We have recently downgraded PMI Group Inc. (PMI) to Underperform, as we expect losses and loss adjustment expenses from mortgage insurance operations, increased valuation allowances, lower premiums earned and shrunken investment income will continue to pressure PMI Group’s earnings.
PMI Group’s default inventory and default rate increased significantly in 2009 to 2010 due to delinquencies in certain adjustable rate mortgage and high loan-to-value loans, declining home prices, higher rates of unemployment and challenging economic conditions in certain geographical areas.
Moreover, other portions of the company’s portfolio could also suffer increasing defaults and losses due to continued weakness in the U.S. housing and mortgage markets. It now appears that the delinquencies and defaults on mortgage loan payments may continue longer than expected, which will further increase losses for the mortgage insurers.
Additionally, high claim rates (the rate at which delinquent insured loans result in claims), average claim sizes, and worsened severity are major concerns for PMI Group at this point. Higher loan sizes and coverage levels in the company’s portfolio have contributed to an increase in the average claim size, which could be damaging for PMI Group’s operating results.
However, domestic growth has been driven by improved persistency levels. PMI Group’s persistency rate has been positively affected for the last several years as a result of lower borrower refinance activity of PMI insured loans primarily due to declining home prices and the diminished availability of loan products.
Also, PMI Group has been witnessing declining delinquency rate.
PMI Group reported third-quarter 2010 loss of $1.74 per share, much worse than the Zacks Consensus Estimate loss of 59 cents.
The Zacks Consensus Estimate for fourth-quarter 2010 is a loss of 68 cents per share. For full years 2010 and 2011, the Zacks Consensus Estimates losses are, respectively, $5.36 per share and 26 cents per share.
The quantitative Zacks #3 Rank (short-term Hold rating) on the stock indicates no clear directional pressure on the shares over the near term.
Headquartered in Walnut Creek, California, the PMI Group Inc. provides insurance coverage to mortgage lenders, commercial banks and other financial institutions. The PMI Group also offers pool insurance in the secondary mortgage market on low down-payment loans, mainly to Fannie Mae and Freddie Mac. It competes with MGIC Investment Corp. (MTG) and Radian Group Inc. (RDN).
MGIC INVSTMT CP (MTG): Free Stock Analysis Report
PMI GROUP (PMI): Free Stock Analysis Report
RADIAN GRP INC (RDN): Free Stock Analysis Report
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