PMI Group, Inc.’s (PMI) third quarter loss from continuing operations came in at $1.06 per share, much better than the Zacks Consensus estimated loss of $1.38. This was also better than the loss from continuing operations of $1.83 in the prior-year quarter.
 
Loss was primarily driven by continued high losses and loss adjustment expenses (LAE) in the U.S. Mortgage Insurance Operations. Premiums earned and investment income in the U.S. Mortgage Insurance Operations also decreased during the quarter. 

Consolidated net premiums written for the third quarter of 2009 were $167.4 million, compared to $176.5 million in the prior-year quarter. The decreases were primarily due to lower levels of new insurance written and higher refunded premiums from rescissions of insurance previously written. Premiums earned for the reported quarter were $176.6 million, compared to $183.6 million in the prior-year quarter.
 
Losses and LAE, which include paid claims and additions to reserve for losses – was $336.8 million, compared to $382.7 million a year ago. The decrease was due primarily to reduced levels of reserve increases in the third quarter of 2009 driven by the negotiated acceleration of certain claims associated with modified pool insurance restructurings. 

As of Sep 30, 2009, reserve for losses and LAE totaled $3.2 billion, compared to $3.2 billion as of Jun 30, 2009 and $2.5 billion as of Sep 30, 2008. Ending reserves for losses and LAE for primary insurance in the U.S. Mortgage Insurance Operations increased by $134.0 million to reach $2.7 billion. The increase was due primarily to higher default inventories and higher average claim rates, partially offset by lower average primary claim sizes and the continued effect from rescission activity. 

During the third quarter of 2009, consolidated other underwriting and operating expenses decreased 41.8% to $34.6 million from $59.4 million in the prior-year quarter. The decrease was due primarily to a decrease in payroll and related expenses. 

The U.S. Mortgage Insurance segment reported a net loss from continuing operations of $110.6 million in the third quarter of 2009, compared to a net loss of $137.1 million in the prior-year quarter. Total revenues for this segment increased 34.0% year-over-year to $209.1 million. 

The International Operations segment reported a net income from continuing operations of $27.4 million, compared to a net loss of $46.0 million in the prior-year quarter. Total revenues for this segment came in at $11.5 million, compared to negative $0.4 million in the prior-year quarter. 

In the Financial Guaranty segment, earnings from continuing operations for the reported quarter was nil, compared to $6.5 million in the prior-year quarter. 

Corporate & Other segment reported a net loss from continuing operations of $4.7 million, compared to net income from continuing operations of $27.4 million in the prior-year quarter. Total revenues for this segment decreased 95.1% year-over-year to $3.5 million. 

As of Sep 30, 2009, book value declined to $11.91 per share, compared to $15.65 as of Dec 31, 2008 and $17.80 as of Sep 30, 2008.
 
As of Sep 30, 2009, the PMI Group had available funds, consisting of cash and cash equivalents and investments, of $3.7 billion and total shareholders’ equity of $1.0 billion. 

The rise in delinquencies and defaults on loan payments may continue for longer than expected earlier, leading to increased losses for the mortgage insurers. Furthermore, we suspect PMI Group may need to raise new capital in the coming quarters, which would result in dilution for the existing shareholders. Though we expect continuous losses in the coming quarters, fundamentals are expected to improve as well.
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