PMI Group (PMI)

Recent Developments Relating to Mortgage Insurance Companies and PMI Guaranty Ratings

On April 8, 2008, Standard & Poor’s downgraded its counterparty credit and insurer financial strength ratings on PMI Mortgage Insurance Co., PMI Insurance Co., PMI Guaranty and PMI Europe from “AA” (CreditWatch with Negative Implications) to “A+” (Negative Outlook). Standard & Poor’s also downgraded its counterparty credit rating on The PMI Group from “A” (CreditWatch with Negative Implications) to “BBB+” (Negative Outlook). In taking these actions, Standard & Poor’s noted that the downgrades reflected, among other things, “weaker-than-expected results for the fourth quarter of 2007 and the continued deterioration in key variables that influence claims for mortgage insurance.” Also on April 8, 2008, Standard & Poor’s placed its “AA-” counterparty credit and insurer financial strength ratings on CMG MI on CreditWatch with Negative Implications. Standard & Poor’s indicated that it had taken this action in order to review the impact that the downgrade of PMI Mortgage Insurance Co. will have on CMG MI.

On April 9, 2008, Standard & Poor’s downgraded its financial strength rating on PMI Australia from “AA” (CreditWatch with Negative Implications) to a rating of “AA-” (CreditWatch with Negative Implications). In taking its actions, Standard & Poor’s noted that the CreditWatch “reflects PMI Group’s intention to implement various operational measures to further protect the Australian subsidiary’s financial strength at the “AA-” level . . . Should the[se] segmented rating measures not be implemented, it is likely the rating will be equated with that of PMI.”

On April 15, 2008, Standard & Poor’s removed its “AA-” counterparty credit and insurer financial strength ratings on CMG MI from CreditWatch with Negative Implications. At the same time, Standard & Poor’s affirmed its ratings on CMG MI with a negative outlook. In taking these actions, Standard & Poor’s indicated that it viewed the April 8, 2008 downgrade of PMI Mortgage Insurance Co. as not having a material impact on CMG MI’s financial strength.

On June 5, 2008, Fitch lowered its insurer financial strength ratings on PMI, PMI Europe, and PMI Guaranty to “A+” (Rating Watch Negative) from “AA” (Rating Watch Negative) and its long-term issuer rating of The PMI Group to “BBB+” (Rating Watch Negative) from “A” (Rating Watch Negative). Fitch also lowered its insurer financial strength rating on PMI Australia to a rating of “AA-” from “AA” while improving its rating outlook of PMI Australia from “Rating Watch Negative” to “Negative Outlook”.

On June 26, 2008, Standard & Poor’s affirmed PMI Australia’s insurer financial strength rating at “AA-” and improved its rating outlook to “Negative Outlook” from “CreditWatch with Negative Implications”.

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On July 9, 2008, Moody’s lowered its insurer financial strength rating on PMI to “A3” (Negative Outlook) from “Aa2” (On Review for Possible Downgrade), and The PMI Group’s senior debt rating to “Baa3” (Negative Outlook) from “A1” (On Review for Possible Downgrade). Moody’s also lowered the ratings of PMI Europe and PMI Guaranty Co. to “A3” (Negative Outlook) from “Aa3” (On Review for Possible Downgrade), and the ratings of PMI Australia to a rating of “Aa3” (On Review for Possible Downgrade) from “Aa2” (On Review for Possible Downgrade).

Determinations of ratings by the rating agencies are affected by a variety of factors, including macroeconomic conditions, economic conditions affecting the mortgage insurance industry, changes in business prospects, regulatory conditions, competition, underwriting and investment losses and the perceived need for additional capital. There can be no assurance that our wholly-owned insurance subsidiaries will not be downgraded in the future.

Any additional ratings downgrade in the future, or the announcement of a potential downgrade or other concern relating to the financial strength of our wholly-owned insurance subsidiaries could have a material adverse effect on our business prospects, our ability to compete, our holding company debt ratings, the ratings or performance of our other insurance subsidiaries (who may receive capital support from the downgraded subsidiary), or the ratings of CMG MI. (See Part II, Item 1A. Risk Factors – We have been negatively impacted by recent downgrades of the insurer financial strength ratings of some of our wholly-owned insurance subsidiaries. Additional adverse rating agency actions with respect to our insurance subsidiaries could further harm our financial condition and our business.)

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Recent Developments Relating to Mortgage Insurance Companies and PMI Guaranty Ratings

On April 8, 2008, Standard & Poor’s downgraded its counterparty credit and insurer financial strength ratings on PMI Mortgage Insurance Co., PMI Insurance Co., PMI Guaranty and PMI Europe from “AA” (CreditWatch with Negative Implications) to “A+” (Negative Outlook). Standard & Poor’s also downgraded its counterparty credit rating on The PMI Group from “A” to “BBB+” (Negative Outlook). In taking these actions, Standard & Poor’s noted that the downgrades reflected, among other things, “weaker-than-expected results for the fourth quarter of 2007 and the continued deterioration in key variables that influence claims for mortgage insurance.” Also on April 8, 2008, Standard & Poor’s placed its “AA-” counterparty credit and insurer financial strength ratings on CMG MI on CreditWatch with Negative Implications. Standard & Poor’s indicated that it had taken this action in order to review the impact that the downgrade of PMI Mortgage Insurance Co. will have on CMG MI.

On April 9, 2008, Standard & Poor’s downgraded its financial strength rating on PMI Australia from “AA” (CreditWatch with Negative Implications) to “AA-” (CreditWatch with Negative Implications). In taking its actions, Standard & Poor’s noted that the CreditWatch “reflects PMI Group’s intention to implement various operational measures to further protect the Australian subsidiary’s financial strength at the “AA-” level . . . Should the[se] segmented rating measures not be implemented, it is likely the rating will be equated with that of PMI.”

On April 15, 2008, Standard & Poor’s removed its “AA-” counterparty credit and insurer financial strength ratings on CMG MI from CreditWatch with Negative Implications. At the same time, Standard & Poor’s affirmed its ratings on CMG MI with a negative outlook. In taking these actions, Standard & Poor’s indicated that it viewed the April 8, 2008 downgrade of PMI Mortgage Insurance Co. as not having a material impact on CMG MI’s financial strength.

Determinations of ratings by the rating agencies are affected by a variety of factors, including macroeconomic conditions, economic conditions affecting the mortgage insurance industry, changes in business prospects, regulatory conditions, competition, underwriting and investment losses, and the perceived need, if any, for additional capital. There can be no assurance that our wholly-owned insurance subsidiaries will not be downgraded in the future.

Any additional ratings downgrade in the future, or the announcement of a potential downgrade or other concern relating to the financial strength of our wholly-owned insurance subsidiaries could have a material adverse effect on our business prospects, our ability to compete, our holding company debt ratings, the ratings or performance of our other insurance subsidiaries (who may receive capital support from the downgraded subsidiary), or the ratings of CMG MI. (See Part II, Item 1A. Risk Factors – We have been negatively impacted by recent downgrades of the insurer financial strength ratings of some of our wholly-owned insurance subsidiaries. Additional adverse rating agency actions with respect to our insurance subsidiaries could further harm our financial condition and our business.)

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Recent Developments Relating to Mortgage Insurance Companies and PMI Guaranty Ratings

In October 2007, Standard & Poor’s placed its “AA” counterparty credit and financial strength ratings on PMI Mortgage Insurance Co., PMI Guaranty, PMI Europe and PMI Australia and its “AA” financial strength rating on PMI Insurance Co. on CreditWatch with negative implications. At the same time, Standard & Poor’s placed its “A” counterparty credit rating on The PMI Group on CreditWatch with negative implications. In taking these actions, Standard & Poor’s indicated that these ratings would likely be removed from CreditWatch and affirmed with a negative or stable outlook if Standard & Poor’s concluded that PMI’s near-term operating performance was not significantly different than its peers and that the group was unlikely to report an underwriting loss in 2009. Standard & Poor’s also indicated that the rating could be lowered by one notch if Standard & Poor’s believed PMI’s operating performance compared unfavorably to its peers in the next two years or that the group was likely to report an underwriting loss for 2009.

In October 2007, Fitch downgraded its debt ratings of The PMI Group to “A” from “A+”, and the debt ratings of PMI Capital I to “A-” from “A”. Fitch affirmed its “AA” insurer financial strength ratings of PMI Mortgage Insurance Co., PMI Insurance Co., PMI Australia, PMI Europe and PMI Guaranty Co. Fitch also revised the Rating Outlook on all ratings to Negative from Stable. Also, in October, Fitch affirmed its “AA” insurer financial rating for CMG MI with a Rating Outlook of Stable.

The above actions followed the announcement of our net loss in the third quarter of 2007. Fitch indicated that the downgrade of debt ratings reflected a normalization of the notching between the operating company’s insurer financial strength rating and the holding company’s senior debt ratings to three notches and that the Rating Outlook revision to Negative for PMI Guaranty Co., PMI Insurance Co., PMI Europe, and PMI Australia was exclusively related to the Rating Outlook of and the capital support provided by PMI Mortgage Insurance Co. through capital support and related agreements to these entities.

In November 2007, Standard & Poor’s removed from CreditWatch with negative implications its “A” counterparty credit rating on PMI Group Inc., its “AA” counterparty credit and financial strength ratings on PMI Mortgage Insurance Co., PMI Guaranty, PMI Europe and PMI Australia, and its “AA” financial strength rating on PMI Insurance Co. At the same time, Standard & Poor’s affirmed its ratings on all the companies with a negative outlook.

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On January 31, 2008, Moody’s placed its “Aa2” insurer financial strength ratings on PMI Mortgage Insurance Co., and PMI Australia and its “Aa3” insurer financial strength ratings on PMI Europe and PMI Guaranty on review for possible downgrades. Moody’s noted that these actions reflected its view that increased losses are likely to have a meaningful impact on PMI’s US mortgage insurance portfolio and that, because the international franchises and PMI Guaranty benefit from capital support provided by PMI U.S. and The PMI Group, a downgrade of PMI’s U.S. operations would have negative implications for the ratings of our international subsidiaries.

On February 13, 2008, Standard & Poor’s placed their ratings of PMI Mortgage Insurance Co., PMI Australia, PMI Europe, and PMI Guaranty on CreditWatch with negative implications and noted that these actions were the result of a reassessment of Standard & Poor’s expectations for the mortgage insurance industry.

On February 25, 2008, Fitch placed its “AA” insurer financial strength ratings on PMI Mortgage Insurance Co., PMI Insurance Co., PMI Australia, PMI Europe and PMI Guaranty Co., as well as the long-term issuer ratings of The PMI Group, Inc. and PMI Capital I on Rating Watch Negative. In taking these rating actions, Fitch indicated that it had updated its view on ultimate loss expectations and their impact on PMI Mortgage Insurance Co.’s capital position, particularly with respect to the company’s large exposure to Alt-A, interest-only and high LTV loans. Fitch indicated that it believes PMI Mortgage Insurance Co. currently has a capital shortfall at the “AA” rating level, and that its current assessment of PMI Mortgage Insurance Co. incorporates a view that The PMI Group, Inc. maintains additional financial flexibility through unutilized capital available at several affiliates. In addition, Fitch expressed its concern on the potential for further negative pressure on the earnings of The PMI Group, Inc. related to investments in financial guaranty insurers FGIC Corporation and RAM Holdings Ltd.

Also on February 25, 2008, Fitch affirmed the ‘AA’ insurer financial strength rating of CMG MI and revised the Rating Outlook from Stable to Negative. In its report Fitch stated that weakness experienced at PMI is tending to be a negative impact on CMG MI, at least over the near-to-intermediate term.

Fitch indicated that it expects PMI Mortgage Insurance Co. to engage in a capital enhancement plan to bolster the company’s financial position over the next several months, and that failure to execute upon a plan could result in the potential downgrade of PMI Mortgage Insurance Co.’s insurer financial strength rating by up to two notches in the near-term. Fitch also indicated that the stringent capital standards required by the Australian regulatory authorities substantially isolate PMI Australia from the capital adequacy concerns related to its parent. Consequently, Fitch indicated, any downgrade of PMI Australia would be limited to one notch.

Determinations of ratings by the rating agencies are affected by a variety of factors, including macroeconomic conditions, economic conditions affecting the mortgage insurance industry, changes in business prospects, regulatory conditions, competition, underwriting and investment losses and the perceived need for additional capital. There can be no assurance that our wholly-owned insurance subsidiaries will not be downgraded or need additional capital in order to maintain their ratings. Indeed, we anticipate that PMI will likely require additional capital in 2008 to maintain a rating within the “double-A” category. As discussed above, there can be no assurance that we will be able to raise any additional capital in the future and, to the extent that we are unable to timely raise sufficient capital in relation to increased capital needs, our wholly-owned insurance subsidiaries’ ratings could be lowered.

A ratings downgrade, or the announcement of a potential downgrade or other concern relating to the financial strength of our wholly-owned insurance subsidiaries could have a material adverse effect on our business prospects, our ability to compete, our holding company debt ratings, the ratings or performance of our other insurance subsidiaries (who may receive capital support from the downgraded subsidiary), or the ratings of CMG MI. Any of these events would harm our consolidated financial condition, results of operations and cash flows. See Item 1A. Risk Factors—A downgrade of the financial strength ratings of our wholly-owned insurance subsidiaries would adversely affect our business and prospects and, consequently, our results of operations and financial condition.

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Recent Developments
Relating to Mortgage Insurance Companies and PMI Guaranty Ratings

SIZE="2">In October 2007, Standard & Poor’s placed its “AA” counterparty credit and financial strength ratings on PMI Mortgage Insurance Co., PMI Guaranty, PMI Europe and PMI Australia and its “AA” financial
strength rating on PMI Insurance Co. on CreditWatch with negative implications. At the same time, Standard & Poor’s placed its “A” counterparty credit rating on The PMI Group on CreditWatch with negative implications. In
taking these actions, Standard & Poor’s indicated that these ratings would likely be removed from CreditWatch and affirmed with a negative or stable outlook if Standard & Poor’s concluded that PMI’s near-term
operating performance was not significantly different than its peers and that the group was unlikely to report an underwriting loss in 2009. Standard & Poor’s also indicated that the rating could be lowered by one notch if
Standard & Poor’s believed PMI’s operating performance compared unfavorably to its peers in the next two years or that the group was likely to report an underwriting loss for 2009.