Paid Claims Swamp PMI Group in Second Quarter
The PMI Group, Inc. (PMI) found itself hit with a swarm of paid claims as the number of borrowers defaulting on their mortgages continued to climb during the second quarter. The Walnut Creek, Calif.-based insurer said that it lost $246.3 million in Q2, or $3.03 per share, compared to income of $83.8 million, or $.95 per share, one year earlier. The loss, not surprisingly, was driven by a $225.9 million net loss in the company's U.S. mortgage insurance operations; PMI also said it had closed its Canadian unit, and said it will close sales offices in Germany, Spain and Italy, as it looks to preserve and redeloy capital to prop up its ailing U.S. insurance business. Paid claims in the U.S. insurance business rose to $198.8 million for the quarter, compared to $168.8 million one year earlier; average claims size rose as well, from $41,600 to $43,900 on a linked-quarter basis. In addition to re-investing capital received from its guaranty segment as part of ceding its entire re-insurance portfolio to a third party, PMI said that its exit from Canada would give it $204 million that it intends to invest into its U.S. mortgage insurance operations. It's a business that clearly needs the fresh capital: The U.S. mortgage insurance business at PMI generated $330.6 million in revenue during the second quarter, a total that was easily swamped by credit losses during the quarter. Credit costs and loss provision charges rose to $605 million during the quarter, and $1.18 billion for the first half of 2008; those totals contrast with $146.2 million and $255.5 million in the year-ago periods. Nearly all of the losses came out of U.S. insurance operations, PMI said, citing "significant deterioration" of the U.S. housing market. Collateral performance Default rates continued to head upward at PMI; hitting 10.3 percent of $30.6 billion risk in force during the second quarter. Alt-A mortgages represent 21.9 percent of PMI's primary risk in force; 24 percent of risk in force was tied to mortgages with greater than 97 percent LTV at the end of Q2. Default rates in California and Florida have ratcheted up to 18 and 18.2 percent of insured mortgages in both states, PMI said. The default rate is even higher for interest-only mortgages, at 19.3 percent by the end of the quarter. Even borrowers with great credit are defaulting -- those with FICO scores above 720 and above, equal to $10.3 billion risk in force, were defaulting at a 4.7 clip at the end of the quarter. Lastly, 1.9 percent of the company's $2.3 billion in 2008 vintage loans had already defaulted. More proof that the collateral trends in 2008 aren't likely to be much better than what we're observing for the 2007 vintage. Related documents: financial supplement, portfolio characteristics Disclosure: No positions in PMI when story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.