The PMI Group, Inc. Q4 2009 Earnings Call Transcript

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 |  About: PMI Group, Inc. (The) (PMIR)
by: SA Transcripts

The PMI Group, Inc. (PMI) Q4 2009 Earnings Call February 16, 2010 12:00 PM ET

Executives

Bill Horning - VP of IR

Steve Smith - Chairman and CEO

Don Lofe - EVP, CFO and CAO

Analysts

Matthew Howlett - Macquarie Capital

Matt Otis - KBW

Conor Ryan - Deutsche Bank

Donna Halverstadt - Goldman Sachs

Mike [Thresher] – Piper Jaffray

Steve Stelmach - FBR Capital Markets

Tom [Martini] – [ECI]

Operator

Welcome to the fourth quarter 2009 earnings call for The PMI Group. (Operator Instructions) Now, I will turn the meeting over to Mr. Bill Horning, Vice President, Investor Relations. Sir you may begin.

Bill Horning

Thank you. Good morning and welcome to The PMI Group's fourth quarter 2009 financial results conference call. Today's call will begin with comments from Steve Smith, PMI's Chairman and Chief Executive Officer. Mr. Smith will discuss PMI's overall financial results and highlights for the fourth quarter.

Don Lofe, PMI's Executive Vice President, Chief Financial Officer and Chief Administrative Officer, will then address other business results for the quarter as well as other financial and capital matters. We also have with us today David Katkov, PMI's Executive Vice President and Chief Business Officer who along with Steve and Don will be available to answer your questions following today's prepared remarks.

Also on today's call, we will be referencing non-Generally Accepted Accounting Principle measures, such as net operating income, which under SEC Regulation G we are required to reconcile to GAAP. The reconciliations of these measures with GAAP financial measures are available on our website.

Before we begin, I would like to review the company's Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this call, we may be making forward-looking statements. Actual results may differ materially from the statements made during this call. The company's business depends on investment considerations, which are highlighted in our Securities and Exchange Commission filings, including our 2008 Form 10-K and our most recent Form 10-Q. All forward-looking statements are made as of today, February 16, 2010, and we undertake no obligation to update such statements except as may be required by law.

With that, I will turn the call over to PMI's Chairman and Chief Executive Officer, Steve Smith.

Steve Smith

Thanks Bill. Good morning everyone and thank you for joining today’s call. The PMI Group had a net loss from continuing operations in the fourth quarter of $248.2 million or a loss of $2.76 per share. Our consolidated results for the fourth quarter were driven by our U.S. mortgage insurance operations which had a net loss of $242 million primarily due to continued losses in loss adjustment expenses, including accelerated claims payments related to the restructurings of certain contracts.

Now let me highlight for you our liquidity and capital position. On a consolidated basis, The PMI Group had total liquidity of $3.3 billion comprised of cash and cash equivalents of approximately $687 million and total investments of $2.6 billion. In addition, we had the benefit of approximately $941 million in captive trust balances for U.S. MI operations. Holding company liquidity at December 31st totaled approximately $61 million.

Now moving to PMI Mortgage Insurance Company, our primary mortgage insurance company, we ended the fourth quarter of 2009 with statutory risk in force of approximately $17 billion, an estimated policy surplus and contingency reserves of approximately $753 million, resulting in an estimated risk to capital ratio of 22 to 1, an excess minimum policy holders position of approximately $64 million as of year-end.

Now as we have discussed on previous conference calls we have and continue to seek statutory capital relief through internal capital initiatives which either free up existing capital or utilize our current capital base more efficiently. During the fourth quarter we were successful in restructuring certain modified pool contracts by effectively accelerating claim payments to the counterparty on a discounted basis resulting in the release of loss reserves. These transactions added approximately $51 million to our statutory capital in the fourth quarter. We will continue to assess opportunities for future restructuring within our pool insurance portfolio.

Also during the fourth quarter PMI Mortgage Insurance Company sold its entire investment in RAM Holdings Ltd., the parent company of RAM Re for $3.2 million. Additionally, the sale generated a tax loss which will result in a significant tax benefit of approximately $29 million for the company. Don will cover this in more detail a little bit later in the call. The completion of this sale reinforces our focus on our core U.S. mortgage insurance operations. Additionally, we realized approximately $9 million of net gains from our investment portfolio principally from the sale of municipal securities.

Our internal capital initiatives and modest possession of certain international subsidiaries and non-core assets have been successful. While we still have meaningful internal capital initiatives we are pursuing future opportunities are more limited. For some time and as we have discussed in past calls, the company has been investigating the possibility of raising external capital. We continue to evaluate market opportunities to ensure that we are in a position should we choose to take advantage of favorable market opportunities if and when they develop.

Barring additional significant internal or external cap limits in the first quarter we believe PMI will exceed the maximum 25 to 1 risk to capital threshold and fall below the required minimum policy holder position. Whether or not this occurs, we are increasingly optimistic that PMI will continue to write high quality new business. Our optimism is based on the important regulatory capital waiver PMI recently received from the Arizona Department of Insurance and the steps we are taking to be able to activate PMI’s subsidiary which we call PMAC in the event that PMI notwithstanding Arizona’s waiver is not permitted to write new business in certain states.

Now let me take a few moments to discuss the Arizona waiver and our PMAC subsidiary strategy. The Arizona Department of Insurance is PMI’s principal insurance regulator because PMI is domiciled in Arizona. The waiver issued by the Department on February 10th relieves PMI from having to continue to comply with Arizona’s minimum policyholder position requirement for mortgage insurers. Unless amended or terminated by the department the waiver runs through December 31, 2011. Prior to issuing the waiver the department spent significant time and resources evaluating PMI, its financial condition and its claim sustainability.

Accordingly, we believe the waiver validates our view that PMI’s claim pay resources are adequate even in the light of high level of insurance claims we are currently paying and expect to pay in the future. We expect that the waiver and the Arizona Department’s analysis of PMI may be important factors considered by other state regulators as they evaluate PMI.

Our announcement yesterday of Fannie Mae’s approval of PMAC as an eligible mortgage insurer is another important step towards activating PMAC in the event that PMI is not permitted to continue to write business in certain states. For the details of Fannie Mae’s approval of PMAC please see yesterday’s press release and the form 8-K we filed with the SEC today. PMAC is currently licensed in 47 states and we are in the licensing process with the three remaining states. We are well along the rate, form and other regulatory required processes. Operationally PMAC is ready to go.

We are in discussions with Freddie Mac to secure its approval. While further steps need to be completed, we believe that PMAC will provide us with a contingency plan in the event that a limited number of states do not follow the approach taken by the Arizona department.

Now before I get into the specific results of loss mitigation for the quarter let me take a moment to remind you that there are many servicer and GSE loan modification programs available to our homeowners and borrowers. The public’s focus has been on the Treasury’s Home Affordable Modification Program (OTCPK:HAMP). However, HAMP is just one modification program that is available. The HAMP program has very specific eligibility criteria and does not meet, nor was it intended to meet, all modification needs. For borrowers who don’t meet the criteria for HAMP servicers and GSE’s would evaluate the borrower for other loan modification programs.

While we are fully supportive of HAMP and any modification program that helps prevent foreclosures and keep families in their homes, it is important to recognize as the FHFA stated earlier this year the vast majority of completed loan modifications have been executed outside of the HAMP programs. Loan modifications and payment plans enabled 7,507 PMI insured borrowers to retain their homes in the fourth quarter and 23,352 in all of 2009. In total, this represents approximately $304 million of risk in force for the fourth quarter and $1 billion of risk in force for the full year. Of this, 1,628 modifications representing $93 million of risk were HAMP modifications in 2009.

Based on reporting we have received there are currently 23,000 loans in our delinquent inventory that are still in the HAMP trial period. We expect HAMP cures to grow in the coming quarters as servicers and the GSEs become better equipped to handle the large volume of HAMP trials as they convert to permanent modification. It is also important to note that loan modifications, HAMP trial plans and payment plan results are understated due to reporting lags related to servicer capacity. Throughout 2009 PMI received reports from servicers truing up prior periods. As servicer capacity in reporting improves we would expect these reporting lags to decrease but not to be completely eliminated.

In addition to our loan modification efforts we enabled 2,302 borrowers to avoid foreclosure through short sales and deeds in lieu of foreclosure in the fourth quarter and 7,595 borrowers for the full year. The volume of insured loans subject to investigation for misrepresentations, negligent underwriting and coverage eligibility remains elevated. As we have in the past when we find such activity pursuant to our master policy we rescind coverage on the loan and refund all associated premiums.

When a claim is filed on a loan that is subject to investigation but the loan file is not provided to us after repeated requests the claim will be denied. The aggregate dollar volume of delinquent primary and pool risk in force rescinded or denied in the fourth quarter of 2009 was approximately $217 million and approximately $1.1 billion for the full year. Additionally, we expect rescission and denial levels to remain high in 2010.

Turning to credit, our primary delinquency rate at 12/31/09 was 21.4% representing a 192 basis point sequential increase. The primary loans in default at year-end totaled 150,925 up from 141,261 at September 30, 2009. On page 13 of our financial supplement we have added a new disclosure highlighting the primary delinquency inventory roll forward. From this new disclosure you will notice the level of new notices of default received in the fourth quarter of 2009 was down 9% from the prior quarter and 20% from the fourth quarter of last year.

We believe book years 2005, 2006 and 2007 have peaked in terms of new delinquencies. With the peaking of these book years the number of delinquencies we expect to receive from each of these book years will be lower in future periods than we have experienced in past periods. We currently expect the number of our primary loans in default at the end of 2010 will be lower on a year-over-year basis principally due to the projected lower new notices of default, higher levels of cures and the actual paid claims.

Finally, let me briefly talk about new business writings. In the fourth quarter our U.S. mortgage insurance operations wrote approximately $1 billion of new insurance compared to $1.2 billion in the third quarter and $5. 7 billion one year ago. Consistent with our most recent guidance, our new insurance written for 2009 was approximately $9 billion. Our 2010 target will be between $9-10 billion. As we have discussed on prior calls, 2009 business writings were of high credit quality and we expect low volatility and high persistency resulting in what we believe will be very profitable books of business. We expect this positive trend to continue in 2010.

In summary, we are encouraged by our ability to execute on a number of internal capital initiatives and the minimum policyholder position waiver granted by the Arizona Department of Insurance and with regard to credit trends we anticipate that book years 2005, 2006 and 2007 have peaked and expect lower new notices of default going forward. We also expect to see continued and increased modification and workout activity. However, in spite of all of these generally positive trends we do not expect to see a return to profitability in 2010.

Now let me turn the call over to Don to cover additional details of the fourth quarter results as well as other capital and liquidity matters. Don?

Don Lofe

Thank you Steve. Good morning. Let me first cover certain aspects of our business operations in the fourth quarter and then detail for you other additional financial, capital and liquidity matters.

With regard to our consolidated financial results, our reported loss from continuing operations for the fourth quarter of 2009 of $2.76 per basic and diluted share was primarily driven by higher incurred losses in our U.S. mortgage insurance operations. Let me also add that a significant negative effect on our reported loss from continuing operations was predominately related to an acceleration of losses in our full portfolio that we originally forecast to occur primarily in 2010.

Now let me take a few minutes to discuss the results of each segment in more detail. Within the U.S. mortgage insurance operations we had an operating loss of $242 million in the fourth quarter of 2009 compared to a loss of $174 million in the fourth quarter of last year. Our fourth quarter result was primarily driven by higher incurred losses. First, addressing our reserves for losses in LEE at the end of the fourth quarter of 2009 the overall increase to our gross reserve to losses is approximately $75 million. At December 31, 2009 our gross reserve to losses and loss adjustment expenses should add approximately $3.21 billion.

Now a number of factors influenced incurred losses in the fourth quarter. Foremost among these was the accelerated pay claims associated with full insurance restructurings which effectively accelerated incurred losses into the fourth quarter but did not significantly change our internal forecast and ultimate losses related to these pool contracts. In addition to this acceleration effect, we experienced higher incurred losses as a result of higher claim rates in our 2005, 2006 and 2007 pool portfolio.

In the fourth quarter we decreased full reserves by approximately $159 million. This decrease was due to the accelerated claim payments partially offset by the higher claim rates on the 2005, 2006 and 2007 pool contracts. Other drivers of our total incurred losses in the quarter were the higher default inventory and claim rates in our primary portfolio. We increased reserves associated with our primary portfolio by approximately $237 million due to these factors.

In the fourth quarter the restructuring in the restructuring of certain pool policies as I previously mentioned resulted in a reduction in pool risk in force growth of established loss reserves of approximately $331 million, a reduction in associated loss reserves of approximately $315 million due to the accelerated claim payments of approximately $254 million. The positive impact or discount of these restructurings out of our loss reserves resulted in an estimated aggregate statutory capital benefit of approximately $51 million.

Also, excluding loss reserves already established for delinquent loans, the growth risk in force for modified pool with deductible decreased to approximately $425 million at December 31, 2009 from approximately $771 million at September 30, 2009 and $1.1 billion at June 30, 2009. With loss reserves established at approximately $130 million our remaining modified pool with deductible risk in force which is net of reserves was $295 million. Further, we believe the risk associated with book years 2004 and earlier of $103 million will not result in future losses of any significance.

You can find more information on PMIs modified pool exposure in our portfolio characteristics supplement which we published today and is available on our website.

In December the company announced the sale of PMI Mortgage Insurance Co.’s investment in RAM Holdings Ltd. This transaction increased statutory capital by $3.2 million for the fourth quarter and will also increase liquidity in 2010 by generating approximately $16 million of refunds on previously paid taxes for PMI Mortgage Insurance Company. In addition, a remaining credit of approximately [audio break] will be utilized on this future tax liability for the PMI Mortgage Insurance Company as well.

In 2008 and throughout 2009 we implemented numerous initiatives that improved our operational efficiencies, rationalized our workforce and refocused us on our core business. As a result, we expect further expense savings on a full year basis in 2010 of approximately $12 million.

Now moving to our international operations, in the fourth quarter of 2009 this segment had a net loss from continuing operations of $2.9 million and net income from continuing operations of $17.7 million for the full year. Loss in the fourth quarter was due primarily to early terminations we negotiated by [audio break] insurance contracts in Europe. PMI Europe ended the year with $4.9 billion of risk in force, down from $7.4 billion at year-end 2008. We expect to negotiate further reductions in risk in force in 2010 which we believe will position PMI Europe to repatriate capital to the PMI Mortgage Insurance Company at some point in 2010 or 2011.

Now with regard to the holding company matter, the PMI Group Inc. ended the fourth quarter with cash and liquid investments of approximately $61 million. Now let me update you on two primary facility covenants of our holding company’s credit agreement which were renegotiated in the second quarter of 2009. The two primary covenants in this facility are adjusted net worth and the fair value of pledged notes relating to our sale of PMI Australia or what we refer to as the QBE note. The minimum required adjusted net worth at December 31, 2009 was $700 million. We exceeded that requirement by approximately $348 million with adjusted net worth of approximately $1 billion at December 31, 2009.

Beginning in January of 2010 the adjusted net worth requirement is further reduced to $500 million until the facility matures in October of 2011. At December 31, 2009 the noticeable value of QBE notes was approximately $195 million representing the original principal amount of $187 million plus the accrual of interest since October of 2008. Assuming full payout of the note we will realize a maturity in December 2011 of $208 million which again includes accrued interest. As you may recall, the amount ultimately received on the QBE note is subject to actual and projected loss performance of PMI Australia’s policies in force as of June 30, 2008.

While losses associated with these policies have increased since June 30, 2008 we do not currently expect as of December 31, 2009 that the ultimate projected losses on this portfolio to trigger a reduction in the QBE note value. Given the recent performance of the Australian housing market and the partial run off of this portfolio as well as its [inaudible] we expect full repayment of the note at maturity. Based in part on our expectation of full repayment of the QBE note in 2011 we believe the liquidity at the holding company will be sufficient to meet our payment obligations through the end of 2012.

Furthermore, related to the QBE note PMI Mortgage Insurance Co. is party to an excessive loss and reinsurance agreement in connection with the sale of PMI Australia. Upon maturity of the QBE note in December 2011 we expect additional $25 million payment which would provide additional liquidity again to the PMI Mortgage Insurance Company.

Finally, I would like to direct those interested in a reconciliation of our consolidated net loss to our consolidated net operating loss to review the disclosure material posted on our website. With regards to PMI Europe we have treated our CDS mark to market adjustments as non-operating only to the extent any adjustments are deemed to relate to changes in credit spreads only and we have treated the fair value adjustment related to our senior set restructuring charges related to our workforce and net realized investment gains as non-operating items as well. Therefore, as presented in the reconciliation, our consolidated net operating loss in the fourth quarter of 2009 was $262.5 million or $3.18 per common share.

Now let me turn the call back to Steve. Steve?

Steve Smith

Thanks Don. I wanted to leave you with some brief thoughts about 2010 before we begin our question and answer session. As we have outlined in our recent real estate trends report and our upcoming housing and mortgage market review report, both available on our website, we believe that 2010 will display generally improved economic conditions nationally and as well improved environments for many local real estate markets.

The delinquency in new insurance written guidance we have given you today is based on this outlook. For example, while we expect unemployment rates to go up temporarily primarily due to discouraged workers re-entering the workforce we believe it will fall below current levels by year-end. We project that even in the face of modestly increasing mortgage rates existing home sales will increase across the year and the 2010 mortgage market size will be approximately $1.7 trillion dollars.

Within this significant mortgage market and similar [inaudible] forecasts the purchase money mortgage component will grow and provide opportunities for increased private mortgage insurance penetration. Finally, we anticipate home prices will firm up this year and to some extent they already have. It is likely that we will see them dip modestly in one quarter or another but by year’s end prices should be in the positive territory nationally.

Our primary mortgage insurance company has strong claims paying resources and at our holding company we believe our liquidity remains sufficient to meet our needs through 2012. The company has consolidated cash and cash equivalents of $3.3 billion and total assets and captive trusts of approximately $941 million at December 31, 2009. With the waiver from our regulator in Arizona and the approval of PMAC by Fannie Mae we are optimistic of our ability to continue to write new business and we are planning to originate between $9-10 billion of highly profitable new mortgage insurance in 2010.

With that let me open up the call for your questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Matthew Howlett - Macquarie Capital.

Matthew Howlett - Macquarie Capital

Just on the guidance I think in terms of what you are guiding to you are saying default inventory will be down year-over-year, your new insurance written will be $9-10 billion and you have given some cost savings in there but you won’t be profitable in 2010. I take that as a big increase in pay losses. What is the expectation on pays built into that guidance?

Steve Smith

Pays will be increasing obviously as our reserves have increased year-over-year but I don’t have an actual paid claim guidance number. We haven’t given that guidance this year so far.

Matthew Howlett - Macquarie Capital

Can we assume pays will be up and reserving will be down and we can back into it that way?

Steve Smith

I think in terms of looking at the ending inventory of NODs we expect new NODs to be less in 2010 as compared to 2009. We expect cure activity in all of its forms which includes modifications as well as rescission and denial activity so the total cure number to be up from 2009. We also expect the number of paid claims to be higher than 2009.

Matthew Howlett - Macquarie Capital

Getting back to the cures, on the modifications you said on the last quarter conference call you said it has been more qualitative than quantitative. What are you baking in, in terms of the success of HAMP or Homeowners or some of the other plans you might have mentioned? What are you baking in? What are your expectations with that guidance? What is embedded in your 16,000 reserve per delinquency level currently?

Steve Smith

Obviously when we look at all of our NODs we break them down in a lot of different factors in terms of product types. The general loan to value and delinquencies, the [state] mix and a whole host of things from an actuarial perspective. We do have some growing information relative to our own internal reports in terms of modifications as well as external information coming from the GSE’s to FHFA, our lenders as well as comparing it to OCC data, etc. While we don’t have explicit number that I will quote to you today, it is a consideration when you see it up against all of our other actuarial analysis. It is a qualitative factor.

Matthew Howlett - Macquarie Capital

You won’t really tell us what you think could go in or what could get cured? Any type of guidance relative to that?

Steve Smith

Well, the guidance we gave is we thought that cures in all of its components which would include modifications, includes natural cures, includes rescissions and denials, etc. we expect that to be up in 2010 over 2009.

Matthew Howlett - Macquarie Capital

Getting back to HAMP, about 16% of your HAMP inventory is in trials. You mentioned a servicing lag. Treasury reports basically 27% of what they call delinquencies eligible are in HAMP trials. Can you give us a sense of what percentage you think could actually be in trials today?

Steve Smith

Gosh, I don’t have a good estimate for you other than what the public information that others have. I do know that in terms of us getting information first to the GSEs and then from our servicers it is probably at least one month and in some cases two month lags. Some servicers are better staffed than others and have more timely reporting than others. If you look at our third quarter reported number at the time of the third quarter and then what was trued up in the fourth quarter it was significant in terms of additional mods that were done for the third quarter. We would expect that to continue for awhile. Those numbers will get trued up and be actually higher than the numbers I reported to you today but I don’t have that information from our servicers and Fannie Mae yet.

Operator

The next question comes from the line of Matt Otis – KBW.

Matt Otis - KBW

On that loss mitigation, how much times passes between when you make those multiple file requests and you don’t hear back from the lender and then you openly deny their claims? How much time is between that?

Steve Smith

That could be many months. We make every effort to try to get the file information so we make repeated requests and it is only after we ensure or at least the lender has indicated they just can’t get the file to us that we take that action. That could be many months.

Matt Otis - KBW

What do you think the shortest amount of time would be?

Steve Smith

Well, I don’t have a number for the shortest amount of time because we try to give lenders again every opportunity to respond to us so it would be several months even at the shortest period of time.

Matt Otis - KBW

Given the 22 to 1 risk to cap level any thoughts on the All State agreement?

Don Lofe

As we have mentioned on prior calls again this agreement covers risks that have been written prior to 1995 and at that time there was approximately $13 billion of risk. Today that portfolio has $50 million of risk and it is less than 1% of our total risk in force. The LTV on this is an average of less than 40%. So we really expect relative to this particular situation to have very immaterial effect to total loss reserves established at year end are less than $1 million.

Steve Smith

But you will notice in our cautionary statement that we say the counterparty were willing to take some action that we consider we still list it as a material condition but as Don said the reality of our risk in force and our reserves against that risk we think we are fully reserved. So the practical effects we think in terms of the way we evaluate it the actual risk outstanding is small. So we are hopeful that would be taken into consideration in any counterparty discussions.

Operator

The next question comes from the line of Conor Ryan - Deutsche Bank.

Conor Ryan - Deutsche Bank

I was wondering first of all if you could bridge for me the increase in loss reserves associated with the acceleration of the modified pools?

Don Lofe

With respect to that, the ending reserve balance and your specific question I want to make sure I get it, do you want to understand the deductible pool balance. Is that correct? From a reserve perspective?

Conor Ryan - Deutsche Bank

I just want to understand so out of the $550 million roughly of loss reserves you incurred in the quarter what amount of that was associated with the acceleration?

Don Lofe

Approximately $70 million of that was acceleration.

Conor Ryan - Deutsche Bank

Any commentary or updated commentary on what you think the potential benefit from HAMP could be? Or HAMP and other programs?

Steve Smith

We do think, as we indicated, that the opportunities for modification will be increasing. We have indicated we expect cures and modifications as part of that cure activity to be increasing in 2010. So we think they are important and could be significant.

Conor Ryan - Deutsche Bank

As it relates to the $8-10 billion roughly of risk in force you may be able to write in 2010, how much of that are you potentially planning on writing out of PMAC and how much could you write out PMAC, etc?

Steve Smith

PMAC we are viewing as a contingency plan which means that we may or may not write any of that business out of PMAC. Our goal, quite frankly, would be to write all of that business out if MIC but if we were to have disruption in a particular state we view PMAC as a contingency plan to continue writing business in that state.

Don Lofe

As you saw in our press release the capital we indicated is approximately $28 million so we are comfortable with that capital base to answer your specific question on what Steve Smith, we believe that is appropriate based upon any type of expectation we would write out of that entity.

Conor Ryan - Deutsche Bank

As it relates to the new writing amount of you just laid out, how does the regulator have an impact on that amount? Does it continue to monitor the portfolio on an ongoing basis and to the extent that the economy weakens will they say okay that is enough of writing new business? How does that relationships work?

Steve Smith

Let me start, we have obviously a very good working relationship with our regulator and the department in Arizona has a very deep understanding of the mortgage insurance industry as well as PMI. We will be presenting, as you will see in our filings and our press release our operating plans to Arizona in each year, 2010 as well as 2011, and we have ongoing reporting requirements that we have with Arizona which quite frankly we have been doing for quite some time. But we would expect that based upon our actions they are very aware of what we are planning for 2010. There shouldn’t be anything in those plans that is surprising to them because we are in constant contact with them. So our guidance we are giving today at least in terms of our expectations for 2010 we would expect to be able to implement and to fill that plan. That is our goal.

Conor Ryan - Deutsche Bank

Relating to that so I can better understand how they look at your business, when you presented your plans to the regulator, did they go into the habit of kind of making their own loss forecast and potentially making their own assumptions about future losses? Or do they tend to look at the work you provide them?

Don Lofe

That is a very good question. They took our work. We provided a great deal of work to them. But they also did their own analysis and they also evaluated it relative to their own views on stress and additional scenarios. So clearly they utilized our work but they did their own work as well.

Operator

The next question comes from the line of Donna Halverstadt - Goldman Sachs.

Donna Halverstadt - Goldman Sachs

My first question relates to the Arizona department’s letter granting the waiver on MPP. In that letter it says they concluded you currently had sufficient capital and resources to help fulfill current projected policyholder obligations. Two part question on that. You may have answered this already but I wanted to be specific. Was there a third-party consulting actuary that assessed that sufficiency for them and if so which firm was it?

Don Lofe

No, the department carried out their examination with their own internal resources.

Donna Halverstadt - Goldman Sachs

Also in terms of making that statement, I know you haven’t given any specifics on your own assumptions but could you give us some more color on what the regulators assumed with respect to future modifications when they came to their conclusion about sufficient capital and resources?

Don Lofe

We really can’t get into those commentaries you asked about and those specifics. However, again I will reiterate Steve and my point to the previous caller’s question that we presented them a great deal of information which had various scenarios related to as you might expect losses, total incurred, et al and the department did their own work and put their own perspective on that and did a lot of detailed analysis again on various scenarios themselves.

Donna Halverstadt - Goldman Sachs

A question on rescissions and denials. I know you said overall you expect cures to go up but when you look specifically at rescissions and denials in the fourth quarter it was the lowest amount of any of the last six quarters and it was significantly below 3Q09 and 2Q09. Was the drop off more than you expected? Was it in line with your expectations? Do you expect the amount of rescissions and denials you saw in 4Q09 to be representative of the next couple of quarters or do you expect it to keep dropping off?

Steve Smith

You are going to have quarterly blips because those numbers include rescissions as well as denials and working through the pipeline. Our general view is that EPDs peaked and obviously new books of business have very small levels of EPDs. The file requests outstanding are also peaking as well. So we will work through all of that in 2010 and our general guidance is that we would expect them to be at similar levels to 2010 but modestly lower for the year.

Donna Halverstadt - Goldman Sachs

One last question. It relates back to states exercising discretion in letting companies write beyond regulatory cap requirements. I don’t expect you to give us any specifics as to what Arizona might have said, but is there any sort of sense in the industry over how high is too high for risk to cap? Or how low is too low for excess MPP? I know there is not a line in the sand but is there perhaps some kind of band in the sand? A point at which the industry would expect waivers to get revoked?

Don Lofe

We really can’t comment on that. I think as Steve mentioned in his remarks and again for one of the previous callers we will continue to keep in our particular situation the Arizona Department apprised of our ongoing progress and really that is what we are required to do and we will continue to do that. Really not a band, to use your term, that we would be aware of from an industry point of view.

Steve Smith

The only thing I would add to that is as you could imagine not only does the department have our expectations and our plans specifically for 2010 but we actually provide extended forecasts on a yearly basis to them as well so that could help you a little bit.

Operator

The next question comes from the line of Mike [Thresher] – Piper Jaffray.

Mike [Thresher] – Piper Jaffray

A follow-up question around the details on some of the modifications that are being done outside of HAMP. How do these mods stack up against those in the HAMP program and can you really tell yet how those are performing? Or how many different programs are there actually out there that various servicers are offering?

Steve Smith

There are multitudes of different programs and as we speak the GSEs themselves continue to focus on additional programs and I think that will continue by lenders in the GSEs throughout the year quite frankly in 2010. In terms of side by side comparison, as you can tell by the number of HAMP actual modifications that were done in 2009 from our book it was 1,628. So it is a percent of all the workout activity we have showed that as 23,352 which is modifications, payment plans and other activity. So it is just a small percentage. The information is early to develop. I think you can generally look at the OCC and the OCS data as they looked at 2008 modifications and as you go to 2009 you clearly are seeing higher percentages of those mods for ourselves as well as for external reporting entities to have lower payments than, for example, some of the early 2008 mods. That does indicate and the data is forming that will get you a better result in terms of lower re-default rates over time. But I will caution it is early to draw definitive conclusions.

Mike [Thresher] – Piper Jaffray

Can you really look at the different programs and get a sense as to whether or not they are following some of the same decision making tree that HAMP is following? Is it I guess a little more lax or more stringent one way or the other?

Steve Smith

Well I think people are using HAMP today as the initial source. I think they are wanting to run them through HAMP but keep in mind that HAMP as specific criteria relative to debt to income so as those delinquencies don’t fit into the specific program then they immediately roll them into the other programs they are offering. For example, there are delinquencies out there where the debt to income is below 31%. Obviously servicers want to work with those borrowers and families as well. So I can’t really give you today any more specific guidance than that. But they are very tailored to the actual delinquency profile in those lenders.

Operator

The next question comes from the line of Steve Stelmach - FBR Capital Markets.

Steve Stelmach - FBR Capital Markets

On the premiums earned the decline in the premiums earned what was the result of the premiums refunded due to rescission activity? What was the impact there for the quarter?

Don Lofe

Could you mention your question again please?

Steve Stelmach - FBR Capital Markets

How much premiums were refunded in the quarter just out of curiosity? From rescission activity?

Don Lofe

I will have to get back to you on that. I don’t have the exact number off the top of my head. I could give you probably $10-15 million.

Steve Stelmach - FBR Capital Markets

Is it fair to say the premium rates on rescissions that are going to happen in 2010 will tend to be lower than the premium rates you saw on rescission in 2009 or is that an over simplification?

Don Lofe

I think it would be an over simplification frankly.

Operator

The next question comes from the line of Matthew Howlett - Macquarie Capital.

Matthew Howlett - Macquarie Capital

Both Freddie and Fannie announced last week they are going to accelerate buyouts predicated to others [and margin] Fannie Freddie and Fannie in the second quarter. What impact do you think that could have on pay losses or modifications going forward? Could there be no impact or do you think there could be an acceleration of foreclosures or a delay? Any type of color would be helpful.

Steve Smith

I think our general review of the program is that it would be favorable particularly relative to modifications.

Matthew Howlett - Macquarie Capital

Could you elaborate on that? Do you think it will kind of push the delinquencies through HAMP mods with sort of greater velocity? Is that sort of how you view it?

Steve Smith

I think the velocity will increase which means that we will get better and earlier data to help fine tune some of our own internal planning and guidance we can give you going forward. As you know, they buy those out of trust at par and are putting them on the books at par and it is not just for the GSEs it is really for any of the other investors as well. So that should mean there would be potentially fewer delays and more activity relative to those loans. We would generally view it as a positive.

Matthew Howlett - Macquarie Capital

If the Treasury Department decides to cram down principle and that has been a topic of debate we know in the House Finance Committee. Remind us again how the PMI policy acts in that scenario?

Steve Smith

We aren’t affected by the reduction in principle in terms of a claim payment but our coverage remains the same so our coverage would basically cover a greater percentage of the then resulting principle amount.

Matthew Howlett - Macquarie Capital

But no initial impact. You don’t share a portion of the principle that is forgiven?

Steve Smith

That is correct.

Matthew Howlett - Macquarie Capital

Not to beat a dead horse on the expectations for cures next year which initially were expected to be up, but is there a sense that weighted average month of delinquency you could give us or the inventory rate now? I know some of it is skewed because some are in HAMP trials and you are not recording that. Is it 6-7 months? What has been the trend over the last couple of quarters? Any guidance you can give us on that so we can model roll rates and so forth?

Steve Smith

If you are asking what will actually be the month or quarter where the ending inventory will actually peak before it comes down and is lower at the end of the year versus 2009 I can’t really call that month for you. There are so many moving parts relative to that. One of the ones which you identified which is really just the backlog of getting through all of these modifications. I can’t really call the month for you.

Matthew Howlett - Macquarie Capital

On top of that, what is the average, what stage is the average inventory in in terms of what bucket would you put on average to delinquent inventory is in? Is it 180-200 days plus? Is it 90-120? That would sort of help us how serious the delinquency, if you will, the average inventory is.

Don Lofe

Again, to use your term we are not trying to beat a dead horse but we really can’t get into that detail. Thank you for that question. We will consider that maybe going forward with respect to our portfolio supplement.

Operator, I would just like to follow-up on the previous question by range of $10-15 million related to refund rescissions we believe that is appropriate.

Operator

The next question comes from the line of Tom [Martini] – [ECI].

Tom [Martini] – [ECI]

Three quick clarifications. When I look at the mod pool paids for the quarter and I read the supplement you are basically saying your total risk is 269 in Q3, 294 in Q4 and your total risk remaining on the mod pools with deductibles is another 295.

Don Lofe

That is right.

Tom [Martini] – [ECI]

So basically if we just back out that 295 from total 2010 paids what do you think…we are back to sort of the 150-200 that we have been running in for awhile. What do you think paids…what is your capacity to pay? How many paids do you think you could potentially run through in 2010 before you start running into administrative concerns? Could we be paying 10,000 claims a quarter? Is there any sort of limit administratively on what we could pay?

Don Lofe

We can’t answer the specifics to your question on forecast for claims. But if I could bring you back to our prepared remarks we talked about, as you said, the 295 and that is mod pools just for clarification with deductibles and you might remember in our remarks we talked about the 2000 and prior, 103 risk in force, and we would expect very little of that to be paid out or reserved for. So hopefully that is helpful.

Tom [Martini] – [ECI]

Secondly, in terms of delving into a little bit more of what you said on expected delinquency inventory to be lower a year from now than it is today, if we assume we rescind are higher in 2010 and we assume we rescind 10,000 loans and we assume we cure 80,000 to 90,000 loans and we pay another 40, you still have to have meaningful reduction in new notices. It is February 16th, how are things trending in Q1? I am assuming it is fair to assume that decline in new notices is really what is going to have our delinquency inventory in the 12 month looking forward level meaningfully lower than the 150,000 loans than it is today? That is the line item that is going to drive this number lower?

Steve Smith

It is really all the components you mentioned that I mentioned but we do expect new NODs in 2010 to be lower than 2009.

Operator

At this time there are no further questions. I will now turn the call back over to Mr. Bill Horning.

Bill Horning

Thank you. This concludes our question and answer portion of the conference call. Thank you for joining us on today’s conference call. As always we thank you for your ownership and interest in The PMI Group.

Steve Smith

Thank you very much.

Operator

This will conclude today’s conference call. You may now disconnect.

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