The PMI Group, Inc. (

PMI

)

Q2 2011 Earnings Call

August 4, 2011 12:00 PM ET

Executives

Bill Horning – VP, IR

Stephen Smith – Chairman, President, CEO and COO

Donald Lofe – EVP, Chief Financial & Administration Officer

David Katkov – Chief Business Officer and EVP

Analysts

Mark DeVries – Barclays Capital, Inc.

Scott Frost – Bank of America Merrill Lynch

John Benda – Susquehanna Financial Group LLP

Chris Gamaitoni – Compass Point Research & Trading LLC

Josh Kramer – JPMorgan Securities

Steve Stelmach – FBR Capital Markets

Ed Groshans – Height Analytics LLC

Presentation

Operator

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» PMI Group Inc.Q2 2010 Earnings Call Transcript

Hello, and welcome to the Second Quarter 2011 Financial Results Conference Call for the PMI Group. At this time all the 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. 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, operator. Good morning and welcome to the PMI Group’s second quarter 2011 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 other matters for the second quarter. After the prepared remarks, Steve Smith along with Don Lofe, PMI’s Executive Vice President, Chief Financial Officer and Chief Administrative Officer, and David Katkov, PMI’s Executive Vice President and Chief Business Officer, will be available to answer your questions.

On today’s call, we will be referencing non-generally accepted accounting principal measures such as net operating income, which under SEC Regulation G we are required to reconcile with GAAP. The 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 may 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 2010 Form 10-K.

Forward-looking statements are made as of today, August 4th, 2011, and we undertake no obligation to update such statements except as may be required by law. Also, I’d like to direct those interested in reconciliation of our consolidated net loss to our consolidated net operating loss, to review the disclosure material posted on our website.

And finally, I would note that given the results of the second quarter and our ongoing discussions and initiatives, we are not in a position to give specific guidance for the company. Additionally, we may not be able to provide specific information regarding initiatives we are currently pursuing. Any future announcements from the company will be made via a press release or an SEC filing.

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

Stephen Smith

Thanks Bill. Good morning, everyone, and thank you for joining the call today. As I’m sure most of you know from our release today, PMI’s second quarter was extremely challenging. Indeed, the mortgage insurance industry is weathering significantly higher losses due to slower than expected economic recovery and rebound in housing. The fact is this, while some positive trends remain, economic and industry factors have developed unfavorably and contrary to our expectations.

First and foremost, of course, is the stalled economic recovery, the lack of meaningful job creation coupled with stagnant or declining home prices has adversely affected the housing recovery and exacerbated losses within our legacy portfolio. The result is that both in the first and second quarters, we have seen loans with our delinquent inventory cure, or return to current status at rates below our expectations. Second, loan modification efforts have not gained the momentum necessary to blunt the negative impact to housing. Third, recent high levels of claims in our reinstatements have caused us to revise our reserve assumptions.

As you recall, if our servicing customers do not produce documents necessary to protect claims, the claim will be denied. If servicers ultimately produce documents, PMI will reverse the claim denial. We consider our estimates of future claim denials and reversals of claim denials in establishing our loss reserves. In the first-half of 2011, the frequency with which servicers have produced documents for previously denied claims significantly increased.

In the second quarter alone, the number of claim denial reinstatements increased by nearly 42%. As a result, in the second quarter of 2011, we significantly decreased our estimate of future claim denials net of expected reversals. We can’t be sure that we’ll not need to further adjust our claim denial assumptions in the future.

Four, while both new delinquencies in the quarter and PMI delinquent loan inventory continued to decline, reserves on our new delinquencies continue to be a significant driver PMI’s total losses. Of U.S. mortgage insurance operations $430 million of losses and loss adjustment expenses in the second quarter, $187 million were due to reserves on new delinquencies. These and other trends form our consolidated net loss of $134.8 million and USMI’s loss of $338.4 million. Our consolidated results were positively affected by $150.5 million gain on sale or $0.93 per share. This gain was due to our recognition of the note issued to us in connection with the sale of our Australian mortgage insurance entity in 2008.

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