Exhibit 99.1

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

(An Indirect Wholly Owned Subsidiary

of The PMI Group, Inc.)

Consolidated Financial Statements

For the years ended December 31, 2004, 2003 and 2002

(With Report of Independent Registered Public Accounting Firm)

INDEX TO FINANCIAL STATEMENTS

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm	F-3
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002	F-4
Consolidated Balance Sheets as of December 31, 2004 and 2003	F-5
Consolidated Statements of Shareholder’s Equity for the years ended December 31, 2004, 2003 and 2002	F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002	F-7
Notes to Consolidated Financial Statements	F-8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of PMI Mortgage Insurance Ltd

We have audited the accompanying consolidated balance sheets of PMI Mortgage Insurance Ltd and subsidiaries (an indirect wholly owned subsidiary of The PMI Group, Inc.) as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholder’s equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PMI Mortgage Insurance Ltd and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Los Angeles, California

February 2, 2006

F-3

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year ended December 31,
	2004		2003			2002
	(Dollars in thousands)
REVENUES
Premiums earned	$	96,637	$	67,503		$	43,710
Net investment income		28,135		15,891			20,378
Net realized investment gains (losses)		39		(241	)		416
Other income		1,144		401			—
Total revenues		125,955		83,554			64,504
LOSSES AND EXPENSES
Losses and loss adjustment expenses (reversal)		2,489		(3,447	)		3,229
Amortization of deferred policy acquisition costs		10,973		8,484			18,431
Other underwriting and operating expenses		22,634		14,774			6,161
Total losses and expenses		36,096		19,811			27,821
Income before income taxes, minority interest and cumulative effect of a change in accounting principle		89,859		63,743			36,683
Income taxes		26,920		21,259			11,917
Income before minority interest and cumulative effect of a change in accounting principle		62,939		42,484			24,766
Minority interest, net		1,733		1,363			750
Income before cumulative effect of a change in accounting principle		61,206		41,121			24,016
Cumulative effect of a change in accounting principle (Note 3)		—		—			7,172
NET INCOME	$	61,206	$	41,121		$	31,188

See accompanying notes to consolidated financial statements.

F-4

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	As of December 31,
	2004		2003
	(Dollars in thousands)
ASSETS
Investments – available-for-sale, at fair value:
Fixed income securities	$	525,193	$	353,384
Equity securities – common		24,430		19,279
Short-term investments		6,171		11,790
Total investments		555,794		384,453
Cash and cash equivalents		48,864		75,675
Related party receivables		2,811		2
Accrued investment income		7,596		5,651
Reinsurance receivables and prepaid premiums		4,298		4,610
Reinsurance recoverables		81		77
Deferred policy acquisition costs		34,129		26,968
Leasehold improvements, equipment and software, net of accumulated depreciation and amortization		2,459		3,254
Other assets		14,666		12,058
Total assets	$	670,698	$	512,748
LIABILITIES
Reserve for losses and loss adjustment expenses	$	7,672	$	5,975
Unearned premiums		280,639		214,751
Reinsurance payables		7,200		6,005
Deferred income taxes		6,508		1,161
Other liabilities and accrued expenses		17,409		17,553
Total liabilities		319,428		245,445
Commitments and contingencies (Notes 7 and 11)
Minority interest		6,226		5,257
SHAREHOLDER’S EQUITY
Ordinary shares – no par value; 210,800 shares issued and outstanding		76,753		76,753
Retained earnings		195,715		134,509
Accumulated other comprehensive income, net of deferred taxes		72,576		50,784
Total shareholder’s equity		345,044		262,046
Total liabilities and shareholder’s equity	$	670,698	$	512,748

See accompanying notes to consolidated financial statements.

F-5

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

	Comprehensive Income			Ordinary Shares			Preference Shares					Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
				Shares	Amount		Shares		Amount
	(Dollars in thousands)
BALANCE, DECEMBER 31, 2001				210,798	$	67,463	2		$	9,290		$	62,200	$	(30,931	)	$	108,022
Conversion of preference shares to ordinary stock				2		9,290	(2	)		(9,290	)
Net income	$	31,188		—		—	—			—			31,188		—			31,188
Change in unrealized gains on investments, net of deferred taxes of $2,082		7,011		—		—	—			—			—		7,011			7,011
Reclassification of realized gains included in net income, net of taxes		(291	)	—		—	—			—			—		(291	)		(291	)
Change in currency translation gains		15,658		—		—	—			—			—		15,658			15,658
Comprehensive income	$	53,566
BALANCE, DECEMBER 31, 2002				210,800		76,753	—			—			93,388		(8,553	)		161,588
Net income		41,121		—		—	—			—			41,121		—			41,121
Change in unrealized gains on investments, net of deferred taxes of ($427)		(3,029	)	—		—	—			—			—		(3,029	)		(3,029	)
Reclassification of realized gains included in net income, net of taxes		169		—		—				—			—		169			169
Change in currency translation gains		62,197				—	—			—			—		62,197			62,197
Comprehensive income	$	100,458
BALANCE, DECEMBER 31, 2003				210,800		76,753	—			—			134,509		50,784			262,046
Net income		61,206		—		—	—			—			61,206		—			61,206
Change in unrealized gains on investments, net of deferred taxes of $3,595		8,412		—		—	—			—			—		8,412			8,412
Reclassification of realized gains included in net income, net of taxes		(27	)	—		—	—			—			—		(27	)		(27	)
Change in currency translation gains		13,407		—		—	—			—			—		13,407			13,407
Comprehensive income	$	82,998
BALANCE, DECEMBER 31, 2004				210,800	$	76,753	—		$	—		$	195,715	$	72,576		$	345,044

See accompanying notes to consolidated financial statements.

F-6

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31,
	2004			2003			2002
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	61,206		$	41,121		$	31,188
Cumulative effect of a change in accounting principle		—			—			(7,172	)
Income before cumulative effect of a change in accounting principle		61,206			41,121			24,016
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest, net		1,733			1,363			750
Net realized investment (gains) losses		(39	)		241			(416	)
Depreciation and amortization		1,532			1,755			401
Deferred income taxes		5,347			1,226			(960	)
Policy acquisition costs incurred and deferred		(18,134	)		(20,642	)		(19,227	)
Amortization of deferred policy acquisition costs		10,973			8,484			18,431
Changes in:
Accrued investment income		(1,945	)		(2,115	)		(3,391	)
Reinsurance receivables, net of reinsurance payables		312			(4,349	)		318
Reinsurance recoverables		(4	)		166			(243	)
Reserve for losses and loss adjustment expenses		1,697			(2,991	)		430
Unearned premiums		65,888			103,847			23,970
Income taxes payable		1,714			2,664			(1,068	)
Other		(4,035	)		8,999			1,553
Net cash provided by operating activities		126,245			139,769			44,564
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of fixed income securities		105,893			42,848			93,908
Proceeds from sales of equity securities		4,510			6,592			2,809
Investment purchases:
Fixed income securities		(272,667	)		(176,825	)		(142,695	)
Equity securities – common		(6,272	)		(12,719	)		(4,346	)
Net change in short-term investments		5,619			584			327
Net change in related party receivables		(2,809	)		70			1,033
Capital expenditures and capitalized software, net of dispositions		(737	)		(2,301	)		(1,448	)
Net cash used in investing activities		(166,463	)		(141,751	)		(50,412	)
Foreign currency translation adjustment		13,407			62,197			15,658
Net (decrease) increase in cash and cash equivalents		(26,811	)		60,215			9,810
Cash and cash equivalents at beginning of year		75,675			15,460			5,650
Cash and cash equivalents at end of year	$	48,864		$	75,675		$	15,460
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year:
Income taxes paid, net of refunds	$	23,854		$	16,730		$	14,591

See accompanying notes to consolidated financial statements.

F-7

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION AND BUSINESS

PMI Mortgage Insurance Ltd (“PMI Ltd”) is a wholly owned subsidiary of PMI Mortgage Insurance Australia (Holdings) Pty Limited (“PMI Holdings”) and was incorporated in Australia on September 24, 1965. The accompanying consolidated financial statements include the accounts of PMI Ltd, an Australian corporation; its majority owned subsidiaries, Western Lenders Mortgage Insurance Company Ltd, and Permanent LMI Pty Ltd; and its wholly owned subsidiary, Advantage Lenders Mortgage Insurance Pty Limited (“Advantage”). PMI Ltd and its subsidiaries are collectively referred to as the “Company.” All material intercompany transactions and balances have been eliminated in the consolidated financial statements. PMI Holdings is a subsidiary of PMI Mortgage Insurance Co. (“PMI”). The ultimate parent of PMI is The PMI Group, Inc. (“The PMI Group”), a United States domiciled corporation.

On August 6, 1999, PMI Holdings acquired all of the outstanding common stock of PMI Ltd. (formerly MGICA, Ltd) for approximately $78.3 million in cash. The acquisition was accounted for under the purchase method of accounting. The excess of the estimated fair value of net assets acquired over the purchase price of approximately $21.7 million first reduced the value of noncurrent assets acquired, with the remaining $9.6 million of negative goodwill being amortized over approximately eight years. As required by the U.S. Securities and Exchange Commission Staff Accounting Bulletin 54, Push Down Basis of Accounting in Financial Statements of a Subsidiary, the purchase method of accounting applied by PMI Holdings to the acquired assets and liabilities associated with PMI Ltd has been “pushed down” to the consolidated financial statements of the Company, thereby establishing a new basis of accounting.

The Company offers mortgage insurance in Australia and New Zealand. The Company is headquartered in Sydney, Australia, and has offices throughout Australia and New Zealand. PMI Ltd’s financial strength is rated “AA” by S&P and Fitch, and “Aa2” by Moody’s. Australian mortgage insurance, known as “lenders mortgage insurance,” or LMI, is characterized by single premiums and coverage of 100% of the loan amount. Lenders usually collect the single premium from a prospective borrower and remit the amount to the Company as the mortgage insurer. The Company recognizes earnings from single premiums in its consolidated financial statements over time in accordance with the expiration of risk. Premiums are partly refundable if the policy is canceled within the first year.

LMI covers the unpaid loan balance, plus selling costs and expenses, following the sale of the security property. Historically, loss severities have normally ranged from 20% to 30% of the original loan amount. In New Zealand, insurance coverage is predominantly “top cover”, where the total loss (including expenses) is paid up to a prescribed percentage of the original loan amount. Typical top cover in New Zealand ranges between 20% to 30% of the original loan amount.

The Company’s primary net insurance written includes direct insurance and insurance on loans underlying residential mortgage-backed securities, or RMBS. RMBS transactions include insurance on seasoned portfolios comprised of prime credit quality loans that have loan to values often below 80%.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting

F-8

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

period. Actual results could differ from these estimates. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation, have been included.

Risks and Uncertainties – The Company is dependent upon lenders and mortgage originators to provide mortgage loans to insure. In the event any of its largest customers choose to stop providing the Company with mortgage loans to insure, the Company’s ability to generate new insurance business could be adversely affected. The Company’s five largest customers generated 65%, 58% and 51% of its premiums earned in 2004, 2003 and 2002, respectively.

The Company is subject to comprehensive regulation. These regulations are generally intended to protect policyholders, rather than to benefit investors. Although their scope varies, applicable laws and regulations grant broad powers to these supervisory agencies and officials to examine companies and to enforce rules or exercise discretion touching almost every significant aspect of the insurance business. The licensing of the Company’s insurance business, the review of its financial statements and periodic financial reporting, permissible investments and adherence to financial standards relating to regulatory capital, dividends to the Company and other criteria of solvency are all subjects of detailed regulation.

The Company establishes loss reserves to recognize the liability of unpaid losses related to insured mortgages that are in default. These loss reserves are based upon the Company’s estimates of the claim rate and average claim amounts, as well as the estimated costs of settling claims. These estimates are regularly reviewed and updated using currently available information. Any adjustments due to positive or adverse developments, which may be material, resulting from these reviews would impact current reserve requirements. The Company’s reserves may not be adequate to cover ultimate loss development on incurred defaults. The Company’s consolidated financial condition, results of operations or cash flows could be seriously harmed if the Company’s reserve estimates are insufficient to cover the actual related claims paid and loss-related expenses incurred.

Significant accounting policies are as follows:

Investments – The Company has designated its entire portfolio of fixed income and equity securities as available-for-sale. These securities are recorded at fair value based on quoted market prices with unrealized gains and losses, net of deferred income taxes, accounted for as a component of accumulated other comprehensive income (loss) in shareholder’s equity. The Company evaluates its investments regularly to determine whether there are declines in value and whether such declines meet the definition of other-than-temporary impairment in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities and SEC Staff Accounting Bulletin No. 59, Accounting for Noncurrent Marketable Equity Securities. The fair value of a security below cost or amortized cost for consecutive quarters is a potential indicator of an other-than-temporary impairment. When the Company determines a security has suffered an other-than-temporary impairment, the impairment loss is recognized, to the extent of the decline, as a realized investment loss in the current period’s earnings.

The Company’s short-term investments have maturities of greater than three and less than 12 months when purchased and are carried at fair value. Realized gains and losses on sales of investments are determined on a specific-identification basis. Investment income consists primarily of interest and dividends. Interest income and preferred stock dividends are recognized on an accrual basis. Dividend income on common stock is recognized on the date of declaration. Net investment income represents interest and dividend income, net of investment expenses.

F-9

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Cash and Cash Equivalents – The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Deferred Policy Acquisition Costs – The Company defers certain costs in its mortgage insurance operations relating to the acquisition of new insurance and amortizes these costs against related premium revenue in order to match costs and revenues. These costs are primarily associated with the acquisition, underwriting and processing of new business, including contract underwriting and sales related activities. Such costs include commissions paid on assumed reinsurance premiums. To the extent the Company is compensated by customers for contract underwriting, those underwriting costs are not deferred. Costs related to the issuance of mortgage insurance business are initially deferred and reported as deferred policy acquisition costs. SFAS No. 60, Accounting and Reporting by Insurance Enterprises, (“SFAS No. 60”), specifically excludes mortgage guaranty insurance from its guidance relating to the amortization of deferred policy acquisition costs. Consistent with industry accounting practice, amortization of these costs for each underwriting year book of business is charged against revenue in proportion to earned premiums. All or predominately all of the policies written by the Company are single premium. The deferred costs related to single premium policies are adjusted as appropriate for policy cancellations to be consistent with the Company’s revenue recognition policy. The amortization estimates for each underwriting year are monitored regularly to reflect actual experience and any changes to persistency or loss development. Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed recoverable amounts, after considering investment income.

Leasehold Improvements, Equipment and Software – Leasehold improvements and equipment, including software, are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from 2.5 to 13 years. Leasehold improvements are recorded at cost and amortized over the lesser of the useful life of the assets or the remaining term of the related lease.

Under the provisions of Statement of Position (“SOP”) No. 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use, the Company capitalizes costs incurred during the application development stage related to software developed for internal-use purposes and for which it has no substantive plan to market externally. Capitalized costs are amortized on a straight-line basis over the estimated useful life of the asset at such time as the software is ready for its intended use, which is generally 2.5 years.

Reserve for Losses and Loss Adjustment Expenses – The reserve for mortgage insurance losses and loss adjustment expenses (“LAE”) is the estimated claim settlement costs on notices of default that have been received by the Company, as well as loan defaults that have been incurred but have not been reported by the lenders. The Company’s master policies define “default” as the borrower’s failure to pay when due an amount equal to the scheduled monthly mortgage payment under the terms of the mortgage. Generally, however, the master policies require an insured to notify the Company of a default no later than the last business day of the month following the month in which the borrower becomes three monthly payments in default. For reporting and internal tracking purposes, the Company does not consider a loan to be in default until it has been delinquent for two consecutive monthly payments. SFAS No. 60, Accounting and Reporting by Insurance Enterprises, specifically excludes mortgage guaranty insurance from its guidance relating to reserves for losses and LAE. Consistent with industry accounting practice, the Company considers its mortgage insurance policies as short duration contracts and, accordingly does not establish loss reserves for future claims on insured loans that are not currently in default. The Company establishes loss reserves on a case-by-case basis when insured loans are identified as currently in default using

F-10

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

estimated claim rates and average claim amounts for each report year, net of salvage recoverable. The Company also establishes loss reserves for defaults that have been incurred but have not been reported to the Company prior to the close of an accounting period, using estimated claim rates and claim amounts applied to the estimated number of defaults not reported. The reserve levels as of the consolidated balance sheet date represent management’s best estimate of existing losses and LAE incurred. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known to the Company. Such adjustments, to the extent of increasing or decreasing loss reserves, are recognized in current period’s consolidated results of operations.

Reinsurance – The Company uses reinsurance to reduce net risk in force and optimize capital allocation. The Company’s reinsurance agreements typically provide for recovery of a proportionate level of claim expenses from reinsurers, and reinsurance recoverable is recorded as an asset. The Company remains liable to its policyholders if the reinsurers are unable to satisfy their obligations under the agreements as with all reinsurance contracts. Reinsurance recoverables on paid losses and loss estimates are based on the Company’s actuarial analysis of the applicable business. Amounts the Company will ultimately recover could differ materially from amounts recorded as reinsurance recoverables. Reinsurance transactions are recorded in accordance with the provisions of the reinsurance agreements and the accounting guidance provided in SFAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. Ceded premiums for quota share reinsurance are deferred and amortized on the same basis as our single premium policies as described below.

Revenue Recognition – Mortgage guarantee insurance policies are contracts that are generally non-cancelable by the insurer and provide payment of premiums on a single basis. Primary mortgage insurance premiums written on policies covering more than one year are referred to as single premiums. A portion of revenue on single premiums is recognized in premiums earned in the current period, and the remaining portion is deferred as unearned premiums and earned over the expected life of the policy, a range of eight to nine years. If single premium policies related to insured loans are cancelled due to repayment by the borrower, and the premium is nonrefundable, then the remaining unearned premium related to each cancelled policy is recognized to earned premiums upon notification of the cancellation. Unearned premiums represent the portion of premiums written that is applicable to the estimated unexpired risk of insured loans. Rates used to determine the earning of single premiums are estimates based on the actuarial analysis of the expiration of risk. The earnings pattern calculation is an estimation process and, accordingly, the Company reviews its premium earnings cycle for each policy acquisition year (“Book Year”) annually and any adjustments to the estimates are reflected to each Book Year as appropriate.

Income Taxes – PMI Ltd is included in the consolidated tax return of PMI Holdings for 2003. Prior to 2003, individual tax returns were filed by each entity. The tax provision for the Company for financial reporting purposes is determined on a stand-alone basis.

The Company accounts for income taxes using the liability method in accordance with SFAS No. 109, Accounting for Income Taxes. The liability method measures the expected future tax effects of temporary differences at the enacted tax rates applicable for the period in which the deferred asset or liability is expected to be realized or settled. Temporary differences are differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that will result in future increases or decreases in taxes owed on a cash basis compared to amounts already recognized as tax expense in the consolidated statements of operations. The Company’s effective tax rate was 30.0%, 33.4% and 35.9% for 2004, 2003 and 2002, respectively, compared to the Australian statutory rate of

F-11

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

30.0%. Differences are principally due to the 33.0% tax rate applied to the New Zealand branch operations, nontax deductible expenditure and prior year adjustments.

Foreign Currency Translation – The consolidated financial statements have been translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency Translation. Accordingly, assets and liabilities are translated using either the year-end spot exchange rates or historical rates. Revenues and expenses are translated at monthly-average exchange rates. Gains and losses on currency re-measurement incurred by the Company represent the revaluation of assets and liabilities into the reporting currency. The effects of translating operations with a functional currency other than the reporting currency are reported as a component of accumulated other comprehensive income (loss) included in consolidated shareholder’s equity.

Comprehensive Income – Comprehensive income includes net income, foreign currency translation gains or losses, changes in unrealized gains and losses on investments, and the reclassification of realized gains and losses previously reported in comprehensive income, net of related tax effects. The Company reports the components of comprehensive income in its consolidated statements of shareholder’s equity.

Business Segments – The Company’s management has determined that the Company has one reportable operating segment.

NOTE 3. NEW ACCOUNTING STANDARDS

On November 5, 2005, the Financial Accounting Standards Board (“FASB”) Staff has issued FASB Staff Position (“FSP”) SFAS Nos. 115-1 and SFAS No 124-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (“FSP Nos. 115-1 and 124-1”). FSP 115-1 and 124-1 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP shall be applied to reporting periods beginning after December 15, 2005. FSP Nos. 115-1 and 124-1 are not expected to significantly impact the Company’s consolidated statements of operations or consolidated financial condition.

Effective January 1, 2002, the Company adopted SFAS No. 141, Business Combinations (“SFAS No. 141”), and SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). Under SFAS No. 142, any unamortized negative goodwill related to an excess of fair value over cost arising from business combinations completed before July 1, 2001 must be written off and recognized as a cumulative effect of a change in accounting principle upon the adoption of SFAS No. 142. Accordingly, the Company realized a $7.2 million gain for the remaining balance of negative goodwill in the first quarter of 2002.

F-12

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 4. INVESTMENTS

Fair Values and Gross Unrealized Gains and Losses on Investments – The cost or amortized cost, estimated fair value, and gross unrealized gains and losses on investments are shown in the table below:

	Cost or Amortized Cost		Gross Unrealized					Fair Value
			Gains		(Losses)
	(Dollars in thousands)
December 31, 2004
Fixed income securities:
Australian and New Zealand Federal and State Government bonds	$	256,953	$	4,038	$	(166	)	$	260,825
Corporate bonds		260,695		3,690		(17	)		264,368
Total fixed income securities		517,648		7,728		(183	)		525,193
Equity securities:
Common stocks		18,323		6,177		(70	)		24,430
Total equity securities		18,323		6,177		(70	)		24,430
Short-term investments		6,171		—		—			6,171
Total investments	$	542,142	$	13,905	$	(253	)	$	555,794
	Cost or Amortized Cost		Gross Unrealized					Fair Value
			Gains		Losses
	(Dollars in thousands)
December 31, 2003
Fixed income securities:
Australian and New Zealand Federal and State Government bonds	$	241,958	$	675	$	(1,797	)	$	240,836
Corporate bonds		111,747		1,136		(335	)		112,548
Total fixed income securities		353,705		1,811		(2,132	)		353,384
Equity securities:
Common stocks		16,947		2,485		(153	)		19,279
Total equity securities		16,947		2,485		(153	)		19,279
Short-term investments		11,790		—		—			11,790
Total investments	$	382,442	$	4,296	$	(2,285	)	$	384,453

Scheduled Maturities – The following table sets forth the amortized cost and fair value of fixed income securities by contractual maturity at December 31, 2004:

	Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	17,820	$	17,856
Due after one year through five years		260,546		263,647
Due after five years through ten years		210,026		213,620
Due after ten years		29,256		30,070
Total fixed income securities	$	517,648	$	525,193

F-13

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Actual maturities may differ from those scheduled as a result of calls or prepayments by the issuers prior to maturity.

Net Investment Income – Net investment income consists of:

	2004			2003			2002
	(Dollars in thousands)
Fixed income securities	$	25,022		$	12,982		$	19,045
Equity securities – dividends		869			584			350
Short-term investments and cash on deposit		2,946			2,698			1,159
Investment income before expenses		28,837			16,264			20,554
Investment expenses		(702	)		(373	)		(176	)
Net investment income	$	28,135		$	15,891		$	20,378

Realized Investment Gains and Losses – Realized gains and losses on investments are composed of:

	2004			2003			2002
	(Dollars in thousands)
Fixed income securities:
Gross gains	$	240		$	199		$	371
Gross losses		(948	)		(80	)		(206	)
Net gains (losses)		(708	)		119			165
Equity securities:
Gross gains	$	1,035		$	701			251
Gross losses		(288	)		(1,061	)		—
Net gains (losses)		747			(360	)		251
Net realized investment gains (losses) before income taxes (benefit)		39			(241	)		416
Income taxes (benefit)		12			(72	)		125
Total net realized investment gains (losses) after income taxes (benefit)	$	27		$	(169	)	$	291

Unrealized Investment Gains and Losses – The change in unrealized gains and losses net of deferred taxes consists of:

	2004		2003			2002
	(Dollars in thousands)
Fixed income securities	$	5,743	$	(4,754	)	$	6,981
Equity securities		2,642		1,894			(261	)
Change in unrealized investment gains (losses), net of deferred taxes (benefit)		8,385		(2,860	)		6,720
Realized investment gains (losses), net of income taxes (benefit)		27		(169	)		291
Total	$	8,412	$	(3,029	)	$	7,011

F-14

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Aging of Unrealized Losses – The following table shows the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2004.

	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
Fixed income securities:
Australian and New Zealand Federal and State Government bonds	$	2,156	$	(2	)	$	10,793	$	(164	)	$	12,949	$	(166	)
Corporate bonds		28,418		(17	)		—		—			28,418		(17	)
Total fixed income securities		30,574		(19	)		10,793		(164	)		41,367		(183	)
Equity securities:
Common stocks		188		(61	)		399		(9	)		587		(70	)
Total equity securities		188		(61	)		399		(9	)		587		(70	)
Total	$	30,762	$	(80	)	$	11,192	$	(173	)	$	41,954	$	(253	)

Unrealized losses were primarily due to interest rate fluctuations during the year and are not considered to be other-than-temporarily impaired as the Company has the intent and ability to hold until such investments recover in value or mature. The remaining unrealized losses do not meet the criteria established in the Company’s policy for determining other-than-temporary impairment and as such are not considered impaired. The Company determined that the decline in the market value of certain equity securities in its investment portfolio met the definition of other-than-temporary impairment and recognized realized losses of $0.2 million in 2004. No securities were determined to be other-than-temporarily impaired for 2003 and 2002, respectively.

Investment Concentrations and Other Items – The Company maintains a diversified portfolio principally of fixed income securities. The following entities represent the largest concentrations in the portfolio, expressed as a percentage of the fair value of the entire portfolio. Holdings that exceed 5% of the fixed income security portfolio at December 31, for the respective years, are presented below:

	2004				2003
	(Dollars in thousands)
Australian Commonwealth Government Bond	$	119,740	22.8	%	$	111,578	31.6	%
Queensland Treasury Corp. Bond	$	63,616	12.1	%	$	44,762	12.7	%
New South Wales Treasury Corp. Bond	$	28,460	5.4	%	$	37,084	10.5	%

The Company has bonds with restrictions on redemption deposited with the New Zealand Public Trust Office. The fair value of such bonds at December 31, 2004 was $0.4 million.

F-15

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 5. DEFERRED POLICY ACQUISITION COSTS

The following table summarizes deferred policy acquisition cost activity as of and for the years ended December 31.

	2004			2003			2002
	(Dollars in thousands)
Balance at January 1,	$	26,968		$	14,810		$	14,014
Policy acquisition costs incurred and deferred		18,134			20,642			19,227
Amortization of deferred policy acquisition costs		(10,973	)		(8,484	)		(18,431	)
Balance at December 31,	$	34,129		$	26,968		$	14,810

Deferred policy acquisition costs are affected by qualifying costs that are deferred in the period and amortization of previously deferred costs in such period. In periods where there is significant growth in new business, the asset will generally increase because the amount of deferred acquisition costs incurred exceeds the amortization of previously deferred policy acquisition costs. Conversely, in periods where new business activity is declining, the asset may decrease because the amortization of previously deferred policy acquisition costs could exceed the amount of deferred acquisition costs incurred.

NOTE 6. LEASEHOLD IMPROVEMENTS, EQUIPMENT AND SOFTWARE

The following table sets forth the cost basis of, and accumulated depreciation and amortization for, leasehold improvements, equipment and software as of December 31.

	2004			2003
	(Dollars in thousands)
Leasehold improvements	$	2,711		$	2,276
Furniture and equipment		1,939			1,600
Software		1,570			1,438
Leasehold improvements, equipment and software, at cost		6,220			5,314
Less accumulated depreciation and amortization		(3,761	)		(2,060	)
Leasehold improvements, equipment and software, net of accumulated depreciation and amortization	$	2,459		$	3,254

Depreciation and amortization expense related to leaseholder improvements, equipment and software totaled $1.5 million in 2004, $1.7 million in 2003 and $0.4 million in 2002. Capitalized costs associated with software developed for internal use were $0.8 million in 2004, $0.8 million in 2003 and $0.7 million in 2002.

F-16

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 7. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

The Company establishes reserves for losses and LAE to recognize the estimated liability for potential losses and related loss adjustment expenses in connection with borrower default on their mortgage payments. The establishment of loss reserves is subject to inherent uncertainty and requires significant judgment by management. The following table provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for each of the three years ended December 31:

	2004			2003			2002
	(Dollars in thousands)
Balance at January 1	$	5,975		$	8,966		$	8,536
Reinsurance recoverables		(77	)		(243	)		(106	)
Net balance at January 1,		5,898			8,723			8,430
Losses and LAE incurred (principally with respect to defaults occurring in):
Current year		7,556			4,677			3,750
Prior years (1)		(5,067	)		(8,124	)		(521	)
Total incurred		2,489			(3,447	)		3,229
Losses and LAE payments (principally with respect to defaults occurring in):
Current year		(479	)		(236	)		(3,441	)
Prior years		(639	)		(1,411	)		(462	)
Total payments		(1,118	)		(1,647	)		(3,903	)
Foreign currency translation effects		322			2,269			967
Net ending balance at December 31,		7,591			5,898			8,723
Reinsurance recoverables		81			77			243
Net balance at December 31,	$	7,672		$	5,975		$	8,966

⁽¹⁾ The reductions in losses and LAE incurred relating to prior years were primarily due to favorable development of actual claim amounts and adjustments to ultimate claim rates due to the strong housing appreciation and overall economic conditions experienced in Australia over the three year period.

NOTE 8. FAIR VALUE OF FINANCIAL INSTRUMENTS

In the normal course of business, the Company invests in various financial assets and incurs various financial liabilities. The estimated fair value of the financial instruments indicated in the table below has been determined by available market information and appropriate valuation methodology. The carrying values of cash and cash equivalents and accrued investment income approximate their fair values primarily due to their liquidity and short-term nature.

	As of December 31, 2004				As of December 31, 2003
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(Dollars in thousands)
Fixed income securities	$	525,193	$	525,193	$	353,384	$	353,384
Equity securities	$	24,430	$	24,430	$	19,279	$	19,279
Short-term investments	$	6,171	$	6,171	$	11,790	$	11,790
Cash and cash equivalents	$	48,864	$	48,864	$	75,675	$	75,675
Accrued investment income	$	7,596	$	7,596	$	5,651	$	5,651

F-17

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Considerable judgment is required in interpreting market data to develop the estimates of fair value and, therefore, changes in the assumptions may have a material effect on the fair valuation estimates. A number of the Company’s other significant assets and liabilities, including deferred policy acquisition costs, loss and LAE reserves, unearned premiums and deferred income taxes are not considered financial instruments.

NOTE 9. REINSURANCE

The following table shows the effects of reinsurance on premiums written, premiums earned and losses and loss adjustment expenses of the Company’s operations for the years ended:

	Year ended December 31,
	2004			2003			2002
	(Dollars in thousands)
Premiums written
Direct	$	114,435		$	96,006		$	48,534
Assumed		44,338			36,919			16,338
Ceded		(6,783	)		(4,757	)		(4,616	)
Net premiums written	$	151,990		$	128,168		$	60,256
Premiums earned
Direct	$	75,394		$	56,706		$	41,515
Assumed		29,070			17,490			6,977
Ceded		(7,827	)		(6,693	)		(4,782	)
Net premiums earned	$	96,637		$	67,503		$	43,710
Losses and loss adjustment expenses
Direct	$	2,112		$	(3,715	)	$	2,193
Assumed		(161	)		210			(248	)
Ceded		538			58			1,284
Net losses and loss adjustment expenses	$	2,489		$	(3,447	)	$	3,229

Ceded premiums related principally to a reinsurance contract with a captive reinsurance operation. Under the captive reinsurance agreement, a portion of the risk insured by the Company is reinsured with the mortgage originator through a reinsurer that is affiliated with the mortgage originator.

Ceded premiums also include premiums paid to PMI for excess of loss reinsurance presented in Note 14.

Direct premiums written and earned include amounts relating to a reinsurance contract with a captive insurer affiliated with a mortgage originator. The Company reinsures the captive insurer on a quota share basis.

F-18

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 10. INCOME TAXES

The components of income tax expenses for the years ended December 31 are as follows:

	2004		2003		2002
	(Dollars in thousands)
Current	$	25,380	$	18,090	$	12,566
Deferred		1,540		3,169		(649	)
Total income taxes before minority interest	$	26,920	$	21,259	$	11,917

A reconciliation of the Australian income tax rate to the effective tax rate reported on income before income taxes is shown in the following table:

	2004		2003		2002
Statutory federal income tax rate	30.0	%	30.0	%	30.0	%
Other	—		3.4		5.9
Effective income tax rate before minority interest	30.0	%	33.4	%	35.9	%

The components of the deferred income tax assets and liabilities as of the years ended December 31 are as follows:

	2004		2003
	(Dollars in thousands)
Deferred tax assets:
Other loss reserves	$	905	$	1,559
Accrued expenses		702		512
Purchased interest and amortization		2,709		2,418
Reinsurance		263		243
Other assets		235		221
Total deferred tax assets		4,814		4,953
Deferred tax liabilities:
Accrued income		2,236		1,656
Unrealized net gains on investments		4,087		519
Deferred policy acquisition costs		568		548
Unearned premium		4,431		3,391
Total deferred tax liabilities		11,322		6,114
Net deferred tax liability	$	6,508	$	1,161

Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized.

F-19

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES

Leases – The Company leases certain office space and office equipment. Minimum rental payments under noncancelable operating leases in the aggregate for the five years subsequent to 2004 are as follows:

	Operating Leases
	(Dollars in thousands)
Year ending December 31,
2005	$	2,529
2006		2,388
2007		2,282
2008		2,130
2009		1,410
Thereafter		3,106
Total minimum lease payments	$	13,845

Rent expense for all leases was $2.4 million for 2004, $1.7 million for 2003 and $1.3 million for 2002. As of December 31, 2004, the Company’s operating leases for office space had renewal options ranging between three and five years.

Legal Proceedings –Various legal actions are currently pending that involve the Company and specific aspects of its conduct of business. In the opinion of management, the ultimate liability in one or more of these actions is not expected to have a material effect on the consolidated financial condition, results of operations or cash flows of the Company.

NOTE 12. BENEFIT PLANS

Employee Benefit Plans and Share-Based Compensation – PMI Ltd’s employees participate in The PMI Group’s Employee Stock Purchase Plan (“ESPP”) which allows eligible employees to purchase The PMI Group’s common shares at a 15% discount to fair market value as determined by the plan. The ESPP offers participants the 15% discount to current fair market value or fair market value with a look-back provision of the lesser of the duration an employee has participated in the ESPP or two years. PMI Ltd’s employees also participate in The PMI Group’s Equity Incentive Plan which provides for awards of stock options subject to various restrictions and performance hurdles, entitling the recipient to receive cash or common stock in the future. Generally options are granted with an exercise price equal to the market value on the date of the grant, expire ten years from the grant and have a three year vesting period. The Company’s consolidated shareholder’s equity is not impacted by either of these plans as common shares are issued out of The PMI Group.

Superannuation Plans – It is compulsory for superannuation contributions to be made by the Company to a regulated and complying superannuation fund for all Australian employees. The minimum required contribution, based on an employee’s salary, which is paid by the Company is 9% in 2004 and 2003. For 2002, the minimum contribution was 8%. Employees may elect to pay additional contributions out of their salary. The default superannuation plan for Australian employees is the ING Corporate Super although employees may elect for the contributions relating to them to be paid into another plan. The Company has made superannuation payments on behalf of their employees of $1.1 million, $1.0 million and $0.6 million for 2004, 2003 and 2002, respectively.

F-20

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In New Zealand all permanent employees are members of the PMI Mortgage Insurance Limited Superannuation Plan. Employer contributions are 8.06% of an employee’s salary.

The Company also pays salary continuance insurance premiums. Salary continuance insurance provides permanent employees payments in the event that an individual is unable to work due to disability following a non work-related accident or injury. Contractors are not covered under this benefit.

NOTE 13. STATUTORY ACCOUNTING

PMI Ltd and its insurance subsidiaries prepare financial statements for their regulator, Australian Prudential Regulation Authority, (“APRA”), in accordance with the accounting practices prescribed by the regulator, which is a comprehensive basis of accounting other than GAAP.

The Company’s APRA capital base, minimum capital requirement and solvency ratio as of and for the years ended are as follows:

	Year ended December 31,
	2004		2003		2002
	(Dollars in thousands)
APRA capital base	$	467,564	$	293,382	$	183,631
APRA minimum capital requirement	$	152,856	$	121,563	$	96,696
APRA solvency ratio		3.06		2.41		1.90

Under the insurance laws of Australia, mortgage insurers are required to establish a catastrophic risk charge defined as a 1 in 250 year event. The Company is required to maintain adequate capital to fund this charge in addition to normal insurance liabilities, by maintaining a solvency ratio of least 1.5 to 1.

The Company’s ability to pay dividends to PMI Holdings is restricted to the extent the payment of dividends causes the solvency ratio to drop below the level established by APRA.

NOTE 14. RELATED PARTY TRANSACTIONS

Related Party Receivables – As of December 31, 2004, related party receivables were $2.8 million consisting of non interest bearing receivables at call, due from two related Australian entities. As of December 31, 2003, there were no related party receivables.

Related Party Payables – As of December 31, 2004, there were no related party payables. As of December 31, 2003, related party payables were $0.6 million consisting of noninterest bearing payables at call, due to related Australian and U.S. based related entities.

Other Related Party Transactions – PMI Ltd has a capital support arrangement with PMI. The ultimate parent of PMI is The PMI Group, Inc., a United States domiciled corporation. Under the capital support arrangement, the related Company has undertaken to ensure that PMI Ltd exceeds the minimum required level of regulatory capital. Fees totaling $0.0 million, $0.2 million and $0.2 million were incurred during 2004, 2003 and 2002, respectively, in relation to this arrangement.

F-21

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

PMI Ltd has an excess of loss outward reinsurance arrangement with PMI. Reinsurance premiums totaling $2.2 million, $1.3 million and $0.9 million were incurred during 2004, 2003 and 2002, respectively, in relation to this arrangement.

PMI Ltd has a management services agreement with PMI Indemnity Limited (“PMI Indemnity”), a related Company in Australia, under normal commercial terms and conditions. Under the agreement PMI Ltd manages all of the operational activities of PMI Indemnity. Fees of $0.3 million, $0.4 million and $3.2 million were earned in 2004, 2003 and 2002, respectively.

NOTE 15. SUBSEQUENT EVENT

On January 3, 2006, PMI Ltd acquired the mortgage insurance portfolio of PMI Indemnity. The estimated fair value of assets acquired was approximately $25 million. The estimated fair value of liabilities assumed was approximately $25 million. PMI Ltd paid no consideration to PMI Holdings for this transfer.

F-22