Executives
L. Stephen Smith - CEO
Donald P. Lofe Jr. - CFO
Bill Horning - VP IR
David Kacko - President and COO
Brad Shuster - President and CEO of PMI Capital Corp.
Analysts
Peter Horne from Gates Capital
Mike Gracher - Piper Jaffrey
James Gilligan - Equity Group Investments
Mark Debris - Lehmann Brothers
Jonathan Adams - Oppenheimer
Howard Shapiro - Fox
PMI Group Inc. (PMI) Q2 2008 Earnings Call August 7, 2008 12:00 PM ET
Operator
Good morning and welcome to the second quarter 2008 earnings call for the PMI Group. At this time all are in a listen only mode. Following the presentation we will conduct a question and answer session. To ask a question, please press (* 1) on your touch tone phone. Today's conference is being recorded, if you have any objections, you may disconnect at this time. I'd now like to turn the meeting over to Mr. Bill Horning, Vice President Investor relations
Bill Horning
Good Afternoon and welcome to the PMI Groups second quarter 2008, earnings result conference call. Today's call will begin with comments from Steve Smith; PMI's Chairman and CEO. Mr. Smith will discuss PMI's overall financial results and business highlights for the second quarter. Donald P. Lofe, PMI's Executive VP and CFO will then address various financial and capital matters. We also have with us today David Kacko, President and COO of PMI's mortgage insurance company, and Brad Shuster, President and CEO of PMI Capital Corp. Who along with Steve and Don, will be available to answer your questions following our prepared remarks. I would also like to mention that FGIC has not released their 2nd quarter 2008 financial results, but since we impaired the carrying value of our investment in the last quarter, we did not need for them to complete their results in order for us to complete our quarterly financial results. Also on today's call we will be referencing non-GAAP measures, such as net operating income which under SEC regulation G we were required to reconcile with GAAP. The reconciliations of these measures to GAAP financial measures are available on our web site.
And 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 SEC filings including our most recent form 10K and 10Q. All forward looking statements are made as of today August second, 2008, and we undertake no obligation to update such statements except as such as may be required by law. Thanks and at this time I'll turn the call over to PMI's Chairman and CEO; Steve Smith.
Steve Smith
Thanks Bill and Good morning, or afternoon everyone, and I thank you for joining today's conference call. As you've seen in our financial results released this morning, the PMI Group had a net loss in the second quarter of $246.3 million, or $3.03 per share. PMI Mortgage Insurance Company had a challenging second quarter, reflecting the continued difficulties in the US housing and capital markets as well as the broader economy. As a result, we had a loss of $225.9 million in our US mortgage insurance operations in the 2nd quarter. However, our international operations posted net income of $31.1 million, driven by $24 million of net income from PMI Australia, approximately $5.7 million of net income from PMI Europe, and approximately $2.5 million from PMI Asia.
In our financial guarantees segment we had equity losses from [ram re], which combined with our partial impairment of our investment balance in the 4th quarter, brought our investment in [ram re] to zero. In addition and as previously disclosed in a recent 8K, we reported a net loss of $21.8 million at PMI Guarantee, in connection with commuting substantially all of its remaining risk. However, completion of this process has allowed us to redeploy approximately $140 million in excess capital to PMI Mortgage Insurance Company and our holding company. Now as we publicly stated, we intend to contribute at least 80% of this excess capital to entities within our US mortgage insurance segment. As we announced this morning in our press release, We'll be closing our PMI Canada operation, and redeploying its excess capital to PMI Mortgage Insurance Company. In order to repatriate the excess capital, we will need to facilitate the removal of a small amount of risk in force, currently residing at PMI Canada. We expect to repatriate approximately $60 million to PMI Mortgage Insurance Company by the end of the year. With regard to PMI Europe, we will reconfigure our operations to conserve and enhance capital and reduce expenses while maintaining a presence in Europe. We will continue to service our existing customers out of our Dublin, Ireland office. As mentioned earlier, our Australian and Asian operations continue to deliver solid results. Our international platforms have provided us with financial flexibility that we believe is important as we continue to navigate the market conditions in the US.
I would like to again share with you the thing that we are doing within the company that are in our control all of which fall within the framework of our five point plan for progress, as you may recall, our plan includes the following point; focus on our core business, book high quality new business, mitigate losses, manage expenses, and maintain financial strength. In our US Mortgage Insurance operations we are exercising control in the areas of quality and volume of the new business that we are insuring. In Q2 2008, we booked $4.5 billion in new insurance, bringing the year to date total to $10.7 billion. As we have discussed last quarter, we have led the mortgage market with several changes in our guidelines, and pricing going back into August of 2007, when recently we announced a new risk based rate structure. This is a significant change for the industry, as we are the first to introduce a comprehensive risk based pricing for all borrow paid rates. This new structure was announced on July 29, and will become effective on October 1st.
Collectively, all of these changes, including underwriting guideline changes, our stress market policy, and our new pricing structure are designed to support new business writings that are of high credit quality. If you look at the distribution of our new insurance written in the second quarter, you can see the positive results these initiatives are having. For example, our new insurance written in Q2 of 2008, consisted of 98% of the loans were fixed rate. 40% had FICO scores of 740 or above, the average FICO was 721, the average loan to value was 90%, and 69% of our new insurance written had loan to values at or below 90% loan to value. Our other positive developments included the rate in our primary portfolio, improved approximately 79.6%, up from 71.7% from one year ago. Our insurance in force ended the quarter at $123.2 billion, an increase of 105 compared to one year ago, total net premiums written increased to $196 million, up from $189 million one year ago. Total net premiums earned increased to $204 million compared to $195 million in Q2 2007.
With regards to our credit performance, and expectation for paid claims, as we announced in early July, we have tightened our guidance range for paid claims for the full year of 2008, to $975 million. Through the first 6 months of 2008, we have paid claims including loss adjustment expenses, of $367.6 million. In the second quarter, net incurred losses for $552.5 million, and we are receiving an increasing benefit from our captive reinsurance agreements, as they reach their attachment points and help mitigate incurred losses. In the second quarter we received approximately $190 million of benefit from our captive reinsurance programs. This helped to build our reserves for losses and loss adjustment expenses to approximately $2.1 million, an increase of $543 million to our gross reserve for losses compared to the end of the first quarter of this year.
I'd also like to address you to the additional exposure included in our supplemental portfolio presentation we released today for information on our captive reinsurance agreements and other detailed matters. Another area of enhanced focus is in loss mitigation. We're experiencing increases in our loss mitigation efforts from all of our initiatives; direct borrow outreach, PMI On site servicing of employees, streamline modifications, In May, our homeownership preservation group issued new guidelines that defined the criteria for loan modifications and delegates the authority to modify the terms of these eligible loans to loan servicing companies. This expedites the loan-modification process and assists our services efforts to keep more borrowers in their homes. Through mid-year 2008 we have approved over 3200 loan workouts. This has more than doubled the number of approvals granted in the first half of 2007. Our workout efforts in the first half of this year have enabled approximately 1700 families to retain their loans, and approximately 1500 loans to avoid closure through pre-sales or deals in lieu.
This compares to 8,051 claims we have paid in the first half of 2008. So it's truly a meaningful impact in reducing the number of claims. Moving to expense management - we continue to be very cognizant of our cost structure and ways to leverage every dollar we spend. In our US mortgage insurance operations we count our expenses and check and posted an expense ratio in the second quarter of 14.3%, among the best in the industry.
The announced closure of our office in Canada, and the reconfiguration of our European operations will entail one time charges with respect to these actions. However, our costs savings on a sustained basis will be meaningful. And finally, we remained focused on maintaining our financial strength. The action we have taken with our international operations will enable us to strengthen the financial position of our core US mortgage insurance business by adding capital and equitity. Now let me turn the call over to Don Lofe to cover the financial aspects of these announcements as well as other capital matters for the second quarter. Don?
Donald P. Lofe Jr.
Thanks Steve, and good afternoon. Let me first very briefly address today's announcement regarding our capital initiatives and then address certain financial equity matters. As Steve mentioned, with the closure of PMI Canada, we are planning on repatriating approximately $60 million dollars of capital to PMI mortgage Insurance company by the end of the year. When completed, this repatriation of capital will enhance the financial strength of our US mortgage insurance operation. Associated with the closure of the Canadian office, we expect to incur pre tax costs of between $10 and $13 million. With regards to our investment in REMRE, during the second quarter 2008 we recorded a $24.3 million equity in losses and a $1.7 million loss in other comprehensive income from the change in unrealized gains or losses in the quarter. This reduced the caring value of RAMRE from $26 million at March 31st 2008 to zero which precludes PMI from recording future equity losses if they arise in the future. With the completion of the PMI guarantee transaction and related accounting changes recognized in the second quarter, combined with the caring value of FIGIC and RAMRE at zero, we do not foresee any future and further losses resulting from the operating segment. However, equity and earnings from FIGIC or RAMRE could be recognized in the future to the extent those earnings are deemed recoverable.
Moving to our captive reinsurance agreement, as Steve mentioned, we are receiving increasing incurred loss benefit from our captive agreement as more of these programs reach their attachment point. Our captive trust balance is at the end of the second quarter stood at $787.8 million. As of June 30, 2008, we have recorded $308.8 million in reinsurance recoverable from the captives. Based on current trends, we expect that the benefit we will receive from captives in the full year 2008 will be approximately $550 million and approximately $310 million in 2009.
With regards to our capital plan, we continue to work with our financial advisors towards the execution of various capital initiatives, offshore complete sales of assets and reinsurance structure matters. PMI Mortgage insurance company's planning to remain strong. At June 30, 2008 PMI Mortgage insurance company had the following: continued reserves of $1.4 billion, statutory policy holders of approximately $632 million and a highly rated investment portfolio of cash totaling approximately $1.8 billion.
As you may recall from our conference call last quarter, in January we adopted FASE #159 the fair value option for financial assets and financial liabilities including and amendment of FASE #115. The adoption of this guide requires that the difference between the caring guide before the election of the fair value option and the fair value be recorded as an adjustment to begin your retained earnings in the period of adoption. The instruments for which the fair value was elected are the PMI Groups $400 million of senior notes. As a result of adopting this new guidance, we recognize the net income benefit of $18.7 million after tax in our first quarter result and this quarter we recognize the further net income benefit of $17 million.
Finally, I would like to direct those interested in a reconciliation of our consolidated net loss to our consolidated net operating loss to reduce this disclosure material posted on our website. With regards to PMI Europe, we have treated our CDS market to market adjustment as not operating only to the extent any adjustments are deemed to relate to increases in credit spread only. And we have treated the fair value adjustment for FASE 157 in our net investment gains as not operating.
These will expedite the loan modification process and assist our services efforts to keep more borrowers in their homes. Through mid-year 2008 we have approved over 3,200 loan workouts. This is more than double the number of approvals granted in the first half of 2007. Our workout efforts in the first half of this year have enabled approximately 1,700 families to retain their homes and approximately 1,500 loans to avoid foreclosure through pre-sales or deeds in lieu. This compares to 8,051 claims we have paid in the first half of 2008.
So it’s truly a meaningful impact in reducing the number of claims.
Moving to expense management, we’ve continued to be very cognizant of our cost structure and ways to leverage every dollar we spend.
In our insurance operations we kept our expenses in check and posted an expense ratio in the second quarter of 14.3%, among the best in the industry. The announced closure of our office in Canada and the reconfiguration of our European operations will entail one time charges with respect to these actions. However, our cost savings on a sustained basis will be meaningful.
And finally, we remain focused on maintaining our financial strength. The action we have taken with our international operations will enable us to strengthen the financial position of our core US mortgage insurance business by adding capital and liquidity.
Finally, I’d like to direct those interested in the reconciliation of our consolidated net loss to our consolidated net operating loss to reduce disclosure material post on our website. With regards to PMI Europe, we have treated our CVS market-to-market adjustments as non-operating only to the extent any adjustments are deemed to relate to increases in credit spreads only. We have also treated the fair value adjustment FES-157 and our net investment gains are not operating. Therefore, as presented in the reconciliation, our consolidated net operating loss in the second quarter of 2008 was $229.9 million or $2.83 per common share. Let me turn the call back to Steve for some closing remarks before we open the call up to questions. Steve.
L. Stephen Smith
Thanks, Don. Before we begin our question-and-answer session, I wanted to reemphasize the key things we’ve discussed with you on today’s call. We continue to move forward on our 5-point plan for progress. We’re booking high-quality business; our mortgage and insurance companies. We’re focusing on our core mortgage insurance business. We’re managing our expenses as seen in a 14.3% expense ratio and our U.S. mortgage insurance operations in the second quarter. Our last mitigation efforts are having a significant impact and we’re maintaining financial spring at an approximately $140 million additional capital and U.S. mortgage insurance operations and a forthcoming capital effect from PMI Canada of approximately $60 million. With that, let’s open up the call for your questions.
Question-and-Answer Session
Operator
Thank you. (operator instructions) And now I’d like to open a line to the first question: Mr. Mike Grasher from Piper Joeffrey.
Mike Grasher - Piper Joeffrey
Good afternoon, gentlemen. I wonder, Don, if you could update us just with regard to your conversations: how they’re going, what discussions are like with regard to the rating agencies?
Donald P. Lofe Jr.
Sure, Mike. As you know, we’ve had ongoing conversations with the agencies that we’ve talked before and a moving sense of action several weeks to go. SNT will be conducting -as we understand- an industry committee meeting in the next couple of weeks and we continue to keep them advised of our projects in progress unrelated to the various matters that we’ve discussed, and so it’s an ongoing discussion and at this point in time, we presented our results to them and also, as they say that they’ve updated our capital initiatives progress. We also have had conversations too with the DBRS group related to the Canadian operations.
Mike Grasher - Piper Joeffrey
Can you elaborate on discussions with Fanny and Freddy; the relationship there?
David Catco
Hi, this is David Catco.
Donald P. Lofe Jr.
Hi, David.
David Catco
How are you. We have the same kind of relationship as you would expect with Fanny and Freddy in terms of updating them on a regular basis. As they’ve discussed publicly, we have submitted remediation plans; those plans that have been accepted by both Fanny Mae and Freddy Mac but it’s an ongoing dialogue, as we do it with the rating embassy
Mike Grasher - Piper Joeffrey
Okay, and is there any sort of time horizon where you need to occasionally update them on those plans and how they’re progressing or have they put any sort of end date or do they have a date in mind where you need to come up with X amount of capital by such a date, or are they comfortable with where you are?
Donald P. Lofe Jr.
First of all, Mike, there’s no end date. However, there are milestones and those milestones are things that we’ve shared with both the rating agencies and the GSE that’s really very consistent with our capital plan as Steve and Dan have described on calls. I should point out that we’re very proactive with Fanny Mae and Freddy Mac. We started a dialogue with them in the fall of 2007 and our suggestion, so that there were no surprises. At this point, they put no constraints on our business and when we agreed, we remained fully eligible.
Mike Grasher - Piper Joeffrey
Thank you very much.
Donald P. Lofe Jr.
Thanks, Mike.
Operator
Next question comes from Mr. Dave Cans from J.P. Morgan. Mr, catch your line, it’s open sir.
Dave Cans JP Morgan
On the level of reserves, you’ve greatly increased that level that you’re taking. If the reserves actually trying to cleanse paid, it’s to greatly impact your liquidity, so we were curious if you anticipate continuing taking reserves our the level?
Donald P. Lofe Jr.
Dave this is Don. With respect to your question about liquidity, we’re quite comfortable with our liquidity. We're not going to comment further with the expected forecasting on the overall reserves, we provide, as we have indicated, at the confidence level that approximates midpoint of the actual range and we are satisfied with respect to that and that's how we look at it, and with respect to the claims to conform that's something we closely watched as we provide for overall reserves and we balance that against our liquidity.
Dave Cans JP Morgan
Ok. Given that you are comfortable with the current levels of liquidity and you are going to have the inset of the 60 million from Canada, do you think that eliminates any need to raise additional capital?
Donald P. Lofe Jr.
Well as Steven and I said on the previous call, and as we indicated this morning, we are looking at various capital initiatives which leads us back to the partial or complete sale of assets or looking at various reinsurance structures and other matters. We haven't gone to the capital markets and we have indicated that could be a combination of types of securities but actually looking from an equity capital raise that is not a primary source of capital raise at this point in time, or that we anticipate that at this point in time.
Dave Cans JP Morgan
Even with this level of reserves?
Donald P. Lofe Jr.
That is correct.
Operator
Thank you. Our next question comes from Howard Shapiro from Foxkit
Howard Shapiro - Fox
Hi, I just wanted to ask you about the trends you’re seeing. When I worked at your increase in delinquencies in the channel, it was higher than we expected and higher than peers. I just wanted to know if there are any trends you’re seeing: are you more adversely affected by your geographic concentrations? Are there any reporting issues, or is this just simply adverse delinquency development? What does it tell us about prime quality delinquency development?
David Catcob
Howard, this is David Catcob.
Howard Shapiro - Fox
Hi.
David Catcob
A couple of things. We’ve had a number of discussions, both with the ratings agencies and with a number of analysts as well. One of the effects that you’re seeing in our reported delinquency comes from the fact that we have written substantially less business year over year and that trend has been consistent for several quarters now, so, in part what you’re seeing is a ratio if you numerate or denumerate by lower writing, so that’s one, Now withstanding that, we are seeing -as others are in the market- continued upper pressure, as we’ve stated before, principally in our 2007 report year and certainly 2006 and 2008 is certainly too early to rate and it’s in the product areas that we’ve discussed in the past. We are seeing pressure with high LTBs, that’s an HPI problem and we’re seeing some pressure and so I don’t know that are experienced, if unique, in either of those categories. That’s how I’d answer it.
Howard Shapiro
Thanks.
Unidentified Company Representative
We’ve recognized that upper pressure so from that perspective we do match off what our reserve build is to our capital expectation need to be and why don’t I turn that over to Don?
Jonathan Adams - Oppenheimer
Before you do that perhaps clarify. Since it’s been a while now since we’ve been into this downturn and it’s been abundantly clear that we have a very severe downturn to work through. Is the erosion that you’ve seen consistent with your expectations, specifically for the second quarter?
Unidentified Company Representative
Since we don’t forecast our total incurred number, I really can’t answer that directly other than to say that everything we update our quarterly estimates, it’s with the best knowledge that we have for all the housing dynamics so I can’t give you a total incurred forecast if that’s what you’re asking.
Jonathan Adams - Oppenheimer
I’m not looking towards the future but, presumably, you have within your own plans a model; an expectation of where incurred losses will head over the next couple of quarters.
Unidentified Company Representative
Right, and that’s in part why we give a range. If you look at the 10Q, you give a broad range in terms of the high for own total reserve balance are lower than are expected and we’re at the midpoint of the expected but that has gone up every quarter for at least the last three or four quarters.
Jonathan Adams - Oppenheimer
Ok, and now, perhaps, related to the capital plans?
Donald P. Lofe Jr.
Hey, Jonathan, it’s Don. As I said to the previous caller regarding the various capital initiatives that even are talked about: it’s a combination of 3 different things but simply, that looking at the partial or complete sale of certain assets that we have within the organization and also looking at various reinsurance structures and that’s a very ongoing endeavor. Also, as I said earlier, looking at the capital markets relative to various opportunities, we might have to pursue that avenue, either in the form of debt and as Stephen and I have said before, but not being a primary focus from an equity point of view. Therefore, we have looked at -which your previous point was regarding total incurred. It claims they will come from that total incurred, the previous caller’s question about liquidity. We are also quite comfortable with overall liquidity position of PMI operations. Again, we’re looking at these initiatives. They are clearly balanced against their expectations as -you’re right- we do have a projection -if you will- internally for the work that we’re doing. At this point in time, we feel these initiatives that we’re continuing to evaluate and pursue will give us the required capital that we’ll need to honor and meet our obligations.
Jonathan Adams - Oppenheimer
What I was asking is whether the goal that you anticipated for the range of capital that you thought you would need to raise over the course of 2008 has changed over the past quarter or so?
Donald P. Lofe Jr.
It would, as David said, it’s somewhat moved to a higher level but we did already consider that there could be some deterioration with respect to that so that was already considered in our very capital initiatives. The thing, in a different way, we just didn’t start with what we thought would be opening for the year-end projections. We’ve considered those projections, we’ve evaluated relative with those projections; projections that incorporated that effect into our capital planning initiatives.
Jonathan Adams - Oppenheimer
Great, thank you.
Operator
Thank you. Next question: Mark Debris from Lehmann Brothers
Mark Debris - Lehmann Brothers
Thanks. Do you mind to get your thoughts on when you think delinquencies might peak, and more specifically, are you seeing any signs that there could actually something to pin frontloading of delinquencies?
David Catcob
Hi, this is David Catcob. I really can’t give you a forecast as to when can people peak. I can make a comment because we’ve been asked this question and we’ve made comments about it. We do think there has been in your using your terms of frontloading of delinquencies. I say that was particularly true for the 2007 book year. That book seems to have developed adversely much more quickly than any book than we’ve seen in many years and so if you follow that logic, and since it’s by far the largest risk enforced book, then there is that possibility that over time, we will see some slowing in the delinquency development, but I can’t give you a forecast for that today.
Mark Debris - Lehmann Brothers
Okay, thanks. Could you give us some color on the way there’s trends in Australia and what your outlook is for incurred losses there?
Brad Shuster
Well, just in terms of the overall business trend. The economy in Australia remains strong. Our writings are in line with our expectations. The charge business or their RMBS business down there has been affected by credit and capital market conditions so that business has fallen off; but the basic flow business remains strong and loss development has been within what we've told you is our long term expectation and consistent with long term loss rates which that business has generated over time.
Steve Smith
Mark, this is Steve. I'd just like to add that the Reserve Bank of Australia has given signals that their expectation is to reduce their discount rate rather than the alternative. That would be good news, if correct. For consumers, as you know, most of the loans in Australia are just for loans so if those rates were to come down that would improve the affordability in Australia, so that would be a good sign. I'd also mention to you that various treasury department reports regarding housing supply in Australia, and unlike the US you generally have an undersupply and a great deal of demand that is building, that should, if you look forward a bit should deliver favorable results for the company.
Unidentified Company Representative
..and Mark if you just look specifically in our supplement on the loss ratio just down which emphasize Brad's point, if you look at the lodge ratios and the trends quarter to quarter in the overall year to date is performing within our expectations.
Operator
Thank you and now to James Gilligan from Equity Group Investments.
James Gilligan - Equity Group Investments
A couple of quick questions; firstly, on your leverage ratio what was your average at the end of the quarter and what is the ratings agency target that you would like to get back to?
Donald P. Lofe Jr. - CFO
Hi James, it's Don. As of 6:30 at approximately 23% on a GAAP basis and then on a ratings agency basis it is approximately 21%. We are very comfortable with that range relative to our holding company. With respect to what the ratings agency expects, obviously there are considerations that have to be taken into account, as we evaluate that suffice it to say that we are comfortable in this range or even it being somewhat a little higher.
James Gilligan - Equity Group Investments
Ok, and you have talked about following the call by Freddy Max yesterday, they had some analytics around and found credit losses in their portfolio. It sounded like you have not done that, or at least are choosing not to do that, or are you thinking about doing this in the future, that is, providing analytics about what the ultimate loss experience might be under different scenario's?
Donald P. Lofe Jr. - CFO
Well let me start James, we included with this release, a pretty thorough supplement portfolio with information, updated as of June 30th. This complements the document that we put out as of 12:30 107, as you could expect us to do that again at the end of this year, but it is quite detailed and thorough in a lot of different areas of products, in terms of risks enforced, new business ridings, etc so you could expect us to continue to do that.
David Kakow
Yes, I would like to add on to that. In the presentation which we put up on the web we give our default rate not only by vintage but by principle product type, we give the fault rate by cycle buckets, we give the fault rate by loan type and drill down in quite a bit of detail so I actually… the GFC tended to report losses differently than we do as an insurance company but I think they provide the same kind of information, but a lot more detailed, so I direct you to that supplement that is up on the web.
James Gilligan - Equity Group Investments
Sure, but in terms of going forward and with different scenarios and lets say the fault rates or home priced clients are reduced to define the sensitivities… do you plan to provide anything like that going forward?
David Kakow
Not on a forecast basis. So really everything we have done is historically and then the current point in time.
Operator
Thank you. Mike Rondell from Key Colony.
Mike Rondell - Key Colony
Yes, two questions. One, could you talk a little bit about your risks?
Donald P. Lofe Jr. - CFO
….pricing is going to affect October 1st, and secondly could you talk a little bit about what you project risks to capital B at year end after you put the 60 million in from Canada and the 150 million or so from PMI guarantee.
David Kakow
Let me take the first one first, Don - why don't you give the risk capital and then I'll talk about the risk based pricing.
Donald P. Lofe Jr. - CFO
Hi Mike, it's Don. our risk capital ratio at 6:30 is going to be 12.6 -1 and we said a couple of times that we are not going to project those types of ratios or metrics, but obviously the addition of the PMI guarantee dividends will enhance that risk capital ratio.
Mike Rondell - Key Colony
Could you say, would it be on a performance basis at June 30th, if you had that 240 in?
Donald P. Lofe Jr. - CFO
Mike, I'm not going to really give a perspective, but let me give you a metric that might help you. For every hundred million dollars of additional capital it’s approximately a 1% benefit. There is 60 million dollars already; Canada is a subsidiary of the PMI Mortgage Insurance company, so it's already included in the risk to capital ratio. So again, you have to look at the PMI guarantee and that will the benefit that would come forward into the USMI operation.
David Kakow
Why don't I skip over to the risk-based pricing and I'll try to make this distinct. With all this priced risk there is nothing new about that and in the less-than-A quality portfolio's the over 97 portfolio we've always premium priced because we knew those loans had a higher risk at default. I think one of the things that we've learnt in this current cycle is that it would be appropriate to re-price our entire rate sheet for borrower paid and what we did very simply is we looked at where we saw adverse development from this last cycle and interestingly enough, loans in the 620-679 cycle scores performed significantly worse than loans with cycle scores above 680. So what you would see if you looked at our pricing is that we raised our rate under for all LTV's from 620-679 quite dramatically- in many cases two times higher than what we currently had. Secondarily, we also know that loans with cycle scores above 700 performed substantially better and as a result, in many categories if not in all categories we actually reduced the rates there - trying to reward borrowers with a better credit profile. The last piece about this that is very important is; while we won't speak for the rating agencies we do know that they are constantly adjusting their capital models and as a result, because we work very closely with them we have a very strong working relationship with them, we have been able to approximate what we believe the capital requirement will be at various cycle scores and LTV's and the risk-based pricing that we have put in place we think adequately captures the capital requirements that we will be facing over the next several years.
Mike Rondell - Key Colony
Could you describe what you think the blended price increase will be on your book of business, taking into account some of the price increases you have already had and this new one?
David Kakow
I guess I'd have to get back to you on that, maybe we can have Kopstuer or Bill tell you that… I think overall it was relatively priced neutral in terms of premium yield to us; we're not going to pick out the significant lift in premium yield because we are really trying to drive higher quality business to the company and I don't expect to get a significant amount of business from this new pricing and that 620-679… we'll get some, but we're trying to ascend to 680 and 700 + business.
Operator
Thank you. Next question, Mike Gracher from Piper Jaffrey.
Mike Gracher - Piper Jaffrey
Hi, just to follow up with a couple of the questions that were coming out… just wondering David, are there assumptions around unemployment that you are making currently and then also where do you get concerned on the unemployment level?
Steve Smith
Let me start that - this is Steve - I think our assumption is; like what we said on the last earnings call, is that we would assume around 6% toward the end of the year as you go into 2009 so that's kind of built into our assumptions and forecasts… we do, as you can imagine, a variety of scenario planning at other levels, but if you were to get significantly higher than that, then obviously you begin to get concerned about it, but we have a variety of, as you can imagine, portfolio stimulations to take into consideration.
Unidentified Analyst
…09. Based on certain presumptions. But we do run averse that our claims could exceed the capital available in the trust at that particular moment. I’m just trying to understand. If that happened, what are the options available to PMI?
Unidentified Company Representative
Thank you for clarifying the question. I think we understand it better now.
First of all, one of the things- If you would follow the releases that we’ve provided in terms of the capital trust balances; you’ll know that they’ve been growing consistently. Our expectation is that they will continue to grow. So this is not a static pool, to use the capital markets term. It’s very dynamic and as premiums, are ceded to our re-insurance partners that a portion of those go directly in as captive trust balances.
We do scenario analysis, to answer earlier questions about highly stressed environments. It is not our expectation that we will exceed the available balances in those trust accounts because of this continuing buildup of premium over time.
In terms of what our rights could be if we were to completely exhaust those trust balances, in truth these are non-recourse agreements. So we could not go back to the re-insurance partner for any kind of deficit.
Unidentified Analyst (Indian accent)
The last clarification; on that particular trust, your claims exceed the capital level plus any premiums, you don’t have a recourse to that particular bank or financial institution PMI takes the charge then.
Unidentified Company Representative
That is correct
Unidentified Company Representative
Let me qualify that. The re-insurer has an obligation to fund the trust at certain levels. If they don’t keep the trust funded at certain levels, then we have access to the trust balances that are in there and we can cancel the arrangements and have, if they don’t comply with their agreements, and then we would have full premium and accessions of premiums will cease to that re-insurer.
We would have premium reversion.
Unidentified Analyst
Okay. Thank you
Unidentified Company Representative
Let me answer one of the other gentlemen’s questions real quickly. I think this was Mike who asked this question, or it may have been Steve.
The loans that originate in 2004 had an average loan size of $158,000. The loans in 2005 were $175,000, in 2006 it was $185,000, in 2007 it was $196,000 and the average loan size in 2008 here to date is $204,000.
Hopefully that answers the question that we had received earlier.
Operator
(Operator instructions)
Our next call comes from Peter Horne from Gates Capital
Peter Horne from Gates Capital
Hi. What was you hold call cash at June 30th?
Unidentified Company Representative
Hold call cash was approximately $252 million.
Peter Horne from Gates Capital
$252 million. So…
Unidentified Company Representative
Obviously, a lot of that, a major component of that was the draw down to credit facility.
Peter Horne from Gates Capital
Right. So around $225 million or so was down fused into the OPTKO during the quarter?
Unidentified Company Representative
No. Only $52 million, here was put into the PMI Mortgage Insurance Company. That was done after 6/30 as we had indicated in the press release. So the $252 million is a stand alone. So the dividend capital is paid to the holding company PMI Guarantee. As we said in our opening remarks it’s approximately $140 million and afterwards we indicated again in our remarks and it was approximately $52 million that went down in to OPTKO. Again, $252 million is the balance of which the component of that is the most significant is the draw-down in credit facility.
Peter Horne from Gates Capital
Okay. And with respect to your remediation plan, and I appreciate that you probably don’t want to share your specifics, but presumably, when you submitted this plan with the GSE’s you had some type of an internal forecast with respect to delinquencies. How have your delinquencies experiences relative to your initial plan?
Unidentified Company Representative
I think, we can say that they’re higher. That’s consistent with the lost reserve additions that we’ve made over the last several quarters.
Peter Horne from Gates Capital
Right. But, are you receiving any pushback or concern from the GSE’s that they’re materially higher or are they just marginally higher?
Unidentified Company Representative
I think that, as you’d expect, when you do forecasts in our business, as Don mentioned earlier, it’s not just the base case that we’re operating under, and importantly it’s not just the base case that we’ve planned for either from an earning standpoint or from a capital perspective. So we shared with, not only…
Two GSE’s, to also with the rating agencies, a variety of scenarios, everything from base case to much more significant stress. So they’re aware of that, and although I can’t speak for them, there’s nothing in their actions at this point that would say that it’s outside what we had shared with them over the last six to nine months.
Peter Horne from Gates Capital
Okay. And has your experience exceeded the downside or is still within the downside case scenario?
Unidentified Company Representative
I really can’t comment on that.
Peter Horne from Gates Capital
Okay. Thank you.
Unidentified Company Representative
Thanks Peter.
Operator
I have no further questions in queue at this time.
Unidentified Company Representative
Thanks operator. This concludes our question and answer portion of the call. Thank you for joining us in today’s conference call and as always, thank you for your ownership and interest in the PMI group.
Unidentified Company Representative
Thank you very much.
Operator
This concludes today's conference call. Thank you for joining. All parties may disconnect at this time. Thank you.
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