PMI Group Downside Remains

PMI Group's (PMI) 1Q08 net operating loss of $3.37 per diluted share was substantially worse than the estimates. The results suffered from increased losses in the U.S. Mortgage Insurance Operations and the impairment of PMI's investment in FGIC, which more than offset the higher net income from International Operations.

PMI wrote-off the carrying value of its investment in FGIC. The company's combined ratio worsened significantly while the claim rates and average claim sizes increased considerably. We suspect the company may need to raise capital in the coming months in order to satisfy the requirements of the rating agencies.

Based on the results, we have further reduced our estimates for FY08 and FY09. Our Sell rating on the shares remains unchanged. Our six-month target price of $5.25 per share incorporates a multiple of 0.20x our projected book value of $26.50 per share for September 30, 2008.

Additionally, the quantitative Zacks Rank is currently 4 (down from 3 relative to March 28, 2008), indicating slight downward pressure on the shares over the near term. Short interest is currently 7.4 days versus 3.8 days previously.

Read the analyst note on PMI.

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