PMI Posts $115m Loss; Blames US Mortgage Cover

The PMI Group (PMI) is posting a first-quarter 2009 loss of $115.3m, or $1.41 per share, from continuing operations, driven primarily by higher-than-expected negative earnings and loss adjustment expenses (LAE) in its US mortgage insurance operations, the company said today. The loss is narrower than the $181m loss Q408 — also driven by its US mortgage insurance operations — due largely to a higher net gain from credit default swaps and lower expenses. A nearly 10-fold surge in net gain from credit default swaps boosted the insurer’s revenue which jumped about 6% from last quarter to $115.3m. But the company’s challenges are evident in its reserve for losses and LAE, which totaled $2.9bn as of March 31, 2009 compared with $2.7bn as of December 31, 2008 and $1.6bn as of March 31, 2008. Reserves for losses and LAE in the US mortgage insurance increased in the first quarter of 2009 by a whopping $230m to $2.9bn, partially offset by a $66.7m credit from reinsurance recoverables, primarily from captive reinsurance agreements.  The increase in the quarter for reserves for losses and LAE was primarily due to increases in notices of default, and higher expected claim rates and claim sizes. In mid-march, PMI said in a filing with the Securities and Exchange Commission that it was exploring alternatives to enhance liquidity and capital, as its mortgage insurance business continued to prove a significant drag on the company’s assets. The insurer said it maintained sufficient liquidity to repay $200m in outstanding debt under a revolving credit facility. PMI also states that is now tapped out, as a result, and does not hold enough reserves to cover balances due on outstanding senior notes. If not cured within 30 days, the facility will default and trigger repayment obligations on PMI’s senior notes, which may impact the firm’s long-term health. On Friday, the company announced that it reached an amended agreement with lenders that would completely replace the current credit facility. The new facility is required to meet certain covenants to avoid default by the end of this month. Among those covenants includes the repayment of $125m of its borrowing under the facility. Certain conditions will require the consent of third parties and regulatory approval, the insurer said in a press release. And there can be no assurance that those consents and approval will be obtained by May 29, 2009. Upon an event of default, the Company would likely be required to repay all outstanding indebtedness under the facility and the lenders would have the right to terminate their loan commitments under the facility. Write to Kelly Curran.