PMI: No Near-Term Bottom

PMI Group Inc’s (PMI - Analyst Report) 3Q08 reported net loss from continuing operations of $149.3 million or $1.83 per diluted share was much better-than-expectations due to lower-than-expected incurred losses. PMI also lowered its 2008 outlook for U.S. paid claims.

However, net premiums written were down 19.3% year-over-year, as the amount of new insurance fell due to the continued declines in home sales. The company had recently agreed to sell its Australian and Asian operations, which are now classified as discontinued operations.

Based on PMI’s 3Q08 financial results and its strategic and business initiatives, we are slightly moderating our FY08 and FY09 loss estimates to $9.93 per share and $2.00 per share, respectively. At current levels, shares of PMI trade at 0.08x PMI's 3Q08 book value of $17.80 per share, which is significantly below its historical 2.2x high. The rise in delinquencies and defaults on loan payments may continue for a longer time than expected earlier, leading to increased losses for the mortgage insurers.

Further, we suspect that PMI may need to raise new capital in the coming quarters, which would result in dilution to the existing shareholders. As a result, we do not expect any correction to the multiple in the near future. Our six-month target price of $1.20 per share incorporates the current multiple of 0.08 on our projected book value of $14.50 per share for March 31, 2009. We are maintaining our Sell recommendation on the shares.

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