|
Change in fair value of certain debt instruments
|
|
|
75.6
|
|
|
|
(47.7
|
)
|
|
|
|
|
|
|
97.3
|
|
|
|
(88.5
|
)
|
|
|
|
|
Other income
|
|
|
2.6
|
|
|
|
2.6
|
|
|
|
|
|
|
|
5.2
|
|
|
|
4.5
|
|
|
|
15.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
219.4
|
|
|
|
122.4
|
|
|
|
79.2
|
%
|
|
|
379.4
|
|
|
|
266.1
|
|
|
|
42.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSSES AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses (LAE)
|
|
|
441.2
|
|
|
|
317.9
|
|
|
|
38.8
|
%
|
|
|
682.3
|
|
|
|
660.2
|
|
|
|
3.3
|
%
|
Amortization of deferred policy acquisition costs
|
|
|
4.5
|
|
|
|
4.2
|
|
|
|
7.1
|
%
|
|
|
8.6
|
|
|
|
8.0
|
|
|
|
7.5
|
%
|
Other underwriting and operating expenses
|
|
|
25.7
|
|
|
|
28.0
|
|
|
|
(8.2
|
)%
|
|
|
53.5
|
|
|
|
62.0
|
|
|
|
(13.7
|
)%
|
Interest expense
|
|
|
13.6
|
|
|
|
12.2
|
|
|
|
11.5
|
%
|
|
|
27.1
|
|
|
|
21.8
|
|
|
|
24.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
485.0
|
|
|
|
362.3
|
|
|
|
33.9
|
%
|
|
|
771.5
|
|
|
|
752.0
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before taxes
|
|
|
(265.6
|
)
|
|
|
(239.9
|
)
|
|
|
(10.7
|
)%
|
|
|
(392.1
|
)
|
|
|
(485.9
|
)
|
|
|
(19.3
|
)%
|
Income tax expense (benefit) from continuing operations
|
|
|
19.7
|
|
|
|
(89.3
|
)
|
|
|
(122.1
|
)%
|
|
|
20.0
|
|
|
|
(178.3
|
)
|
|
|
(111.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(285.3
|
)
|
|
$
|
(150.6
|
)
|
|
|
89.4
|
%
|
|
$
|
(412.1
|
)
|
|
$
|
(307.6
|
)
|
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations, net of tax
|
|
|
150.5
|
|
|
|
|
|
|
|
|
|
|
|
150.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(134.8
|
)
|
|
$
|
(150.6
|
)
|
|
|
(189.5
|
)%
|
|
$
|
(261.6
|
)
|
|
$
|
(307.6
|
)
|
|
|
(15.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss from continuing operations per share
|
|
$
|
(1.76
|
)
|
|
$
|
(1.11
|
)
|
|
|
58.6
|
%
|
|
$
|
(2.55
|
)
|
|
$
|
(2.81
|
)
|
|
|
(9.3
|
)%
|
Diluted gain on sale of discontinued
operation per share
|
|
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share
|
|
$
|
(0.83
|
)
|
|
$
|
(1.11
|
)
|
|
|
(25.2
|
)%
|
|
$
|
(1.62
|
)
|
|
$
|
(2.81
|
)
|
|
|
(42.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in premiums earned in the second quarter of 2011 compared to the second quarter of 2010 was
driven by lower policies in force in our U.S. Mortgage Insurance Operations due in part to low levels of NIW. The decrease in premiums earned in the first half of 2011 compared to the first half of 2010 was driven by lower policies in force in our
U.S. Mortgage Insurance Operations due in part to low levels of NIW and higher premium refunds resulting from an increase in the premium refund reserve of $22.1 million from year end 2010.
The decreases in net investment income in the second quarter and first half of 2011 compared to the same periods of 2010 were primarily
due to lower average pre-tax book yields and lower average investment balances. Our consolidated pre-tax book yield was 2.4% and 2.8% as of June 30, 2011 and 2010, respectively. This decrease in our consolidated pre-tax book yield was primarily
due to our decision to liquidate certain tax-advantaged municipal bond and preferred stock securities which had higher average book yields. A significant majority of the proceeds were reinvested in taxable securities with shorter average maturity
dates and lower average book yields.
Equity in losses from unconsolidated subsidiaries in the second quarters and first
halves of 2011 and 2010 were driven by losses from CMG MI. CMG MIs losses were primarily due to elevated levels of unemployment and the continued weakness of the housing and mortgage markets. Declines in new notices of default drove CMG
MIs reduced losses in the second quarter and first half of 2011 compared to the same periods of 2010.
52
Net realized investment gains in the second quarter and first half of 2011 resulted
primarily from the sales of municipal, government and corporate bonds, partially offset by realized losses on the sale of certain preferred stocks. Net realized investment gains in the second quarter and first half of 2010 were driven primarily by
sales of municipal bonds and preferred equity securities.
In the second quarter and first half of 2011, our revenues
increased by $75.6 million and $97.3 million, respectively, as a result of decreases in the fair value of our debt. The decreases in fair value were due largely to the widening of credit spreads during the periods. In the second quarter and first
half of 2010, our revenues decreased by $47.7 million and $88.5 million, respectively, as a result of increases in the fair value of our debt. The increases in fair value were due largely to the narrowing of credit spreads during the periods.
The increase in other income in the first half of 2011 compared to the first half of 2010 was due primarily to income
recognized from our pool restructuring receivable in connection with the restructuring of a significant number of modified pool contracts completed in the second quarter of 2010.
Losses in the periods presented have been affected by a number of economic factors, including weaker than expected job creation and U.S.
home prices. For a discussion of other drivers of losses and LAE, see
Conditions and Trends Affecting our Business U.S. Mortgage Insurance Operations Losses and LAE.
The decreases in other underwriting and operating expenses in the second quarter and first half of 2011 compared to the same periods a
year ago were primarily due to the decrease in payroll and related expense for the periods. Interest expense in the periods presented resulted from interest expense on our 4.50% Convertible Senior Notes issued in the second quarter of 2010.
The effective tax rates were (7.4)% and (5.1)% for the second quarter and first half of 2011, respectively, compared to 37.2%
and 36.7% for the second quarter and first half of 2010, and the federal statutory rate of 35.0%. The primary driver for the change in effective tax rates was an increase in our deferred tax valuation allowance in the third quarter of 2010. The
income tax expense in the second quarter and first half of 2011 was due to an increase in the reserve for uncertain tax positions currently under audit and an increase in our deferred tax valuation allowance.
The gain on sale of discontinued operations, net of tax, for the second quarter and first half of 2011was the result of our recognition
of the notional amount of the QBE Note plus accrued interest, net of taxes, through June 30, 2011.
Segment Results
The following table presents consolidated results for each of our segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
Six Months
Ended
June 30,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Percentage
Change
|
|
|
2011
|
|
|
2010
|
|
|
Percentage
Change
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
U.S. Mortgage Insurance Operations
|
|
$
|
(338.4
|
)
|
|
$
|
(115.6
|
)
|
|
|
192.7
|
%
|
|
$
|
(474.7
|
)
|
|
$
|
(237.4
|
)
|
|
|
100.0
|
%
|
International Operations
|
|
|
(12.0
|
)
|
|
|
4.6
|
|
|
|
|
|
|
|
(13.0
|
)
|
|
|
4.6
|
|
|
|
|
|
Corporate and Other
|
|
|
65.1
|
|
|
|
(39.5
|
)
|
|
|
|
|
|
|
75.6
|
|
|
|
(74.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations*
|
|
$
|
(285.3
|
)
|
|
$
|
(150.6
|
)
|
|
|
89.4
|
%
|
|
$
|
(412.1
|
)
|
|
$
|
(307.5
|
)
|
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations*
|
|
|
150.5
|
|
|
|
|
|
|
|
|
|
|
|
150.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss*
|
|
$
|
(134.8
|
)
|
|
$
|
(150.6
|
)
|
|
|
(10.5
|
)%
|
|
$
|
(261.6
|
)
|
|
$
|
(307.5
|
)
|
|
|
(14.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
May not total due to rounding.
|
53
U.S. Mortgage Insurance Operations
The results of our U.S. Mortgage Insurance Operations include the operating results of PMI. CMG MI is accounted for under the equity
method of accounting and its results are recorded as equity in losses from unconsolidated subsidiaries. U.S. Mortgage Insurance Operations results are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Percentage
Change
|
|
|
2011
|
|
|
2010
|
|
|
Percentage
Change
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
Net premiums written
|
|
$
|
126.0
|
|
|
$
|
141.4
|
|
|
|
(10.9
|
)%
|
|
$
|
250.1
|
|
|
$
|
292.3
|
|
|
|
(14.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
125.5
|
|
|
$
|
145.8
|
|
|
|
(13.9
|
)%
|
|
$
|
244.6
|
|
|
$
|
297.5
|
|
|
|
(17.8
|
)%
|
Net investment income
|
|
|
16.0
|
|
|
|
21.3
|
|
|
|
(24.9
|
)%
|
|
|
32.1
|
|
|
|
46.4
|
|
|
|
(30.8
|
)%
|
Equity in losses from unconsolidated subsidiaries
|
|
|
(1.3
|
)
|
|
|
(3.9
|
)
|
|
|
(66.7
|
)%
|
|
|
(2.8
|
)
|
|
|
(8.1
|
)
|
|
|
(65.4
|
)%
|
Net realized investment gains
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
7.2
|
|
|
|
(86.1
|
)%
|
Other income
|
|
|
1.7
|
|
|
|
2.4
|
|
|
|
(29.2
|
)%
|
|
|
3.5
|
|
|
|
2.1
|
|
|
|
66.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
143.0
|
|
|
|
165.6
|
|
|
|
(13.6
|
)%
|
|
|
278.4
|
|
|
|
345.1
|
|
|
|
(19.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE
|
|
|
429.6
|
|
|
|
318.6
|
|
|
|
34.8
|
%
|
|
|
668.6
|
|
|
|
660.1
|
|
|
|
1.3
|
%
|
Underwriting and operating expenses
|
|
|
28.3
|
|
|
|
29.6
|
|
|
|
(4.4
|
)%
|
|
|
57.5
|
|
|
|
63.7
|
|
|
|
(9.7
|
)%
|
Interest expense
|
|
|
3.2
|
|
|
|
2.2
|
|
|
|
45.5
|
%
|
|
|
6.4
|
|
|
|
2.2
|
|
|
|
190.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
461.1
|
|
|
|
350.4
|
|
|
|
31.6
|
%
|
|
|
732.5
|
|
|
|
726.0
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(318.1
|
)
|
|
|
(184.8
|
)
|
|
|
72.1
|
%
|
|
|
(454.1
|
)
|
|
|
(380.9
|
)
|
|
|
19.2
|
%
|
Income tax expense (benefit)
|
|
|
20.3
|
|
|
|
(69.2
|
)
|
|
|
(129.3
|
)%
|
|
|
20.6
|
|
|
|
(143.5
|
)
|
|
|
(114.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(338.4
|
)
|
|
$
|
(115.6
|
)
|
|
|
192.7
|
%
|
|
$
|
(474.7
|
)
|
|
$
|
(237.4
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and earned
PMIs net premiums written refers to the amount of
premiums recorded based on effective coverage during a given period, net of refunds and premiums ceded primarily under captive reinsurance agreements. Under captive reinsurance agreements, PMI transfers portions of its risk written on loans
originated by certain lender-customers to captive reinsurance companies affiliated with such lender-customers. In return, portions of PMIs gross premiums written are ceded to those captive reinsurance companies.
PMIs premiums earned refers to the amount of net premiums written, net of changes in unearned premiums and the reserve for premium
refunds. The components of PMIs net premiums written and premiums earned are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Percentage
|
|
|
Six Months Ended June 30,
|
|
|
Percentage
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
Direct premiums written, net of refunds
|
|
$
|
150.6
|
|
|
$
|
173.2
|
|
|
|
(13.0
|
)%
|
|
$
|
301.7
|
|
|
$
|
358.1
|
|
|
|
(15.7
|
)%
|
Ceded premiums, net of assumed
|
|
|
(24.6
|
)
|
|
|
(31.8
|
)
|
|
|
(22.6
|
)%
|
|
|
(51.6
|
)
|
|
|
(65.8
|
)
|
|
|
(21.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
126.0
|
|
|
$
|
141.4
|
|
|
|
(10.9
|
)%
|
|
$
|
250.1
|
|
|
$
|
292.3
|
|
|
|
(14.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
125.5
|
|
|
$
|
145.8
|
|
|
|
(13.9
|
)%
|
|
$
|
244.6
|
|
|
$
|
297.5
|
|
|
|
(17.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in direct premiums written and premiums earned in the second quarter of 2011 compared to the
second quarter of 2010 was driven by lower policies in force due in part to low levels of NIW. The decrease in direct premiums written and premiums earned in the first half of 2011 compared to the first half of 2010 was driven by lower policies in
force due in part to low levels of NIW and higher premium refunds resulting from a $22.1 million increase in the premium refund reserve from year end 2010. We increased the premium refund reserve primarily as a result of an increase in estimated
refunds related to rescissions and claim related payments. The decreases in ceded premiums in the second quarter and first half of 2011 compared to the second quarter and first half of 2010 were primarily due to commutations of certain XOL captive
reinsurance agreements in 2010 and 2011 and XOL captives placed into runoff effective January 1, 2009. As of June 30, 2011, 38.8% of PMIs primary risk-in-force was subject to captive reinsurance agreements compared to 45.8% as of
June 30, 2010. See
Conditions and Trends Affecting our Business U.S. Mortgage Insurance Operations Captives
.
54
Net investment income
Net investment income decreased in the second
quarter and first half of 2011 primarily due to lower average pre-tax book yields and lower average investment balances. The average pre-tax book yields in the second quarter and first half of 2011 were lower than the same periods of 2010 primarily
due to our decision to liquidate certain tax-advantaged municipal bond and preferred stock securities which generally had higher average book yields. A significant majority of the proceeds were reinvested in taxable securities with lower average
book yields.
Equity in earnings (losses) from unconsolidated subsidiaries
Equity in losses from
unconsolidated subsidiaries (CMG MI) was $1.3 million and $2.8 million in the second quarter and first half of 2011, respectively, compared to $3.9 million and $8.1 million in the second quarter and first half of 2010. CMG MIs losses were
primarily due to elevated levels of unemployment and the continued weakness of the housing and mortgage markets. Declines in new notices of default drove CMG MIs reduced losses in the second quarter and first half of 2011 when compared to the
same periods of 2010.
Net realized investment gains (losses)
Net realized investment gains in the second
quarter and first half of 2011 resulted primarily from the sales of municipal, government and corporate bonds. Net realized investment gains in the first half of 2010 were driven primarily by sales of municipal bonds and certain preferred stocks.
Losses and LAE
PMIs total losses and LAE incurred includes net changes in the period to loss
reserves on PMIs delinquent loan inventories. Total losses and LAE also includes expenses related to default, loss mitigation and claim processing. Because losses and LAE includes changes to loss reserves, it incorporates our best estimate of
PMIs future claim payments and costs relating to PMIs existing inventories of delinquent loans. PMIs losses and LAE are shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Percentage
|
|
|
Six Months
Ended
June 30,
|
|
|
Percentage
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
Losses incurred- primary
|
|
$
|
404.8
|
|
|
$
|
296.0
|
|
|
|
36.8
|
%
|
|
$
|
616.2
|
|
|
$
|
554.7
|
|
|
|
11.1
|
%
|
Losses incurred- pool
|
|
|
11.9
|
|
|
|
10.1
|
|
|
|
17.8
|
%
|
|
|
23.4
|
|
|
|
80.0
|
|
|
|
(70.8
|
)%
|
LAE and other
|
|
|
12.9
|
|
|
|
12.5
|
|
|
|
3.2
|
%
|
|
|
29.0
|
|
|
|
25.4
|
|
|
|
14.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and LAE incurred
|
|
$
|
429.6
|
|
|
$
|
318.6
|
|
|
|
34.8
|
%
|
|
$
|
668.6
|
|
|
$
|
660.1
|
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increases in primary losses incurred in the second quarter and first half of 2011 were driven by
additions to loss reserves as a result of re-estimations of reserves established at year end 2010. For a discussion of PMIs losses and LAE, see
Conditions and Trends Affecting our Business U.S. Mortgage Insurance Operations
Losses and LAE
, above. The decrease in pool losses incurred in the first half of 2011 was driven by the operation of contractual stop loss limits and modified pool contract restructurings in 2009 and 2010 which significantly reduced pool
risk-in-force. As of June 30, 2011, we ceded $392.0 million in loss reserves primarily to captive reinsurers, which we record as reinsurance recoverables. Reinsurance recoverables do not exceed assets in captive trust accounts. As of
June 30, 2011, assets in captive trust accounts held for the benefit of PMI totaled approximately $634.7 million, before quarterly net settlements. See
Conditions and Trends Affecting our Business U.S. Mortgage Insurance Operations
Captives.
55
Claims paid
PMIs claims paid including LAE is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Percentage
|
|
|
Six Months
Ended
June 30,
|
|
|
Percentage
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
|
(Dollars in millions, except claim size)
|
|
|
|
|
|
(Dollars in millions, except claim size)
|
|
|
|
|
Total primary claims paid
|
|
$
|
250.1
|
|
|
$
|
274.9
|
|
|
|
(9.0
|
)%
|
|
$
|
423.2
|
|
|
$
|
511.3
|
|
|
|
(17.2
|
)%
|
Total pool and other
|
|
|
17.6
|
|
|
|
156.9
|
|
|
|
(88.8
|
)%
|
|
|
34.2
|
|
|
|
178.2
|
|
|
|
(80.8
|
)%
|
Loss adjustment expenses
|
|
|
14.7
|
|
|
|
12.5
|
|
|
|
17.6
|
%
|
|
|
29.6
|
|
|
|
25.7
|
|
|
|
15.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total claims paid including LAE
|
|
$
|
282.4
|
|
|
$
|
444.3
|
|
|
|
(36.4
|
)%
|
|
$
|
487.0
|
|
|
$
|
715.2
|
|
|
|
(31.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of primary claims paid
(1)
|
|
|
6,320
|
|
|
|
8,284
|
|
|
|
(23.7
|
)%
|
|
|
12,186
|
|
|
|
15,176
|
|
|
|
(19.7
|
)%
|
Average primary claim size
(in thousands)
|
|
$
|
40.5
|
|
|
$
|
33.2
|
|
|
|
22.0
|
%
|
|
$
|
35.2
|
|
|
$
|
33.7
|
|
|
|
4.5
|
%
|
(1)
|
Amount includes claims denials.
|
The decreases in the total and number of primary claims paid in the second quarter and first half of 2011 compared to the second quarter
and first half of 2010 were driven by increases in the length of time required for claims processing and review and the length of time to complete foreclosure proceedings in certain states. Claims processing and review periods lengthened due to,
among other factors, delays in servicers abilities to produce documents and perfect claims.
The calculation of
PMIs average primary claim size includes claim denials, which are counted in the total number of claims paid as zero dollar claim settlements. If we reverse a claim denial and pay the claim in a later period, when we calculate the average
primary claim size, we include the dollar amount of the claim payment in the total claims paid but do not add a claim count to the total number of claims paid, as the claim was already counted as a settled claim in a prior reported period. In
previous periods, elevated levels of claim denials reduced the average primary claim size. In 2011, while claim denials remain elevated, reversals of claim denials have increased significantly, which caused PMIs average primary claim size to
increase in the second quarter and first half of 2011 when compared to the same periods a year ago.
Defaults
PMIs primary mortgage insurance master policies define default as the
borrowers failure to pay when due an amount equal to the scheduled installment payment under the terms of the mortgage. Generally, the master policies require an insured to notify PMI of a default no later than the last business day of the
month following the month in which the borrower becomes three monthly payments in default. For reporting and internal tracking purposes, we do not consider a loan to be in default until the borrower has missed two consecutive payments. Depending
upon its scheduled payment date, a loan in default for two consecutive monthly payments could be reported to PMI between the 31
st
and the 60
th
day after the first missed payment due date.
PMIs primary delinquent roll forward is presented in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Percentage
|
|
|
Six Months Ended
June 30,
|
|
|
Percentage
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
Number of policies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning delinquent inventory
|
|
|
119,748
|
|
|
|
147,248
|
|
|
|
(18.7
|
)%
|
|
|
127,478
|
|
|
|
150,925
|
|
|
|
(15.5
|
)%
|
Plus: New notices
|
|
|
22,796
|
|
|
|
28,597
|
|
|
|
(20.3
|
)%
|
|
|
47,550
|
|
|
|
62,865
|
|
|
|
(24.4
|
)%
|
Less: Cures
|
|
|
(19,593
|
)
|
|
|
(28,008
|
)
|
|
|
(30.0
|
)%
|
|
|
(45,133
|
)
|
|
|
(57,573
|
)
|
|
|
(21.6
|
)%
|
Less: Paids
(1)
|
|
|
(6,320
|
)
|
|
|
(8,284
|
)
|
|
|
(23.7
|
)%
|
|
|
(12,186
|
)
|
|
|
(15,176
|
)
|
|
|
(19.7
|
)%
|
Less: Rescissions
|
|
|
(889
|
)
|
|
|
(1,122
|
)
|
|
|
(20.8
|
)%
|
|
|
(1,967
|
)
|
|
|
(2,610
|
)
|
|
|
(24.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending delinquent inventory, June 30
|
|
|
115,742
|
|
|
|
138,431
|
|
|
|
(16.4
|
)%
|
|
|
115,742
|
|
|
|
138,431
|
|
|
|
(16.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Claims paid are net of claim reversals and reinstatements.
|
56
PMIs primary default data are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2011
|
|
|
March 31,
2011
|
|
|
December 31,
2010
|
|
|
September 30,
2010
|
|
|
June 30,
2010
|
|
|
March 31,
2010
|
|
Flow channel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in default
|
|
|
95,625
|
|
|
|
98,408
|
|
|
|
104,303
|
|
|
|
107,978
|
|
|
|
113,438
|
|
|
120,665
|
|
Policies in force
|
|
|
521,311
|
|
|
|
535,026
|
|
|
|
547,505
|
|
|
|
562,164
|
|
|
|
577,040
|
|
|
591,079
|
|
Default rate
|
|
|
18.34
|
%
|
|
|
18.39
|
%
|
|
|
19.05
|
%
|
|
|
19.21
|
%
|
|
|
19.66
|
%
|
|
20.41%
|
|
|
|
|
|
|
|
|
Structured channel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in default
|
|
|
20,117
|
|
|
|
21,340
|
|
|
|
23,175
|
|
|
|
23,913
|
|
|
|
24,993
|
|
|
26,583
|
|
Policies in force
|
|
|
75,609
|
|
|
|
78,225
|
|
|
|
81,649
|
|
|
|
85,155
|
|
|
|
89,164
|
|
|
92,809
|
|
Default rate
|
|
|
26.61
|
%
|
|
|
27.28
|
%
|
|
|
28.38
|
%
|
|
|
28.08
|
%
|
|
|
28.03
|
%
|
|
28.64%
|
|
|
|
|
|
|
|
|
Total primary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in default
|
|
|
115,742
|
|
|
|
119,748
|
|
|
|
127,478
|
|
|
|
131,891
|
|
|
|
138,431
|
|
|
147,248
|
|
Policies in force
|
|
|
596,920
|
|
|
|
613,251
|
|
|
|
629,154
|
|
|
|
647,319
|
|
|
|
666,204
|
|
|
683,888
|
|
Default rate
|
|
|
19.39
|
%
|
|
|
19.53
|
%
|
|
|
20.26
|
%
|
|
|
20.37
|
%
|
|
|
20.78
|
%
|
|
|
|
|
21.53
|
%
|
PMIs modified pool default data are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2011
|
|
|
March 31,
2011
|
|
|
December 31,
2010
|
|
|
September 30,
2010
|
|
|
June 30,
2010
|
|
|
March 31,
2010
|
|
Modified pool with deductible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in default
|
|
|
3,364
|
|
|
|
3,572
|
|
|
|
3,981
|
|
|
|
4,023
|
|
|
|
4,186
|
|
|
|
10,573
|
|
Policies in force
|
|
|
30,300
|
|
|
|
31,406
|
|
|
|
32,938
|
|
|
|
34,375
|
|
|
|
36,974
|
|
|
|
59,699
|
|
Default rate
|
|
|
11.10
|
%
|
|
|
11.37
|
%
|
|
|
12.09
|
%
|
|
|
11.70
|
%
|
|
|
11.32
|
%
|
|
|
17.71
|
%
|
|
|
|
|
|
|
|
Modified pool without deductible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in default
|
|
|
6,134
|
|
|
|
6,416
|
|
|
|
7,553
|
|
|
|
7,711
|
|
|
|
8,974
|
|
|
|
9,880
|
|
Policies in force
|
|
|
33,415
|
|
|
|
34,209
|
|
|
|
35,122
|
|
|
|
36,171
|
|
|
|
43,694
|
|
|
|
45,252
|
|
Default rate
|
|
|
18.36
|
%
|
|
|
18.76
|
%
|
|
|
21.51
|
%
|
|
|
21.32
|
%
|
|
|
20.54
|
%
|
|
|
21.83
|
%
|
|
|
|
|
|
|
|
Total modified pool
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in default
|
|
|
9,498
|
|
|
|
9,988
|
|
|
|
11,534
|
|
|
|
11,734
|
|
|
|
13,160
|
|
|
|
20,453
|
|
Policies in force
|
|
|
63,715
|
|
|
|
65,615
|
|
|
|
68,060
|
|
|
|
70,546
|
|
|
|
80,668
|
|
|
|
104,951
|
|
Default rate
|
|
|
14.91
|
%
|
|
|
15.22
|
%
|
|
|
16.95
|
%
|
|
|
16.63
|
%
|
|
|
16.31
|
%
|
|
|
19.49
|
%
|
The changes in PMIs primary and modified pool default inventories in the second quarter and first
half of 2011 are discussed in
Conditions and Trends Affecting our Business U.S. Mortgage Insurance Operations Defaults,
above.
Total underwriting and operating expenses
PMIs total underwriting and operating expenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Percentage
Change
|
|
|
2011
|
|
|
2010
|
|
|
Percentage
Change
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
Amortization of deferred policy acquisition costs
|
|
$
|
4.5
|
|
|
$
|
4.2
|
|
|
|
7.1
|
%
|
|
$
|
8.6
|
|
|
$
|
8.0
|
|
|
|
7.5
|
%
|
Other underwriting and operating expenses
|
|
|
23.8
|
|
|
|
25.4
|
|
|
|
(6.3
|
)%
|
|
|
48.9
|
|
|
|
55.6
|
|
|
|
(12.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwriting and operating expenses
|
|
$
|
28.3
|
|
|
$
|
29.6
|
|
|
|
(4.4
|
)%
|
|
$
|
57.5
|
|
|
$
|
63.6
|
|
|
|
(9.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs incurred and deferred
|
|
$
|
5.9
|
|
|
$
|
6.0
|
|
|
|
(1.7
|
)%
|
|
$
|
11.8
|
|
|
$
|
11.3
|
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
PMIs policy acquisition costs are those costs that vary with, and are related to, our
acquisition, underwriting and processing of new mortgage insurance policies. We defer policy acquisition costs when incurred and amortize these costs in proportion to estimated gross profits for each policy year. Policy acquisition costs incurred
and deferred are variable and fluctuate with the volume of new insurance applications processed and NIW. PMIs deferred policy acquisition cost asset was $49.6 million as of June 30, 2011 compared to $46.4 million as of December 31,
2010 and $44.5 million as of June 30, 2010.
Other underwriting and operating expenses generally consist of costs that
are not attributable to the acquisition of new business and are recorded as expenses when incurred. Other underwriting and operating expenses decreased in the second quarter and first half of 2011 compared to the second quarter and first half of
2010 primarily due to the decrease in our payroll and related expense during the periods.
Interest expense
The increases in interest expense in the second quarter and first half of 2011 compared to the same periods of 2010 were due to interest from the $285 million interest-bearing surplus notes issued by MIC to The PMI Group in the second
quarter of 2010.
Income taxes
U.S. Mortgage Insurance Operations statutory tax rate is 35%. U.S.
Mortgage Insurance Operations had an effective tax rate of (6.4)% and (4.5)% in the second quarter and first half of 2011, respectively. The income tax expenses in the second quarter and first half of 2011 were due to an increase in the reserve for
uncertain tax positions currently under audit and an increase in the deferred tax valuation allowance. The tax benefits recorded in the second quarter and first half of 2010 in our U.S. Mortgage Insurance Operations segment primarily reflect tax
benefits attributable to tax exempt interest and dividends and favorable interim period adjustments, resulting in effective tax rates of 37.4% and 37.7% for the quarter and first six months ended June 30, 2010, respectively. Beginning in the
third quarter of 2010, the Company discontinued taking certain income tax benefits from current period losses and will continue to do so until such time management is able to demonstrate sufficient taxable income.
Ratios
PMIs loss, expense and combined ratios are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Variance
|
|
|
2011
|
|
|
2010
|
|
|
Variance
|
|
Loss ratio
|
|
|
342.3
|
%
|
|
|
218.4
|
%
|
|
|
123.9 pps
|
|
|
|
273.4
|
%
|
|
|
221.9
|
%
|
|
|
51.5 pps
|
|
Expense ratio
|
|
|
22.4
|
%
|
|
|
21.0
|
%
|
|
|
1.4 pps
|
|
|
|
23.0
|
%
|
|
|
21.8
|
%
|
|
|
1.2 pps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
364.7
|
%
|
|
|
239.4
|
%
|
|
|
125.3 pps
|
|
|
|
296.4
|
%
|
|
|
243.7
|
%
|
|
|
52.7 pps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PMIs loss ratio is the ratio of losses and LAE to premiums earned. The loss ratio increased in the
second quarter and first half of 2011 compared to the second quarter and first half of 2010 as a result of higher losses and LAE and a decrease in premiums earned. PMIs expense ratio is the ratio of total underwriting and operating expenses to
net premiums written. The increase in PMIs expense ratio in the second quarter and first half of 2011 compared to the second quarter and first half of 2010 was primarily due to decreases in net premiums written which were in excess of the
reduction in total underwriting and operating expenses.
58
Insurance and risk-in-force
PMIs primary insurance in force and
primary and pool risk-in-force are shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
Percentage Change/
|
|
|
|
2011
|
|
|
2010
|
|
|
Variance
|
|
|
|
(Dollars in millions)
|
|
|
|
|
Primary insurance in force
|
|
$
|
96,922
|
|
|
$
|
107,571
|
|
|
|
(9.9
|
)%
|
Primary risk in force
|
|
|
23,744
|
|
|
|
26,304
|
|
|
|
(9.7
|
)%
|
Pool risk in force*
|
|
|
575
|
|
|
|
828
|
|
|
|
(30.6
|
)%
|
Policy cancellations primary
(
year-to-date
)
|
|
|
7,685
|
|
|
|
8,655
|
|
|
|
(11.2
|
)%
|
Persistency primary
|
|
|
83.5
|
%
|
|
|
85.6
|
%
|
|
|
(2.1
|
) pps
|
*
|
Includes modified pool and other pool risk-in-force.
|
Primary insurance in force and risk-in-force decreased in the first half of 2011 compared to the first half of 2010 as a result of policy terminations exceeding NIW. See
Conditions and Trends Affecting
our Business U.S. Mortgage Insurance Operations New Insurance Written (NIW),
above.
Modified pool
risk-in-force as of June 30, 2011 was $0.3 billion compared to $0.3 billion as of December 31, 2010 and $0.5 billion as of June 30, 2010. The decrease in modified pool risk-in-force in the first half of 2011 from the first half of
2010 was primarily driven by the operation of contractual stop loss limits. Pool risk-in-force is net of risk for which reserves have been established.
The table below sets forth the percentage of PMIs primary risk-in-force as of June 30, 2011 and December 31, 2010 in the ten states with the highest risk-in-force as of June 30, 2011
in PMIs primary portfolio and the reserve for losses and LAE associated with delinquent risk-in-force in those states. The geographic mix of our delinquent loan inventory is one of many factors we consider when estimating loss reserves. As we
do not determine loss reserves based on a geographic location, the table below reflects an allocation of loss reserves based on such information. For a discussion of our loss reserve estimation process, see
Critical Accounting Estimates
Reserves for Losses and LAE
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011
|
|
|
As of December 31, 2010
|
|
|
|
Percentage of
Primary Risk
in Force
|
|
|
Reserve for
Losses and LAE
|
|
|
Reserves as a
Percentage of
Total USMI
Reserves
|
|
|
Percentage of
Primary Risk
in Force
|
|
|
Reserve for
Losses and LAE
|
|
|
Reserves as a
Percentage of
Total USMI
Reserves
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Florida
|
|
|
9.4
|
%
|
|
$
|
556,889
|
|
|
|
18.8
|
%
|
|
|
9.6
|
%
|
|
$
|
558,437
|
|
|
|
19.6
|
%
|
Texas
|
|
|
8.2
|
%
|
|
|
101,970
|
|
|
|
3.4
|
%
|
|
|
8.0
|
%
|
|
|
98,945
|
|
|
|
3.5
|
%
|
California
|
|
|
7.4
|
%
|
|
|
314,968
|
|
|
|
10.6
|
%
|
|
|
7.4
|
%
|
|
|
305,147
|
|
|
|
10.7
|
%
|
Illinois
|
|
|
5.2
|
%
|
|
|
171,681
|
|
|
|
5.8
|
%
|
|
|
5.2
|
%
|
|
|
165,352
|
|
|
|
5.8
|
%
|
Georgia
|
|
|
4.6
|
%
|
|
|
118,849
|
|
|
|
4.0
|
%
|
|
|
4.6
|
%
|
|
|
111,082
|
|
|
|
3.9
|
%
|
New York
|
|
|
4.1
|
%
|
|
|
117,108
|
|
|
|
4.0
|
%
|
|
|
4.1
|
%
|
|
|
116,537
|
|
|
|
4.1
|
%
|
Ohio
|
|
|
4.0
|
%
|
|
|
71,559
|
|
|
|
2.4
|
%
|
|
|
4.0
|
%
|
|
|
68,714
|
|
|
|
2.4
|
%
|
Pennsylvania
|
|
|
3.5
|
%
|
|
|
58,282
|
|
|
|
2.0
|
%
|
|
|
3.5
|
%
|
|
|
56,359
|
|
|
|
2.0
|
%
|
New Jersey
|
|
|
3.4
|
%
|
|
|
115,345
|
|
|
|
3.9
|
%
|
|
|
3.3
|
%
|
|
|
106,886
|
|
|
|
3.8
|
%
|
Washington
|
|
|
3.3
|
%
|
|
|
83,516
|
|
|
|
2.9
|
%
|
|
|
3.3
|
%
|
|
|
72,048
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
1,710,167
|
|
|
|
57.8
|
%
|
|
|
|
|
|
$
|
1,659,507
|
|
|
|
58.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit and portfolio characteristics
In the second quarter and first half of 2011,
PMI did not write new insurance on less-than-A quality, Alt-A , Above-97, interest only or payment option ARM loans. NIW consisting of ARMs (mortgage loans with interest rates that may adjust prior to their fifth anniversary) was insignificant in
the first quarter of 2011.
The table below presents PMIs less-than-A quality, Alt-A, ARM, Above-97, interest only and
payment option ARM loans as a percentage of primary risk-in-force and the associated reserve for losses and LAE associated with delinquent risk-in-force for each loan type. Loan and risk characteristics within PMIs delinquent loan inventory
are two of many factors we consider when estimating loss reserves. As we do not establish loss reserves based on these factors, the loss reserve amounts set out below have been allocated based on total delinquencies and also on the number of
delinquencies associated with each risk characteristic.
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011
|
|
|
As of December 31, 2010
|
|
|
|
Percentage of
Primary Risk
in Force
|
|
|
Reserve for
Losses and LAE
|
|
|
Reserves as a
Percentage of
Total USMI
Reserves
|
|
|
Percentage of
Primary Risk
in Force
|
|
|
Reserve for
Losses and LAE
|
|
|
Reserves as a
Percentage of
Total USMI
Reserves
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Loan Type*:
|
|
|
|
|
|
|
|
|
Less-than-A Quality loans (FICO scores below 620)
|
|
|
6.4
|
%
|
|
$
|
278,427
|
|
|
|
9.4
|
%
|
|
|
6.5
|
%
|
|
$
|
281,806
|
|
|
|
9.9
|
%
|
Less-than-A Quality loans with FICO scores below 575**
|
|
|
1.7
|
%
|
|
|
82,143
|
|
|
|
2.8
|
%
|
|
|
1.7
|
%
|
|
|
84,816
|
|
|
|
3.0
|
%
|
Alt-A loans
|
|
|
14.7
|
%
|
|
|
876,392
|
|
|
|
29.6
|
%
|
|
|
15.3
|
%
|
|
|
872,683
|
|
|
|
30.7
|
%
|
ARMs (excluding 2/28 Hybrid ARMs)
|
|
|
6.3
|
%
|
|
|
390,662
|
|
|
|
13.2
|
%
|
|
|
6.7
|
%
|
|
|
388,197
|
|
|
|
13.6
|
%
|
2/28 Hybrid ARMs***
|
|
|
1.3
|
%
|
|
|
99,241
|
|
|
|
3.4
|
%
|
|
|
1.4
|
%
|
|
|
118,181
|
|
|
|
4.2
|
%
|
Above-97s (Above 97% LTVs)
|
|
|
19.0
|
%
|
|
|
683,769
|
|
|
|
23.1
|
%
|
|
|
19.5
|
%
|
|
|
645,485
|
|
|
|
22.7
|
%
|
Interest Only
|
|
|
9.4
|
%
|
|
|
512,725
|
|
|
|
17.3
|
%
|
|
|
9.8
|
%
|
|
|
494,358
|
|
|
|
17.4
|
%
|
Payment Option ARMs
|
|
|
2.3
|
%
|
|
|
176,956
|
|
|
|
6.0
|
%
|
|
|
2.6
|
%
|
|
|
184,665
|
|
|
|
6.5
|
%
|
*
|
Loan types are not mutually exclusive as certain loans may be included in one or more of the above loan categories. Total reserves for losses and LAE associated with
all loan types listed above were $1.9 billion for the periods ended June 30, 2011 and December 31, 2010. Total reserves for losses and LAE for the U.S. Mortgage Insurance Operations segment were $3.0 billion and $2.8 billion for the
periods ended June 30, 2011 and December 31, 2010, respectively.
|
**
|
Less-than-A quality loans with FICO scores below 575 is a subset of PMIs less-than-A quality loan portfolio.
|
***
|
2/28 Hybrid ARMs are loans whose interest rate is fixed for an initial two-year period and floats thereafter.
|
International Operations
International Operations results include continuing operations of PMI Europe and PMI Canada and the gain on sale of PMI Australia:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Percentage
Change
|
|
|
Six Months Ended June 30,
|
|
|
Percentage
Change
|
|
|
|
2011
|
|
|
2010
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
(USD in millions)
|
|
|
|
|
|
(USD in millions)
|
|
|
|
|
PMI Europe
|
|
$
|
(12.7
|
)
|
|
$
|
4.6
|
|
|
|
|
|
|
$
|
(12.5
|
)
|
|
$
|
5.1
|
|
|
|
|
|
PMI Canada
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations*
|
|
|
(12.0
|
)
|
|
|
4.6
|
|
|
|
|
|
|
|
(13.0
|
)
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations, net of taxes
|
|
|
150.5
|
|
|
|
|
|
|
|
|
|
|
|
150.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income*
|
|
$
|
138.5
|
|
|
$
|
4.6
|
|
|
|
|
|
|
$
|
137.5
|
|
|
$
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
May not total due to rounding.
|
60
PMI Europe
The table below sets forth the financial results of PMI Europe:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Percentage
Change
|
|
|
Six Months Ended June 30,
|
|
|
Percentage
Change
|
|
|
|
2011
|
|
|
2010
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
(USD in millions)
|
|
|
|
|
|
(USD in millions)
|
|
|
|
|
Net premiums written
|
|
$
|
(1.2
|
)
|
|
$
|
0.3
|
|
|
|
|
|
|
$
|
(0.4
|
)
|
|
$
|
1.0
|
|
|
|
(140.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
|
|
|
$
|
1.1
|
|
|
|
(100.0
|
)%
|
|
$
|
1.2
|
|
|
$
|
2.4
|
|
|
|
(50.0
|
)%
|
Net gains from credit default swaps
|
|
|
0.8
|
|
|
|
0.5
|
|
|
|
60.0
|
%
|
|
|
1.6
|
|
|
|
2.2
|
|
|
|
(27.3
|
)%
|
Net investment income
|
|
|
0.7
|
|
|
|
2.3
|
|
|
|
(69.6
|
)%
|
|
|
1.1
|
|
|
|
3.8
|
|
|
|
(71.1
|
)%
|
Net realized (losses) gains
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
0.6
|
|
|
|
3.9
|
|
|
|
(84.6
|
)%
|
|
|
3.0
|
|
|
|
8.7
|
|
|
|
(65.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE
|
|
|
12.1
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
13.1
|
|
|
|
(0.3
|
)
|
|
|
|
|
Other underwriting and operating expenses
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
(10.0
|
)%
|
|
|
2.1
|
|
|
|
2.6
|
|
|
|
(19.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
13.0
|
|
|
|
0.3
|
|
|
|
|
|
|
|
15.2
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before taxes
|
|
|
(12.4
|
)
|
|
|
3.6
|
|
|
|
|
|
|
|
(12.2
|
)
|
|
|
6.4
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
0.3
|
|
|
|
(1.0
|
)
|
|
|
(130.0
|
)%
|
|
|
0.3
|
|
|
|
1.3
|
|
|
|
(76.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(12.7
|
)
|
|
$
|
4.6
|
|
|
|
|
|
|
$
|
(12.5
|
)
|
|
$
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The average USD/Euro currency exchange rate was 1.4399 and 1.4050 for the second quarter and first half
of 2011 compared to 1.2728 and 1.3278 for the corresponding periods in 2010. The changes in the average USD/Euro currency exchange rates from 2010 to 2011 negatively impacted PMI Europes financial results by $0.7 million in the first half of
2011.
Premiums written and earned
Net premiums written consist of quarterly and annual premiums due on
insurance in force. Net premiums written are negative in the second quarter and first half of 2011 due to commutations that resulted in reversals of premiums written. Net premiums earned decreased in the second quarter and first half of 2011 due to
the decision in 2008 to cease writing new business in Europe and policy commutations. As PMI Europes insurance in force ages, premiums earned will continue to decline.
Net gains from credit default swaps
As of June 30, 2011, PMI Europe terminated all CDS contracts classified as derivatives, compared to exposure to five transactions as of
June 30, 2010. Net gains in the second quarter and first half of 2011 and 2010 from CDS contracts were driven by changes in the fair value of derivative contracts during the periods, resulting from income earned and the reversal of unrealized
losses as the contracts aged.
Net investment income
PMI Europes net investment income consists
primarily of interest income from cash and short-term investments and foreign exchange gains or losses arising from the revaluation of short-term monetary assets. Net investment income in the second quarter and first half of 2011 was lower than the
corresponding periods a year ago primarily due to foreign currency remeasurement losses in the second quarter and first half of 2011 compared to foreign currency remeasurement gains in the same periods of 2010. The pre-tax book yields were 2.8% and
2.0% as of June 30, 2011 and 2010, respectively.
Losses and LAE
Losses and LAE in the second
quarter and first half of 2011 were primarily driven by termination of risk on the U.S. sub-prime reinsurance portfolio, offset by gain on termination of CDS contracts and foreign exchange remeasurement gains on the CDS portfolio. Losses and LAE in
the second quarter and first half of 2010 were primarily driven by reserve decreases related to reinsurance of U.S. subprime exposures.
Underwriting and operating expenses
PMI Europes underwriting and operating expenses decreased in the second quarter and first half of 2011 compared to the second quarter and
first half of 2010 due to the cessation of new business writings.
61
Income taxes
The $0.3 million tax expense recorded for PMI Europe in
the second quarter of 2011 primarily related to current Italian corporate taxes. A valuation allowance was previously established against deferred tax assets as it is more likely than not that such assets would not be utilized. There
were no significant changes to the valuation allowance in the periods presented.
Risk-in-force
PMI
Europes risk-in-force was $0.5 billion as of June 30, 2011 and $0.7 billion as of December 31, 2010.
PMI Canada
PMI Canada had net income of $0.7 million in the second quarter of 2011 compared to an immaterial amount of net income in
the second quarter of 2010 primarily as a result of lower losses and LAE on new defaults reported in the second quarter of 2011. PMI Canadas net losses were $0.5 million in the first half of 2011 and 2010.
Discontinued Operations
We recognized the notional amount of the QBE Note plus accrued interest, net of taxes, through June 30, 2011 as a gain on sale of
discontinued operations for the quarter ended June 30, 2011. The gain was reflected net of $81.0 million in taxes. The total cash proceeds from the QBE Note of approximately $208 million are due to TPG on September 30, 2011. Upon receipt
of payment of the QBE Note, TPG is required to make a $25 million payment to MIC under the terms of the agreement pursuant to which MIC assigned and transferred the QBE Note to TPG. MIC recognized the $25 million receivable in the second quarter of
2011. Additionally, QBE made a $25 million cash payment to MIC on June 30, 2011 related to a profit sharing arrangement tied to the performance of the PMI Australia insurance portfolio.
Corporate and Other
The results of our Corporate and Other segment include
net investment income, interest expense, equity in earnings (losses) from certain limited partnership investments, and corporate overhead of The PMI Group, our holding company. Our Corporate and Other segment results are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Percentage
Change
|
|
|
Six Months Ended
June 30,
|
|
|
Percentage
Change
|
|
|
|
2011
|
|
|
2010
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
Net investment income
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
|
|
|
|
$
|
0.2
|
|
|
$
|
0.3
|
|
|
|
(33.3
|
)%
|
Equity in (losses) earnings from unconsolidated subsidiaries
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
(0.2
|
)
|
|
|
(150.0
|
)%
|
Net realized investment gains
|
|
|
|
|
|
|
0.3
|
|
|
|
(100.0
|
)%
|
|
|
|
|
|
|
0.3
|
|
|
|
(100.0
|
)%
|
Change in fair value of certain debt instruments
|
|
|
75.6
|
|
|
|
(47.7
|
)
|
|
|
|
|
|
|
97.3
|
|
|
|
(88.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
75.6
|
|
|
|
(47.3
|
)
|
|
|
|
|
|
|
97.6
|
|
|
|
(88.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
1.0
|
|
|
|
0.8
|
|
|
|
25.0
|
%
|
|
|
1.8
|
|
|
|
1.9
|
|
|
|
(5.3
|
)%
|
Other operating expenses
|
|
|
|
|
|
|
0.5
|
|
|
|
(100.0
|
)%
|
|
|
0.4
|
|
|
|
1.5
|
|
|
|
(73.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
|
1.0
|
|
|
|
1.3
|
|
|
|
(23.1
|
)%
|
|
|
2.2
|
|
|
|
3.4
|
|
|
|
(35.3
|
)%
|
Interest expense
|
|
|
10.4
|
|
|
|
10.1
|
|
|
|
3.0
|
%
|
|
|
20.7
|
|
|
|
19.5
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
11.4
|
|
|
|
11.4
|
|
|
|
|
|
|
|
22.9
|
|
|
|
22.9
|
|
|
|
|
|
Net income (loss) before income taxes
|
|
|
64.2
|
|
|
|
(58.7
|
)
|
|
|
|
|
|
|
74.7
|
|
|
|
(111.0
|
)
|
|
|
(167.3
|
)%
|
Income tax benefit
|
|
|
(0.9
|
)
|
|
|
(19.2
|
)
|
|
|
(95.3
|
)%
|
|
|
(0.9
|
)
|
|
|
(36.2
|
)
|
|
|
(97.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
65.1
|
|
|
$
|
(39.5
|
)
|
|
|
|
|
|
$
|
75.6
|
|
|
$
|
(74.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings (losses) from unconsolidated subsidiaries
Equity in earnings
(losses) from unconsolidated subsidiaries in the periods presented were driven by limited partnership earnings (losses).
62
Change in fair value of certain debt instruments
Fluctuations in our
credit spreads drove the changes in fair value of our debt. In the second quarter and first half of 2011 our total revenues were increased by $75.6 million and $97.3 million, respectively, as a result of the decreases in the fair value of our debt.
These decreases in fair value were due largely to the widening of credit spreads in the periods. In the second quarter and first half of 2010 our total revenues were decreased by $47.7 million and $88.5 million, respectively, as a result of the
increases in the fair value of our debt. These increases in fair value were due largely to the narrowing of credit spreads in the periods.
Share-based compensation expense
The increase in share-based compensation expense in the second quarter of 2011 was primarily due to grants with higher fair values in the second
quarter of 2011. The decrease in share-based compensation expense in the first half of 2011 was primarily due to the amortization of the stock units and options granted in the first quarter of 2011 which were at a lower fair value than prior years.
Other operating expenses
Other operating expenses decreased in the second quarter and first half of 2011
compared to the second quarter and first half of 2010 primarily due to the decrease in deferred compensation expense.
Interest expense
The increases in interest expense in the periods presented resulted from interest expense on our
Convertible Notes issued in the second quarter of 2010.
Income taxes
Our Corporate and Other segment had
an effective tax rate of (1.4)% and (1.2)% in the second quarter and first half of 2011 compared to the federal statutory rate of 35.0%. The effective tax rates were driven by the full valuation allowance established on the segments deferred
tax assets. The $0.9 million tax benefit recorded in the second quarter and first half of 2011 was primarily related to release of liability of certain state income taxes. The tax benefits recorded in the second quarter and first half of 2010 in our
Corporate and Other segment primarily reflect tax benefits attributable to state taxes, resulting in effective tax rates of 32.7% and 32.6% for the quarter and first six months ended June 30, 2010, respectively.
Liquidity and Capital Resources
Sources and Uses of Funds
The PMI Group Liquidity
The
PMI Group is a holding company and conducts its business operations through various subsidiaries. The PMI Groups liquidity is primarily dependent upon: (i) The PMI Groups subsidiaries ability to pay dividends to The PMI Group;
(ii) financing activities in the capital markets; (iii) maturing or refunded investments and investment income from The PMI Groups investment portfolio; and (iv) receivables from MIC with respect to tax sharing and expense cost
allocation agreements and regularly scheduled interest payments by MIC on the Surplus Notes, described below. The PMI Groups ability to access dividend and financing sources is limited and depends on, among other things, the financial
performance of The PMI Groups subsidiaries, regulatory restrictions on the ability of The PMI Groups insurance subsidiaries to pay dividends, The PMI Groups and its subsidiaries ratings by the rating agencies, and
restrictions and agreements to which The PMI Group or its subsidiaries are subject that restrict their ability to pay dividends, incur debt or issue equity securities. MIC did not pay dividends to The PMI Group in 2009 or 2010 and we do not expect
that MIC will pay dividends in the foreseeable future. We received a $45.7 million federal income tax refund in the first quarter of 2011. Of the $45.7 million, $7.3 million was allocated to The PMI Group and $38.4 million was allocated to the U.S.
Mortgage Insurance Operations segment.
The PMI Groups principal uses of liquidity are the payment of operating costs,
principal and interest on its capital instruments, dividends to shareholders, repurchases of its common shares, purchases of investments, and capital investments in and for its subsidiaries. The PMI Groups available funds, consisting of cash
and cash equivalents and investments, were $69.7 million at June 30, 2011 compared to $79.1 million at December 31, 2010. Provided an event of default with respect to our debt securities does not occur (see below), we believe there is
currently sufficient liquidity at the holding company to pay holding company expenses (including interest expense on its outstanding debt) through 2011. The PMI Group does not expect to pay any dividends in 2011.
Tax and Expense Cost Allocation Agreements
MIC and The PMI Group are parties to tax sharing agreements that
have benefited, and expense cost allocation agreements that are benefitting, us materially by reducing our obligations and liquidity requirements. The tax sharing agreements allocate current tax expense (benefit) and tax payments (refunds) between
TPG and its insurance subsidiaries. Due to significant losses, TPG is not expected to receive significant tax reimbursements from MIC until such time it begins to generate taxable income. There is a significant risk, particularly in the event that
the Department were to require MIC to cease writing new business, that the Department could require TPG to pay higher portions of incurred expenses currently paid by MIC pursuant to the cost allocation agreements, or could cause MIC to limit, or
cease making, tax and expense reimbursements to TPG.
63
Convertible Senior Notes due 2020
In the second quarter of 2010,
we completed a concurrent public offering of equity and debt, including the sale of $285 million aggregate principal amount of 4.50% Convertible Senior Notes due 2020 (Convertible Notes) and received aggregate net proceeds of
approximately $732 million. Of these aggregate net proceeds, The PMI Group contributed approximately $610 million to MIC in the form of capital and two surplus notes with aggregate face amounts of $285 million (the Surplus Notes).
The terms of the Surplus Notes provide for interest, principal and redemption payments that are generally concurrent with and
equivalent to the payment of interest, principal and redemptions with respect to the Convertible Notes or cash settlement of the Convertible Notes once such conversions exceed a specified level. All interest payments and principal repayments on the
Surplus Notes and early redemption of the Surplus Notes are subject to the prior approval of the Department, which has issued a letter to MIC pre-approving regularly scheduled interest payments to The PMI Group on the Surplus Notes. Although we have
received the letter from the Department approving MICs payment of interest provided all of the terms and conditions of the Surplus Notes are satisfied, that approval may be rescinded at any time, and it is more likely to be rescinded if the
Department were to require MIC to cease writing new business in all states. In addition, the pre-approval letter does not contain any advance approval of the payment of principal or redemption amounts. There is a significant risk that the Department
could require MIC to limit, or cease, making scheduled interest and principal payments to TPG on the Surplus Notes.
Indenture Governing TPGs Debt Securities
The indenture governing an aggregate of $685 million in principal
amount of TPGs outstanding debt securities provides that it will be an event of default with respect to those debt securities if, among other things, a court were to enter an order appointing a custodian, receiver, liquidator or similar
official of MIC or a substantial part of its property and such order were to continue unstayed and in effect for a period of 60 consecutive days or if MIC were to consent to such an appointment. Accordingly, although an order by the Department
requiring MIC to cease writing new business would not itself constitute an event of default, if the Department were to seek and obtain a court order appointing a receiver of MIC, and such order were to remain in effect unstayed for 60 consecutive
days, an event of default would occur with respect to these debt securities. In addition, it is possible that other actions that the Department might take or to which MIC might consent involving the appointment of other officials with authority over
MIC or its assets would also constitute such an event of default. If such an event of default were to occur, these debt securities would become immediately due and payable. TPG does not have access to sufficient funds or other sources of liquidity
sufficient to enable it to repay such debt securities if they were to become due and payable.
Credit
Facility
We have borrowed $49.8 million under our $50 million credit facility. The credit facility matures on October 24, 2011 and will be permanently reduced by the amount of any payment we receive in connection with the
QBE Note (see below).
The QBE Note
In connection with the sale of PMI Australia, MIC received
approximately $746 million in cash and a contingent note (the QBE Note) in the principal amount of approximately $187 million, with interest accruing through September 2011 when it matures and is payable. In May 2009, The PMI Group
purchased the QBE Note from MIC. The actual amount owed under the QBE Note was subject to potential reduction based upon the performance of PMI Australias policies in force at June 30, 2008. On June 30, 2011, QBE waived any right to
seek deductions to the value of the QBE Note. The removal of payment contingencies allowed PMI to recognize $206.6 million (pre-tax), representing the notional amount of $186.5 million plus accrued interest through June 30, 2011, in the second
quarter of 2011. The total cash proceeds from the QBE Note of approximately $208 million are due to TPG on September 30, 2011. Upon receipt of payment of the QBE Note, TPG is required to make a $25 million payment to MIC under the terms of the
agreement pursuant to which MIC assigned and transferred the QBE Note to TPG. Additionally, QBE made a $25.0 million cash payment to MIC on June 30, 2011 related to a profit sharing arrangement tied to the performance of the PMI Australia
insurance portfolio.
Dividends to The PMI Group
MICs ability to pay dividends to The PMI
Group is affected by state insurance laws, credit agreements, rating agencies, the discretion of insurance regulatory authorities and our agreements with Fannie Mae and Freddie Mac relating to PMAC. The laws of Arizona, MICs state of domicile
for insurance regulatory purposes, provide that MIC may pay dividends out of any available surplus account, without prior approval of the Director of the Arizona Department of Insurance (Arizona Director), during any 12-month period in
an amount not to exceed the lesser of 10% of policyholders surplus as of the preceding year end or the prior calendar years net investment income. A dividend that exceeds the foregoing threshold is deemed an extraordinary
dividend and requires the prior approval of the Arizona Director.
64
Other states may also limit or restrict MICs ability to pay shareholder dividends. For
example, California and New York prohibit mortgage insurers from declaring dividends except from the surplus of undivided profits over the aggregate of their paid-in capital, paid-in surplus and contingency reserves. MICs ability to pay
dividends is also subject to restriction under the terms of a runoff support agreement with Allstate Insurance Company (Allstate), described below under
Capital Constraints
.
MICs ability to pay dividends is also limited by the terms of our agreements with the GSEs relating to PMAC. Under the agreements,
MIC may not, without the GSEs prior written consent, pay dividends or make distributions or payments of indebtedness outside the ordinary course of business or in excess of specified levels. Notwithstanding these restrictions, our agreements
with Fannie Mae and Freddie Mac permit MIC to make dividend, interest and principal payments in connection with the issuance of certain new debt or equity instruments up to specified levels.
U.S. Mortgage Insurance Operations Liquidity
The principal uses of U.S. Mortgage Insurance Operations
liquidity are the payment of operating expenses, claim payments, taxes, interest payments on the Surplus Notes, dividends to The PMI Group and the growth of its investment portfolio. The principal sources of U.S. Mortgage Insurance
Operations liquidity are the investment portfolio, including cash and cash equivalents, written premiums, net investment income and capital contributed from its parent (TPG).
International Operations Liquidity
The principal uses of this segments liquidity are the payment of
operating expenses, claim payments, taxes and returns of capital. The principal sources of this segments liquidity are written premiums, investment maturities and net investment income.
Capital Constraints
We expect that MIC will continue to incur significant future losses. The degree of MICs noncompliance with applicable capital requirements will depend on the magnitude of losses in the second half
of 2011 and thereafter. Estimating future losses, and the timing of future losses, is inherently uncertain and requires significant judgment. Our expectations regarding MICs future losses may change significantly over time. Our losses have
exceeded our estimates in past periods, and our future losses could materially exceed our estimates.
Our future losses and
capital position could be affected by a variety of factors. Such factors include, among others:
|
|
|
Current and future economic conditions, including continued slow economic recovery from the most recent recession or the potential of the U.S. economy
to reenter a recessionary period, borrower access to credit, levels of unemployment, interest rates and home prices.
|
|
|
|
The level of new delinquencies, the claim rates of delinquencies (including the level of future modifications of delinquent loans) and the claim
severity within MICs mortgage insurance portfolio.
|
|
|
|
Potentially negative economic changes in geographic regions where our insurance in force is more concentrated.
|
|
|
|
The levels of future modifications, rescissions and claim denials and future reversals of rescissions and claim denials.
|
|
|
|
The rate at which our U.S. mortgage insurance portfolio remains in force (persistency rate).
|
|
|
|
The timing of future claims paid.
|
65
|
|
|
Future levels of new insurance written (and the profitability of such business), which will impact future premiums written and earned and future
losses.
|
|
|
|
The performance of our investment portfolio and the extent to which issuers of the fixed-income securities that we own default on principal and
interest payments or the extent to which we are required to impair portions of the portfolio as a result of deteriorating capital markets.
|
|
|
|
The statutory credit MIC can continue to receive with respect to its subsidiary investments.
|
|
|
|
The performance of PMI Europe, which is affected by the U.S. and European mortgage markets.
|
|
|
|
Any requirements to provide capital under the PMI Europe or CMG Mortgage Insurance Company (CMG MI) capital support agreements.
|
We are exploring capital alternatives that, if successful, could provide capital or capital relief
to MIC or capital to other insurance subsidiaries so that they may replace MIC as our primary writer of new insurance. Such alternatives include the restructuring of MICs primary insurance portfolio, debt or equity offerings by our insurance
subsidiaries or TPG, and reinsurance. We may not be able to consummate any capital raising or capital relief transactions on favorable terms, in a timely manner or at all. See Item 1A.
Risk Factors Depending on the timing and
magnitude of future losses, MIC could exhaust its available claims-paying resources and capital and surplus,
and
We must procure substantial capital to preserve our ability to continue to write new business and we may not be able to
raise such capital on a timely basis and on favorable terms, or at all.
If it were to be enforced by a court of final
appeal or applicable regulator, the terms of a 1994 Allstate runoff support agreement restrict MIC in the event that its risk-to-capital ratio exceeds 23 to 1. Under the runoff support agreement, among other things, MIC may not declare or pay
dividends at any time that its risk-to-capital ratio equals or exceeds 23 to 1 or if such a dividend would cause its risk-to-capital ratio to equal or exceed 23 to 1. In addition, if MICs risk-to-capital ratio equals or exceeds 23 to 1 at
three consecutive monthly measurement dates, MIC may not enter into new insurance or reinsurance contracts without the consent of Allstate. Following such time as MICs risk-to-capital ratio were to exceed 24.5 to 1, the runoff support
agreement requires MIC to transfer substantially all of its liquid assets to a trust account for the payment of MICs obligations to policyholders, therefore negatively affecting MICs and The PMI Groups liquidity position. The
original risk-in-force on policies covered under the Allstate runoff support agreement has been reduced from approximately $13 billion in 1994 to less than $30 million as of June 30, 2011 (less than 0.2% of the original risk-in-force).
Consolidated Contractual Obligations
Our consolidated contractual obligations include reserves for losses and LAE, long-term debt obligations, operating lease obligations, capital lease obligations and purchase obligations. Most of our
purchase obligations are capital expenditure commitments that will be used for technology improvements. We have lease obligations under certain non-cancelable operating leases. In addition, we may be committed to fund, if called upon to do so, $2.7
million of additional equity in certain limited partnership investments.
66
Consolidated Investments
Net Investment Income
Net investment income consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Fixed income securities
|
|
$
|
16,204
|
|
|
$
|
20,068
|
|
|
$
|
32,274
|
|
|
$
|
43,687
|
|
Equity securities
|
|
|
1,533
|
|
|
|
2,768
|
|
|
|
3,228
|
|
|
|
5,869
|
|
Short-term investments, cash and cash equivalents and other
|
|
|
(21
|
)
|
|
|
1,766
|
|
|
|
(218
|
)
|
|
|
2,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income before expenses
|
|
|
17,716
|
|
|
|
24,602
|
|
|
|
35,284
|
|
|
|
52,139
|
|
Investment expenses
|
|
|
(879
|
)
|
|
|
(741
|
)
|
|
|
(1,725
|
)
|
|
|
(1,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
16,837
|
|
|
$
|
23,861
|
|
|
$
|
33,559
|
|
|
$
|
50,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decreases in net investment income in the second quarter and first half of 2011 compared to the
second quarter and first half of 2010 were primarily due to lower average pre-tax book yields and lower average investment balances. Our consolidated pre-tax book yield was 2.4% and 2.8% as of June 30, 2011 and 2010, respectively. The decline
in our consolidated pre-tax book yield was primarily due to our decision to liquidate the majority of our tax-advantaged municipal bond and preferred stock securities in 2010 which generally had higher average book yields. A significant majority of
the proceeds were reinvested in taxable securities with lower average book yields. The negative net investment income related to short-term investments, cash and cash equivalents and other for the second quarter and first half of 2011 was primarily
due to foreign exchange remeasurement losses on U.S. denominated short-term monetary assets in PMI Europe arising from the strengthening of the Euro against the U.S. dollar.
Net Realized Investment Gains (Losses)
Net realized investment gains
(losses) on investments are composed of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
$
|
2,574
|
|
|
$
|
3,146
|
|
|
$
|
2,673
|
|
|
$
|
9,041
|
|
Gross losses
|
|
|
(1,790
|
)
|
|
|
(3,706
|
)
|
|
|
(1,805
|
)
|
|
|
(5,188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses)
|
|
|
784
|
|
|
|
(560
|
)
|
|
|
868
|
|
|
|
3,853
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
|
97
|
|
|
|
281
|
|
|
|
345
|
|
|
|
3,773
|
|
Gross losses
|
|
|
(227
|
)
|
|
|
|
|
|
|
(619
|
)
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (losses) gains
|
|
|
(130
|
)
|
|
|
281
|
|
|
|
(274
|
)
|
|
|
3,625
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
|
7
|
|
|
|
676
|
|
|
|
7
|
|
|
|
352
|
|
Gross losses
|
|
|
(467
|
)
|
|
|
|
|
|
|
(488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (losses) gains
|
|
|
(460
|
)
|
|
|
676
|
|
|
|
(481
|
)
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains before income taxes
|
|
|
194
|
|
|
|
397
|
|
|
|
113
|
|
|
|
7,830
|
|
Income tax expense
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
2,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains after income taxes
|
|
$
|
194
|
|
|
$
|
258
|
|
|
$
|
113
|
|
|
$
|
5,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net realized investment gains in the second quarter and first half of 2011 are primarily attributable
to realized gains from the sales of municipal, government and corporate bonds partially offset by realized losses on the sale of certain preferred stocks. Net realized investment gains for the second quarter and first half of 2010 resulted primarily
from sales of municipal bonds and preferred stocks.
67
Investment Portfolio by Operating Segment
The following table summarizes the estimated fair value of the consolidated investment portfolio as of June 30, 2011 and
December 31, 2010. Amounts shown under International Operations consist of the investment portfolios of PMI Europe and PMI Canada. Amounts shown under Corporate and Other consist of the investment portfolio of The PMI
Group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Mortgage
Insurance
Operations
|
|
|
International
Operations
|
|
|
Corporate and
Other
|
|
|
Consolidated
Total
|
|
|
|
(Dollars in thousands)
|
|
June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Municipal bonds
|
|
$
|
220,148
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
220,148
|
|
Foreign governments
|
|
|
97,351
|
|
|
|
14,187
|
|
|
|
|
|
|
|
111,538
|
|
Corporate bonds
|
|
|
1,160,360
|
|
|
|
54,826
|
|
|
|
|
|
|
|
1,215,186
|
|
FDIC corporate bonds
|
|
|
168,218
|
|
|
|
14,371
|
|
|
|
|
|
|
|
182,589
|
|
U.S. governments and agencies
|
|
|
276,551
|
|
|
|
6,972
|
|
|
|
|
|
|
|
283,523
|
|
Asset-backed securities
|
|
|
192,124
|
|
|
|
|
|
|
|
|
|
|
|
192,124
|
|
Mortgage-backed securities
|
|
|
331,288
|
|
|
|
|
|
|
|
1,875
|
|
|
|
333,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
2,446,040
|
|
|
|
90,356
|
|
|
|
1,875
|
|
|
|
2,538,271
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
23,539
|
|
|
|
|
|
|
|
|
|
|
|
23,539
|
|
Preferred stocks
|
|
|
74,516
|
|
|
|
|
|
|
|
|
|
|
|
74,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
98,055
|
|
|
|
|
|
|
|
|
|
|
|
98,055
|
|
Short-term investments
|
|
|
6,789
|
|
|
|
24
|
|
|
|
|
|
|
|
6,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
2,550,884
|
|
|
$
|
90,380
|
|
|
$
|
1,875
|
|
|
$
|
2,643,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Mortgage
Insurance
Operations
|
|
|
International
Operations
|
|
|
Corporate and Other
|
|
|
Consolidated Total
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Municipal bonds
|
|
$
|
220,111
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
220,111
|
|
Foreign governments
|
|
|
135,198
|
|
|
|
17,141
|
|
|
|
|
|
|
|
152,339
|
|
Corporate bonds
|
|
|
1,127,275
|
|
|
|
104,542
|
|
|
|
|
|
|
|
1,231,817
|
|
FDIC corporate bonds
|
|
|
169,169
|
|
|
|
11,601
|
|
|
|
|
|
|
|
180,770
|
|
U.S. governments and agencies
|
|
|
310,713
|
|
|
|
12,410
|
|
|
|
|
|
|
|
323,123
|
|
Asset-backed securities
|
|
|
220,872
|
|
|
|
|
|
|
|
|
|
|
|
220,872
|
|
Mortgage-backed securities
|
|
|
320,342
|
|
|
|
|
|
|
|
1,832
|
|
|
|
322,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
2,503,680
|
|
|
|
145,694
|
|
|
|
1,832
|
|
|
|
2,651,206
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
30,664
|
|
|
|
|
|
|
|
|
|
|
|
30,664
|
|
Preferred stocks
|
|
|
120,421
|
|
|
|
|
|
|
|
|
|
|
|
120,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
151,085
|
|
|
|
|
|
|
|
|
|
|
|
151,085
|
|
Short-term investments
|
|
|
17,843
|
|
|
|
24
|
|
|
|
|
|
|
|
17,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
2,672,608
|
|
|
$
|
145,718
|
|
|
$
|
1,832
|
|
|
$
|
2,820,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our consolidated investment portfolio holds primarily investment grade securities comprised of readily
marketable fixed income and equity securities. The fair value of these securities in our consolidated investment portfolio decreased to $2.6 billion as of June 30, 2011 from $2.8 billion as of December 31, 2010 as a result of claims paid
in the first half of 2011.
Our consolidated investment portfolio consists primarily of publicly traded corporate bonds, U.S.
and foreign government bonds, municipal bonds, mortgage-backed securities, asset-backed securities and preferred stocks. Our investment policies and strategies are subject to change depending on regulatory, economic and market conditions and our
financial condition and operating requirements, including our tax position.
68
The following table summarizes the rating distributions of our consolidated investment
portfolio (including cash and cash equivalents, excluding common stocks) as of June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Mortgage
Insurance
Operations
|
|
|
International
Operations
|
|
|
Corporate and
Other
|
|
|
Consolidated
Total
|
|
AAA or equivalent
|
|
|
48
|
%
|
|
|
53
|
%
|
|
|
100
|
%
|
|
|
50
|
%
|
AA
|
|
|
17
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
17
|
%
|
A
|
|
|
27
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
26
|
%
|
BBB
|
|
|
8
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011, approximately $115 million, or 4.0% of our consolidated investment portfolio
(including cash and cash equivalents, excluding common stocks) was insured by monoline financial guarantors. The financial guarantors include AMBAC, NPFG, AGC, AGMC and others.
We do not rely on the financial guarantees as a principal source of repayment when evaluating securities for purchase. Rather, securities
are evaluated primarily based on the underlying issuers credit quality. During 2008, several of the financial guarantors listed above were downgraded by one or more of the rating agencies. A downgrade of a financial guarantor may have an
adverse effect on the fair value of investments insured by the downgraded financial guarantor. If we determine that declines in the fair values of our investments are other-than-temporary, we record a realized loss. The table below illustrates the
underlying rating distributions of our consolidated investment portfolio (including cash and cash equivalents, excluding common stocks) as of June 30, 2011, excluding the benefit of the financial guarantees provided by these financial
guarantors. Underlying ratings, excluding the benefit of financial guarantors, are based upon the higher underlying rating assigned by S&P or Moodys when an underlying rating exists from either rating agency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Mortgage
Insurance Operations
|
|
|
International
Operations
|
|
|
Corporate and
Other
|
|
|
Consolidated
Total
|
|
AAA or equivalent
|
|
|
48
|
%
|
|
|
53
|
%
|
|
|
100
|
%
|
|
|
50
|
%
|
AA
|
|
|
17
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
16
|
%
|
A
|
|
|
28
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
27
|
%
|
BBB
|
|
|
7
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Support Obligations
MIC has a capital support agreement with PMI Europe, with a corresponding guarantee from The PMI Group, under which MIC may be required to
make additional capital contributions from time-to-time as necessary to maintain PMI Europes minimum capital requirements. Under the PMI Europe capital support agreement, MIC also guarantees timely payment of PMI Europes obligations. MIC
also has a capital support agreement whereby it agreed to contribute funds, under specified conditions, to maintain CMG MIs risk-to-capital ratio (as defined in the agreement) at or below 23 to 1. MICs obligation under the CMG MI capital
support agreement is limited to an aggregate of $37.7 million. As of June 30, 2011, CMG MIs risk-to-capital ratio was 19.7 to 1. MIC also has a capital support agreement with PMI Canada. We believe it is unlikely that there is any
remaining material support obligation under this agreement.
Cash Flows
With respect to our holding company, our principal sources of funds are cash flows generated by our subsidiaries and investment income
derived from our investment portfolios. One of the primary goals of our cash management policy is to ensure that we have sufficient funds on hand to pay obligations when they are due. We believe that we have sufficient cash to meet these and other
of our short- and medium-term obligations. Provided an event of default with respect to our debt securities does not occur, we believe that we currently have sufficient liquidity at our holding company to pay holding
69
company expenses (including interest expense on our outstanding debt) through 2011. See
Liquidity and Capital Resources -Sources and Uses of Funds Indenture Governing TPGs Debt
Securities.
The PMI Group currently has sufficient funds or other sources of liquidity to enable it to repay our credit facility if the obligation is required to be repaid prior to maturity.
Consolidated cash flows used in operating activities, including premiums, investment income, underwriting and operating expenses and
losses, were $221.2 million in the first half of 2011 compared to consolidated cash flows used in operating activities of $520.8 million in the first half of 2010. Cash flows used in operations decreased in the first half of 2011 compared to the
first half of 2010 primarily due to lower levels of claim payments from PMI. We expect cash flows from operating activities to be negatively affected throughout 2011 due to payment of claims from loss reserves recorded by PMI in 2008, 2009 and 2010,
the continued reduction in premiums earned (which is driven by lower premiums written) due to the continued decline of insurance in force, and the decline in net investment income due to lower investment balances and lower investment yields.
Consolidated cash flows provided by investing activities in the first half of 2011, including purchases and sales of
investments and capital expenditures, were $183.9 million compared to consolidated cash flows provided by investing activities of $205.3 million in the first half of 2010. Cash flows provided by investing activities decreased in the first half of
2011 compared to cash flows provided by investing activities in the first half of 2010 primarily as a result of proceeds from sales of fixed income and equity securities being lower than net purchases of investment securities. We expect to continue
to maintain significant cash and cash equivalents available to pay current and future obligations.
Consolidated cash flows
provided by financing activities were $0.3 million in the first half of 2011 compared to consolidated cash flows provided by financing activities of $657.4 million in the first half of 2010. The cash flows provided by financing activities in 2010
were primarily due to the sale of additional common stock and the Convertible Notes in the second quarter of 2010.
Ratings
The rating agencies have assigned the following ratings to certain of The PMI Groups subsidiaries and equity
investee subsidiaries:
|
|
|
|
|
|
|
|
|
Standard &
Poors
|
|
Moodys
|
|
Fitch
|
Financial Strength Ratings
|
|
|
|
|
|
|
PMI Mortgage Insurance Co.
|
|
B-
|
|
B3
|
|
NR
|
CMG MI
|
|
BBB
|
|
NR
|
|
BBB
|
Ratings assigned to our holding company or its debt are set out below.
|
|
|
|
|
|
|
|
|
Holding Company Ratings
|
|
|
Standard &
Poors
Counterparty Credit Rating
|
|
Moodys Senior
Unsecured Debt Rating
|
|
Fitch Senior
Unsecured Debt Rating
|
The PMI Group, Inc.
|
|
CCC-
|
|
Caa3
|
|
NR
|
Recent Developments Relating to Mortgage Insurance Companies Ratings
On June 14, 2011, Standard & Poors Ratings Services (S&P) lowered the counterparty credit and
financial strength ratings on PMI Mortgage Insurance Co. to B- from B+ and placed the ratings on CreditWatch with negative implications. At the same time, S&P lowered the counterparty credit and senior debt ratings on The
PMI Group, Inc. to CCC- from CCC+ and placed the ratings on CreditWatch Negative.
On July 5,
2011, S&P affirmed B- counterparty credit and financial strength ratings on PMI Mortgage Insurance Co. and CCC- counterparty credit rating on The PMI Group, Inc., and removed all of these ratings from CreditWatch with
negative implications. The outlook is negative.
70
On July 29, 2011, Moodys Investors Service (Moodys) lowered the
insurance financial strength rating of PMI Mortgage Insurance Co. to B3 from B2. The outlook for the rating is negative. Moodys also lowered the senior unsecured debt ratings of The PMI Group, Inc. to Caa3
from Caa2. The outlook for the rating is negative.
Determinations of ratings by the rating agencies are affected
by a variety of factors, including macroeconomic conditions, economic conditions affecting the mortgage insurance industry, changes in business prospects, regulatory conditions, competition, underwriting and investment losses and the need for
additional capital. There can be no assurance that our wholly-owned insurance subsidiaries or our holding company or its debt will not be downgraded in the future. If our wholly-owned insurance subsidiaries are downgraded by one or more rating
agencies, our business could be adversely affected. If our holding company or its debt is downgraded by one or more rating agencies, we could face an increased challenge in securing external sources of financing.
CRITICAL ACCOUNTING ESTIMATES
Managements Discussion and Analysis of Financial Condition and Results of Operations
, as well as disclosures included elsewhere in this report, are based upon our consolidated financial
statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosure of contingencies. Actual results may differ significantly from these estimates. We believe that the following critical accounting estimates involved significant judgments used in
the preparation of our consolidated financial statements.
Reserves for Losses and LAE
We establish reserves for losses and LAE to recognize the liability of unpaid losses related to insured mortgages that are in default. We
do not rely on a single estimate to determine our loss and LAE reserves. To ensure the reasonableness of our ultimate estimates, we develop scenarios using generally recognized actuarial projection methodologies that result in various possible
losses and LAE.
Changes in loss reserves can materially affect our consolidated net income or loss. The process of estimating
loss reserves requires us to forecast interest rate, employment and housing market environments, which are highly uncertain. Therefore, the process requires significant management judgment and estimation. The use of different estimates would have
resulted in the establishment of different reserves. In addition, changes in the accounting estimates are likely to occur from period to period based on the economic conditions. We review the judgments made in our prior period estimation process and
adjust our current assumptions as appropriate. While our assumptions are based in part upon historical data, the loss provisioning process is complex and subjective and, therefore, the ultimate liability may vary significantly from our estimates.
The following table shows the reasonable range of losses and LAE reserves, as determined by our actuaries, and recorded
reserves for losses and LAE (gross of recoverables) as of June 30, 2011 and December 31, 2010 by segment and on a consolidated basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011
|
|
|
As of December 31, 2010
|
|
|
|
Low
|
|
|
High
|
|
|
Recorded
|
|
|
Low
|
|
|
High
|
|
|
Recorded
|
|
|
|
(Dollars in millions)
|
|
|
(Dollars in millions)
|
|
U.S. Mortgage Insurance Operations
|
|
$
|
2,500.0
|
|
|
$
|
3,525.0
|
|
|
$
|
2,960.5
|
|
|
$
|
2,335.0
|
|
|
$
|
3,285.0
|
|
|
$
|
2,846.6
|
|
International Operations
|
|
|
32.9
|
|
|
|
34.8
|
|
|
|
34.3
|
|
|
|
17.2
|
|
|
|
33.1
|
|
|
|
23.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated loss and LAE reserves*
|
|
$
|
2,532.9
|
|
|
$
|
3,559.8
|
|
|
$
|
2,994.8
|
|
|
$
|
2,352.2
|
|
|
$
|
3,318.1
|
|
|
$
|
2,869.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
May not total due to rounding.
|
U.S. Mortgage Insurance Operations
We establish PMIs reserves for losses and LAE based upon our estimate of
unpaid losses and LAE on (i) reported mortgage loans in default and (ii) estimated defaults incurred but not reported (IBNR) to PMI by its customers. Our best estimate of PMIs reserves for losses and LAE is derived
primarily from our analysis of PMIs default and loss experience. The key assumptions used in the estimation process are expected claim rates, average claim sizes and costs to settle claims. We evaluate our assumptions in light of PMIs
historical patterns of claim
71
payments, loss experience in past and current economic environments, the seasoning of PMIs various books of business, PMIs coverage levels, the credit quality profile of PMIs
portfolios, and the geographic mix of PMIs business. Our assumptions are influenced by historical loss patterns and are adjusted to reflect recent loss trends. Our assumptions are also influenced by our assessment of current and future
economic conditions, including trends in housing prices and unemployment. We also evaluate various scenarios representing possible losses and LAE under different economic assumptions.
Our actuaries utilize a number of generally recognized actuarial projection methodologies in order to determine a single point estimate
of loss reserves. The actuarial reviews and documentation are completed in accordance with professional actuarial standards with reserves established on a basis consistent with GAAP. The selected assumptions reflect the actuarys judgment based
on historical data and experience combined with information concerning current underwriting, economic, judicial, regulatory and other influences on ultimate claim settlements.
The lead methodology our actuaries use is a frequency-severity method based on the inventory of pending delinquencies. The frequency-severity method is preferable when there have been significant changes
in established historical patterns of losses, as is the case in the recent and current credit cycle. In using this method, our actuaries can optimize results by utilizing our knowledge of the number of delinquent loans and the coverage amounts
(risk size) on those loans. The delinquencies are grouped by the year in which they were reported to PMI (report year). A claim rate is then developed for each report year, which represents an estimate of the frequency with
which the delinquencies may become claims. The claim rates are based on an analysis of the patterns of emerging cure counts and claim counts for the report year, the foreclosure status of the pending delinquencies, the product and geographical mix
of the delinquencies and the actuaries views of future economic and claim conditions. The actuaries estimate the severity of projected claims by examining the risk sizes on the delinquent loans and estimating the portion of the coverage that
will be paid, as well as any expenses. The actuaries estimation of the portion of coverage paid is based on a review of historical data and an assessment of economic conditions and consideration of the opportunities for loss mitigation
techniques, various expenses claimable by insureds and the level of equity the borrowers may have in their homes.
In addition
to the frequency-severity method, our actuaries use various chain-ladder methods utilizing actual loss amounts and expected patterns of loss emergence to determine an estimate of ultimate losses. These methods may be appropriate when there is a
relatively stable pattern of loss emergence. Chain-ladder techniques are less suitable in cases in which the insurer does not have a developed claims history. In the chain-ladder technique, the ultimate value of a claim count, paid loss amount or
other amount is estimated by applying a loss development factor to the current value. The loss development factor measures the portion of the loss emergence pattern that has been completed and extends the current amount to its ultimate value. The
difference between the ultimate value and the current value is the amount carried in the loss reserve. The emergence pattern used in this technique is based on an analysis of historical patterns of emergence from prior report years.
Management believes the amounts recorded for U.S. Mortgage Insurance Operations as of June 30, 2011 represent the most likely
outcome within the actuarial range. The recorded reserves, slightly below the midpoint of the actuarially-determined reserve range, are based upon, among many considerations, managements estimates of claim rates and claim sizes. As discussed
below, projected future loss mitigation, rescission and claim denial activity continue to positively affect managements views of future claim rates and claim sizes. In the first half of 2011, however, fewer than expected cures of delinquent
loans and loan modifications negatively affected managements claim rate assumptions on notices of defaults received in 2010. In addition, management increased its estimation of future reinstatements of previously denied claims. This
re-estimation negatively affected our loss reserves.
Loss mitigation activity and loss reserves.
Our projection of
future modifications of delinquent insured loans is a factor in managements evaluation of the selected claim rate. We continue to expect that a material percentage of loans in our delinquent loan inventory will be modified or become current,
and managements loss reserve estimation process takes into consideration this expectation. Because the age of a delinquency is a primary factor in determining whether a loan is likely to modify and become current in the future, management
develops its projections of future modifications of existing delinquent loans based on the year in which we received the notice of default (an NOD report year). Within each NOD report year, management divides the pending delinquent loans
into various categories depending on their relative probabilities of modifying and curing in the future. To develop the categories and probabilities, management assesses numerous factors, including servicer reports on the stages of retention and
liquidation workouts and forbearance
72
arrangements; managements assessment of loans in our default inventory that may have the potential to qualify for an available modification plan, including HAMP; and historical modification
data and trends. As of June 30, 2011, we forecast that approximately 18% of our primary delinquent loan inventory will cure as a result of future loan modifications. The estimated amount of risk-in-force associated with this percentage was
approximately $1.0 billion.
Management does not include a re-default assumption within its loss reserve estimates related to
loan modifications. As loan modifications have the effect of curing the underlying default, successfully modified loans are removed from PMIs delinquent loan inventory and, therefore, cease to be included in our loss reserve estimates. This is
consistent with our loss reserving methodology of not establishing loss reserves for future claims on insured loans that are not currently in default and establishing reserves only with respect to loans currently identified as in default. We treat a
subsequent re-default of a modified loan as a new default in the period it is reported to us and a reserve is established through our normal loss reserving process.
Rescission activity and loss reserves
. Our projection of future rescission activity with respect to the current inventory of delinquent loans has reduced and continues to materially reduce our loss
reserve estimates. In each reporting period, management estimates the future rescission rate on the then existing inventory of delinquent loans. An increase in managements estimate of the future rescission rate in a period would increase the
reserve benefit, while a reduction in the estimated future rescission rate and actual rescission activity in a period would reduce the recognized benefit. Managements estimate is based upon historical data and trends, including past
percentages of delinquent loans rescinded, and other factors, including the characteristics and age of the delinquent loan inventory and the current inventory of loan files under or scheduled for investigation. In this estimation process, we also
consider that we will in the future reinstate a portion of the policies subject to future rescission activity following requests by lenders for reconsideration or challenges of our rescission decisions. (For a discussion of our rescission
reconsideration process, see
Conditions and Trends Affecting our Business U.S. Mortgage Insurance Operations Rescission Activity.
) Accordingly, in our forecasting, we utilize an estimate of future rescissions net of estimated
reinstatements. Our practice of projecting reinstatements has been refined over time as we gain further actual experience and utilizes, among other things, our experience of the cumulative incidence of rescission reinstatements that have also become
paid claims and our views of likely future trends.
As of June 30, 2011 and December 31, 2010, our loss reserves
balances were reduced by reserve benefits of approximately $0.15 billion and $0.26 billion, respectively, as a result of estimated future rescission activity (net of estimated reinstatements). The decrease in the reserve benefit in the first half of
2011 was driven by actual rescission activity (net of reinstatements) in the first half of 2011 of approximately $102 million. This rescission activity reduced the reserve benefit in the first six months of 2011 but did not impact our consolidated
statement of operations.
As a result of our rescission reconsideration process, management also expects that PMI will
reinstate coverage in the future on a portion of previously rescinded policies subject to requests by lenders that we reconsider our rescission. At any point in time, we have pending requests or challenges from lenders with respect to which we have
not completed our reconsideration of our rescission decision. Based on our historical experience, we estimate the portion of policies that we expect to reinstate after our reconsideration is complete, and take such estimate into account in
establishing our IBNR reserves. In the first halves of 2011 and 2010, we reinstated approximately $48.1 million and $40.3 million, respectively, of previously delinquent rescinded risk. We did not significantly change our IBNR reserve in the second
quarter and first half of 2011 related to our change in estimates of future reinstatements of previously rescinded policies. With respect to loans as to which we have determined not to reinstate coverage, we do not include a reserve in our IBNR and
loss reserves for the possibility that we may be unsuccessful in defending our rescissions in litigation or other dispute resolution processes. See Item 1A.
Risk Factors Rescission activity may not materially reduce our loss reserve
estimates at the same levels we have recently experienced. Also, our loss reserves will increase if future rescission activity is lower than projected, if we reverse rescissions beyond expected levels, or if we are unable to defend our rescissions
in litigation and, therefore, are required to reassume risk and establish loss reserves on delinquent loans.
Our
investigation and rescission reconsideration processes require detailed reviews of loan level origination files, which are time and resource intensive. As a result, during any reporting period, we maintain inventories of: (i) loan files
identified for investigation or files which are being investigated; and (ii) requests for PMI to reconsider its previous rescissions of coverage which are under review by PMI. We review the size and characteristics of these inventories in
detail when we project future rescission and rescission reinstatement activity.
73
Claim denials and loss reserves.
Our projection of future claim denial activity with
respect to the current inventory of delinquent loans has reduced, and is continuing to reduce, our loss reserve estimates. An increase in our estimate of future claim denial activity in a period would increase the reserve benefit, while a reduction
in our estimate of future claim denial activity and actual claim denial activity in a period would reduce the recognized reserve benefit. Historically, the significant majority of claim denials resulted from the inability of servicers to produce
documents necessary to perfect the claim (documentation claim denials). Managements estimate of future documentation claim denials on the existing inventory of delinquent loans is based upon historical document claim denial data
and trends, and the performance of various servicers of loans within the delinquent loan inventory. In arriving at its estimate, management also estimates the percentage of future documentation claim denials that will later be reversed, and
therefore paid, as a result of the servicer ultimately providing to PMI the required loan or claim documentation. In considering future reversal rates, management reviews historical reversal data by particular servicers.
As of June 30, 2011 and December 31, 2010, our loss reserves balances were reduced by approximately $0.24 billion and $0.40
billion, respectively, by our estimated future claim denial activity (net of estimated reversals of claim denials). The decrease in the reserve benefit in the first half of 2011 was driven by actual claim denials, net of reversals of claim denials,
occurring in the first half of 2011 of approximately $121 million. This $121 million reduction to the reserve benefit did not impact our consolidated statement of operations for the first half of 2011. An additional driver for the reduction in the
reserve benefit was an increase in our estimate of future reversals of both claims that have been denied and future claim denials. This net reduction of $35 million from the beginning of 2011 increased our loss and loss adjustment expenses. See
Item 1A.
Risk Factors Claim denials may not materially reduce our loss reserve estimates at the same levels as we expect, and our loss reserves will increase if future claim denial activity is lower than projected or if we reverse
claim denials beyond expected levels.
Our estimate of future reversals of claims previously denied is one of the
components of PMIs IBNR reserve. The methodology we used to estimate future reversals of claims previously denied was similar to our rescission reversal estimate process described above. The amounts of risk related to previously denied claims
that were subsequently reversed were $130.8 million and $226.8 million for the three and six months ended June 30, 2011, respectively, compared to $28.7 million and $65.6 million for the same periods in 2010, respectively. In the first half of
2011, management increased its estimate of future reversals of previously denied claims resulting in an increase in the IBNR reserve and a negative impact on losses in our consolidated statements of operations of approximately $67 million. This
increase in estimate was driven by recent increases in the frequency of servicers production of previously requested loan documentation on denied claims.
Beginning in 2010, claim denials also included claims denied or curtailed as a result of servicers failure to, among other things, adhere to customary servicing standards applicable to delinquent
loans (servicer-related claim denials). We expect the number of servicer-related claim denials to increase in 2011. Beginning in the fourth quarter of 2010, we assessed the likelihood and estimated the impact of servicer-related claim
denials on our loss reserves. In this process, we considered our internal reviews of various servicers performance as well as our review of specific claim files for which we identified potential servicing failures, but had not denied as of the
balance sheet date. Based upon these reviews, we established a preliminary estimate of the potential future benefit of servicer-related claim denials. However, due to a lack of substantial historical data, we significantly limited this potential
future benefit at the time of recording our loss reserves as of December 31, 2010 and June 30, 2011. The benefit recorded in our loss reserve estimate, net of estimated reversals, was limited to the actual claims files which were reviewed
and met our criteria for denial, but for which the claim denial had not yet been processed as of the balance sheet date. As with documentation claim denials, our servicer-related denial estimates include assumptions relating to the percentage of
denials that will later be reversed and paid. In considering future reversal rates, we reviewed, among other things, historical reversal data related to documentation claim denials.
74
The table below provides a reconciliation of our U.S. Mortgage Insurance Operations
beginning and ending reserves for losses and LAE for the quarters ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in millions)
|
|
Balance at January 1
|
|
$
|
2,846.6
|
|
|
$
|
3,138.3
|
|
Reinsurance recoverables
|
|
|
(459.7
|
)
|
|
|
(703.6
|
)
|
|
|
|
|
|
|
|
|
|
Net balance at January 1
|
|
|
2,386.9
|
|
|
|
2,434.7
|
|
Losses and LAE incurred (principally with respect to defaults occuring in):
|
|
|
|
|
|
|
|
|
Current year
|
|
|
364.4
|
|
|
|
492.2
|
|
Prior years
|
|
|
304.2
|
|
|
|
167.9
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
668.6
|
|
|
|
660.1
|
|
Losses and LAE payments (principally with respect to defaults occuring in):
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(1.2
|
)
|
|
|
(2.2
|
)
|
Prior years
|
|
|
(485.8
|
)
|
|
|
(713.0
|
)
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
|
(487.0
|
)
|
|
|
(715.2
|
)
|
|
|
|
|
|
|
|
|
|
Net balance at June 30
|
|
|
2,568.5
|
|
|
|
2,379.6
|
|
Reinsurance recoverables
|
|
|
392.0
|
|
|
|
613.6
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30
|
|
$
|
2,960.5
|
|
|
$
|
2,993.2
|
|
|
|
|
|
|
|
|
|
|
The above loss reserve reconciliation shows the components of our losses and LAE reserve changes for the
periods presented. Losses and LAE payments of $487.0 million and $715.2 million for the periods ended June 30, 2011 and 2010, respectively, reflect amounts paid during the periods presented and are not subject to estimation. Total losses and
LAE incurred of $668.6 million and $660.1 million for the periods ended June 30, 2011 and 2010, respectively, are managements best estimates of ultimate losses and LAE on our existing delinquent loan inventory and are subject to change in
subsequent periods. The $364.4 million of total losses and LAE incurred with respect to defaults occurring in the first six months of 2011 was lower than total losses and LAE incurred with respect to defaults reported in the first six months of 2010
as a result of lower levels of new notices of defaults. In the first half of 2011, our rescission and claim denial estimates with respect to defaults reported during the period did not significantly change. The changes in our estimates with respect
to defaults reported in prior years are principally reflected in the Losses and LAE incurred line items related to prior years of $304.2 million and $167.9 million for the periods ended June 30, 2011 and 2010, respectively.
The table below provides the changes in reserves related to prior years by particular accident years for the six months ended
June 30, 2011 and 2010, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE Incurred
|
|
|
Change in
Incurred
|
|
Accident Year
(year in which
default occurred)
|
|
June
30,
2011
|
|
|
December
31,
2010
|
|
|
June
30,
2010
|
|
|
December
31,
2009
|
|
|
6/30/11
vs.
12/31/10
|
|
|
6/30/10
vs.
12/31/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
2002 and prior
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
2003
|
|
|
224.6
|
|
|
|
224.8
|
|
|
|
226.9
|
|
|
|
226.5
|
|
|
|
(0.2
|
)
|
|
|
0.4
|
|
2004
|
|
|
239.7
|
|
|
|
239.2
|
|
|
|
240.8
|
|
|
|
241.0
|
|
|
|
0.5
|
|
|
|
(0.2
|
)
|
2005
|
|
|
270.5
|
|
|
|
270.9
|
|
|
|
272.8
|
|
|
|
271.5
|
|
|
|
(0.4
|
)
|
|
|
1.3
|
|
2006
|
|
|
422.7
|
|
|
|
420.1
|
|
|
|
419.1
|
|
|
|
413.3
|
|
|
|
2.6
|
|
|
|
5.8
|
|
2007
|
|
|
1,242.8
|
|
|
|
1,201.9
|
|
|
|
1,179.2
|
|
|
|
1,111.7
|
|
|
|
40.9
|
|
|
|
67.5
|
|
2008
|
|
|
2,053.5
|
|
|
|
1,942.7
|
|
|
|
1,880.8
|
|
|
|
1,799.8
|
|
|
|
110.8
|
|
|
|
81.0
|
|
2009
|
|
|
1,734.0
|
|
|
|
1,598.7
|
|
|
|
1,514.0
|
|
|
|
1,502.1
|
|
|
|
135.3
|
|
|
|
11.9
|
|
2010
|
|
|
941.6
|
|
|
|
927.0
|
|
|
|
|
|
|
|
|
|
|
|
14.6
|
|
|
|
|
|
2011
|
|
|
364.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
304.2
|
|
|
$
|
167.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in millions)
|
|
Primary insurance portfolio:
|
|
$
|
307.1
|
|
|
$
|
127.2
|
|
Pool insurance portfolio:
|
|
|
(2.9
|
)
|
|
|
40.7
|
|
|
|
|
|
|
|
|
|
|
Changes in reserves related to prior years
|
|
$
|
304.2
|
|
|
$
|
167.9
|
|
|
|
|
|
|
|
|
|
|
The $304.2 million increase related to prior years reserves in the first six months of 2011 was due
to decreases in expected future claim denials (net of reinstatements), re-estimations of ultimate claim rates from those established at the original notices of defaults, updated through the periods presented, increasing the IBNR reserves and
re-estimations of ultimate claim sizes from those established at the original notices of defaults, updated through the periods presented. The $167.9 million increase related to prior years reserves in the first six months of 2010 was due to
re-estimations of ultimate claim rates and claim sizes from those established at the original notices of defaults, updated through the periods presented.
Many of the key assumptions used to develop our reserve estimates are inter-related and inter-dependent, including claim rates, our estimated rates of future rescission and claim denial activity on
delinquent loans, and our estimated claim severity, among other assumptions. Such interdependencies make it difficult to isolate and quantify the effects of changes in individual factors. The principal drivers of changes in prior year development
typically relate to our claim rate (including our estimated rate of rescissions), and our estimated claim size (including estimated future claim denials).
The $307.1 million net increase in prior years reserves in the first six months of 2011 related to our primary portfolio was driven by increases in claim rates, representing a reserve increase of
approximately $100 million and increases in claim sizes, representing a reserve increase of approximately $207 million. The $100 million net reserve increase related to the increases in claim rates was primarily due to fewer than expected cures,
including loan modifications, and to a lesser extent, fewer than expected rescissions. Approximately $94 million of the $207 million net reserve increase from increases in claim sizes was due to decreasing our claim denial estimates. The remaining
$113 million was primarily due to a higher proportion of pending delinquencies with lower average loan balances curing.
The
$2.9 million decrease in prior years reserves in the first six months of 2011 related to our pool business was primarily the result of decreases in claim sizes, representing approximately $3.2 million, partially offset by increases in claim
rates, representing approximately $0.3 million. The development of the prior years reserves with respect to pool business was not significantly impacted by changes in our rescission or claim denial estimates.
The $127.2 million increase in prior years reserves in the first six months of 2010 related to our primary business was the result
of increases in claim rates, representing approximately $44 million, and increases in claim sizes, representing approximately $83 million
In the first six months of 2010, the $40.7 million increase in the prior years reserves related to our pool portfolio was due to increases in claim rates, representing $160 million, partially offset
by decreases in claim sizes, representing $57 million, and modified pool contract restructurings, representing $62 million. The increases in pool claim rates were driven by fewer delinquencies curing than expected due to the significant weakening of
the housing and mortgage markets, combined with an elevated percentage of Alt-A or limited documentation loans insured under the pool contracts.
The following table shows a breakdown of reserves for losses and LAE by primary and pool insurance:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
(Dollars in millions)
|
|
Primary insurance
|
|
$
|
2,795.6
|
|
|
$
|
2,670.7
|
|
Pool insurance
|
|
|
144.4
|
|
|
|
155.4
|
|
Other*
|
|
|
20.5
|
|
|
|
20.5
|
|
|
|
|
|
|
|
|
|
|
Total reserves for losses and LAE
|
|
$
|
2,960.5
|
|
|
$
|
2,846.6
|
|
|
|
|
|
|
|
|
|
|
The increase in primary insurance reserves was driven by decreases in expected future claim denials (net
of reinstatements), re-estimations of ultimate claim rates from those established at the original notices of defaults, updated
76
through the periods presented, increasing the IBNR reserves and re-estimations of ultimate claim sizes from those established at the original notices of defaults, updated through the periods
presented. The decrease in the pool insurance reserves was driven primarily by claims paid.
The following table shows a
breakdown of reserves for losses and LAE by loans in default, incurred but not reported, or IBNR, and the cost to settle claims, or LAE:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
(Dollars in millions)
|
|
Loans in default
|
|
$
|
2,630.9
|
|
|
$
|
2,584.4
|
|
IBNR
|
|
|
250.2
|
|
|
|
181.7
|
|
Cost to settle claims (LAE)
|
|
|
58.9
|
|
|
|
60.0
|
|
Other *
|
|
|
20.5
|
|
|
|
20.5
|
|
|
|
|
|
|
|
|
|
|
Total reserves for losses and LAE
|
|
$
|
2,960.5
|
|
|
$
|
2,846.6
|
|
|
|
|
|
|
|
|
|
|
*
|
Other relates to PMI Guarantys loss reserves related to the agreement between PMI Guaranty, FGIC, and AG Re under which PMI Guaranty commuted certain risks with
FGIC.
|
To provide a measure of sensitivity of pre-tax income to changes in loss reserve estimates, we estimate
that: (i) for every 5% change in our estimate of the future average claim sizes or every 5% change in our estimate of the future claim rates with respect to the June 30, 2011 reserves for losses and LAE, the effect on pre-tax income would
be an increase or decrease of approximately $131.5 million; (ii) for every 5% change in our estimate of incurred but not reported loans in default as of June 30, 2011, the effect on pre-tax income would be approximately $12.5 million; and
(iii) for every 5% change in our estimate of the future cost of claims settlement expenses as of June 30, 2011, the effect on pre-tax income would be approximately $2.9 million.
If either the claim rate or claim size, or a combination of the claim rate and claim size, were to increase approximately 19.1% above our
current estimates, we would reach the top of our actuarially determined range. Conversely, if the claim rate or claim size, or a combination of the claim rate and claim size, were to decrease by approximately 15.6% of our current estimates, we would
reach the bottom end of our actuarially determined range.
The establishment of loss reserves is subject to inherent
uncertainty and requires judgment by management. The actual amount of claim payments may vary substantially from the loss reserve estimates. For example, the relationship of a change in assumption relating to future average claim sizes, claim rates
or cost of claims settlement to the change in value may not be linear. Also, the effect of a variation in a particular assumption on the value of the loss and LAE reserves is calculated without changing any other assumption.
Changes in one factor may result in changes in another which might magnify or counteract the sensitivities. Changes in factors such as
persistency or cure rates can also affect the actual losses incurred. To the extent persistency increases and assuming all other variables remain constant, the absolute dollars of claims paid will increase as insurance in force will remain in place
longer, thereby generating a higher potential for future incidences of loss. Conversely, if persistency were to decline, absolute claim payments would decline. In addition, changes in cure rates would positively or negatively affect total losses if
cure rates increased or decreased, respectively.
International Operations
PMI Europe establishes loss
reserves for all of its insurance and reinsurance business and for CDS transactions entered into before July 1, 2003. Revenue, losses and other expenses associated with CDS contracts executed on or after July 1, 2003 are recognized through
derivative accounting treatment. As of June 30, 2011, PMI Europe terminated all of its CDS contracts. PMI Europes loss reserving methodology contains two components: case reserves and IBNR reserves. Case and IBNR reserves are based upon
factors which include, but are not limited to, our analysis of arrears and loss payment reports, loss assumptions derived from pricing analyses, our view of current and future economic conditions and industry information. Payments due in respect of
termination agreements that were executed prior to the quarter end are included in our case reserves as at June 30 2011. Our actuaries calculated a range for PMI Europes loss reserves at June 30, 2011 of $32.5 million to $33.1
million. PMI Europes recorded loss reserves at June 30, 2011 were $32.7 million, which represented our best estimate and an increase of $11.6 million from PMI Europes loss reserve balance of $21.1 million at December 31, 2010.
The increase to PMI Europes loss reserves in the first half of
77
2011 was primarily due to executing termination agreements on a number of transactions including our US reinsurance risk. The remaining loss reserves within our International Operations segment
relate to PMI Canada, which ceased writing new business in 2008.
The following table shows a breakdown of International
Operations loss and LAE reserves:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
(Dollars in millions)
|
|
Loans in default
|
|
$
|
33.4
|
|
|
$
|
22.2
|
|
IBNR
|
|
|
0.5
|
|
|
|
0.7
|
|
Cost to settle claims (LAE)
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
Total loss and LAE reserves
|
|
$
|
34.3
|
|
|
$
|
23.2
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of International Operations beginning and ending
reserves for losses and LAE for the six months ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in millions )
|
|
Balance at January 1,
|
|
$
|
23.2
|
|
|
$
|
40.1
|
|
Reinsurance recoverables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at January 1,
|
|
|
23.2
|
|
|
|
40.1
|
|
Losses and LAE incurred (principally with respect to defaults occurring in)
|
|
|
|
|
|
|
|
|
Current year
|
|
|
6.6
|
|
|
|
(2.0
|
)
|
Prior years
|
|
|
7.1
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
13.7
|
|
|
|
0.1
|
|
Losses and LAE payments (principally with respect to defaults occurring in)
|
|
|
|
|
|
|
|
|
Current year
|
|
|
|
|
|
|
|
|
Prior years
|
|
|
(1.3
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
|
(1.3
|
)
|
|
|
(1.6
|
)
|
Foreign currency translation
|
|
|
(1.3
|
)
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
|
|
|
Net balance at June 30,
|
|
|
34.3
|
|
|
|
33.2
|
|
Reinsurance recoverables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30,
|
|
$
|
34.3
|
|
|
$
|
33.2
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE incurred relating to prior years of $7.1 million in the first six months of 2011 was
primarily due to increasing the severity assumptions established in prior years for defaults in the U.S. sub-prime reinsurance portfolio. Losses and LAE incurred relating to prior years of $2.1 million in 2010 was primarily due to foreign currency
remeasurement related to U.S. reinsurance loss reserves which were established in the prior years.
78
Reinsurance
Loss reserves ceded to captive reinsurers are recorded as reinsurance recoverables and reduce total incurred losses in our consolidated statements of operations. Reinsurance recoverables are based on our
estimates of unpaid claims as applied to the terms of the respective reinsurance arrangements. The methodology and key assumptions used in our estimate of reinsurance recoverables are the same as those used in our estimate of loss reserves and are
allocated to reinsurance contracts using actuarial analysis for applicable reinsurance agreements. (For a discussion of our loss reserve estimation process and methodology, see
Critical Accounting Estimates Reserves for Losses and
LAE
.) As reinsurance recoverables are derived from our loss estimation process, amounts we will ultimately recover could differ materially from amounts recorded as reinsurance recoverables. PMI limits its recorded reinsurance recoverable to the
amount currently available in the trust account maintained by the captive insurance company for PMIs benefit, if that amount is less than PMIs ceded loss reserves.
The following table shows amounts of reinsurance recoverables related to each type of reinsurance contract:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
Dollar Amount
|
|
|
Percentage
|
|
|
Dollar Amount
|
|
|
Percentage
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Captives
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess-of-loss
|
|
$
|
389,355
|
|
|
|
99.3
|
%
|
|
$
|
457,082
|
|
|
|
99.4
|
%
|
Quota share
|
|
|
2,619
|
|
|
|
0.7
|
%
|
|
|
2,589
|
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
391,974
|
|
|
|
100.0
|
%
|
|
$
|
459,671
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts shown have been reduced by a valuation allowance of $62.1 million and $75.1 million as of June 30, 2011 and December 31, 2010, respectively, on reinsurance
recoverables, to the extent applicable, if they are in excess of captive trust account balances.
|
The table
below shows the total of all balances in trust accounts for the benefit of PMI. While certain recoverables from captives equal the amount in the respective captive trust account, the majority of captive trust accounts have assets in excess of
PMIs related recoverable.
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Off Balance Sheet
|
|
|
|
|
|
|
|
|
Captive Trust Assets
|
|
$
|
634,723
|
|
|
$
|
724,278
|
|
|
|
|
|
|
|
|
|
|
Credit Default Swap Contracts
Through PMI Europe, we provided credit protection in the form of credit default swaps (CDS), which are considered derivatives and are marked to market through earnings under the requirements
of Topic 815. In the second quarter of 2011, we terminated all remaining CDS exposure in PMI Europe which eliminated all derivative liabilities as of June 30, 2011. The fair value of derivative liabilities was $5.4 million as of
December 31, 2010 and is included in other liabilities on the consolidated balance sheet. The fair value of these CDS liabilities includes payment obligations that have been incurred but unpaid as of the balance sheet date. Certain of PMI
Europes CDS contracts contained collateral support provisions which required, in certain circumstances, PMI Europe to post collateral for the benefit of the counterparty. As a result of eliminating all of our CDS exposure in the second quarter
of 2011, we are no longer subject to collateral posting requirements. As of June 30, 2011, PMI Europe had posted collateral, consisting of corporate securities and cash, of $5.0 million on the terminated CDS transactions. In accordance with the
terms of the termination agreements, this collateral was returned to PMI in July 2011.
79
Investment Securities
We review all of our fixed income and equity security investments on a periodic basis for impairment, with focus on those having unrealized losses. We specifically assess all investments with declines in
fair value and, in general, monitor all security investments as to ongoing risk.
We review on a quarterly basis, or as needed
in the event of specific credit events, unrealized losses on all investments with declines in fair value. These investments are then tracked to establish whether they meet our established other than temporary impairment criteria. This process
involves monitoring market events and other items that could impact issuers. We consider relevant facts and circumstances in evaluating whether the impairment of a security is other-than-temporary.
Relevant facts and circumstances considered include, but are not limited to:
|
|
|
a decline in the market value of a security below cost or amortized cost for a continuous period of at least six or twelve months;
|
|
|
|
the severity and nature of the decline in market value below cost regardless of the duration of the decline;
|
|
|
|
recent credit downgrades of the applicable security or the issuer by the rating agencies;
|
|
|
|
the financial condition of the applicable issuer;
|
|
|
|
whether scheduled interest payments are past due; and
|
|
|
|
whether it is more likely than not we will hold the security for a sufficient period of time to allow for anticipated recoveries in fair value.
|
Once a security is determined to have met certain of the criteria for consideration as being
other-than-temporarily impaired, further information is gathered and evaluated pertaining to the particular security. If the security is an unsecured obligation, the additional evaluation is a security specific approach with particular emphasis on
the likelihood of the issuer to meet the contractual terms of the obligation.
We assess equity securities using the criteria
outlined above and also consider whether in addition to these factors we have the ability and intent to hold the equity securities for a period of time sufficient for recovery to cost or amortized cost. If we lack the intent or if it is not more
likely than not that we can hold the security for a sufficient time to allow for anticipated recoveries in value, the equity securitys decline in fair value is deemed to be other than temporary, and we record the full difference between fair
value and cost in earnings.
Once the determination is made that a debt security is other-than-temporarily impaired, an
estimate is developed of the portion of such impairment that is credit-related. The estimate of the credit-related portion of impairment is based upon a comparison of ratings at the time of purchase and the current ratings of the security, to
establish whether there have been any specific credit events during the time we have owned the security, as well as the outlook through the expected maturity horizon for the security. We obtain ratings from nationally recognized rating agencies for
each security being assessed. We also incorporate information on the specific securities internally and, as appropriate, from external investment advisors on their views on the probability of it receiving the interest and principal cash flows for
the remaining life of the securities.
This information is used to determine our best estimate of what the credit related
portion of the impairment is, based on a probability-weighted estimate of future cash flows. The probability weighted cash flows for the individual securities are modeled using internal models, which calculate the discounted cash flows at the
implicit rate at purchase through maturity. If the cash flow projections indicate that we do not expect to recover its amortized cost basis, we recognize the estimated credit loss in earnings. For debt securities that are intended to be sold, or
that management believes are more likely than not to be required to be sold prior to recovery, the full impairment is recognized immediately in earnings. For debt securities that management has no intention to sell and believes it is more likely
than not that they will not be required to be sold prior to recovery, only the credit component of the impairment is recognized in earnings, with the remaining impairment loss recognized in AOCI.
80
The total impairment for any debt security that is deemed to have an other-than-temporary
impairment is recorded in the statement of operations as a net realized loss from investments. The portion of such impairment that is determined to be non-credit related is deducted from net realized losses in the consolidated statement of
operations and reflected in other comprehensive income (loss) and AOCI, the latter of which is a component of stockholders equity in the consolidated balance sheets.
The following table shows our investments gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized
loss position, as of June 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
|
(Dollars in thousands)
|
|
June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
78,899
|
|
|
$
|
(1,359
|
)
|
|
$
|
62,939
|
|
|
$
|
(5,407
|
)
|
|
$
|
141,838
|
|
|
$
|
(6,766
|
)
|
Foreign governments
|
|
|
2,446
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
2,446
|
|
|
|
(1
|
)
|
Corporate bonds
|
|
|
449,136
|
|
|
|
(9,908
|
)
|
|
|
796
|
|
|
|
(1
|
)
|
|
|
449,932
|
|
|
|
(9,909
|
)
|
FDIC corporate bonds
|
|
|
10,172
|
|
|
|
(428
|
)
|
|
|
|
|
|
|
|
|
|
|
10,172
|
|
|
|
(428
|
)
|
U.S. governments and agencies
|
|
|
124,111
|
|
|
|
(2,231
|
)
|
|
|
|
|
|
|
|
|
|
|
124,111
|
|
|
|
(2,231
|
)
|
Mortgage-backed securities
|
|
|
94,386
|
|
|
|
(710
|
)
|
|
|
280
|
|
|
|
(903
|
)
|
|
|
94,666
|
|
|
|
(1,613
|
)
|
Asset-backed securities
|
|
|
28,723
|
|
|
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
|
28,723
|
|
|
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
787,873
|
|
|
|
(14,794
|
)
|
|
|
64,015
|
|
|
|
(6,311
|
)
|
|
|
851,888
|
|
|
|
(21,105
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
1,166
|
|
|
|
(4
|
)
|
|
|
20,835
|
|
|
|
(8,928
|
)
|
|
|
22,001
|
|
|
|
(8,932
|
)
|
Preferred stocks
|
|
|
|
|
|
|
|
|
|
|
14,372
|
|
|
|
(628
|
)
|
|
|
14,372
|
|
|
|
(628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
1,166
|
|
|
|
(4
|
)
|
|
|
35,207
|
|
|
|
(9,556
|
)
|
|
|
36,373
|
|
|
|
(9,560
|
)
|
Short-term investments
|
|
|
6,789
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
6,789
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
795,828
|
|
|
$
|
(14,806
|
)
|
|
$
|
99,222
|
|
|
$
|
(15,867
|
)
|
|
$
|
895,050
|
|
|
$
|
(30,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
131,919
|
|
|
$
|
(5,631
|
)
|
|
$
|
61,391
|
|
|
$
|
(7,034
|
)
|
|
$
|
193,310
|
|
|
$
|
(12,665
|
)
|
Corporate bonds
|
|
|
714,901
|
|
|
|
(17,721
|
)
|
|
|
758
|
|
|
|
(5
|
)
|
|
|
715,659
|
|
|
|
(17,726
|
)
|
FDIC corporate bonds
|
|
|
11,622
|
|
|
|
(430
|
)
|
|
|
2,057
|
|
|
|
(201
|
)
|
|
|
13,679
|
|
|
|
(631
|
)
|
U.S. governments and agencies
|
|
|
186,635
|
|
|
|
(4,914
|
)
|
|
|
|
|
|
|
|
|
|
|
186,635
|
|
|
|
(4,914
|
)
|
Mortgage-backed securities
|
|
|
293,266
|
|
|
|
(5,120
|
)
|
|
|
|
|
|
|
|
|
|
|
293,266
|
|
|
|
(5,120
|
)
|
Asset-backed securities
|
|
|
118,117
|
|
|
|
(711
|
)
|
|
|
|
|
|
|
|
|
|
|
118,117
|
|
|
|
(711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,456,460
|
|
|
|
(34,527
|
)
|
|
|
64,206
|
|
|
|
(7,240
|
)
|
|
|
1,520,666
|
|
|
|
(41,767
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
25,359
|
|
|
|
(4,403
|
)
|
|
|
|
|
|
|
|
|
|
|
25,359
|
|
|
|
(4,403
|
)
|
Preferred stocks
|
|
|
7,331
|
|
|
|
(150
|
)
|
|
|
40,981
|
|
|
|
(1,605
|
)
|
|
|
48,312
|
|
|
|
(1,755
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
32,690
|
|
|
|
(4,553
|
)
|
|
|
40,981
|
|
|
|
(1,605
|
)
|
|
|
73,671
|
|
|
|
(6,158
|
)
|
Short-term investments
|
|
|
17,405
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
17,405
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,506,555
|
|
|
$
|
(39,102
|
)
|
|
$
|
105,187
|
|
|
$
|
(8,845
|
)
|
|
$
|
1,611,742
|
|
|
$
|
(47,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011, we had gross unrealized losses of $30.7 million on investment securities,
including fixed maturity and equity securities that had a fair value of $895.1 million. There were no non-credit related other-than- temporary impairments on debt securities in the first six months of 2010. We recorded impairments of $0.3 million in
the second quarter of 2011 related to fixed income securities in our Canadian investment portfolio.
81
The decreases in gross unrealized losses in the U.S. fixed income portfolio in the first
half of 2011 were principally due to declining yields across the fixed income investment categories and the improvement in the market values of municipal bonds. The gross unrealized loss in the equity security portfolio increased in the first half
of 2011 as a result of the deterioration in the valuation of the common stock portfolio, partially offset by the improvement in the valuation of the preferred stock portfolio.
Impaired investments must either meet the criteria established in our accounting policy regarding the extent and length of time the investment was in a loss position or be determined that management would
not hold the security for a period of time sufficient to allow for any anticipated recovery. Additional factors considered in evaluating an investment for impairment include the financial condition and near-term prospects of the issuer, evidenced by
debt ratings and analyst reports. Under our policy, a decline in fair value greater than 15% below cost for six or more consecutive months or a decline in fair value greater than 10% below cost for twelve or more consecutive months requires
impairment of an investment security unless significant mitigating factors exist and such factors are documented and approved by management. As of June 30, 2011, there were certain equity securities in our investment portfolio which experienced
significant declines in fair value and were below cost by approximately $9.0 million but did not meet our impairment criteria outlined above. If these securities do not recover in accordance with our policy we will likely impair these securities in
the third quarter of 2011. As of June 30, 2011, our investment portfolio included 337 securities in an unrealized loss position compared to 629 securities as of December 31, 2010.
Deferred Policy Acquisition Costs
Our policy acquisition costs are those
costs that vary with, and are primarily related to, our acquisition, underwriting and processing of new mortgage insurance policies, including sales related activities. To the extent we provided contract underwriting services on loans that did not
require mortgage insurance, associated underwriting costs were not deferred. We defer policy acquisition costs when incurred and amortize these costs in proportion to estimated gross profits for each policy year by type of insurance contract (i.e.,
monthly, annual and single premium). The amortization estimates for each underwriting year are monitored regularly to reflect persistency and expected loss development by type of insurance contract. We review our estimation process on a regular
basis and any adjustments made to the estimates are reflected in the current periods consolidated net income. Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed recoverable amounts, after
considering investment income. PMIs deferred policy acquisition cost asset increased to $49.6 million at June 30, 2011 from $46.4 million at December 31, 2010 and $44.5 million at June 30, 2010.
Premium Deficiency Analysis
We perform an analysis for premium deficiency using assumptions based on our best estimate when the analysis is performed. The premium deficiency analysis requires significant judgment and includes
estimates of future expected premiums, expected claims, loss adjustment expenses and maintenance costs as of the date of the test. The calculation of future expected premiums uses assumptions for persistency and termination levels on policies
currently in force. Assumptions for future expected losses include future expected average claim sizes and claim rates which are based on the current default rate and expected future defaults. Investment income is also considered in the premium
deficiency calculation. For the calculation of investment income we use our pre-tax investment yield.
We perform premium
deficiency analyses quarterly on a single book basis for the U.S. Mortgage Insurance Operations and International Operations. We determined that there were premium deficiencies for PMI Europe and PMI Canada and recorded premium deficiency reserves
in the fourth quarter of 2009. As of June 30, 2011, a premium deficiency reserve for PMI Europe was not required and the premium deficiency reserve for PMI Canada was $0.9 million. The premium deficiency reserves are recorded as losses and loss
adjustment expenses on the consolidated statement of operations and as reserve for losses and loss adjustment expenses on the consolidated balance sheet. We determined there was no premium deficiency in our U.S. Mortgage Insurance Operations segment
despite continued significant losses in 2010 and the first six months of 2011. The excess of future expected premiums, reserves for losses and loss adjustment expenses and investment income over expected paid claims and expenses in our U.S. Mortgage
Insurance Operations
82
segment was approximately $0.3 billion for the six months ended June 30, 2011 and $0.9 billion for the year ended December 31, 2010. To the extent premium levels and actual loss
experience differ from our assumptions, our results could be negatively affected in future periods.
Some of the key
assumptions and possible changes in circumstances that could result in negative changes to the excess include the following:
|
|
|
Expected Losses Losses could be higher than our estimate due to higher levels of delinquencies, higher claim rates and claim sizes driven by
factors such as fewer than expected loan modifications, fewer borrowers bringing their loans current, and fewer than expected rescissions or claim denials.
|
|
|
|
Persistency Should policies terminate faster than our expectations, premiums earned will decline. However, fewer policies in force would also
indicate a lower number of new delinquencies.
|
|
|
|
Economic Trends Negative economic trends such as higher than expected unemployment levels could result in higher than expected new delinquencies
and ultimately claims paid.
|
|
|
|
Home Price Changes Worse than expected home price changes, including significant declines in home values, could result in higher than expected
delinquencies, claim payments and claim sizes.
|
As a result of their credit quality, PMIs recent book
years are expected to be profitable and are offsetting losses incurred from prior book years.
Using different assumptions for
the factors above, including assumptions that are reasonably possible but not, in our view, likely at the time of our analysis, could result in a significant decrease in the excess noted above, and could potentially result in the recognition of a
premium deficiency reserve.
Valuation of Deferred Tax Assets
PMIs management reviews the need to establish a valuation allowance against deferred tax assets on a quarterly basis. In the course of its review, PMIs management analyzes several factors,
including the severity and frequency of operating or capital losses, PMIs capacity for the carryback or carryforward of any losses, the expected occurrence of future income or loss, available tax planning alternatives, and future contractual
cash flows. As discussed below, PMIs valuation allowance as of June 30, 2011 was approximately $688.9 million.
In
periods prior to 2008, we deducted significant amounts of statutory contingency reserves on our federal income tax returns. The reserves were deducted to the extent we purchased tax and loss bonds in an amount equal to the tax benefit of the
deduction pursuant to § 831(e) of the Internal Revenue Code. The reserves are included in taxable income in future years when they are released for statutory accounting purposes or if we elect to redeem the tax and loss bonds that were
purchased in connection with the deduction for the reserves. Accordingly, prior to 2010, we did not have a domestic net operating loss carryforward for tax purposes.
We incurred net operating losses during the first six months of 2011 on a consolidated basis and have unused net operating losses on a foreign and state level resulting in a deferred tax asset of $418.3
million, unused tax credits of nearly $195.3 million, and abnormal capital losses of nearly $245.5 million, that could offset future taxable income.
As of June 30, 2011, we had $733.7 million of net deferred tax assets. Our valuation allowance on our deferred tax assets was $688.9 million. We expect to utilize the remaining net deferred tax
assets of $44.8 million based on contractual cash flow streams and tax strategies that are not dependent on generating taxable income from our mortgage insurance activities. In the second quarter, as a result of the removal of payment contingencies
related to the QBE note, we utilized $81.0 million of our deferred tax assets through recording a tax expense and establishing a deferred tax liability. We will not be able to realize our deferred tax asset for which we have established a valuation
allowance until such time as we return to a period of sustained profitability. However, any future tax benefits may not be realized or, even if realized, may be significantly delayed. Additional valuation allowance benefits or charges could be
recognized in the future due to changes in managements expectations regarding the realization of tax benefits. In addition, in the event of an ownership change for federal income tax purposes under § 382 of the Internal
Revenue Code, we may
83
be restricted annually in our ability to use our deferred tax assets. See Item 1A.
Risk Factors We may be required to record a full valuation allowance or increase the current
partial valuation allowance against our net deferred tax assets and may not be able to realize all of our deferred tax assets in the future.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Market risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates,
foreign currency exchange rates and equity prices. Market risk is directly influenced by the volatility and
liquidity in the markets in which
the related underlying financial instruments are traded. The following is a discussion of our market risk exposures and our risk management practices.
Interest rate risk
As of June 30, 2011, the fair value of our
consolidated investment portfolio excluding cash and cash equivalents was $2.6 billion. The fair value of investments in our portfolio is calculated from independent market quotations and is interest rate sensitive and subject to change based on
interest rate movements. As of June 30, 2011, 96.0% of our investments were fixed income securities, primarily corporate bonds. As interest rates fall, the fair value of fixed income securities generally increases, and as interest rates rise,
the fair value of fixed income securities generally decreases. The following table summarizes the estimated change in fair value and the accounting effect on comprehensive income (pre-tax) for our consolidated investment portfolio based upon
specified hypothetical changes in interest rates as of June 30, 2011:
|
|
|
|
|
|
|
Estimated Increase/
(Decrease)
in
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
300 basis point decline
|
|
$
|
268,334
|
|
200 basis point decline
|
|
$
|
212,384
|
|
100 basis point decline
|
|
$
|
110,791
|
|
100 basis point rise
|
|
$
|
(115,716
|
)
|
200 basis point rise
|
|
$
|
(212,063
|
)
|
300 basis point rise
|
|
$
|
(299,640
|
)
|
These hypothetical estimates of changes in fair value are primarily related to our fixed-income
securities as the fair values of fixed-income securities generally fluctuate with increases or decreases in interest rates. The weighted average option-adjusted duration of our consolidated investment portfolio including cash and cash equivalents
was 3.6 as of June 30, 2011.
84
Currency exchange rate risk
We analyze the sensitivity of fluctuations in foreign currency exchange rates on investments in our foreign subsidiaries denominated in currencies other than the U.S. dollar. This estimate is calculated
using the spot exchange rates as of June 30, 2011 and respective current period end investment balances in our foreign subsidiaries in the applicable foreign currencies. The following table summarizes the estimated changes in the
investments in our foreign subsidiaries and the accounting effect on comprehensive income (pre-tax) based upon specified hypothetical percentage changes in foreign currency exchange rates as of June 30, 2011, with all other factors remaining
constant:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Increase (Decrease)
Foreign
Currency Translation
|
|
Change in foreign currency exchange rates
|
|
Europe
|
|
|
Canada
|
|
|
Consolidated
|
|
|
|
(USD in thousands)
|
|
15% decline
|
|
$
|
(6,882
|
)
|
|
$
|
(206
|
)
|
|
$
|
(7,088
|
)
|
10% decline
|
|
$
|
(5,588
|
)
|
|
$
|
(137
|
)
|
|
$
|
(5,725
|
)
|
5% decline
|
|
$
|
(4,295
|
)
|
|
$
|
(69
|
)
|
|
$
|
(4,364
|
)
|
5% rise
|
|
$
|
4,295
|
|
|
$
|
69
|
|
|
$
|
4,364
|
|
10% rise
|
|
$
|
5,588
|
|
|
$
|
137
|
|
|
$
|
5,725
|
|
15% rise
|
|
$
|
6,882
|
|
|
$
|
206
|
|
|
$
|
7,088
|
|
Foreign currency translation rates as of June 30,
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollar relative to
|
|
|
|
Euro
|
|
|
Canadian
Dollar
|
|
2011
|
|
|
1.4502
|
|
|
|
1.0380
|
|
2010
|
|
|
1.2237
|
|
|
|
0.9399
|
|
The changes in the foreign currency exchange rates from the second quarter of 2010 to the second quarter
of 2011 positively affected our investments in our foreign subsidiaries by $13.7 million. This foreign currency translation impact is calculated by applying the period over period change in the period end spot exchange rates to the current period
end investment balance of our foreign subsidiaries.
As of June 30, 2011, $114.8 million, including cash and cash
equivalents of our invested assets, were held by PMI Europe. Of the $114.8 million, $33.9 million was denominated in Euros and $80.9 million was denominated in U.S. dollars. As of June 30, 2011, $11.8 million, including cash and cash
equivalents of our invested assets, were held by PMI Canada. Of the $11.8 million, $3.1 million was denominated in Canadian dollars and $8.7 million was denominated in U.S. dollars. The above table shows the exchange rate of the U.S. dollar relative
to the Euro and Canadian dollar as of June 30, 2011 and 2010. The values of the Euro and the Canadian dollar both strengthened relative to the U.S. dollar as of June 30, 2011 compared to June 30, 2010.
Debt instruments
Effective January 1, 2008, The PMI Group, Inc. adopted Topic 820 and the fair value option outlined in Topic 825. In particular, we
elected to adopt the fair value option outlined in Topic 825 for certain corporate debt liabilities on the adoption date. The fair value of these corporate debt instruments is measured under level 2 of the fair value hierarchy and is measured at
actual trading prices sourced from independent pricing services that use observable market data for similar transactions, including broker-dealer quotes and actual trade activity as a basis for valuation.
85
Changes in the fair value of these corporate debt liabilities for which the fair value
option was elected is principally due to changes in our credit spreads. The following table summarizes the estimated change in yield and corresponding fair value and the accounting effect on income (pre-tax) based upon reasonably likely changes in
our credit spreads as of June 30, 2011, with all other factors remaining constant:
|
|
|
|
|
|
|
Estimated
(Decrease)/Increase
in Liability
|
|
|
|
Change in credit spreads
|
|
|
|
(USD in thousands)
|
|
300 basis point decline
|
|
$
|
41,702
|
|
200 basis point decline
|
|
$
|
26,185
|
|
100 basis point decline
|
|
$
|
12,295
|
|
100 basis point increase
|
|
$
|
(11,552
|
)
|
200 basis point increase
|
|
$
|
(21,880
|
)
|
300 basis point increase
|
|
$
|
(31,335
|
)
|
Equity market price risk
At June 30, 2011, the market value and book value of equity securities in our investment portfolio were $98.1 million and $88.6 million, respectively. Exposure to changes in equity market prices can
be estimated by assessing potential changes in market values on our equity investments resulting from a hypothetical broad-based decline in equity market prices of 20%. With all other factors remaining constant, we estimated that such a decrease
would reduce our investment portfolio held in equity investments by $19.6 million as of June 30, 2011. Preferred securities make up approximately 76.0% of our equity security portfolio with a market value of $74.5 million. The majority of our
preferred stocks are perpetual preferreds with dividends. The fair value of the preferred securities could be affected by a deferral of dividends. We believe that the fair value of our preferred securities would decrease significantly if the
dividends were deferred.
ITEM 4.
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CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of June 30, 2011, our principal executive officer and principal financial officer have concluded that, as
of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting
that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
86
PART II OTHER INFORMATION
ITEM 1.
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LEGAL PROCEEDINGS
|
As
previously disclosed, in April 2008, The PMI Group and certain of our executive officers and directors were named in one federal and one state shareholder derivative suit. The parties to these actions agreed to settlements of both actions in
March 2011. On July 13, 2011, the U.S. District Court for the Northern District of California entered a final order approving the settlement of, and dismissing with prejudice, the federal court action. The Courts order further
directed the parties to seek dismissal with prejudice of the state action, pursuant to the terms of the agreed-upon settlement.
87
The
discussion of our business and financial results should be read together with the risk factors contained below and in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2010 and in our Quarterly Report on Form 10-Q
for the quarter ended March 31, 2011, which describe risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows,
or prospects in a material and adverse manner.
Our primary mortgage insurance subsidiary, MIC, no longer complies with
minimum regulatory capital requirements. MIC could be required to cease writing new business, placed under regulatory supervision or ordered into receivership.
As a result of continued losses, at June 30, 2011, we estimate that: (1) MICs statutory capital (which is the sum of MICs policyholders surplus and contingency reserves) was
$257.8 million, which was $320.3 million below the minimum set by Arizona law; and (2) its risk-to-capital ratio was 58.1 to 1, above the regulatory maximum 25 to 1 set by various other states. Without significant additional capital or capital
relief, MICs:
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|
|
statutory capital will continue to decline,
|
|
|
|
risk-to-capital ratio will continue to increase, and
|
|
|
|
policyholders surplus could become negative, and such event could occur as early as the second half of 2011.
|
MICs primary insurance regulator is the Arizona Department of Insurance (the Department). Arizona law provides for the
mandatory suspension of an insurers license if the insurers policyholders surplus declines below $1.5 million. In the event MIC either does not obtain significant capital or capital relief or does not demonstrate to the Department
significant progress in connection therewith, we believe it is likely that the Department will require MIC to cease writing new business and, in addition, could place MIC under supervision or initiate receivership proceedings, as described below.
See,
We must procure substantial capital to preserve our ability to continue to write new business and we may not be able to raise such capital on a timely basis and on favorable terms, or at all
, below.
We have advised the Department of MICs second quarter results and its non-compliance with its minimum policyholders position.
In the near future, we expect to further discuss with the Department MICs financial condition and the capital initiatives we are pursuing. To date, the Department has neither limited MICs ability to transact new insurance business nor
provided us with a timetable of required action by MIC. If the Department were to determine that MICs financial condition warranted regulatory action, it could, among other actions, issue an administrative order requiring MIC to suspend
writing new business in all states. There can be no assurance that the Department will not require MIC to cease writing new business.
The Department also has the authority, if it were to make a finding that MIC was in a hazardous financial condition, to issue a corrective order and place MIC under supervision.
Under supervision, MIC would likely be prohibited from writing new business and from engaging in transactions (including disposing of assets) out of the ordinary course of business unless it has the prior approval of the Director of the Department
or the Directors designated supervisor. Further, the Department at any time could initiate state court receivership proceedings for the rehabilitation or liquidation of MIC. In a court-ordered receivership, the Director would be appointed
receiver of MIC and would have full and exclusive power of management and control of MIC.
We cannot predict if, or under what
circumstances or timing, the Department will take any of the above steps. One or more of the actions described above, if taken by the Department, would have a material adverse effect on our financial condition and results of operations.
We must procure substantial capital to preserve our ability to continue to write new business and we may not be able to raise such
capital on a timely basis and on favorable terms, or at all.
88
As a result of continued elevated losses in 2011, and our expectation that we will continue
to incur significant future losses, we must procure substantial amounts of additional capital in order to preserve our ability to continue to write new insurance business. We are exploring capital alternatives that, if successful, could provide
capital or capital relief to MIC or capital to other insurance subsidiaries so that they may replace MIC as our primary writer of new insurance. Such alternatives include the restructuring of MICs primary insurance portfolio, debt or equity
offerings by TPG or our insurance subsidiaries, and reinsurance.
The substantial decline in our market capitalization, the
downgrades in the ratings of our debt securities and our significant operating losses, combined with difficult market conditions generally and in our industry specifically, limit our ability to obtain debt or equity financing in capital markets
transactions or from private sources. We may not be able to raise capital on favorable terms and in the amounts that we require, or at all. Moreover, to the extent a capital raising transaction is undertaken in an effort to avoid an adverse action
by insurance regulators, the GSEs or other third parties, we cannot be sure that the transaction could be completed in a timely manner to avoid such action. If we are not able to raise needed capital, we likely will be required, at a minimum, to
cease writing new business. In such an event, our control of MIC would be limited and it is possible that a receiver would be appointed and would acquire exclusive power of management and control of MIC.
The terms of a capital raising transaction could require us to agree to stringent financial and operating covenants and to grant security
interests on our assets to lenders or holders of our debt securities that could limit our flexibility in operating our business or our ability to pay dividends on our common stock and could make it more difficult for us to obtain capital in the
future. We may not be able to access additional debt financing on acceptable terms or at all. If we were to obtain equity financing for a significant portion of our capital needs, any such financing would likely be significantly dilutive to our
existing shareholders or result in the issuance of securities that have rights, preferences and privileges that are senior to those of our common stock, or both. Further, any capital initiatives in the form of reinsurance, or other risk transfer
transactions of our existing portfolios, would have a dilutive effect on our future earnings, if any.
The amount of, and need
for, additional capital could be affected by a variety of factors, including, among others:
|
|
|
State regulatory capital requirements and the views of state insurance regulators regarding our financial position.
|
|
|
|
Current and future economic conditions, including continued slow economic recovery from the most recent recession or the potential of the U.S. economy
to reenter a recessionary period, borrower access to credit, levels of unemployment, interest rates and home prices.
|
|
|
|
The level of new delinquencies, the claim rates of delinquencies (including the level of future modifications of delinquent loans) and the claim
severity within MICs mortgage insurance portfolio.
|
|
|
|
Potentially negative economic changes in geographic regions where our insurance in force is more concentrated.
|
|
|
|
The levels of future modifications, rescissions and claim denials and future reversals of rescissions and claim denials.
|
|
|
|
The rate at which our U.S. mortgage insurance portfolio remains in force (persistency rate).
|
|
|
|
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.
|
|
|
|
GSE and rating agency requirements and determinations.
|
|
|
|
The performance of our investment portfolio and the extent to which issuers of the fixed-income securities that we own default on principal and
interest payments or the extent to which we are required to impair portions of the portfolio as a result of deteriorating capital markets.
|
|
|
|
The statutory credit MIC can continue to receive with respect to its subsidiary investments.
|
89
|
|
|
The performance of PMI Europe, which is affected by the U.S. and European mortgage markets.
|
|
|
|
Any requirements to provide capital under the PMI Europe or CMG Mortgage Insurance Company (CMG MI) capital support agreements.
|
Many of these factors are outside of our control and difficult to predict. In addition, some of these
factors, such as the views and requirements of the GSEs and rating agencies, are subjective and not subject to specific quantitative standards.
Our holding company structure and certain regulatory and other constraints could affect our ability to satisfy our obligations.
We are a holding company and conduct our business operations through our various subsidiaries. Our principal sources of funds are
dividends and other payments from our insurance subsidiaries, income from our investment portfolio and funds that may be raised from time to time in the capital markets. We are largely dependent on amounts from MIC to pay principal and interest on
our indebtedness, to pay holding company operating expenses, to make capital investments in our subsidiaries and, if we were to wish to do so in the future, purchase our common stock in the open market or pay dividends on our common stock.
Following our capital raise in the second quarter of 2010, The PMI Group contributed $610 million to MIC in the form of
capital and two surplus notes with aggregate face amounts of $285 million (the Surplus Notes). The terms of the Surplus Notes provide for interest, principal and redemption payments that are generally concurrent with and equivalent to
the payment of interest, principal or redemptions with respect to our convertible notes or cash settlements of our convertible notes once such conversions exceed a specified level. Pursuant to the Arizona Insurance Code, our interest in the Surplus
Notes is subordinate to the claims of policyholders, claimants and beneficiaries and to all other classes of creditors, other than surplus noteholders. Amounts may only be paid out of surplus, and even if sufficient surplus is available, each
interest, principal and redemption payment in respect of the Surplus Notes is subject to the prior approval of the Department. Although we have received a letter from the Department approving MICs payment of interest provided all of the terms
and conditions of the Surplus Notes are satisfied, that approval may be rescinded at any time and it is more likely to be rescinded if the Department were to require MIC to cease writing new business in all states. In addition, the pre-approval
letter does not contain any advance approval of the payment of principal or redemption amounts. There is a significant risk that the Department could require MIC to limit, or cease, making scheduled interest or principal payments on the Surplus
Notes. Accordingly, there can be no assurance that we will receive any payments in respect of the Surplus Notes, either in a timely manner in order to satisfy our obligations, including our obligations under our convertible notes, or at all.
MIC and The PMI Group are parties to tax sharing agreements that have benefited, and expense cost allocation agreements that
are benefitting, us materially by reducing our obligations and liquidity requirements. The tax sharing agreements allocate current tax expense (benefit) and tax payments (refunds) between TPG and its insurance subsidiaries. Due to significant
losses, TPG is not expected to receive significant tax reimbursements from MIC until such time it begins to generate taxable income. There is a significant risk, particularly in the event that the Department were to require MIC to cease writing
new business, that the Department could require TPG to pay higher portions of incurred expenses currently paid by MIC pursuant to the cost allocation agreements, or could cause MIC to limit, or cease making, tax and expense reimbursements to TPG.
Accordingly, there can be no assurance that we will continue to receive payments pursuant to the allocation agreements, either in a timely manner in order to satisfy our obligations or at all. The inability of MIC and our other subsidiaries to pay
amounts in respect of the Surplus Notes and the tax and expense cost allocation agreements in amounts sufficient to enable us to meet our cash requirements at the holding company level would affect our ability to repay our debt, pay holding company
expenses and otherwise have a material adverse effect on The PMI Groups liquidity.
MIC did not pay dividends to us in
2010 and we do not expect that MIC will pay dividends in the foreseeable future.
The laws of Arizona, the state of MICs
domicile for insurance regulatory purposes, provide that MIC may pay out of any available surplus account, without prior approval of the Director, 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 years net investment income. To pay dividends in excess of that amount, MIC must obtain the prior approval of the Director. In addition to Arizona, other states may limit or restrict MICs
ability to pay shareholder dividends. For example, California and New York prohibit mortgage insurers from declaring dividends except from undivided profits remaining above the aggregate of their paid-in capital, paid-in surplus and contingency
reserves. In addition, it is possible that Arizona will adopt revised statutory provisions or interpretations of existing statutory provisions that will be more or less restrictive than those described above or will otherwise take actions that may
further restrict the ability of MIC to pay dividends or make distributions or returns of capital.
90
Under the terms of the agreement that we entered into with Fannie Mae with respect to PMAC,
PMI has agreed not to pay dividends or make distributions with respect to its capital stock without the consent of Fannie Mae, subject to limited exceptions (including exceptions for payments under the Surplus Notes and payments The PMI Group, Inc.
is required to cause MIC to make under our credit facility). The approval letter from Freddie Mac is contingent upon compliance with similar restrictions.
If the Department were to seek and obtain a court order appointing, or MIC were to consent to the appointment of, a receiver or similar official of MIC, an event of default could result under the
indenture governing The PMI Groups outstanding debt securities, which would cause those debt securities to become immediately due and payable.
The indenture governing an aggregate of $685 million in principal amount of The PMI Groups outstanding debt securities provides that it will be an event of default with respect to those debt
securities if, among other things, a court were to enter an order appointing a custodian, receiver, liquidator or similar official of MIC or a substantial part of its property and such order were to continue unstayed and in effect for a period of 60
consecutive days or if MIC were to consent to such an appointment. Accordingly, although an order by the Department requiring MIC to cease writing new business would not itself constitute an event of default, if the Department were to seek and
obtain a court order appointing a receiver of MIC, and such order were to remain in effect unstayed for 60 consecutive days, an event of default would occur with respect to these debt securities. In addition, it is possible that other actions that
the Department might take or to which MIC might consent involving the appointment of other officials with authority over MIC or its assets would also constitute such an event of default. If such an event of default were to occur, these debt
securities would become immediately due and payable. The PMI Group does not have access to sufficient funds or other sources of liquidity sufficient to enable it to repay such debt securities if they were to become due and payable.
MIC is currently unable to write business in six states and we expect this number to significantly increase. Our plan to write
certain new mortgage insurance in a subsidiary of MIC may not be successful.
In sixteen states, if a mortgage insurer
does not meet a required minimum policyholders position (calculated in accordance with statutory formulae) or exceeds a maximum permitted risk-to-capital ratio of 25 to 1, it may be prohibited from writing new business. In two of those states,
mortgage insurers are required to cease writing new business immediately if and so long as they fail to meet capital requirements. In the remaining fourteen states (including Arizona), regulators exercise discretion as to whether the mortgage
insurer may continue writing new business. Thirty-four other states do not have specific capital adequacy requirements for mortgage insurers.
MIC is currently precluded from writing new business in six states and is operating under regulatory waivers or discretion in ten states. Four of MICs waivers expire on December 31, 2011 or
earlier. Each of the waivers issued to MIC may be withdrawn at any time by the applicable insurance department. In light of our second quarter results, we expect that the number of states in which MIC is precluded from writing new insurance will
significantly increase. It is not clear what actions, if any, the insurance regulators in states that do not have capital adequacy requirements may take as a result of MIC failing to meet capital adequacy requirements established by one or more
states.
In the third quarter of 2011, we began writing new mortgage insurance through PMAC, a subsidiary of MIC, in six
states in which MIC either did not obtain, or exceeded the terms of, a waiver or other regulatory forbearance. We believe that the number of states in which we seek to utilize PMAC for our new business writings will significantly increase. Fannie
Mae and Freddie Mac (collectively, the GSEs) approved the use of PMAC as a limited, direct issuer of mortgage guaranty insurance in certain states in which MIC is unable to continue to write new business. The GSEs approvals of PMAC
currently expire on December 31, 2011. While we have requested extensions, there can be no assurance that the GSEs will grant them or that the GSEs will not revoke the PMAC approvals prior to December 31, 2011.
The GSEs approvals of PMAC are subject to restrictions. Fannie Maes approval is conditioned upon the requirements that:
(1) the Department shall not have required MIC to cease transacting new business; and (2) PMACs direct written premiums for a calendar quarter not exceed 20% of the combined direct written premiums of MIC and PMAC for such calendar
quarter, unless Fannie Mae provides prior written consent, which it shall not unreasonably
91
withhold. If the Department requires MIC to cease transacting new business, under Fannie Maes approval, PMAC would no longer be an eligible mortgage insurer. If we are unable to satisfy any
of the other GSE eligibility requirements for PMAC, if the GSEs do not extend PMACs approvals, or if the GSEs revoke PMACs approvals, we would be unable to offer mortgage insurance through PMAC. If this were to occur, we would not be
able to offer mortgage insurance through our combined insurance subsidiaries in all fifty states. Our inability to write new mortgage insurance in one or more states could significantly harm our customer relationships, revenues and results of
operations. In addition, some of our customers may choose not to purchase mortgage insurance from us in any state unless we offer mortgage insurance through the combined companies in all fifty states. If we lose the business from a significant
portion of our customer base, our revenues and results of operations would be negatively impacted.
MICs inability
to maintain its status with the GSEs as an eligible provider of mortgage guaranty insurance would significantly harm our financial condition and results of operations.
In 2008, in order to maintain its eligibility with the GSEs, MIC was required to submit remediation plans to each of the GSEs. To date, each of the GSEs continues to treat MIC as an eligible mortgage
insurer. On May 25, 2011, we received a request from Freddie Mac to update MICs 2008 remediation plan. Among other things, Freddie Mac requested information regarding MICs performance under the 2008 plan, capital enhancement
initiatives, and financial and performance projections. Freddie Mac also requested that MIC provide significant additional actuarial information under a variety of scenarios. On July 1, 2011, we responded to Freddie Macs request to update
MICs remediation plan and are currently in discussions with Freddie Mac regarding the timing of providing it with the requested actuarial information.
There can be no assurance that each of the GSEs will continue to be satisfied with MICs performance under its remediation plans or that MIC will continue to be treated as an eligible mortgage
insurer under a remediation plan with either or both GSEs. As a result of our current capital position and financial results, among other factors, there is a greater risk that either or both of the GSEs could determine that MIC is no longer an
eligible mortgage insurer. The GSEs, as major purchasers of conventional mortgage loans in the United States, are the primary beneficiaries of MICs mortgage insurance coverage. If either or both of the GSEs were to cease to consider MIC an
eligible mortgage insurer and, therefore, cease accepting our mortgage insurance products, our customers who sell loans to the GSEs would stop purchasing mortgage insurance from us, and our consolidated financial condition and results of operations
would be materially, and potentially irreparably, impaired.
Customers may reduce or eliminate their allocation of new
business to PMI, which would negatively impact our revenues and results of operations.
As a result of PMIs
financial condition and lack of compliance with state minimum capital requirements, our customer relationships could be significantly harmed. PMIs customers could immediately reduce or eliminate their allocations of business to PMI.
Additionally, if we are unable to offer mortgage insurance through PMAC, we would not be able to offer mortgage insurance through our combined insurance subsidiaries in all fifty states. See
MIC is currently unable to write business in six states
and we expect this number to significantly increase. Our plan to write certain new mortgage insurance in a subsidiary of MIC may not be successful,
above. Some of our customers may choose not to purchase mortgage insurance from us in any state
unless we offer mortgage insurance through the combined companies in all fifty states. If customers reduce or eliminate their allocations of business to PMI, our revenues and results of operations would be negatively impacted.
Depending on the timing and magnitude of future losses, MIC could exhaust its available claims-paying resources and capital and
surplus.
As a result of continuing losses, in the second quarter of 2011, MICs policyholders position
declined below the minimum, and its risk-to-capital ratio increased above the maximum, levels necessary to meet state regulatory capital adequacy requirements, described above. The degree of MICs noncompliance with applicable capital
requirements will depend on the magnitude of losses in the second half of 2011 and thereafter. Estimating future losses, and the timing of future losses, is inherently uncertain and requires significant judgment. Our expectations regarding
MICs future losses have changed significantly from period to period and may change significantly over time. In recent periods, our losses have significantly exceeded our estimates in past periods, and our future losses could materially exceed
our estimates.
92
Our future losses could be affected by a variety of factors. Such factors include, among
others:
|
|
|
Current and future economic conditions, including continued slow economic recovery from the most recent recession or the potential of the U.S. economy
to reenter a recessionary period, borrower access to credit, levels of unemployment, interest rates and home prices.
|
|
|
|
The level of new delinquencies, the claim rates of delinquencies (including the level of future modifications of delinquent loans) and the claim
severity within MICs mortgage insurance portfolio.
|
|
|
|
Potentially negative economic changes in geographic regions where our insurance in force is more concentrated.
|
|
|
|
The levels of future modifications, rescissions and claim denials and future reversals of rescissions and claim denials.
|
|
|
|
The rate at which our U.S. mortgage insurance portfolio remains in force (persistency rate).
|
|
|
|
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.
|
|
|
|
GSE and rating agency requirements and determinations.
|
|
|
|
The performance of our investment portfolio and the extent to which issuers of the fixed-income securities that we own default on principal and
interest payments or the extent to which we are required to impair portions of the portfolio as a result of deteriorating capital markets.
|
|
|
|
The statutory credit MIC can continue to receive with respect to its subsidiary investments.
|
|
|
|
The performance of PMI Europe, which is affected by the U.S. and European mortgage markets.
|
|
|
|
Any requirements to provide capital under the PMI Europe or CMG Mortgage Insurance Company (CMG MI) capital support agreements.
|
Many of these factors are outside of our control and difficult to predict. In addition, some of these
factors, such as the views and requirements of the GSEs and rating agencies, are subjective and not subject to specific quantitative standards. Due to the inherent uncertainty and significant judgment involved in the numerous assumptions required in
order to estimate our losses, loss estimates have varied widely. Internal models and various third parties have estimated our losses based on their own perspectives on such assumptions and have projected such losses to be materially higher than
managements estimates have indicated and/or that the time frame in which we would have to make payments with respect to such losses will occur sooner than we anticipate. If the amount and/or timing of MICs mortgage insurance losses were
to emerge in a manner that is consistent with certain of those estimates, MIC could exhaust its available claims-paying resources and capital and surplus unless we raise additional capital or are able to take other steps to enhance our capital.
Rescission activity may not materially reduce our loss reserve estimates at the same levels we have recently
experienced. Also, our loss reserves will increase if future rescission activity is lower than projected, if we reverse rescissions beyond expected levels, or if we are unable to defend our rescissions in litigation and, therefore, are required to
reassume risk and establish loss reserves on delinquent loans.
Based on PMIs investigations and industry and
other data, we believe that there were unexpectedly and significantly high levels of mortgage origination fraud and decreases in the quality of mortgage origination underwriting primarily in 2006 and 2007 when compared to historical levels. PMI has
reviewed, investigated, and rescinded coverage of a material number of loans.
When PMI rescinds insurance coverage, we remove
it from our calculation of PMIs risk-in-force and insurance in force. In addition, if the rescinded loan was delinquent, we cease to include that loan in our default inventory and,
93
therefore, do not incorporate that loan into our loss reserve estimates. Accordingly, past rescissions of delinquent loans have materially reduced our loss reserve estimates. In arriving at our
loss reserve estimates, we also consider the effect of projected future rescission activity with respect to the existing inventory of delinquent insured loans. Projected future rescissions are materially reducing our current loss reserve estimates,
although to a lesser extent than in past periods. To the extent future rescission activity is lower than projected, we would increase loss reserves in future periods.
Upon receiving PMIs notice of rescission with respect to a loan, the insured, either directly or through its servicer, may seek additional information as to our rescission and/or request
reconsideration by challenging the bases of our decision to rescind coverage on specific loans (loan-level challenge). (For a discussion of our rescission reconsideration process, see
Managements Discussion and Analysis of
Financial Condition and Results of Operations Conditions and Trends Affecting our Business U.S. Mortgage Insurance Operations Rescission Activity.
) If we decide to reverse a rescission after consideration of a loan-level
challenge, we reinstate coverage of the loan after receipt of the applicable premium (reinstatement). If we reinstate coverage of a loan that is delinquent at the time of reinstatement, regardless of its status at the time of the
rescission, we reassume the risk and include the loan in our delinquent loan inventory. Based on our historical experience, we estimate the portion of policies that we expect to reinstate after our reconsideration is complete, and take such estimate
into account in establishing our reserves. If levels of reinstatements exceed our expectations, we will increase our loss reserves, and our financial condition and results of operations will be negatively impacted.
In some cases, insureds are also challenging our general rights to rescind coverage of all or any loans under the terms of PMIs
master policies (general challenges). These general challenges do not identify the specific loans believed to be at issue and may refer to broad categories of loans. As we have received general challenges from several larger customers,
the aggregate risk relating to general challenges would be material if we are unable to satisfactorily resolve such challenges. With respect to loans as to which we have determined not to reinstate coverage, we do not include a reserve for the
possibility that we may be unsuccessful in defending our rescissions in litigation or other dispute resolution processes.
If we are not able to informally resolve a disagreement with an insured regarding a rescission of coverage and/or its general
challenges, the insured or PMI may seek resolution of the disagreement by filing a lawsuit or requesting that the parties agree to an arbitration or other form of dispute resolution. See Part I, Item 1.
Interim Consolidated Financial
Statements and Notes
Note 9,
Commitments and Contingencies Legal Proceedings
for a discussion of certain rescission related litigation and other proceedings in which PMI is currently involved. Because our or other mortgage
insurers contractual rescission rights have been subject to few judicial decisions, it is unclear whether a court or arbitrator would adopt the same interpretation of our contractual rescission rights as we do. Accordingly, there is a risk
that we will not be successful in defending our contractual bases of rescission against challenges. If this were to happen, we would likely be required to reinstate coverage on the disputed, rescinded loans, pay claims (including accrued interest)
on those rescinded loans that were delinquent, and pay additional contractual or extra-contractual damages, if any, awarded by the court or arbiter. An adverse judgment or settlement could have a material adverse effect on our results of operations,
financial condition and cash flows.
On June 30, 2011, Fannie Mae issued an announcement to its servicers
regarding their obligation to repurchase loans following rescissions of mortgage insurance coverage or denials of claims (Fannie Mae Announcement). Among other things, the Fannie Mae Announcement requires lenders to resolve requested
repurchases within ninety days of Fannie Maes request. As a result of the Fannie Mae Announcement, we believe servicers will attempt to resolve requests for reconsideration of mortgage insurance rescissions and claim denials with PMI within
the same ninety-day time-frame. It is uncertain whether the Fannie Mae Announcement will increase the likelihood of rescission and/or claim denial related disputes with servicers of PMI insured loans.
Claim denials may not materially reduce our loss reserve estimates at the same levels as we expect, and our loss reserves will
increase if future claim denial activity is lower than projected or if we reverse claim denials beyond expected levels.
In some cases, our servicing customers do not produce documents necessary to perfect claims. This is often the result of the
servicers inability to provide the loan origination file or other servicing records for our review. If the requested documents are not produced after repeated requests by PMI, the claim will be denied (documentation claim denials).
Beginning in 2010, claim denial activity also included claims denied or curtailed as a result of servicers failure to, among other things, adhere to customary standards relating to the servicing of delinquent loans (servicer-related
claim denials). We expect the number of servicer-related claim denials
94
to increase in 2011. We consider our estimates of future claim denials in establishing our loss reserves. In 2010, we increased our assumptions of future claim denials which reduced our loss
reserves estimates. Our projection of future claim denials with respect to the current inventory of delinquent loans has reduced, and is continuing to reduce, our loss reserve estimates. If future expected documentation and servicer-related claim
denials are lower than expected when loss reserves are established, we would be required to increase our loss reserves. In the second quarter of 2011, as a result of significantly greater numbers of reversals of claim denials in the period, we
significantly decreased our estimate of future claim denials, which negatively impacted our losses. In addition, we increased loss reserves in the quarter as a result of actual reversals of claim denials occurring in the period. There can be no
assurance that we will not significantly adjust our claim denial and reversal of claim denial assumptions in the future. There can be no assurance that the reversal frequency will not again exceed our expectations or that our loss reserve estimates
adequately provide for such occurrences. To date, we have not received material challenges to our documentation and servicer-related claim denials. As discussed above in
Rescission activity may not materially reduce our loss reserve estimates at
the same levels we have recently experienced. Also, our loss reserves will increase if future rescission activity is lower than projected, if we reverse rescissions beyond expected levels, or if we are unable to defend our rescissions in litigation
and, therefore, are required to reassume risk and establish loss reserves on delinquent loans
, it is unclear whether the recent Fannie Mae Announcement regarding servicers repurchase obligations will result in material challenges to our
claim denials. However, there can be no assurance that we will not receive significant challenges in the future or that such challenges will not result in disputes with our customers. Our claim denial practices have not been subject to judicial
interpretation; therefore, it is unclear whether a court would adopt the same interpretation of our rights as we do. If we are not successful in defending our claim denials, we could be required to pay significant additional amounts in claims, which
could materially harm our financial condition and results of operations.
Due to continued losses, we may be required in
the future to record a premium deficiency reserve with respect to our U.S. Mortgage Insurance Operations or MIC.
We
perform premium deficiency analyses quarterly on a single book basis for the U.S. Mortgage Insurance Operations using assumptions based on our best estimates when the analyses are performed. In addition, we also perform a premium deficiency analysis
on a statutory basis for MIC. The calculation for premium deficiency, which is our estimate of expected future losses and expenses to the extent they exceed expected future premiums, requires significant judgment and includes estimates of future
expected premiums, expected claims, loss adjustment expenses, maintenance costs and interest income as of the date of the test. The calculation of future expected premiums uses assumptions for persistency and termination levels on policies
currently in force. Assumptions for future expected losses include future expected average claim sizes and claim rates which are based on the current default rate and expected future defaults.
A premium deficiency analysis was performed on a GAAP basis, as of June 30, 2011, and we determined there was no premium deficiency in
our U.S. Mortgage Insurance Operations segment despite continued significant losses in the second quarter of 2011. The excess of future expected premiums, reserves for losses and loss adjustment expenses and investment income over expected paid
claims and expenses in our U.S. Mortgage Insurance Operations segment was approximately $0.3 billion for the six months ended June 30, 2011. There are certain key assumptions and possible changes in circumstances that could result in negative
changes to the excess. Using different assumptions, including assumptions that are reasonably possible but not, in our view, likely at the time of our analysis, could result in a significant decrease is the excess noted above, and could potentially
result in the recognition of a premium deficiency reserve. Because this premium deficiency calculation required significant judgment and estimation, to the extent actual losses are higher or actual premiums are lower than the assumptions we used in
our analysis, we could be required to record a premium deficiency reserve in future reporting periods, which would negatively affect our financial condition, results of operations or MICs statutory capital. In the second quarter of 2011, we
recorded a premium deficiency reserve with respect to one of MICs reinsurance subsidiaries, which negatively impacted MICs statutory capital.
Implementation of the Dodd-Frank Act could negatively impact private mortgage insurers and PMI.
Among other things, the Dodd-Frank Act, passed by Congress in July 2010, expands federal oversight of the insurance industry and consumer financial products and services, including mortgage loans. One
component of the Dodd-Frank Act will require mortgage lenders and securitizers to retain a portion of the risk on mortgage loans they sell or securitize, unless the mortgage loans are qualified residential mortgages or are insured by the
FHA or another federal agency. On March 30, 2011, federal regulators released a proposed rule that details the regulatory definition of a qualified residential mortgage, including a requirement that such mortgages include a cash down-payment
equal to at least the sum of (i) the closing costs payable by the borrower, (ii) 20% of the lesser of the applicable propertys estimated market value and its purchase price, and (iii) the difference, if a positive amount,
between the applicable propertys purchase price and its estimated market value. Regulators are seeking public comment and data regarding the credit risk mitigation effects of private mortgage insurance and an alternative definition that would
include a down-payment of 10% (as opposed to 20%) of the lesser of the applicable propertys estimated market value and its purchase price and take into account private mortgage insurance for higher LTV ratio maximum requirements. The proposed
rule exempts the GSEs from the risk
95
retention requirement as long as they remain in conservatorship. We submitted comments to the proposed rule on August 1, 2011 in support of a definition of a qualified residential mortgage
that includes a lower down-payment requirement and the use of private mortgage insurance. Depending on the maximum LTV allowed in the final definition and whether, and to what extent, if any, the presence of mortgage insurance becomes a criterion
for a qualified residential mortgage and whether lenders choose mortgage insurance for non-qualified residential mortgages, the proposed rule could negatively affect the private mortgage insurance industry and our future insurance
writings.
In addition, the Dodd-Frank Act established the Bureau of Consumer Financial Protection to regulate the offering
and provision of consumer financial products or services. It is unclear whether this new agency will issue any rules or regulations that affect our business or the volume of low-down-payment mortgage originations. Such rules and regulations could
negatively impact our financial position and results of operations.
We may be required to record a full valuation
allowance or increase the current partial valuation allowance against our net deferred tax assets and may not be able to realize all of our deferred tax assets in the future.
As of June 30, 2011, we had net deferred tax assets of $733.7 million. Our management reviews the need to establish a valuation
allowance against our deferred tax assets on a quarterly basis. Under Topic 740, and beginning in 2010, we do not use forecasted taxable income from our mortgage insurance activities as positive evidence in determining whether or not the deferred
tax assets will be utilized. In the second quarter of 2011, we evaluated our deferred tax assets in light of this and other factors and determined that it was necessary to increase the valuation allowance by $161.6 million to $688.9 million. We
expect to be able to utilize our remaining net deferred tax assets of $44.8 million based on contractual cash flow streams and tax strategies that are not dependent on generating taxable income from our mortgage insurance activities. There is no
assurance that our future expected cash flow streams or tax strategies will permit us to utilize our remaining $44.8 million net deferred tax assets. We may be required to record a full valuation allowance or increase the current partial valuation
allowance against our remaining net deferred tax assets, with a corresponding charge to net income, which would have a material adverse effect on our results of operations and financial condition. See
Managements Discussion and Analysis of
Financial Condition and Results of Operations Critical Accounting Estimates Valuation of Deferred Tax Assets
for more discussion.
We will not be able to realize our deferred tax asset for which we have established a valuation allowance until such time as we return to a period of sustained profitability. There is no assurance,
however, that we will return to profitability. Even if we return to profitability, there is a risk that such period of profitability will not be long enough in duration to generate sufficient future taxable income to permit us to realize some or all
tax benefits. Even if we were to realize future tax benefits, the timing may be significantly delayed.
Our primary
insurance subsidiary, MIC, could be subject to the terms of its runoff support agreement with Allstate.
If it were to
be enforced by a court of final appeal or applicable regulator, the terms of a 1994 Allstate runoff support agreement restrict MIC in the event that its risk-to-capital ratio exceeds 23 to 1. The original risk-in-force on policies covered under the
Allstate runoff support agreement has been reduced from approximately $13 billion in 1994 to less than $30 million as of June 30, 2011 (less than 0.2% of original risk-in-force). We expect any potential future losses associated with the
remaining risk-in-force under the Allstate runoff support agreement to be immaterial. Under the runoff support agreement, among other things, MIC may not declare or pay dividends at any time that its risk-to-capital ratio equals or exceeds 23 to 1
or if such a dividend would cause its risk-to-capital ratio to equal or exceed 23 to 1. In addition, if MICs risk-to-capital ratio equals or exceeds 23 to 1 at three consecutive monthly measurement dates, MIC may not enter into new insurance
or reinsurance contracts without the consent of Allstate. Following such time as MICs risk-to-capital ratio were to exceed 24.5 to 1, the runoff support agreement requires MIC to transfer substantially all of its liquid assets to a trust
account for the payment of MICs obligations to policyholders, therefore negatively affecting MICs and The PMI Groups liquidity position. Any failure to meet the capital requirements set forth in the runoff support agreement with
Allstate could, if pursued by Allstate, have a material adverse impact on our financial condition, results of operations and business.
96
Our Amended and Restated Tax Benefits Preservation Plan may not be effective in
preventing an ownership change as defined in Section 382 of the Internal Revenue Code and our deferred tax assets and other tax attributes could be significantly limited.
We have significant deferred tax assets that are generally available to offset future taxable income or income tax. On August 12,
2010, the Board of Directors of The PMI Group adopted a Tax Benefits Preservation Plan (the Plan). In connection with the adoption of the Plan, on August 12, 2010, The PMI Groups Board of Directors declared a dividend of one
preferred stock purchase right for each outstanding share of The PMI Groups common stock payable to holders of record of the common stock on August 23, 2010. On February 17, 2011, the Board of Directors of The PMI Group adopted the
Amended and Restated Tax Benefits Preservation Plan (as amended, the Amended Plan), which amends and restates the Plan in its entirety. The purpose of the Amended Plan is to help protect our ability to recognize certain tax benefits in
future periods from net unrealized built in losses and tax credits, as well as any net operating losses that may be expected in future periods (the Tax Benefits). Our use of the Tax Benefits in the future would be significantly limited
if we experience an ownership change for U.S. federal income tax purposes. In general, an ownership change will occur if there is a cumulative change in our ownership by 5-percent shareholders (as defined under
U.S. income tax laws) that exceeds 50 percentage points over a rolling three-year period. The Amended Plan is designed to reduce the likelihood that we will experience an ownership change by (i) discouraging any person or group from becoming a
5-percent shareholder and (ii) discouraging any existing 5-percent shareholder from acquiring more than a minimal number of additional shares of our stock. The Amended Plan was approved by The PMI Groups
stockholders at its 2011 annual meeting.
Although the Amended Plan is designed to reduce the likelihood that we will
experience an ownership change, there can be no assurance that the Amended Plan will be effective in preventing an ownership change. If an ownership change were to occur, our ability to use the Tax Benefits in the future would likely be limited,
which would have a significant negative impact on our financial position and results of operations.
97
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
August 4, 2011
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/s/ Donald P. Lofe, Jr.
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Donald P. Lofe, Jr.
Executive Vice President, Chief
Financial Officer and Chief
Administrative Officer (Duly
Authorized Officer and Principal
Financial Officer)
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August 4, 2011
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/s/ Thomas H. Jeter
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Thomas H. Jeter
Group Senior Vice President, Chief
Accounting Officer and Corporate
Controller
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98
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Exhibit
Number
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Description of Exhibit
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4.1
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Specimen common stock certificate (incorporated by reference to exhibit 4.1 to the registrants annual report on Form 10-K, filed on March 13, 2011 (File No.
001-13664)).
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4.2
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Amended and Restated Tax Benefits Preservation Plan, dated as of February 17, 2011, between The PMI Group, Inc. and American Stock Transfer & Trust Company,
LLC, as Rights Agent, which includes the Form of Certificate of Designation of Series A Participating Preferred Stock of The PMI Group, Inc. as Exhibit A, the Summary of Terms of the Amended and Restated Tax Benefits Preservation Plan as Exhibit B
and the Form of Right Certificate as Exhibit C (incorporated by reference to exhibit 4.1 to the registrants current report on Form 8-K filed on February 22, 2011 (File No. 001-13664)).
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10.1*
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Form of The PMI Group, Inc. Amended and Restated Change in Control Agreement (incorporated by reference to exhibit 10.1to the registrants current report on Form
8-K filed on July 25, 2011 (File No. 001-13664)).
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31.1
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Certification of Chief Executive Officer.
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31.2
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Certification of Chief Financial Officer.
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32.1
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Certification of Chief Executive Officer.
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32.2
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Certification of Chief Financial Officer.
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*
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Management or director contract or compensatory plan or arrangement.
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99
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