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PMI Group CEO Discuss Q3 2010 Results - Earnings Call Transcript

PMI Group CEO Discuss Q3 2010 Results - Earnings Call Transcript

PMI Group, Inc. (

PMI

)

Q3 2010 Earnings Conference Call

October 28, 2010, 12:00 pm ET

Executives

Bill Horning - VP of IR

Steve Smith - Chairman and CEO

Don Lofe - CFO and CAO

David Katkov - EVP and CBO

Analysts

Matthew Howlett - Macquarie

Steve Stelmach - FBR Capital Markets

Conor Ryan - Deutsche Bank

Alan Connor - Spectrum Advisory Services

TheStreet Recommends

Donna Halverstadt - Goldman Sachs

Mark DeVries - Barclays Capital

Edwin Roshan - Height

Presentation

Operator

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Previous Statements by PMI
» PMI Group Inc.Q2 2010 Earnings Call Transcript
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» The PMI Group, Inc. Q4 2009 Earnings Call Transcript
» The PMI Group, Inc. Q3 2009 Earnings Call Transcript

Hello and welcome to the third quarter 2010 earnings call for the PMI Group. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions)

Now, I will turn the meeting over to Mr. Bill Horning, Vice President of Investor Relations. Sir, you may begin.

Bill Horning

Thanks Jeremy, and good morning. Welcome to the PMI Group's third quarter 2010 financial results conference call. Today's call will begin with comments from Steve Smith, PMI's Chairman and Chief Executive Officer. Mr. Smith will discuss PMI's overall financial results as well as other matters for the third quarter. Don Lofe, PMI's Executive Vice President, Chief Financial Office and Chief Administration Officer will then address other business results for the quarter, as well as other financial and capital matters. We also have with us today, David Katkov, PMI's Executive Vic President and Chief Business Officer, who along with Steve and Don will be available to answer your questions following today's prepared remarks.

On today's call, we'll be referencing non-Generally Accepted Accounting Principle measures, such as net operating income, which under SEC Regulation G, we are required to reconcile with GAAP. These reconciliations of these measures with GAAP financial measures are available on our website.

Before I begin, I would like to review the company's Safe Harbor statement under the private securities litigation reform act of 1995. During this call, we will be making forward-looking statements. Actual results may differ materially from the statements made during this call. The company's business depends on investment considerations, which are highlighted in our Securities and Exchange Commission filings, including our 2009 Form 10-K and our most recent Form 10-Q. Our Forward-looking statements are made as of today, October 28

th

, 2010, and we undertake no obligation to update such statements except as may be required by law.

With that, I'll turn the call over to PMI's Chairman and Chief Executive Officer, Steve Smith.

Steve Smith

Thanks, Bill, and good morning, everyone and thank you for joining today's call. In the third quarter, the PMI Group had a net loss from continuing operations of $281.1 million or a loss of $1.74 per share. Our results for the third quarter included a $200.2 million increase in our valuation allowance related to our deferred tax assets.

In the course of our quarterly evaluation of our deferred tax assets, we determined that this increase was necessary under current accounting guidance. As Don will further discuss, the factors necessitating this increase included losses beyond our expectations in 2010 and the uncertainties we face with respect to the future level of losses and economic conditions.

This increase represents a non-cash expense and affected only our GAAP results and not our statutory financial statements. Approximately $1.24 of our third quarter loss per share was attributable to the increase in our valuation allowance. Our consolidated results were also driven by US Mortgage Insurance operation losses and loss adjusted expenses or LAE of $317.1 million in the third quarter.

Before reviewing our results in more detail, let me take a moment to discuss two recent actions that have generated a lot of attention. First was the FHA price increase in early October, while we don't expect that this will have an immediate impact on our new insurance written, we are pleased by this change, which we believe makes our MI product more competitive and is an important part of shifting market share back to private mortgage insurers.

Second, foreclosure moratoriums previously instituted by several servicers has introduced an element of uncertainty, as to when foreclosures may occur in various states. Certainly if these moratoriums delay the foreclosure filings and the transfer of title to our insured, this will lead to a delay in the payment of claims. However, our current expectation is that these foreclosure moratoriums may delay the payment of future claims, but is unlikely to reduce our risk exposure.

As mentioned, US MI net loss was driven by continued high losses and associated loss adjustment expenses. Let me update you on several factors affecting US MI losses. First, primary new notices of default or NODs received in the third quarter total 29,715, which is up only slightly from the second quarter, the better than what historical seasonality factors would have indicated.

New NODs received through September 30, 2010 totaled 92,580. This was down approximately 25% compared to the same period one year ago. Second, total claims paid were approximately $323 million in the third quarter, which is down 27% from the second quarter, but up 19% from the first quarter of this year, while the level of paid claims continues to vary quarter-to-quarter, the total of $1 billion paid through the first three quarters continues to be within our expectations.

Third, cures, which are a significant assumption within our loss reserving process, were lower than we expected from NODs that when inventory at 12/13/2009. This lower level of cures from the previously delinquent book were driven by the following factors, continued high levels of unemployment, ongoing stress in the housing markets, particularly with regard to pressure on home prices, and growing strain in the ability of our servicer customers to find retention opportunities for those borrowers.

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