PMI Pmi Grp. (The) Common Stock

We are retaining our Underperform recommendation on PMI Group Inc. (PMI) as the company continues to report losses. PMI Group’s second-quarter operating loss was worse than the Zacks Consensus Estimate and widened year over year as the company continued to suffer mortgage losses.

To add to its woes, PMI Group is not able to sell new policies. Arizona-based PMI Mortgage Insurance Co., the main subsidiary, is short of funds, which is required to meet regulatory requirements in Arizona. As such, the State insurance department will likely bar it from selling new policies, which might result in either rehabilitation or liquidation of the unit.

PMI Group’s default inventory and default rate increased significantly due to delinquencies in certain adjustable rate mortgage and high loan-to-value loans, declining home prices, higher rates of unemployment and challenging economic conditions in certain geographical areas.

The quarter experienced new delinquencies coupled with continued decline in PMI delinquent loan inventory, as such reserves on new delinquencies continue to be a major factor driving PMI’s total losses.

Rating downgrades are also a big concern for the company at this point. Since mid-2009, PMI Group has experienced several rating downgrades by Moody’s, Fitch and S&P. The downgrades have had a negative impact on PMI’s eligibility to insure mortgage loans from government sponsored enterprises and other private mortgage lenders.

Counting on the positives, PMI Group had implemented a five-point plan to address the challenging U.S. economy and the negative global market sentiment. The plan focuses on core mortgage insurance business, book high-quality new business, mitigate losses and manage expenses. PMI Group also intends to build its capital position to maintain its growth. To this end the company has restricted dividend payments as well as share repurchases for the past two years. This action will reduce cash expenditure and enhance the liquidity position to position it for better recovery at the turn of the economic cycle.

The Zacks Consensus Estimate for third-quarter 2011 is a loss of 22 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates of loss are respectively, $1.84 per share and 64 cents per share.

The quantitative Zacks #4 Rank (short term Sell rating) on the stock indicates downward pressure on the shares over the near term.

Headquartered in Walnut Creek, California, the PMI Group provides insurance coverage to mortgage lenders, commercial banks and other financial institutions to protect them against default by a particular class of borrowers. The company competes with MGIC Investment Corp. (MTG).

 
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