Sell-Off of PMI Group Continues
PMI Group’s (PMI - Analyst Report) first-quarter 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’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. Hence, our Sell rating on the shares remains unchanged.
We have further reduced our FY08 and FY09 estimates to a negative $7.50 per share and a negative $1.10 per share respectively. At current levels, shares of PMI trade at 0.13x PMI’s 1Q08 book value of $27.58 per share, which is significantly below its historical 2.2x high. Our six-month target price of $3.00 per share incorporates a multiple of 0.11x our projected book value of $26.50 per share for September 30, 2008.