The third quarter was less-than-kind to the PMI Group, Inc. (PMI), with the mortgage insurer announcing Monday morning a third quarter loss of $149.3 million, or $1.83/share; the loss widens a year-ago quarterly loss of $110.6 million, or $1.32/share. Revenues at the company’s U.S. insurance unit, which comprise the bulk of its business, fell 33.4 percent, as the insurer continued to tighten its guidelines amid rising losses on existing MI policies. Losses on claims paid at PMI’s U.S. unit rose to $200.1 million for the third quarter, up sharply from $92.6 million one year earlier; the insurer cited “an increase in the number of claims paid, higher claim rates and larger average claim sizes” as chief culprits. As a result, the insurer continued to jack up its loss reserves, moving reserves for its U.S. insurance business up $217 million to $2.3 billion, compared to $2.1 billion at the end of June. The only really good news for investors in PMI’s earnings was a separate announcement by the firm that it was revising its full-year estimate of paid claims into the range of $850 million to $900 million; the company had said earlier it expected claims to range from $900 to $975 million. Shares bounced up ever-so-slightly in early trading Monday morning to $2.53, up 1.6 percent, on the news. A look at the company’s Q3 results, however, suggests that the revised guidance has less to do with improved mortgage collateral performance than it does with expected recoveries from reinsurers and other entities: for example, PMI’s U.S. business booked a $79.2 million credit during Q3 from reinsurance recoverables, primarily from captive reinsurance agreements. A look at collateral performance PMI’s U.S. operations saw a sharp jump in borrower defaults within its primary insurance line of business during Q3: 93,670 such loans were in default at the end of Q3, up nearly 16 percent from the second quarter alone. In total (including both primary and pool insurance), defaults rose 15 percent to 136,411 loans. It’s also interesting to note where the borrower defaults are within PMI’s portfolio– because an astounding shift has taken place. Going into 2008, the largest primary default rate was in California at 10.9 percent, while Ohio was close behind, posting a PDR of 10.8 percent. No more. By the end of Q3, Florida had assumed the top PDR in PMI’s U.S. portfolio, at a stunning 22.6 percent; the state’s default rate had been only 10.6 percent at the end of 2007. California was relegated to second place, but saw its PDR jump up to 21.0 percent in the same time frame. Worse yet, six of the top ten states as a percentage of primary risk in force saw default rates jump into the double digits by the end of Q3; that compares to just three states heading into the start of the year. Write to Paul Jackson at firstname.lastname@example.org. Disclosure: The author held no positions in any of the stocks mentioned when this story was published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
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