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The PMI Group, Inc. Q1 2010 Earnings Call Transcript

The PMI Group, Inc. Q1 2010 Earnings Call Transcript

The PMI Group, Inc.


Q1 2010 Earnings Call Transcript

April 26, 2010 8:00 am ET


Bill Horning – VP, IR

Steve Smith – Chairman and CEO

Don Lofe – EVP, CFO and Chief Administrative Officer

David Katkov – EVP and Chief Business Officer


Donna Halverstadt – Goldman Sachs

Matthew Howlett – Macquarie Research Equities

Conor Ryan – Deutsche Bank

Clark Baker – Harbinger

David Selenic [ph] – Fir Tree Partners

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Hello and welcome to the first quarter 2010 financial results 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) Today’s call is being recorded, and if you have any objections, you may disconnect at this time.

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

Bill Horning

Thank you Laurie. Good morning and welcome to The PMI Group's first 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 and highlights for the first quarter.

Don Lofe, PMI's Executive Vice President, Chief Financial Officer and Chief Administrative 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 Vice President and Chief Business Officer who along with Steve and Don will be available to answer your questions following the prepared remarks.

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

Before we 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 most recent Form 10-Q. Forward-looking statements are made as of today, April 26


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

Before Steve begins his prepared remarks, I want to note for our participants that due to legal restrictions that apply in the context of the securities offering, we will not address any questions regarding the offerings we announced yesterday. We also ask that all participants on this call limit the subject of your questions to our financial results.

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

Steve Smith

Thanks Bill. Good morning everyone and thank you for joining today’s call. In the first quarter, The PMI Group had a net loss from continuing operations of $157 million or a loss of $1.90 per share. Our consolidated results for the quarter were driven by U.S. Mortgage Insurance Operations, which had a net loss of $121.8 million and also a $40.8 million loss as a result of the increase in the fair market value of our debt due to our improving credit spreads.

First, let me start by highlighting our liquidity and capital position. On a consolidated basis, The PMI Group had total liquidity of $3.2 billion, combined of cash and cash equivalents of approximately $859 million and total investments of $2.3 billion. In addition, we had the benefit of approximately $931 million in captive trust balances for U.S. Mortgage Operations.

Moving to PMI Mortgage Insurance Co., our primary mortgage insurance company, we ended the first quarter of 2010 with statutory risk in force of approximately $16 billion and an estimated policyholder surplus and contingency reserves of approximately $601 million. During the first quarter, we were successful in restructuring certain modified pool contracts, while effectively accelerating claim payments to the counterparty on a discounted basis, resulting in the release of loss reserves.

Also in this particular restructuring, we retained a contractual right to the future premium cash flow stream. The combined effect added approximately $115 million to our statutory capital in the first quarter. Our mainly modified pool exposure continues to decline. And we have recently completed another restructuring, which will be reflected in our second quarter results, and will further reduce the modified pool risk in force. We will continue to assess opportunities for future restructurings within our pool insurance portfolio. Additionally, we realized approximately $7 million of net gains from our investment portfolio, primarily from the sale of municipal bonds and preferred equity securities.

Turning to credit, the primary loans in default at March 31, 2010 totaled 147,248, down from 150,925 at December 31, 2009. New notices of default declined for the second straight quarter, and were at their lowest level since the fourth quarter of 2007. Additionally, new notices of default were down 21% from the level of new notices we received in the first quarter of last year. In addition to the lower levels of new notices of default, the mix has also improved. We received fewer notices of default from high loan-to-value in troubled geographic areas than in the prior quarter.

Cures increased for the third consecutive quarter, reaching the highest level in over two years. Our primary delinquency rate at March 31, 2010 was 21.5%, which was nearly flat to year-end 2009. This was despite lower levels of policies in force, which declined at a faster rate than the new notices of default. The credit trends seen in the first quarter were positive, and we continue to expect as a number of our primary loans in default at the end of 2010 would be lower than those at year-end 2009.

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