The PMI Group, Inc., (NYSE:PMI), provides insurance coverage to mortgage lenders, commercial banks, and other financial institutions to protect them against default. The company's policies focus on a particular class of borrowers, those that are only able to pay a nominal down-payment on a house (less than 20%) both in national and international markets. The PMI Group also offers pool insurance (coverage above primary coverage) in the secondary mortgage market on low down-payment loans, mainly to Fannie Mae (FNM) and Freddie Mac (FRE).
The company conducts its U.S. Mortgage Insurance Operations through its subsidiary PMI Mortgage Insurance Company. Its other subsidiary, Fairbanks Capital Holding Corporation (FCHC), provides mortgage loan servicing. The PMI Group completed the divestiture of its title insurance subsidiary, American Pioneer Title Insurance Company (APTIC) in March 2004. It is also a 42% stakeholder in the FGIC corporation, the third-largest monoline bond insurer in the U.S.
FGIC has been under scrutiny lately, as along with the top two bond insurers Ambac Financial Group (ABK) and MBIA (MBI) it had insured a considerable number of mortgage-backed securities. These assets have plummeted in the wake of the subprime lending crisis, and FGIC, Ambac, and MBIA are on the hook for billions of dollars to cover loan defaults. FGIC, meanwhile, has announced that it will request to be split into two companies, one for the insurance of municipal bonds and the other responsible for structured finance bonds (including mortgage-backed securities).
Premiums accounted for 73.4% of PMI's $923.9 million in total revenues for 2009. Investment income accounted for 17.0%, with the remaining 9.6% attributed to equity in the earnings of subsidiaries. Total revenues increased in 2009 from the previous year, when revenues were only $908 million. As a result, PMI was able to decrease its net loss from $929 million in 2008 to $659 million in 2009.
More borrowers have defaulted on their loans since 2007, due to delinquencies in certain adjustable rate mortgage and high LTV loans, declining home prices (particularly in California and Florida) and economic conditions in certain Midwestern states. Other portions of PMI'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 for a longer time than expected earlier, giving rise to increased losses for the mortgage insurers.
A decline in home price diminished the availability of certain loan products, and a decrease in the percentage of the default inventory has contributed to higher claim rates. Higher loan sizes and coverage levels in PMI's portfolio have contributed to an increase in the average claim size. Due to these factors, increase in claim rates and average claim sizes may continue going forward, which could be damaging for PMI's operating results.
Although much smaller than both MBIA (MBI) and Ambac Financial Group (ABK), PMI competes against these two bond insurers. It also competes against some large insurance agencies such as American International Group (AIG), which also insured a wide variety of securities such as Credit Default Swap (CDS).