PMI

PMI Group Inc.

Through our subsidiary, PMI Mortgage Insurance Co. (“MIC”), and its affiliated companies (collectively “PMI”), we provide residential mortgage insurance in the United States. Mortgage insurance provides loss protection to mortgage lenders and investors in the event of borrower default. By protecting lenders and investors from credit losses, we help to ensure that mortgages are available to prospective U.S. homebuyers.

Our business has undergone significant changes in the past few years, and the protracted deterioration of the U.S. economy has negatively affected our financial condition and results of operations. Our consolidated net loss was $659.3 million for the year ended December 31, 2009. Our financial condition and results of operations for 2009 are discussed on both a consolidated and segment basis in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”), below. As a result of our significant net losses, we face a number of regulatory and other issues as discussed in C. Regulatory and Other Issues Facing PMI, below, and in the MD&A.

In 2008, we sold our Australian and Asian operations and we are not writing new business in our European and Canadian operations. As a result, we are primarily focused on our U.S. Mortgage Insurance operations. In response to changing economic and industry conditions and in order to preserve capital, PMI made a number of changes to its underwriting guidelines and customer management strategies in 2008 and 2009, all of which had the effect of limiting PMI’s new business writings in 2009. We are undertaking efforts to maintain or slightly increase insurance writings in 2010. However, we expect a variety of factors to continue to impact our new business writings in 2010. Such factors include, among others, mortgage and private mortgage insurance market conditions, PMI’s underwriting guidelines, which limit the type of new business that PMI is willing to write, and the continuation of certain customer management strategies adopted in 2009.

In 2009, we implemented a number of capital and business initiatives designed to mitigate losses and/or generate capital or capital relief. Such initiatives included:

Homeownership Preservation—In 2007, we formed PMI’s Homeownership Preservation Initiatives (“HPI”) department to develop and carry out our loss mitigation strategies. One of our strategies is to help loan servicers with their implementation of programs, including the Home Affordable Modification Program (“HAMP”), designed to assist troubled borrowers with finding solutions to avoid foreclosure and potentially cure and reinstate their loans. In 2009, loss mitigation efforts contributed to approximately $1.0 billion of workouts of delinquent risk in force.

Modified Pool Restructuring—In 2009, we restructured (including through commutation) certain modified pool policies which resulted in the acceleration of claims paid at a discount of the reserves established on such modified pool policies and the release of loss reserves, which in turn resulted in capital benefits to MIC, on both a statutory and GAAP basis.

Contribution of PMI Insurance Co., or PIC, to MIC—Effective September 30, 2009, we contributed our wholly owned subsidiary, PIC, to MIC. As of the effective date, the contribution of PIC improved MIC’s capital position and increased MIC’s excess minimum policyholders’ position.

Sale of RAM Re—In 2009, MIC sold its entire investment in RAM Re, which benefited PMI’s liquidity and capital position. MIC previously reduced its carrying value of its investment in RAM Re to zero.

We continue to focus on capital initiatives but, especially given current and expected future market conditions, there can be no assurance that we will be able to achieve further statutory capital relief or improve our capital and liquidity position. See Item 1A. Risk Factors—Capital and Liquidity Constraints.

We divide our business into three segments—U.S. Mortgage Insurance Operations, International Operations and Corporate and Other.

U.S. Mortgage Insurance Operations. As a U.S. residential mortgage insurer, PMI offers a variety of mortgage insurance products to meet the capital and credit risk mitigation needs of its customers. PMI also owns 50% of CMG Mortgage Insurance Company, or CMG MI, a joint venture that provides mortgage insurance exclusively to credit unions.

International Operations. Our International Operations segment consists of our European and Canadian subsidiaries (“PMI Europe” and “PMI Canada”), neither of which is writing new business. PMI Europe offered mortgage insurance and mortgage credit enhancement products tailored primarily to the European mortgage markets, through 2008. PMI Canada offered residential mortgage insurance products in Canada from 2007 to 2008. Our International Operations segment also consists of the discontinued operations of our former Australian and Asian mortgage insurance subsidiaries, which we sold in 2008. Our International Operations segment did not generate significant revenues in 2009. In connection with our sale of PMI Australia, we received a note from QBE in the principal amount of approximately $187 million, with interest accruing through September 2011, when it matures. The note, which we refer to as the QBE Note, is payable by QBE. Other than revenues from the amounts due on the QBE Note in 2011, we do not expect that our International Operations segment will generate significant revenues in the future.

Corporate and Other. Our Corporate and Other segment consists of corporate debt and expenses of our holding company, The PMI Group, Inc. (“The PMI Group” or “TPG” or the “Company”), equity in earnings or losses from investments in certain limited partnerships and our discontinued contract underwriting operations. This segment also includes our investment in FGIC Corporation and its wholly-owned subsidiary, Financial Guaranty Insurance Company (“FGIC”) and our former investment in RAM Re, which we sold in the fourth quarter of 2009. FGIC is a financial guarantor and has ceased writing new business. In 2008, we reduced the carrying value of our investment in FGIC to zero.

As of December 31, 2009, our consolidated total assets were $4.6 billion, including our investment portfolio of $2.6 billion and total cash and cash equivalents of $0.7 billion. Our consolidated shareholders’ equity was $0.7 billion as of December 31, 2009. See Item 8. Financial Statements and Supplementary Data – Note 18. Business Segments, for financial information regarding our business segments.

Employees

As of December 31, 2009, The PMI Group, together with its wholly-owned subsidiaries and CMG MI, had 600 full-time and part-time employees, of which 567 persons performed services primarily for PMI, 5 were employed by PMI Europe and 28 performed services primarily for CMG MI. Our employees are not unionized and we consider our employee relations to be good. In addition, we had 113 temporary workers as of December 31, 2009.