PMI Group Inc. (PMI)

Q2 2010 Earnings Call

July 29, 2010 12:00 pm ET


Bill Horning - VP of IR

Steve Smith - Chairman and CEO

Don Lofe - EVP, CFO and CAO

David Katkov - EVP and CBO


Donna Halverstadt - Goldman Sachs

Mark Devries - Barclays Capital

Matthew Howlett - Macquarie Research Equities

Jordan Hammerlan - Philadelphia Financial

Bill Drew - Harbinger Capital

Sam Martini - ECI

Matthew Howlett - Macquarie

Steve Stelmach - FBR Capital Market

Chris Owens - Castlewood



Hello and welcome to the second 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 Instruction) 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 and good morning and welcome to the PMI Group’s second quarter 2010 financial results conference call. Today’s call will begin with comments from Steve Smith, PMI’s Chairman and Chief Executive Office. Mr. Smith will discuss PMI’s overall financial results and highlights for the second 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.

Also on today’s we were referencing non-Generally Accepted Accounting Principle 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 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, July 29th, 2010, and we undertake no obligation to update such statements except as may be required by law.

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 second quarter the PMI Group had a net loss from continuing operations of $150.6 million or a loss of $1.11 per share. Our consolidated results for the second quarter driven by US mortgage insurance operations, which had a net loss of $115.6 million and in our corporate and other segment which had a $47.7 million loss as a result of an increase in the fair market value of debt due to our improving credit spreads.

Before reviewing the business in more detail, let me take a moment to discuss the mortgage insurance industry fundamentals. Most of you follow the mortgage insurance companies of America or MICA industry statistics that are reliefs on a one-month lag and have undoubtedly seen the improving cure ratios and the lower new notices of default.

Many of you also follow various government and housing statistics that show increasing loan work activity and modifications. We have experienced these same trends and, encouraged by the fundamentals, are generally moving in the right direction. With the peaking of some of the most troubled vintages, the number of new delinquent loans continued to decline in the second quarter. Peers remained elevated through the first half of 2010, relative to the prior two years.

With regards to new insurance written for the second quarter, our US MI operations saw an increase in new business production and market share compared to our private market competitors. It remains our expectation that private MI penetration, relative to FHA will increase over the next several years as we return to more historical norms.

US MI net loss was driven by continued high losses and associated Loss Adjustment Expenses or LAE. As Don will discuss, high level claim payments drove a reduction in loss reserves in the second quarter of 2010. That said several factors in the quarter partially offset this reduction.

In the second quarter, we received 28,597 new Notices of Default or NODs. NODs continue to negatively affect loss reserves. On the policy side however, this represents a decline in the NODs for the third straight quarter, the lowest NOD level since the fourth quarter of 2007, and a 25% decline from the second quarter of last year. In addition, the mix of NODs is improving. We received pure NODs from Alt-A, high loan-to-values and from the troubled geographic areas than in the prior quarter. As a result of the decline in NODs, higher claims paid and our loss mitigation efforts.

Primary loans in default at June 30, 2010, total 138,431, down from the 147,248 at March 31, 2010, and 150,925 at December 31st, 2009. Our primary delinquency rate at June 30, 2010, was 20.8%, down modestly from March 31st, 2010. But more importantly, the first decrease since the first quarter of 2007. While we anticipate adverse seasonality in the second half of the year, we continue to expect that PMI’s total primary default inventory at the end of 2010 will be lower than the year end 2009. This expectation derived my belief that defaults from troubled vintages have peaked.

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