10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 1-13664

THE PMI GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware	94-3199675
(State of Incorporation)	(IRS Employer Identification No.)

3003 Oak Road,
Walnut Creek, California	94597
(Address of principal executive offices)	(Zip Code)

(925) 658-7878

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and larger accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  þ            Accelerated filer  ¨            Non-accelerated filer  ¨

Indicate by check mark whether the registration is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class of Stock	Par Value	Date	Number of Shares
Common Stock	$0.01	October 31, 2007	81,120,144

TABLE OF CONTENTS

		Page
Part I - Financial Information
Item 1.	Interim Consolidated Financial Statements and Notes (Unaudited)	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006	3
	Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	74
Item 4.	Controls and Procedures	75
Part II - Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75
Item 6.	Exhibits	75
Signatures		76
Index to Exhibits		77
Exhibits

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PART I – FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007			2006		2007			2006
	(Dollars in thousands, except per share data)
REVENUES
Premiums earned	$	256,834		$	214,903	$	735,532		$	634,787
Net investment income		55,408			49,680		159,166			145,561
Equity in (losses) earnings from unconsolidated subsidiaries		(22,602	)		31,491		49,655			91,404
Net realized investment gains		394			726		2,386			1,621
Other (loss) income		(3,064	)		4,120		6,597			14,843
Total revenues		286,970			300,920		953,336			888,216
LOSSES AND EXPENSES
Losses and loss adjustment expenses		372,844			79,603		628,324			212,403
Amortization of deferred policy acquisition costs		18,022			16,935		51,477			52,063
Other underwriting and operating expenses		50,585			55,949		173,059			168,994
Interest expense		8,358			9,486		25,015			25,732
Total losses and expenses		449,809			161,973		877,875			459,192
(Loss) income before income taxes		(162,839	)		138,947		75,461			429,024
Income tax (benefit) expense		(76,066	)		34,709		(23,632	)		109,823
NET (LOSS) INCOME	$	(86,773	)	$	104,238	$	99,093		$	319,201
PER SHARE DATA
Basic net (loss) income	$	(1.04	)	$	1.22	$	1.15		$	3.65
Diluted net (loss) income	$	(1.04	)	$	1.16	$	1.14		$	3.38

See accompanying notes to consolidated financial statements.

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THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2007			December 31, 2006
	(Unaudited)			(Audited)
	(Dollars in thousands, except per share data)
ASSETS
Investments—available-for-sale, at fair value:
Fixed income securities	$	3,310,185		$	2,826,853
Equity securities:
Common		180,388			162,263
Preferred		311,206			248,761
Short-term investments		31,661			55,056
Total investments		3,833,440			3,292,933
Cash and cash equivalents		233,256			457,207
Investments in unconsolidated subsidiaries		1,126,781			1,100,387
Related party receivables		1,459			714
Accrued investment income		53,842			45,232
Premiums receivable		67,418			64,524
Reinsurance receivables and prepaid premiums		8,686			21,574
Reinsurance recoverables		4,747			3,741
Deferred policy acquisition costs		94,787			87,008
Property, equipment and software, net of accumulated depreciation and amortization		166,295			174,128
Prepaid income taxes		40,471			7,044
Other assets		114,177			72,698
Total assets	$	5,745,359		$	5,327,190
LIABILITIES
Reserve for losses and loss adjustment expenses	$	770,386		$	414,736
Unearned premiums		612,889			520,264
Long-term debt		496,593			496,593
Reinsurance payables		42,493			42,518
Related party payables		653			1,744
Deferred income taxes		104,765			112,993
Other liabilities and accrued expenses		151,870			169,752
Total liabilities		2,179,649			1,758,600
Commitments and contingencies (Note 8)
SHAREHOLDERS’ EQUITY
Preferred stock—$0.01 par value; 5,000,000 shares authorized; none issued or outstanding		—			—
Common stock—$0.01 par value; 250,000,000 shares authorized;
119,313,767 shares issued; 81,120,018 and 86,747,031 shares outstanding		1,193			1,193
Additional paid-in capital		887,069			858,188
Treasury stock, at cost (38,193,749 and 32,566,736 shares)		(1,354,603	)		(1,164,214	)
Retained earnings		3,679,394			3,609,343
Accumulated other comprehensive income, net of deferred taxes		352,657			264,080
Total shareholders’ equity		3,565,710			3,568,590
Total liabilities and shareholders’ equity	$	5,745,359		$	5,327,190

See accompanying notes to consolidated financial statements.

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THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2007			2006
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	99,093		$	319,201
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in earnings from unconsolidated subsidiaries		(49,655	)		(91,404	)
Net realized investment gains		(2,386	)		(1,621	)
Depreciation and amortization		20,204			24,134
Deferred income taxes		(8,228	)		21,575
Compensation expense related to stock options and employee stock purchase plan		13,507			9,920
Excess tax benefits on the exercise of employee stock options		(4,001	)		(2,323	)
Policy acquisition costs incurred and deferred		(59,256	)		(47,942	)
Amortization of deferred policy acquisition costs		51,477			51,482
Net cost to exchange and extinguish long-term debt		—			875
Changes in:
Accrued investment income		(8,610	)		(1,738	)
Premiums receivable		(2,894	)		2,064
Reinsurance receivables, and prepaid premiums net of reinsurance payables		12,863			(4,540	)
Reinsurance recoverables		(1,006	)		(378	)
Prepaid income tax / income tax payable		(33,427	)		20,829
Reserve for losses and loss adjustment expenses		355,650			25,369
Unearned premiums		92,625			(1,061	)
Other		(44,564	)		(60,207	)
Net cash provided by operating activities		431,392			264,235
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of fixed income securities		231,492			487,887
Proceeds from sales of equity securities		81,475			49,186
Proceeds from sale of unconsolidated subsidiary		3,989			11,227
Investment purchases:
Fixed income securities		(762,472	)		(520,464	)
Equity securities		(162,776	)		(186,369	)
Net change in short-term investments		23,395			2,796
Distributions from unconsolidated subsidiaries, net of investments		22,763			18,339
Net change in related party receivables		(795	)		2,250
Capital expenditures and capitalized software, net of dispositions		(16,431	)		(14,427	)
Net cash used in investing activities		(579,360	)		(149,575	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of bridge loan		—			345,000
Issuance of long term debt, net of issuance costs		—			388,041
Net repurchase of senior notes		—			(299,280	)
Purchases of treasury stock		(214,996	)		(495,000	)
Proceeds from issuance of treasury stock for employee benefit plans		30,953			35,241
Excess tax benefits on the exercise of employee stock options		4,001			2,323
Dividends paid to common shareholders		(13,422	)		(13,471	)
Net cash used in financing activities		(193,464	)		(37,146	)
Foreign currency translation value increase		117,481			20,624
Net (decrease) increase in cash and cash equivalents		(223,951	)		98,138
Cash and cash equivalents at beginning of period		457,207			595,112
Cash and cash equivalents at end of period	$	233,256		$	693,250
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year:
Interest paid, net of capitalization	$	31,361		$	26,350
Income taxes paid, net of refunds	$	59,649		$	74,976

See accompanying notes to consolidated financial statements.

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THE PMI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1. BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of The PMI Group, Inc. (“The PMI Group” or “TPG”), a Delaware corporation and its direct and indirect wholly-owned subsidiaries, including: PMI Mortgage Insurance Co., an Arizona corporation, and its affiliated U.S. mortgage insurance and reinsurance companies (collectively “PMI”); PMI Mortgage Insurance Ltd and its holding company, PMI Mortgage Insurance Australia (Holdings) Pty Limited (collectively “PMI Australia”); PMI Mortgage Insurance Company Limited and its holding company, PMI Europe Holdings Limited, the Irish insurance companies (collectively “PMI Europe”); PMI Mortgage Insurance Asia Ltd. (“PMI Asia”); PMI Mortgage Insurance Company Canada and its holding company, PMI Mortgage Insurance Holdings Canada Inc. (collectively “PMI Canada”); PMI Guaranty Co. (“PMI Guaranty”); and other insurance, reinsurance and non-insurance subsidiaries. The PMI Group and its subsidiaries are collectively referred to as the “Company.” All material inter-company transactions and balances have been eliminated in the consolidated financial statements.

The Company has a 42.0% equity ownership interest in FGIC Corporation, the holding company of Financial Guaranty Insurance Company (collectively “FGIC”), a New York-domiciled financial guaranty insurance company. The Company also has equity ownership interests in CMG Mortgage Insurance Company, CMG Mortgage Reinsurance Company and CMG Mortgage Assurance Company (collectively “CMG MI”), which conduct residential mortgage insurance business for credit unions. The Company also has equity ownership interests in RAM Holdings Ltd., the holding company of RAM Reinsurance Company, Ltd. (collectively “RAM Re”), a financial guaranty reinsurance company based in Bermuda. The Company also has ownership interests in several limited partnerships. In addition, the Company owns 100% of PMI Capital I (“Issuer Trust”), an unconsolidated wholly-owned trust that privately issued debt in 1997.

On October 4, 2005, the Company sold to Credit Suisse First Boston (USA), Inc. (“CSFB”) its equity ownership interest in SPS Holding Corp. (“SPS”). The Company has received cash payments of $4.0 million during the first nine months of 2007 from the residual interest in SPS mortgage servicing assets. As of September 30, 2007, there was no remaining carrying value of this residual interest.

The Company’s unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and disclosure requirements for interim financial information and the requirements of Form 10-Q and Articles 7 and 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation, have been included. Interim results for the three months and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in The PMI Group’s annual report on Form 10-K for the year ended December 31, 2006.

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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 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 for the periods presented, have been included.

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 in shareholders’ 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 Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) 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 consolidated statement of operations.

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 stocks is recognized on the date of declaration. Net investment income represents interest and dividend income, net of investment expenses.

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.

Investments in Unconsolidated Subsidiaries — Investments in the Company’s unconsolidated subsidiaries include both equity investees and other unconsolidated subsidiaries. Investments in equity investees with ownership interests of 20-50% are generally accounted for using the equity method of accounting, and investments of less than 20% ownership interest are generally accounted for using the cost method of accounting if the Company does not have significant influence over the entity. Limited partnerships with ownership interests greater than 3% but less than 50% are primarily accounted for using the equity method of accounting. The Company reports the equity in earnings from FGIC and CMG MI on a current month basis, and RAM Re and the Company’s interest in limited partnerships on a one-quarter lag basis. The carrying value of the investments in the Company’s unconsolidated subsidiaries also includes the Company’s share of net unrealized gains and losses in the unconsolidated subsidiaries’ investment portfolios.

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Periodically, or as events dictate, the Company evaluates potential impairment of its investments in unconsolidated subsidiaries. Accounting Principles Board (“APB”) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, (“APB No. 18”), provides criteria for determining potential impairment. In the event a loss in value of an investment is determined to be an other-than-temporary decline, an impairment charge would be recognized in the consolidated statement of operations. Evidence of a loss in value that could indicate impairment might include, but would not necessarily be limited to, the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. Realized capital gains or losses resulting from the sale of the Company’s ownership interests of unconsolidated subsidiaries are recognized as net realized investment gains or losses in the consolidated statement of operations.

The SEC requires public companies to disclose condensed financial statement information for significant equity investees and other unconsolidated subsidiaries, individually or in the aggregate, if (i) the Company’s investments in and advances to the subsidiaries are in excess of 10% of the total consolidated assets of the Company, (ii) the Company’s proportionate share of unconsolidated subsidiaries’ total assets is in excess of 10% of total consolidated assets of the Company, or (iii) equity in income from continuing operations before income taxes, extraordinary items and the cumulative effect of a change in accounting principle of the unconsolidated subsidiaries is in excess of 10% of such income of the Company. Summarized financial statement information of FGIC and CMG MI is included in Note 5, Investments in Unconsolidated Subsidiaries.

Related Party Receivables — As of September 30, 2007 and December 31, 2006, related party receivables were $1.5 million and $0.7 million, respectively, which were comprised of non-trade receivables from unconsolidated subsidiaries.

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. To the extent the Company is compensated by customers for contract underwriting, those underwriting costs are not deferred. Costs related to the acquisition 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 estimated gross profits. Estimated gross profits are composed of earned premiums, interest income, losses and loss adjustment expenses as well as the amortization of deferred policy acquisition costs. The rate of amortization is not adjusted for monthly and annual policy cancellations unless it is determined that the policy cancellations are of such magnitude that impairment of the deferred costs is probable. 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.

Property, Equipment and Software — Property 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 three to thirty nine years. Leasehold improvements are recorded at

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cost and amortized over the lesser of the useful life of the assets or the remaining term of the related lease. The Company’s accumulated depreciation and amortization was $181.2 million and $156.9 million as of September 30, 2007 and December 31, 2006, respectively.

Under the provisions of Statement of Position 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 at such time as the software is ready for its intended use on a straight-line basis over the estimated useful life of the asset, which is generally three to seven years. The Company capitalized costs associated with software developed for internal use of $12.0 million for the nine months ended September 30, 2007 and 2006.

Derivatives — Certain credit default swap contracts entered into by PMI Europe are considered credit derivative contracts under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities. These credit default swaps derivatives are recorded at their fair value on the consolidated balance sheet with subsequent changes in fair value recorded in consolidated net income. The Company determines the fair values of its credit default swaps on a quarterly basis and uses internally developed models since market values are not available. These models include future estimated claim payments and market input assumptions including discount rates and market spreads to calculate a fair value and reflect management’s best judgment about current market conditions. Due to the illiquid nature of the credit default swap market, the use of available market data and assumptions used by management to estimate fair value could differ materially from amounts that would be realized in the market if the derivatives were traded. Due to the volatile nature of the credit market as well as the imprecision inherent in the Company’s fair value estimate, future valuations could differ materially from those reflected in the current period.

In 2007, the Company purchased foreign currency put options to partially mitigate the negative financial impact of a potential strengthening U.S. dollar relative to both the Australian dollar and the Euro. These Australian dollar and Euro put options expire ratably over the calendar year and had a combined cost of $1.3 million. In 2007, the Company recorded a realized loss of $1.3 million (pre-tax) in other income related to amortization of option costs and mark-to-market adjustments.

Special Purpose Entities — Certain insurance transactions entered into by PMI and PMI Europe require the use of foreign special purpose wholly-owned subsidiaries principally for regulatory purposes. These special purpose entities are consolidated in the Company’s consolidated financial statements.

Reserve for Losses and Loss Adjustment Expenses — The consolidated reserves for losses and loss adjustment expenses (“LAE”) for the Company’s U.S. Mortgage Insurance and International Operations are 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. 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. The Company’s U.S. mortgage insurance primary master policy defines “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 policy requires an insured to notify PMI of a default no later than the last business day of the month following the month in which the

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borrower becomes three monthly payments in default. SFAS No. 60 specifically excludes mortgage guaranty insurance from its guidance relating to reserves for losses and LAE. Consistent with industry accounting practices, the Company considers its mortgage insurance policies 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 estimated claim rates and claim amounts for each report year, net of salvage recoverable. The Company also establishes loss reserves for defaults that it believes have been incurred but not yet 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 the current period’s consolidated results of operations.

Reinsurance — The Company uses reinsurance to reduce net risk in force, optimize capital allocation and comply with a statutory provision adopted by several states that limits the maximum mortgage insurance coverage to 25% for any single risk. The Company’s reinsurance agreements typically provide for a recovery of a proportionate level of claim expenses from reinsurers, and a reinsurance receivable is recorded as an asset. The Company remains liable to its policyholders if the reinsurers are unable to satisfy their obligations under the agreements. Reinsurance recoverables on 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 accounting guidance provided in SFAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. Accordingly, management assesses, among other factors, risk transfer criteria for all reinsurance arrangements.

Revenue Recognition — Mortgage guaranty insurance policies are contracts that are generally non-cancelable by the insurer, are renewable at a fixed price, and provide payment of premiums on a monthly, annual or single basis. Upon renewal, the Company is not able to re-underwrite or re-price its policies. SFAS No. 60 specifically excludes mortgage guaranty insurance from its guidance relating to the earning of insurance premiums. Consistent with industry accounting practices, premiums written on a monthly basis are earned as coverage is provided. Monthly premiums accounted for 64.8% and 65.7% of gross premiums written from the Company’s mortgage insurance operations in the three and nine months ended September 30, 2007, respectively, and 70.3% and 71.6% in the three and nine months ended September 30, 2006, respectively. Premiums written on an annual basis are amortized on a monthly pro rata basis over the year of coverage. Primary mortgage insurance premiums written on policies covering more than one year are referred to as single premiums. A portion of the revenue from 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 seven to fifteen years. If single premium policies related to insured loans are cancelled due to repayment by the borrower, and the premium is non-refundable, then the remaining unearned premium related to each cancelled policy is recognized as 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 actuarial analysis of the expiration of risk. The premiums earnings pattern calculation methodology 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 these estimates are reflected for each Book Year as appropriate.

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Income Taxes — 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 statement of operations. The Company’s effective tax rates were 46.7% and (31.3)% for the three and nine months ended September 30, 2007, respectively, compared to the federal statutory rate of 35.0%. The effective tax rate for the three months ended September 30, 2007 reflects the loss we incurred for the period (including the impact of our equity in losses incurred by FGIC); for the nine months ended September 30, 2007, the effective tax rate reflects our equity in earnings from FGIC and income derived from certain international operations, which have lower effective tax rates, combined with the Company’s municipal bond investment income. The Company records a federal tax expense relating to its proportionate share of net income available to FGIC Corporation’s common shareholders at a rate of 7% based on its assessment that it will ultimately receive those earnings in the form of dividends.

As of January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”). See Note 11, Income Taxes, for further discussion.

Benefit Plans — The Company provides pension benefits to all eligible U.S. employees under The PMI Group, Inc. Retirement Plan (the “Retirement Plan”), and to certain employees of the Company under The PMI Group, Inc. Supplemental Employee Retirement Plan. In addition, the Company provides certain health care and life insurance benefits for retired employees under another post-employment benefit plan. On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (“SFAS No. 158”). SFAS No. 158 requires the Company to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its defined benefit postretirement plans, with a corresponding adjustment to accumulated other comprehensive income.

On May 17, 2007, The PMI Group’s Board of Directors approved an amendment to the Retirement Plan. The amendment changed the Plan’s benefit formula from a “final pay” pension formula to a cash balance formula. The amendment takes effect immediately for employees hired or rehired on or after September 1, 2007. For employees hired before and continuously employed on September 1, 2007, the amendment will take effect on January 1, 2011. Under the new cash balance plan formula, the Company will contribute 8% of qualified employees’ compensation to cash balance accounts and credit interest at a rate equal to the 30-year Treasury Bond rate.

All U.S. full-time, part-time and certain temporary employees of the Company are eligible to participate in The PMI Group, Inc. Savings and Profit-Sharing Plan (“401(k) Plan”). Eligible employees who participate in the 401(k) Plan may receive, within certain limits, matching Company contributions. Contract underwriters are covered under The PMI Group, Inc. Alternate 401(k) Plan, under which there are no matching Company contributions. In addition to the 401(k) Plan, the Company has an officers’ deferred compensation plan (“ODCP”) available to certain

11

employees, and an Employee Stock Purchase Plan (“ESPP”). The ODCP is available to certain of the Company’s officers, and permits each participant to elect to defer receipt of part or all of his or her eligible compensation on a pre-tax basis. Under the ODCP, the Company makes a matching contribution of its common shares for each participant equal to 25% of the initial contribution to the extent the participant selects the Company’s common shares from the investment choices available under the ODCP. These matching contributions are subject to a three year vesting period. The ESPP allows eligible employees to purchase shares of the Company’s stock 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.

Foreign Currency Translation — The financial statements of the Company’s foreign subsidiaries have been translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency Translation. Assets and liabilities denominated in non-U.S. dollar functional currencies are translated using the period-end spot exchange rates. Revenues and expenses are translated at monthly-average exchange rates. The effects of translating operations with a functional currency other than the reporting currency are reported as a component of accumulated other comprehensive income included in total shareholders’ equity. Gains and losses on foreign currency re-measurement incurred by PMI Australia, PMI Europe, PMI Asia and PMI Canada represent the revaluation of assets and liabilities denominated in non-functional currencies into the functional currency, the Australian dollar, the Euro, the Hong Kong dollar and the Canadian dollar, respectively.

Comprehensive Income — Comprehensive income includes net income, the change in foreign currency translation gains or losses, changes in unrealized gains and losses on investments and from derivatives designated as cash flow hedges, and reclassification of realized gains and losses previously reported in comprehensive income, net of related tax effects.

Business Segments — The Company’s reportable operating segments are U.S. Mortgage Insurance Operations, International Operations, Financial Guaranty, and Corporate and Other. U.S. Mortgage Insurance Operations includes the results of operations of PMI Mortgage Insurance Co., affiliated U.S. insurance and reinsurance companies and the equity in earnings from CMG MI. International Operations includes the results of operations of PMI Australia, PMI Europe, PMI Asia, and PMI Canada. Financial Guaranty includes the equity in earnings from FGIC and RAM Re, and the financial results of PMI Guaranty. The Company’s Corporate and Other segment mainly consists of our holding company and contract underwriting operations.

Earnings Per Share — Basic earnings per share (“EPS”) excludes dilution and is based on consolidated net income available to common shareholders and the actual weighted-average common shares that are outstanding during the period. Diluted EPS is based on consolidated net income available to common shareholders, adjusted for the effects of dilutive securities, and the weighted-average dilutive common shares outstanding during the period. The weighted-average dilutive common shares reflect the potential increase of common shares if contracts to issue common shares, including stock options issued by the Company that have a dilutive impact, were exercised, or if outstanding securities were converted into common shares. Due to the net loss in this quarter, normally dilutive components of shares outstanding such as stock options were not included in fully diluted shares outstanding as their inclusion would have been anti-dilutive.

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The following is a reconciliation of consolidated net income to net income for purposes of calculating diluted EPS for the periods set forth below:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007			2006		2007		2006
	(Dollars in thousands)
Net (loss) income:
As reported	$	(86,773	)	$	104,238	$	99,093	$	319,201
Interest on contingently convertible debt (“CoCo’s”), net of taxes		—			799		—		3,513
Net (loss) income adjusted for diluted EPS calculation	$	(86,773	)	$	105,037	$	99,093	$	322,714

The following is a reconciliation of the weighted-average common shares used to calculate basic EPS to the weighted-average common shares used to calculate diluted EPS for the periods set forth below:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007			2006		2007		2006
	(Shares in thousands)
Weighted-average shares for basic EPS		83,747			85,319		85,833		87,557
Weighted-average stock options and other dilutive components		—			1,029		881		1,125
Weighted-average dilutive components of CoCo’s		—			4,453		—		6,906
Weighted-average shares for diluted EPS		83,747			90,801		86,714		95,588
Basic EPS	$	(1.04	)	$	1.22	$	1.15	$	3.65
Diluted EPS	$	(1.04	)	$	1.16	$	1.14	$	3.38
Dividends per share declared and accrued to common shareholders	$	0.0525		$	0.0525	$	0.1575	$	0.1575

Share-Based Compensation — The Company applies SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”) for share-based payment transactions. SFAS No. 123R requires that such transactions be accounted for using a fair value-based method and recognized as expense in the consolidated results of operations. For share-based payments granted and unvested upon the adoption of SFAS No. 123R, the Company recognizes the fair value of share-based payments, including employee stock options and employee stock purchase plan shares, granted to employees as compensation expense in the consolidated results of operations.

Reclassifications — Certain items in the prior corresponding period’s consolidated financial statements have been reclassified to conform to the current period’s consolidated financial statement presentation.

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NOTE 3. NEW ACCOUNTING STANDARDS

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FASB Statements No. 157, Fair Value Measurements (“SFAS No. 157”), and No. 107, Disclosures about Fair Value of Financial Instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is still evaluating the impact of SFAS No. 159 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements but does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS No. 157 is not currently expected to materially impact the Company’s consolidated financial condition or results of operations.

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 tables below:

	Cost or Amortized Cost		Gross Unrealized					Fair Value
			Gains		(Losses)
			(Dollars in thousands)
As of September 30, 2007
Total fixed income securities	$	3,274,478	$	78,660	$	(42,953	)	$	3,310,185
Equity securities:
Common stocks		126,207		54,868		(687	)		180,388
Preferred stocks		314,048		3,137		(5,979	)		311,206
Total equity securities		440,255		58,005		(6,666	)		491,594
Short-term investments		31,663		—		(2	)		31,661
Total investments	$	3,746,396	$	136,665	$	(49,621	)	$	3,833,440

	Cost or Amortized Cost		Gross Unrealized					Fair Value
			Gains		(Losses)
			(Dollars in thousands)
As of December 31, 2006
Total fixed income securities	$	2,738,086	$	103,477	$	(14,710	)	$	2,826,853
Equity securities:
Common stocks		117,383		45,175		(295	)		162,263
Preferred stocks		240,397		8,419		(55	)		248,761
Total equity securities		357,780		53,594		(350	)		411,024
Short-term investments		55,046		10		—			55,056
Total investments	$	3,150,912	$	157,081	$	(15,060	)	$	3,292,933

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Net Investment Income — Net investment income consists of the following for the three and nine months ended:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Dollars in thousands)						(Dollars in thousands)
Fixed income securities	$	45,348		$	38,163		$	126,773		$	114,129
Equity securities		6,456			3,899			16,007			9,867
Short-term investments		4,418			8,323			18,878			23,692
Investment income before expenses		56,222			50,385			161,658			147,688
Investment expenses		(814	)		(705	)		(2,492	)		(2,127	)
Net investment income	$	55,408		$	49,680		$	159,166		$	145,561

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 the individual securities have been in a continuous unrealized loss position as of September 30, 2007:

	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
Fixed income securities:
U.S. municipal bonds	$	258,307	$	(3,538	)	$	—	$	—		$	258,307	$	(3,538	)
Foreign governments		312,697		(8,456	)		245,458		(8,336	)		558,155		(16,792	)
Corporate bonds		487,484		(11,407	)		298,948		(11,214	)		786,432		(22,621	)
U.S. government and agencies		—		—			243		(2	)		243		(2	)
Total fixed income securities		1,058,488		(23,401	)		544,649		(19,552	)		1,603,137		(42,953	)
Equity securities:
Common stocks		15,040		(687	)		—		—			15,040		(687	)
Preferred stocks		184,391		(5,979	)		—		—			184,391		(5,979	)
Total equity securities		199,431		(6,666	)		—		—			199,431		(6,666	)
Short-term investments		1,413		(2	)		—		—			1,413		(2	)
Total	$	1,259,332	$	(30,069	)	$	544,649	$	(19,552	)	$	1,803,981	$	(49,621	)

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Unrealized losses on fixed income securities were primarily due to an increase in interest rates in 2007 and are not considered to be other-than-temporarily impaired as the Company has the intent and ability to hold such investments until they recover in value or mature. The Company determined that the decline in the market value of certain investments met the definition of other-than-temporary impairment and recognized realized losses of $1.9 million and $3.2 million in the third quarter and first nine months of 2007, respectively, compared to $5.2 million and $5.4 million for the corresponding periods in 2006.

NOTE 5. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

Investments in the Company’s unconsolidated subsidiaries include both equity investees and other unconsolidated subsidiaries. The carrying values of the Company’s investments in unconsolidated subsidiaries consisted of the following as of September 30, 2007 and December 31, 2006:

	September 30, 2007		Ownership Percentage		December 31, 2006		Ownership Percentage
	(Dollars in thousands)
FGIC	$	884,009	42.0	%	$	856,519	42.0	%
CMG MI		127,206	50.0	%		132,403	50.0	%
RAM Re		100,408	23.7	%		93,730	23.7	%
Other		15,158	various			17,735	various
Total	$	1,126,781			$	1,100,387

As of September 30, 2007, the carrying value of the Company’s investment in FGIC was $884.0 million, which included $617.0 million of cash and capitalized acquisition costs, with the balance representing equity in earnings and the Company’s proportionate share of FGIC’s net unrealized gains (losses) in its investment portfolio.

Equity in earnings (losses) from unconsolidated subsidiaries consisted of the following for the periods presented below:

	Three Months Ended September 30,										Nine Months Ended September 30,
	2007			Ownership Percentage		2006			Ownership Percentage		2007		Ownership Percentage		2006			Ownership Percentage
	(Dollars in thousands)										(Dollars in thousands)
FGIC	$	(28,902	)	42.0	%	$	23,667		42.0	%	$	27,872	42.0	%	$	70,461		42.0	%
CMG		4,167		50.0	%		5,010		50.0	%		13,645	50.0	%		15,231		50.0	%
RAM Re		2,161		23.7	%		2,882		23.7	%		7,932	23.7	%		5,800		23.7	%
Other		(28	)	various			(68	)	various			206	various			(88	)	various
Total	$	(22,602	)			$	31,491				$	49,655			$	91,404

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FGIC’s condensed balance sheets as of September 30, 2007 and December 31, 2006, and condensed statements of operations for the three and nine months ended September 30, 2007 and 2006 are as follows:

	September 30, 2007		December 31, 2006
	(Dollars in thousands)
Condensed Balance Sheets
Assets:
Investments, available for sale, at fair value	$	4,067,775	$	3,867,039
Variable interest entity fixed maturity securities, held to maturity, at amortized cost		750,000		750,000
Cash and cash equivalents		71,870		33,278
Accrued investment income		55,753		50,214
Policy acquisition costs deferred, net		113,439		93,170
Accounts receivable and other assets		296,143		219,531
Total assets	$	5,354,980	$	5,013,232
Liabilities:
Reserve for losses and loss adjustment expenses	$	40,239	$	40,299
Unearned premiums		1,442,018		1,347,592
Accounts payable and other liabilities		358,483		198,008
Variable interest entity floating rate notes		750,000		750,000
Debt		323,390		323,373
Total liabilities		2,914,130		2,659,272
Shareholders’ equity		2,440,850		2,353,960
Total liabilities and shareholders’ equity	$	5,354,980	$	5,013,232

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Dollars in thousands)
Condensed Statements of Operations
Gross revenues	$	(80,233	)	$	110,533		$	159,300		$	323,657
Total expenses		34,416			31,528			101,405			88,682
(Loss) income before income taxes		(114,649	)		79,005			57,895			234,975
Income tax (benefit) expense		(49,354	)		19,413			(19,107	)		57,479
Net (loss) income		(65,295	)		59,592			77,002			177,496
Preferred stock dividends		(4,854	)		(4,543	)		(14,566	)		(13,627	)
Net (loss) income available to common shareholders		(70,149	)		55,049			62,436			163,869
TPG’s ownership interest in common equity		42.0	%		42.0	%		42.0	%		42.0	%
TPG’s proportionate share of net (loss) income available to common stockholders		(29,454	)		23,113			26,216			68,804
TPG’s proportionate share of management fees and other		552			554			1,656			1,657
Total equity in (losses) earnings from FGIC	$	(28,902	)	$	23,667		$	27,872		$	70,461

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CMG MI’s condensed balance sheets as of September 30, 2007 and December 31, 2006, and condensed statements of operations for the three and nine months ended September 30, 2007 and 2006 are as follows:

	September 30,		December 31,
	2007		2006
	(Dollars in thousands)
Condensed Balance Sheets
Assets:
Cash and Investments, at fair value	$	277,600	$	282,600
Deferred policy acquisition costs		9,244		8,047
Other assets		15,979		14,572
Total assets	$	302,823	$	305,219
Liabilities:
Reserve for losses and loss adjustment expenses	$	21,416	$	13,741
Unearned premiums		23,480		24,334
Other liabilities		10,223		9,045
Total liabilities		55,119		47,120
Shareholders’ equity		247,704		258,099
Total liabilities and shareholders’ equity	$	302,823	$	305,219

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Dollars in thousands)
Condensed Statements of Operations
Gross revenues	$	23,867		$	20,572		$	68,131		$	59,704
Total expenses		11,854			6,217			29,240			16,243
Income before income taxes		12,013			14,355			38,891			43,461
Income tax expense		3,680			4,335			11,602			12,999
Net income		8,333			10,020			27,289			30,462
PMI’s ownership interest in common equity		50.0	%		50.0	%		50.0	%		50.0	%
Total equity in earnings from CMG MI	$	4,167		$	5,010		$	13,645		$	15,231

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NOTE 6. DEFERRED POLICY ACQUISITION COSTS

The following table summarizes deferred policy acquisition cost activity as of and for the three months and nine months ended September 30, 2007 and 2006:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Dollars in thousands)
Beginning balance	$	93,178		$	83,666		$	87,008		$	86,170
Policy acquisition costs incurred and deferred		19,631			15,899			59,256			48,523
Amortization of deferred policy acquisition costs		(18,022	)		(16,935	)		(51,477	)		(52,063	)
Ending balance	$	94,787		$	82,630		$	94,787		$	82,630

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

NOTE 7. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE)

The Company establishes reserves for losses and LAE to recognize the estimated liability for potential losses and LAE related to insured mortgages that are in default. The establishment of a loss reserve is subject to inherent uncertainty and requires significant judgment by management. The following table provides a reconciliation of the beginning and ending consolidated reserves for losses and LAE between January 1 and September 30, 2007 and 2006:

	2007			2006
	(Dollars in thousands)
Balance at January 1,	$	414,736		$	368,841
Less: reinsurance recoverables		(3,741	)		(3,278	)
Net balance at January 1,		410,995			365,563
Losses and LAE incurred, principally with respect to defaults occurring in:
Current year		453,714			204,690
Prior years (1)		174,610			7,713
Total incurred		628,324			212,403
Losses and LAE payments, principally with respect to defaults occurring in:
Current year		(14,112	)		(7,943	)
Prior years		(266,170	)		(180,445	)
Total payments		(280,282	)		(188,388	)
Foreign currency translation effects		6,602			976
Net ending balance at September 30,		765,639			390,554
Reinsurance recoverables		4,747			3,656
Balance at September 30,	$	770,386		$	394,210

⁽¹⁾ The $174.6 million increase and $7.7 million increase in total losses and LAE incurred in prior years were due to re-estimates of ultimate loss rates and amounts from those established at the original notice of default, updated through the periods presented. These re-estimates of ultimate loss rates and amounts are the result of management’s periodic review of estimated claim amounts in light of actual claim amounts, loss development data or ultimate claim rates. The increase in prior years’ reserves in 2007 was primarily due to increases in estimated claim rates and claim sizes.

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The increase in total consolidated loss reserves at September 30, 2007 compared to September 30, 2006 was primarily due to increases in the reserve balances for U.S. Mortgage Insurance Operations as a result of increase in default inventory, higher claim rates and higher average claim sizes. Upon receipt of a default notice, future claim payments are estimated relating to those delinquent loans and a reserve is recorded. Generally, it takes approximately 12 to 36 months from the receipt of a default notice to result in a claim payment. Accordingly, most losses paid relate to default notices received in prior years.

NOTE 8. COMMITMENTS AND CONTINGENCIES

Indemnification — mortgage-backed securities — In connection with structured transactions in the U.S., Europe and Australia, the Company is often required to provide narrative and/or financial information relating to the Company and its subsidiaries to mortgage-backed securities issuers for inclusion in the relevant offering documents and the issuers’ ongoing SEC filings. In connection with the provision of such information, the Company and its subsidiaries may be required to indemnify the issuer of the mortgage-backed securities and the underwriters of the offering with respect to the information’s accuracy and completeness and its compliance with applicable securities laws and regulations.

Indemnification — SPS — As part of the sale of the Company’s interest in SPS in 2005, the Company and SPS’s other prior shareholders have indemnified CSFB for certain liabilities relating to SPS’s operations, including litigation and regulatory actions, and this indemnification obligation may potentially reduce the monthly proceeds that the Company receives post sale. The maximum indemnification obligation for SPS’s operations is $33.7 million. The Company’s portion of this obligation is 61.4% or $20.7 million. As of September 30, 2007, the Company recorded a liability of $6.4 million with respect to this indemnification obligation.

Guarantees — The PMI Group has guaranteed certain payments to the holders of the privately issued debt securities (“Capital Securities”) issued by PMI Capital I. Payments with respect to any accrued and unpaid distributions payable, the redemption amount of any Capital Securities that are called and amounts due upon an involuntary or voluntary termination, winding up or liquidation of the Issuer Trust are subject to the guarantee. In addition, the guarantee is irrevocable, is an unsecured obligation of the Company and is subordinate and junior in right of payment to all senior debt of the Company.

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Funding Obligations — The Company has invested in certain limited partnerships with ownership interests greater than 3% but less than 50%. As of September 30, 2007, the Company had committed to fund, if called upon to do so, $6.7 million of additional equity in certain limited partnership investments.

Legal Proceedings — Various legal actions and regulatory reviews 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 9. COMPREHENSIVE INCOME

The components of comprehensive income for the three months and nine months ended September 30, 2007 and 2006 are shown in the table below.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Dollars in thousands)
Net (loss) income	$	(86,773	)	$	104,238		$	99,093		$	319,201
Other comprehensive income (loss), net of deferred taxes:
Total change in unrealized gains/losses during the period		15,472			61,687			(37,659	)		(813	)
Less: realized investment gains, net of income taxes		(256	)		(472	)		(1,551	)		(1,055	)
Change in unrealized gains/losses arising during the period, net of deferred tax expenses (benefits) of $8,355, $31,157, $(16,184) and $1,889, respectively		15,216			61,215			(39,210	)		(1,868	)
Net unrealized losses from derivatives designated as cash flow hedges, net of deferred tax benefits		—			(9,427	)		—			(5,864	)
Accretion of cash flow hedges, net of deferred tax expenses		98			17			296			17
Change in foreign currency translation gains		53,064			1,129			117,481			20,624
Other comprehensive income, net of deferred tax benefits		68,378			52,934			78,567			12,909
Comprehensive (loss) income	$	(18,395	)	$	157,172		$	177,660		$	332,110

The changes in unrealized gains in 2007 were primarily due to increases in fixed income security interest rates, which caused market value declines relative to the consolidated fixed income portfolio as well as the Company’s share of unrealized losses arising in the Company’s unconsolidated subsidiaries’ investment portfolios. The changes in foreign currency translation gains for 2007 were due primarily to strengthening of the Australian dollar and Euro spot exchange rate relative to the U.S. dollar.

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NOTE 10. BENEFIT PLANS

The following table provides the components of net periodic benefit cost for the pension and other post-retirement benefit plans:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Dollars in thousands)
Pension benefits
Service cost	$	1,345		$	2,438		$	6,401		$	7,532
Interest cost		908			1,496			3,993			4,349
Expected return on plan assets		(1,364	)		(1,437	)		(5,205	)		(4,137	)
Amortization of prior service cost		(357	)		(6	)		(588	)		(15	)
Recognized net actuarial loss		88			348			348			821
Net periodic benefit cost	$	620		$	2,839		$	4,949		$	8,550
	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Dollars in thousands)
Other post-retirement benefits
Service cost	$	125		$	161		$	375		$	484
Interest cost		155			138			465			415
Amortization of prior service cost		(200	)		(184	)		(600	)		(553	)
Recognized net actuarial loss		95			69			285			207
Net periodic post-retirement benefit cost	$	175		$	184		$	525		$	553

In 2007, the Company contributed approximately $10 million to its Retirement Plan. The Company currently does not expect to make additional contributions to its Retirement Plan in 2007. The benefit costs for the three months and nine months ended September 30, 2007 decreased from the corresponding periods in 2006 primarily due to the amendment to the Retirement Plan in May 2007 (discussed in Note 2).

The amendment also reduced the Plan’s projected benefit obligation by $11.8 million and the reduction was recorded as an adjustment to accumulated other comprehensive income on the Company’s consolidated balance sheet. The adjustment will be amortized through other underwriting and operating expenses over time.

NOTE 11. INCOME TAXES

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized an approximately $15.6 million increase in deferred tax liabilities, which was accounted for as a reduction to the January 1, 2007 balance of consolidated retained earnings. This liability was accrued upon adoption of FIN 48 and after consideration of certain 2004 California legislation relating to the taxation of insurance companies that could impact the Company’s future tax payments. Additionally, the Company has unrecognized tax benefits of approximately $2.7 million as of September 30, 2007 which if recognized, would affect the Company’s future effective tax rate. Of this total, approximately $2.5 million had been accrued as of December 31, 2006, and an additional $0.2 million has been accrued in 2007.

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When incurred, the Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company incurred interest and penalties of approximately $0.1 million in 2007. The Company remains subject to examination in the following major tax jurisdictions: in the United States from 2001 to present, in California from 2003 to present, in Australia from 2001 to present, in Ireland from 2005 to present, in Canada from 2006 to present, and in Hong Kong from 2006 to present.

NOTE 12. 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 three and nine months ended:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Dollars in thousands)
Premiums written
Direct	$	319,417		$	245,764		$	893,464		$	725,633
Assumed		8,770			10,478			25,781			30,843
Ceded		(51,464	)		(43,816	)		(142,494	)		(130,331	)
Net premiums written	$	276,723		$	212,426		$	776,751		$	626,145
Premiums earned
Direct	$	295,910		$	246,371		$	851,674		$	728,930
Assumed		12,390			12,467			25,748			36,175
Ceded		(51,466	)		(43,935	)		(141,890	)		(130,318	)
Net premiums earned	$	256,834		$	214,903		$	735,532		$	634,787
Losses and loss adjustment expenses
Direct	$	374,523		$	80,139		$	629,851		$	212,971
Assumed		(10	)		25			387			556
Ceded		(1,669	)		(561	)		(1,914	)		(1,124	)
Net losses and loss adjustment expenses	$	372,844		$	79,603		$	628,324		$	212,403

The majority of the Company’s existing reinsurance contracts are captive reinsurance agreements in U.S. Mortgage Insurance Operations. Under captive reinsurance agreements, a portion of the risk insured by PMI is reinsured with the mortgage originator or investor through a reinsurer that is affiliated with the mortgage originator or investor. Reinsurance recoverables on losses incurred in U.S. Mortgage Insurance Operations were $3.8 million at September 30, 2007 and $2.8 million as of December 31, 2006.

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NOTE 13. BUSINESS SEGMENTS

Reporting segments are based upon our internal organizational structure, the manner in which the Company’s operations are managed, the criteria used by our chief operating decision-maker to evaluate segment performance, the availability of separate financial information, and overall materiality considerations.

The following tables present segment income or loss and balance sheets as of and for the periods indicated:

	Three Months Ended September 30, 2007
	U.S. Mortgage Insurance Operations			International Operations			Financial Guaranty			Corporate and Other			Consolidated Total
	(Dollars in thousands)
Revenues:
Premiums earned	$	205,539		$	50,839		$	438		$	18		$	256,834
Net loss from credit default swaps		—			(8,371	)		—			—			(8,371	)
Net investment income		28,786			22,366			2,321			1,935			55,408
Equity in earnings (losses) from unconsolidated subsidiaries		4,167			—			(26,741	)		(28	)		(22,602	)
Net realized investment gains (losses)		2,865			(231	)		(354	)		(1,886	)		394
Other income		167			577			—			4,563			5,307
Total revenues		241,524			65,180			(24,336	)		4,602			286,970
Losses and expenses:
Losses and loss adjustment expenses (“LAE”)		348,314			24,530			—			—			372,844
Amortization of deferred policy acquisition costs		12,809			4,939			274			—			18,022
Other underwriting and operating expenses		18,420			14,740			507			16,918			50,585
Interest expense		36			—			731			7,591			8,358
Total losses and expenses		379,579			44,209			1,512			24,509			449,809
(Loss) income before income taxes		(138,055	)		20,971			(25,848	)		(19,907	)		(162,839	)
Income tax (benefit) expense		(72,833	)		7,092			(1,456	)		(8,869	)		(76,066	)
Net (loss) income	$	(65,222	)	$	13,879		$	(24,392	)	$	(11,038	)	$	(86,773	)

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	Three Months Ended September 30, 2006
	U.S. Mortgage Insurance Operations			International Operations			Financial Guaranty			Corporate and Other			Consolidated Total
	(Dollars in thousands)
Revenues:
Premiums earned	$	168,118		$	46,766		$	—		$	19		$	214,903
Income from credit default swaps		—			978			—			—			978
Net investment income (loss)		27,082			17,442			(1	)		5,157			49,680
Equity in earnings (losses) from unconsolidated subsidiaries		5,010			—			26,549			(68	)		31,491
Net realized investment gains (losses)		1,620			3,452			—			(4,346	)		726
Other (loss) income		(22	)		(40	)		—			3,204			3,142
Total revenues		201,808			68,598			26,548			3,966			300,920
Losses and expenses:
Losses and LAE		67,699			11,907			—			(3	)		79,603
Amortization of deferred policy acquisition costs		12,830			4,105			—			—			16,935
Other underwriting and operating expenses		22,619			10,971			—			22,359			55,949
Interest expense		1			124			—			9,361			9,486
Total losses and expenses		103,149			27,107			—			31,717			161,973
Income (loss) before income taxes		98,659			41,491			26,548			(27,751	)		138,947
Income tax expense (benefit)		27,819			12,048			2,820			(7,978	)		34,709
Net income (loss)	$	70,840		$	29,443		$	23,728		$	(19,773	)	$	104,238

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	Nine Months Ended September 30, 2007
	U.S. Mortgage Insurance Operations			International Operations			Financial Guaranty			Corporate and Other			Consolidated Total
	(Dollars in thousands)
Revenues:
Premiums earned	$	594,683		$	139,605		$	1,197		$	47		$	735,532
Net loss from credit default swaps		—			(4,964	)		—			—			(4,964	)
Net investment income		83,074			62,111			6,956			7,025			159,166
Equity in earnings from unconsolidated subsidiaries		13,645			—			35,804			206			49,655
Net realized investment gains (losses)		6,113			(141	)		(354	)		(3,232	)		2,386
Other income		171			352			—			11,038			11,561
Total revenues		697,686			196,963			43,603			15,084			953,336
Losses and expenses:
Losses and LAE		575,482			52,842			—			—			628,324
Amortization of deferred policy acquisition costs		38,001			12,831			645			—			51,477
Other underwriting and operating expenses		72,840			37,970			1,393			60,856			173,059
Interest expense		75			6			2,194			22,740			25,015
Total losses and expenses		686,398			103,649			4,232			83,596			877,875
Income (loss) before income taxes		11,288			93,314			39,371			(68,512	)		75,461
Income tax (benefit) expense		(33,913	)		28,212			4,885			(22,816	)		(23,632	)
Net income (loss)	$	45,201		$	65,102		$	34,486		$	(45,696	)	$	99,093

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	Nine Months Ended September 30, 2006
	U.S. Mortgage Insurance Operations			International Operations			Financial Guaranty		Corporate and Other			Consolidated Total
	(Dollars in thousands)
Revenues:
Premiums earned	$	503,482		$	131,252		$	—	$	53		$	634,787
Income from credit default swaps		—			4,744			—		—			4,744
Net investment income		79,823			47,852			1		17,885			145,561
Equity in earnings (losses) from unconsolidated subsidiaries		15,231			—			76,260		(87	)		91,404
Net realized investment gains (losses)		2,162			3,846			—		(4,387	)		1,621
Other (loss) income		(38	)		(559	)		—		10,696			10,099
Total revenues		600,660			187,135			76,261		24,160			888,216
Losses and expenses:
Losses and LAE		190,999			21,407			—		(3	)		212,403
Amortization of deferred policy acquisition costs		39,434			12,629			—		—			52,063
Other underwriting and operating expenses		73,455			30,873			—		64,666			168,994
Interest expense		2			124			—		25,606			25,732
Total losses and expenses		303,890			65,033			—		90,269			459,192
Income (loss) before income taxes		296,770			122,102			76,261		(66,109	)		429,024
Income tax expense (benefit)		83,660			38,554			7,426		(19,817	)		109,823
Net income (loss)	$	213,110		$	83,548		$	68,835	$	(46,292	)	$	319,201

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	September 30, 2007 (Unaudited)
	U.S. Mortgage Insurance Operations		International Operations		Financial Guaranty		Corporate and Other			Consolidated Total
	(Dollars in thousands)
Assets:
Cash and investments, at fair value	$	2,078,322	$	1,681,609	$	205,766	$	100,999		$	4,066,696
Investments in unconsolidated subsidiaries		127,206		—		984,417		15,158			1,126,781
Property, equipment and software, net of accumulated depreciation and amortization		80,170		6,400		131		79,594			166,295
Other assets		234,041		103,905		7,740		39,901			385,587
Total assets	$	2,519,739	$	1,791,914	$	1,198,054	$	235,652		$	5,745,359
Liabilities:
Reserve for losses and loss adjustment expenses	$	698,238	$	72,148	$	—	$	—		$	770,386
Unearned premiums		112,634		493,486		6,748		21			612,889
Long-term debt		—		—		50,000		446,593			496,593
Other liabilities (assets)		205,749		72,522		37,766		(16,256	)		299,781
Total liabilities		1,016,621		638,156		94,514		430,358			2,179,649
Shareholders’ equity (deficit)		1,503,118		1,153,758		1,103,540		(194,706	)		3,565,710
Total liabilities and shareholders’ equity	$	2,519,739	$	1,791,914	$	1,198,054	$	235,652		$	5,745,359

	December 31, 2006
	U.S. Mortgage Insurance Operations		International Operations		Financial Guaranty		Corporate and Other			Consolidated Total
	(Dollars in thousands)
Assets:
Cash and investments, at fair value	$	1,990,326	$	1,349,069	$	210,277	$	200,468		$	3,750,140
Investments in unconsolidated subsidiaries		132,403		—		950,249		17,735			1,100,387
Property, equipment and software, net of accumulated depreciation and amortization		87,139		4,002		—		82,987			174,128
Other assets		185,820		88,562		4,292		23,861			302,535
Total assets	$	2,395,688	$	1,441,633	$	1,164,818	$	325,051		$	5,327,190
Liabilities:
Reserve for losses and loss adjustment expenses	$	366,182	$	48,554	$	—	$	—		$	414,736
Unearned premiums		106,445		412,196		1,589		34			520,264
Long-term debt		—		—		50,000		446,593			496,593
Other liabilities (assets)		283,544		67,645		41,440		(65,622	)		327,007
Total liabilities		756,171		528,395		93,029		381,005			1,758,600
Shareholders’ equity (deficit)		1,639,517		913,238		1,071,789		(55,954	)		3,568,590
Total liabilities and shareholders’ equity	$	2,395,688	$	1,441,633	$	1,164,818	$	325,051		$	5,327,190

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT

Statements in this report that are not historical facts, or that are preceded by, followed by or include the words “believes,” “expects,” “anticipates,” “estimates” or similar expressions, and that relate to future plans, events or performance are “forward-looking” statements within the meaning of the federal securities laws. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors are described in more detail under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006. All forward-looking statements are qualified by and should be read in conjunction with those risk factors, our consolidated financial statements, related notes and other financial information. Such uncertainties and other factors include, but are not limited to, the following:

• changes in economic conditions and factors, including, but not limited to: economic recessions or slowdowns; changes in interest rates, consumer confidence, housing demand, housing values, foreclosures, liquidity in the capital markets, unemployment rates, consumer and borrower credit and levels of refinancing activity, especially in regions where our risk is more concentrated (e.g., California and Florida); or developments in the financial and equity markets, including changes in interest rates and foreign currency exchange rates, which could affect our investment portfolio and financing plans;

• potential limitations (due to market conditions or otherwise) on our ability to raise significant amounts of capital, in the event that we need to do so;

• PMI’s default inventory and default rate have increased significantly in 2007. Factors contributing to the increase have included delinquencies in certain adjustable rate mortgages and high LTV loans, declining home prices (particularly in California and Florida) and economic conditions in certain Midwestern states. Other portions of PMI’s portfolio (such as PMI’s portfolio of Alt-A loans) could also suffer increasing defaults and losses due to continued adverse conditions in the U.S. housing and mortgage markets. PMI expects its default inventory and default rate to continue to increase in the fourth quarter of 2007. Such increases could harm our operating results;

• PMI’s claim rates and average claim sizes have increased in 2007. Home price declines and diminished availability of certain loan products, and a decrease in the percentage of the default inventory that is returning to current status have contributed to higher claim rates. Higher loan sizes and coverage levels in PMI’s portfolio and declining home prices (which limit PMI’s loss mitigation opportunities) have contributed to an increase in PMI’s average claim sizes. We expect these factors will contribute to further increases in claim rates and average claim sizes. If future claim rates or claim sizes exceed our current expectations, our operating results could suffer;

• changes in the volume of mortgage originations or mortgage insurance cancellations, which could reduce our insurance in force;

• the level and severity of default and claims experienced by our insurance subsidiaries, an increase in unanticipated defaults claims, the level and impact of future loan modifications, or any insufficiency in our loss reserve estimates;

• changes in the demand for mortgage insurance as a result of economic factors, government policy changes, competition, new products, the use of product alternatives to mortgage insurance (such as 80/20 or similar loans or alternative risk transfer products or structures), and trends in pricing or in policy terms and conditions;

• the use of captive reinsurance in the mortgage insurance industry or risks associated with our contract underwriting services and delegated underwriting activities;

• the aging of our mortgage insurance portfolio, which could cause losses to increase, or the performance of the portion of our mortgage insurance portfolio associated with less-than-A quality loans, Alt-A loans, adjustable rate mortgages (ARMs), payment option ARMs, interest only loans, and mortgage loans with higher loan-to-value ratios;

• the loss of a significant customer or the influence of large lenders and investors;

• changes in the regulation, business practices or eligibility guidelines of Fannie Mae and Freddie Mac, or the GSEs;

• rating agency actions, beyond those taken in October and November 2007 described herein, such as changes in our or our subsidiaries’ or unconsolidated subsidiaries’ claims-paying, financial strength or credit ratings. The rating agencies have indicated that they are engaged in ongoing monitoring of the mortgage insurance and financial guaranty industries and the mortgage-backed securities market to assess the adequacy of, and where necessary refine, their capital models. Determinations of ratings by the rating agencies are affected by a variety of factors, including macroeconomic conditions, economic conditions affecting the mortgage insurance and financial guaranty industries, changes in regulatory conditions, competition, underwriting and investment losses and the perceived need for us to make capital contributions to our subsidiaries. A downgrade of our insurance subsidiaries’ ratings could have a material, negative affect on our consolidated financial condition and results of operations;

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• federal and state legislative and regulatory developments, regulatory investigations (including ongoing investigations by the Minnesota Department of Commerce and the New York Insurance Department, and potential future investigations by state insurance departments, attorneys general and other regulators) relating to captive reinsurance arrangements and other products and services, and litigation and new theories of liability applicable to us or our subsidiaries;

• legal and other constraints on the amount of dividends we may receive from subsidiaries;

• the performance of our international subsidiaries, which depend upon a number of factors, including changes in the economic, political, legal, regulatory, and competitive environments in which they operate, fluctuations in foreign currency exchange rates, and fluctuations in market spreads which impact changes in the estimated fair market value of derivative contracts in determining gains and losses on such contracts;

• the performance of our unconsolidated subsidiaries, which are subject to a number of risks that arise from the nature of their businesses and which we may not be able to avoid or mitigate by taking unilateral action because we do not control those companies, including, but not limited to, changes in the demand for and pricing of financial guaranty insurance and reinsurance as a result of competition, the possible insufficiency of loss reserves, changes in the estimated fair market value of derivative financial guaranty contracts in determining gains and losses on such contracts, economic factors or political or regulatory conditions and potential changes in accounting practices in the financial guaranty industry;

• technological developments; and

• management’s ability to appropriately respond to uncertainties and risks, including the foregoing.

Except as may be required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Financial Results for the Quarter and Nine Months Ended September 30, 2007

For the third quarter of 2007, we recorded a consolidated net loss of $86.8 million compared to consolidated net income of $104.2 million for the corresponding period in 2006. Our consolidated net income for the first nine months of 2007 was $99.1 million compared to $319.2 million for the corresponding period in 2006. These changes in our financial results were primarily due to higher U.S. losses and loss adjustment expenses (which includes claims paid, loss adjustment expenses and changes in loss reserves) in 2007 and our equity in losses incurred by FGIC in the third quarter of 2007. Our financial results in the third quarter and nine months ended September 30, 2007 were positively impacted by higher premiums earned in the U.S. and Australia.

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Overview of Our Business

We are a global provider of credit enhancement products that expand homeownership and strengthen communities by delivering innovative solutions to financial markets worldwide. We offer first loss, mezzanine and risk remote financial insurance across the credit spectrum. Our financial products are designed to reduce risk, lower costs and expand market access for our customers. We divide our business into four segments:

• U.S. Mortgage Insurance Operations. We offer mortgage insurance products in the U.S. that enable borrowers to buy homes with low down payment mortgages. U.S. Mortgage Insurance Operations recorded a net loss of $65.2 million in the third quarter of 2007 and net income of $45.2 million for the first nine months of 2007, compared to net income of $70.8 million and $213.1 million for the corresponding periods in 2006. The results from U.S. Mortgage Insurance Operations include PMI Mortgage Insurance Co. and its affiliated U.S. mortgage insurance and reinsurance companies (collectively, “PMI”), and equity in earnings from PMI’s joint venture, CMG Mortgage Insurance Company and its affiliated companies (collectively, “CMG MI”).

• International Operations. We offer mortgage insurance and other credit enhancement products in Australia, New Zealand, Europe, Asia, and Canada. Net income from our International Operations segment was $13.9 million and $65.1 million for the third quarter and first nine months of 2007, respectively, compared to $29.4 million and $83.5 million for the corresponding periods in 2006.

• Financial Guaranty. We are the lead investor in FGIC Corporation, whose wholly-owned subsidiary, Financial Guaranty Insurance Company (collectively, “FGIC”), provides financial guaranty insurance. We also have a significant interest in RAM Holdings Ltd., whose wholly-owned subsidiary, RAM Reinsurance Company, Ltd., or RAM Re, provides financial guaranty reinsurance. Our Financial Guaranty segment also includes PMI Guaranty Co., our wholly-owned surety company based in New Jersey. PMI Guaranty was formed in 2006 to provide financial guaranty insurance, financial guaranty reinsurance and related credit enhancement products and services. Our Financial Guaranty segment generated a net loss of $24.4 million for the third quarter of 2007 and net income of $34.5 million for the first nine months of 2007, compared to net income of $23.7 million and $68.8 million for the corresponding periods in 2006.

• Corporate and Other. Our Corporate and Other segment consists of our holding company (“The PMI Group” or “TPG”), contract underwriting operations, and equity in earnings or losses from investments in certain limited partnerships. Our Corporate and Other segment generated net losses of $11.0 million and $45.7 million for the third quarter and first nine months of 2007, respectively, compared to net losses of $19.7 million and $46.2 million for the corresponding periods in 2006.

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Conditions and Trends Affecting our Business

U.S. Mortgage Insurance Operations. The financial performance of our U.S. Mortgage Insurance Operations segment is affected by a number of factors, including:

• Losses and LAE. Continuing deterioration in the U.S. housing and mortgage markets has caused PMI’s losses and loss adjustment expenses (“LAE”) and default inventory to increase significantly in the third quarter and first nine months of 2007. We increased PMI’s net loss reserves in the third quarter and first nine months of 2007 by $252.4 million and $331.1 million, respectively, as a result of the increase in PMI’s default inventory (discussed under Defaults below), higher claim rates and higher average claim sizes. Higher claim rates have been driven by home price declines and diminished availability of certain loan products, both of which constrain refinancing opportunities, and a decrease in the percentage of the default inventory that is returning to current status (“cure rate”). The increase in PMI’s average claim sizes has been driven by higher loan sizes and coverage levels in PMI’s portfolio, and declining home prices which limit PMI’s loss mitigation opportunities. We expect claim rates and average claim sizes to continue to increase and our third quarter of 2007 loss reserve increase reflects this expectation. Future claim rates or claim sizes beyond our current expectations will negatively impact losses and LAE.

Claims paid including LAE increased in the third quarter and first nine months of 2007 to $95.9 million and $244.4 million, respectively, from $65.0 million and $178.0 million in the corresponding periods in 2006. These increases were primarily due to the higher claim rates and higher average claim sizes discussed above. Because we expect claim rates and claim sizes to continue to increase, we also expect PMI’s claims paid to be higher in the fourth quarter of 2007 than in the current period.

• Defaults. PMI’s primary default inventory increased to 50,742 as of September 30, 2007, from 42,349 as of June 30, 2007 and 39,997 as of December 31, 2006. PMI’s primary default rate increased to 6.45% as of September 30, 2007 from 5.64% as of June 30, 2007 and 5.55% as of December 31, 2006. The increases in PMI’s primary default inventory and default rate in 2007 have been driven by the continued development of PMI’s 2005 portfolio and adverse and accelerated development of PMI’s 2006 and 2007 insured loan portfolios.

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PMI’s 2005 and 2006 insured books have been particularly affected by delinquencies in its structured finance channel of 2/28 hybrid ARMs, adjustable rate mortgages where the interest rate on the note is fixed for an initial two year period and floats thereafter. As of September 30, 2007, risk in force from 2/28 hybrid ARMs in all book years originated through PMI’s structured finance channel represented 3.8% of PMI’s primary risk in force and delinquent risk in force from 2/28 hybrid ARMs originated through structured finance represented 16.7% of delinquent primary risk in force. PMI’s 2007 book, which is still in its initial stage of development, has been affected by higher than expected levels of delinquent high LTV loans, loans above 97% LTV, in its flow channel. As of September 30, 2007, risk in force from high LTV loans in all book years originated through PMI’s flow channel represented 19.5% of PMI’s primary risk in force and delinquent flow high LTV loan risk in force represented 19.5% of PMI’s delinquent primary risk in force. Delinquency development of high LTV loans originated in 2007 is more rapid than development in 2006 of high LTV loans originated in that year.

Declining home prices, particularly in California and Florida, and economic conditions in Michigan, Indiana, Ohio, and Illinois have also negatively affected the development of PMI’s 2005, 2006 and 2007 portfolios. As of September 30, 2007, risk in force from California and Florida insured loans represented 7.7% and 10.8% of PMI’s primary risk in force, respectively. Delinquent risk in force from California and Florida represented 10.7% and 13.5% of PMI’s delinquent primary risk in force, respectively. These delinquency percentages represent significant increases since December 31, 2006, when California and Florida delinquencies were below PMI’s average primary delinquency rate. As of September 30, 2007, risk in force from the Midwestern states noted above represented 13.8% of PMI’s primary risk in force and delinquent risk in force from those states represented 17.7% of delinquent primary risk in force.

PMI’s delinquent loan inventory typically increases in the fourth quarter of each year due to seasonality. As the 2005, 2006 and 2007 books continue to age under difficult market conditions, we expect PMI’s default inventory and default rate to be higher in the fourth quarter of 2007 than in the current period (even after adjusting for expected seasonality).

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• Credit and Portfolio Characteristics. PMI’s primary risk in force as of September 30, 2007 consisted of higher percentages of high LTV, interest only and Alt-A loans compared to September 30, 2006. We consider a loan Alt-A if it has a credit score of 620 or greater, and the borrower requests and is given the option of providing reduced documentation verifying income, assets, deposit information, and/or employment. We believe that these percentage increases generally reflected higher concentrations of these loans in the mortgage origination and private mortgage insurance markets in 2006 and early 2007. In the second and third quarters of 2007, the percentages of PMI’s new insurance written (“NIW”) comprised of Alt-A loans and ARMs has significantly decreased as a result of changes in the mortgage origination market and PMI’s underwriting guidelines. We expect these decreases to continue. The higher percentages of high LTV loans in PMI’s primary risk in force (23.8% as of September 30, 2007 compared to 15.9% as of September 30, 2006) and NIW is consistent with trends in the mortgage origination market and reflects the decline in alternative loan product originations (particularly 80/20 loans) which serve as substitutes for low down payment mortgages that typically require mortgage insurance. As a result of changes made to PMI’s pricing and underwriting guidelines, we expect the percentage of NIW comprised of high LTV loans to decline in the fourth quarter and through 2008.

As discussed above, PMI has experienced higher than expected delinquency rates on high LTV loans and 2/28 hybrid ARMs. In general, we expect these loans, as well as Alt-A loans and less-than-A quality loans (generally loans with credit scores less than 620), to experience higher default and claim rates, and we incorporate these assumptions into our underwriting approach, portfolio limits, pricing and loss and claim estimates. While PMI’s Alt-A portfolio has generally performed within our expectations to date, continued market stress could negatively affect this portfolio’s future loss development.

• New Insurance Written (NIW). PMI’s primary NIW increased by 89.3% in the third quarter and by 62.5% in the first nine months of 2007 compared to the corresponding periods in 2006. These increases were primarily attributable to higher levels of NIW generated by PMI’s flow channel in 2007. The increase in PMI’s flow channel NIW was driven by a larger private mortgage insurance market. We believe that the private mortgage insurance market grew in 2007 primarily as a result of a decline in the origination of alternative loan products, particularly 80/20 loans, that do not require mortgage insurance. We believe that the decline in the use of alternative products was due to diminished demand in the capital markets for these products. We also believe that the private mortgage insurance market increased as a result of tax deductibility for eligible borrowers of borrower-paid mortgage insurance premiums relating to loans closed in 2007.

We expect PMI’s NIW in the fourth quarter of 2007 to decline from the third quarter. We also expect PMI’s NIW to be lower in 2008 than in 2007. Our expectations are based upon the continuing slowdown in the mortgage origination and secondary mortgage markets and the previously described changes to PMI’s pricing and underwriting guidelines with respect to high LTV and Alt-A loans.

• Policy Cancellations and Persistency. PMI’s persistency rate, which is based upon the percentage of primary insurance in force at the beginning of a 12-month period that remains in force at the end of that period, was 73.3% as of September 30, 2007, 69.6% as of December 31, 2006 and 67.3% as of September 30, 2006. The improvement in PMI’s persistency rate reflects lower levels of residential mortgage refinance activity and home price declines. If these trends continue, we expect that policy cancellation rates will continue to slow, PMI’s persistency rate will continue to improve and PMI’s insurance in force will be positively affected.

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• Captive Reinsurance. Under captive reinsurance agreements, PMI transfers portions of its risk written on loans originated by certain lender-customers to captive reinsurance companies affiliated with such lender-customers. In return, PMI cedes a share of its gross premiums written to these captive reinsurance companies. As of September 30, 2007, 50.2% of PMI’s primary insurance in force was subject to captive reinsurance agreements compared to 53.9% as of September 30, 2006. This decrease was primarily due to a higher percentage of NIW generated by products that are generally not subject to captive reinsurance agreements. Based on current trends, we expect that the captive trust assets will begin to reduce PMI’s losses and LAE in 2008 and materially reduce PMI’s losses and LAE in 2009.

International Operations. Factors affecting the financial performance of our International Operations segment include:

• PMI Australia. PMI Australia’s losses and LAE increased to $21.8 million and $48.2 million for the third quarter and first nine months of 2007, respectively, from $10.5 million and $18.5 million for the corresponding periods in 2006. These increases were primarily a result of higher actual and expected claims paid, driven by higher claim rates and average claim sizes. PMI Australia’s loss experience in 2007 has been negatively affected by interest rate increases in 2006 and 2007, and moderating home price appreciation and home price declines in some markets. PMI Australia’s claims paid were $16.8 million and $32.5 million in the third quarter and first nine months of 2007, compared to $ 4.5 million and $8.9 million in the corresponding periods in 2006. PMI Australia’s loss reserves were increased by $5.0 million and $15.7 million in the third quarter and first nine months of 2007, respectively, primarily as a result of increases in claim rates, average claim sizes and PMI Australia’s default inventory.

• PMI Europe. Changes in the fair value of credit default swaps (“CDS”) derivative contracts may occur as a result of a number of factors, including changes in market spreads and to the extent actual claims payments differ from estimated claims payments. We recorded an unrealized mark-to-market loss of $8.6 million on PMI Europe’s CDS derivative contracts in the third quarter of 2007 as a result of significant widening of market spreads. Credit deterioration predominately in the U.S. sub-prime market has impacted market spreads worldwide, including spreads on PMI Europe’s CDS portfolio which relates only to European prime mortgage risks. Continuing volatility of market spreads may lead to positive or negative fair value adjustments of these contracts in the future. In our view, the volatility of these market spreads does not reflect the credit quality of PMI Europe’s CDS portfolio and we believe these spread-driven changes in fair value will have little or no impact on future estimated net cash flows. In the third quarter and first nine months of 2007, PMI Europe’s net income was also negatively affected by decreases in premiums earned associated with the Royal & Sun Alliance (“R&SA”) insurance portfolio acquired in 2003 and positively impacted by primary NIW. We expect these trends to continue in the fourth quarter of 2007.

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• PMI Asia. PMI Asia’s net income is affected by, among other things, the level of mortgage originations in Hong Kong. PMI Asia’s reinsurance premiums written increased in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 due to higher levels of origination activity in Hong Kong, partially offset by PMI Asia’s leading customer’s increased retention of risk.

• Foreign Currency Exchange Fluctuations and Foreign Currency Put Options. The performance of our International Operations is subject to fluctuations in exchange rates between the reporting currency of the U.S. dollar and other functional foreign currencies. The changes in the average foreign currency exchange rates from the third quarter and first nine months of 2006 to the corresponding periods in 2007 positively affected International Operations’ net income by $1.5 million and $5.3 million, respectively. Foreign currency translation impact is calculated using the period over period change in the average exchange rates to the current period ending net income in the local currency.

Financial Guaranty. Factors affecting the financial performance of our Financial Guaranty segment include:

• FGIC. FGIC’s financial performance is affected by, among other things, interest rate movements, which may generate refundings, the volume of issuance in the public and structured finance markets and FGIC’s ability to penetrate these markets. FGIC’s financial performance is also subject to changes in the fair value of its financial guaranty contracts accounted for as derivatives. FGIC’s net realized and unrealized mark-to-market losses on such derivative contracts were $206.2 million in the third quarter of 2007 and $222.1 million for the first nine months of 2007 compared to net realized and unrealized mark-to-market gains of $1.1 million and $0.3 million for the corresponding periods in 2006. The 2007 losses consisted predominantly of unrealized mark-to-market losses related to financial guaranty contracts issued by FGIC in CDS form on collateralized debt obligations (“CDOs”), collateralized by asset-backed securities, including mortgage-backed securities. The unrealized CDO mark-to-market losses were caused primarily by widening credit spreads. Future valuation estimations by FGIC of its derivative contracts may differ materially from those reflected in the current period.

• RAM Re. On November 5, 2007, RAM Re announced a $14.7 million loss for its third quarter of 2007 due primarily to an unrealized mark-to-market loss of $28.4 million on its credit derivative portfolio as a result of widening credit spreads. As we report our equity in earnings/losses from RAM Re on a one quarter lag, our 23.7% share of RAM Re’s third quarter results will be reflected in our consolidated financial results in the fourth quarter of 2007.

• PMI Guaranty. PMI Guaranty began operations in the fourth quarter of 2006. The company provides credit enhancement on both a reinsurance and direct basis, and its insured portfolio includes mortgage-backed securities (“MBS”) and public finance sector transactions. PMI Guaranty’s net income for the third quarter and the first nine months of 2007 was $1.2 million and $3.9 million, respectively. We believe that PMI Guaranty’s losses and LAE will likely increase as a result of future additions to reserves and/or claims relating to the $48.5 million par amount of mortgage-backed securities that it has insured to date.

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Corporate and Other. Factors affecting the financial performance of our Corporate and Other segment include:

• Contract Underwriting Services. Total contract underwriting expenses include allocated expenses and monetary remedies provided to customers in the event we failed to properly underwrite a loan. Contract underwriting remedies, and accruals thereof, were $1.4 million and $5.0 million in the third quarter and first nine months of 2007 compared to $3.8 million and $8.9 million in the corresponding periods in 2006.

• Share-Based Compensation. During the third quarter and first nine months of 2007, we incurred pre-tax share-based compensation expense of $2.9 million and $13.5 million, respectively, compared to $2.3 million and $9.9 million for the corresponding periods in 2006. Our share-based compensation expense was lower in 2006 as a result of our acceleration of out-of-the-money stock options in 2005.

• Additional Items Affecting this Segment. Our Corporate and Other segment also includes net investment income from our holding company, expenses related to corporate overhead, including compensation expense not included in our other operating segments, and interest expense.

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RESULTS OF OPERATIONS

Consolidated Results

The following table presents our consolidated financial results:

	Three Months Ended September 30,							Nine Months Ended September 30,
	2007			2006		Percentage Change		2007			2006		Percentage Change
	(Dollars in millions, except per share data)
REVENUES:
Premiums earned	$	256.8		$	214.9	19.5	%	$	735.5		$	634.8	15.9	%
Net investment income		55.4			49.7	11.5	%		159.2			145.6	9.3	%
Equity in (losses) earnings from unconsolidated subsidiaries		(22.6	)		31.5	(171.7	)%		49.7			91.4	(45.6	)%
Net realized investment gains		0.4			0.7	(42.9	)%		2.4			1.6	50.0	%
Other (loss) income		(3.0	)		4.1	(173.2	)%		6.6			14.8	(55.4	)%
Total revenues		287.0			300.9	(4.6	)%		953.4			888.2	7.3	%
LOSSES AND EXPENSES:
Losses and loss adjustment expenses	$	372.8		$	79.6	—		$	628.3		$	212.4	195.8	%
Amortization of deferred policy acquisition costs		18.0			16.9	6.5	%		51.5			52.1	(1.2	)%
Other underwriting and operating expenses		50.6			56.0	(9.6	)%		173.1			169.0	2.4	%
Interest expense		8.4			9.5	(11.6	)%		25.0			25.7	(2.7	)%
Total losses and expenses		449.8			162.0	177.7	%		877.9			459.2	91.2	%
(Loss) income before income taxes		(162.8	)		138.9	—			75.5			429.0	(82.4	)%
Income tax (benefit) expense		(76.0	)		34.7	—			(23.6	)		109.8	(121.5	)%
Net (loss) income	$	(86.8	)	$	104.2	(183.3	)%	$	99.1		$	319.2	(69.0	)%
Diluted (loss) earnings per share	$	(1.04	)	$	1.16	(189.7	)%	$	1.14		$	3.38	(66.3	)%

For the third quarter of 2007, we recorded a consolidated net loss of $86.8 million compared to consolidated net income of $104.2 million for the corresponding period in 2006. Our consolidated net income for the first nine months of 2007 was $99.1 million compared to $319.2 million for the corresponding period in 2006. These changes in our financial results were primarily due to higher losses and LAE in 2007 in the U.S. and equity in losses incurred by FGIC in the third quarter of 2007. Our financial results in the third quarter and nine months ended September 30, 2007 were positively impacted by higher premiums earned in the U.S. and Australia.

The increases in premiums earned in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 were driven by higher levels of PMI’s primary NIW, higher insured loan sizes, and higher U.S. average primary premium rates (reflecting changes in the business mix of our U.S. portfolio as described above under “Conditions and Trends Affecting our Business — Credit and Portfolio Characteristics”). PMI Australia’s insurance in force growth also contributed to the increases in premiums earned.

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The increases in net investment income in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 were due to growth in PMI Australia’s investment portfolio, a stronger Australian dollar relative to the U.S. dollar and an increase in our consolidated book yield. Our consolidated pre-tax book yield was 5.47% and 5.38% as of September 30, 2007 and 2006, respectively.

We account for our unconsolidated subsidiaries and limited partnerships using the equity method of accounting. Equity in losses from FGIC for the third quarter of 2007 was $28.9 million compared to equity in earnings from FGIC of $23.6 million for the same period in 2006. Equity in earnings from FGIC for the first nine months of 2007 decreased to $27.9 million from $70.4 million for the corresponding period in 2006. FGIC’s financial results for the third quarter and first nine months of 2007 were negatively impacted by net unrealized mark-to-market losses of $206.6 million and $222.6 million, respectively, predominantly related to CDS derivative contracts. These market value changes were due principally to widening credit spreads.

The increases in our losses and LAE in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 were primarily due to increases to loss reserves in the U.S. and higher claims paid in the U.S. and, to a lesser extent, Australia. The increase in U.S. Mortgage Insurance Operations’ losses and LAE in the third quarter was due to a $252.4 million increase to net loss reserves in the quarter and a $30.9 million increase in claims paid compared to the third quarter of 2006. In the first nine months of 2007, U.S. Mortgage Insurance Operations’ net loss reserves were increased by $331.1 million while claims paid increased by $66.4 million over the corresponding period in 2006.

The decrease in other underwriting and operating expenses in the third quarter of 2007 compared to the corresponding period in 2006 was primarily a result of lower employee compensation expenses in the third quarter of 2007. The increase in other underwriting and operating expenses in the first nine months of 2007 compared to the corresponding period in 2006 was primarily due to growth in our International Operations and lower share-based compensation expenses in 2006.

We recorded income tax benefits of $76.0 million and $23.6 million for the third quarter and first nine months of 2007, respectively, compared to income tax expenses of $34.7 million and $109.8 million for the corresponding periods in 2006. We record income taxes at the end of each quarter based on our current best estimate of the annual effective tax rate. The estimated annual effective tax rate is then applied to quarter-to-date and year-to-date pre-tax net income or loss at the end of every quarter to determine the current period’s tax expense or benefit. The effective tax rates for the third quarter and first nine months of 2007 were 46.7% and (31.3)%, respectively, compared to 25.0% and 25.6% for the corresponding periods in 2006. The changes in 2007 effective tax rates compared to 2006 were due to the losses in our U.S. Mortgage Insurance Operations and Financial Guaranty segments.

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Segment Results

The following table presents consolidated net income (loss) and net income (loss) for each of our segments:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2007			2006			Percentage Change		2007			2006			Percentage Change
	(Dollars in millions)								(Dollars in millions)
U.S. Mortgage Insurance Operations	$	(65.2	)	$	70.8		(192.1	)%	$	45.2		$	213.1		(78.8	)%
International Operations		13.9			29.4		(52.7	)%		65.1			83.5		(22.0	)%
Financial Guaranty		(24.4	)		23.7		—			34.5			68.8		(49.9	)%
Corporate and Other		(11.0	)		(19.7	)	(44.2	)%		(45.7	)		(46.2	)	(1.1	)%
Consolidated net (loss) income *	$	(86.8	)	$	104.2		(183.3	)%	$	99.1		$	319.2		(69.0	)%

* May not total due to rounding.

U.S. Mortgage Insurance Operations

U.S. Mortgage Insurance Operations’ results are summarized in the table below.

	Three Months Ended September 30,							Nine Months Ended September 30,
	2007			2006		Percentage Change		2007			2006		Percentage Change
	(Dollars in millions)							(Dollars in millions)
Net premiums written	$	214.4		$	160.5	33.6	%	$	599.5		$	482.8	24.2	%
Premiums earned	$	205.5		$	168.1	22.2	%	$	594.7		$	503.5	18.1	%
Net investment income		28.8			27.1	6.3	%		83.1			79.8	4.1	%
Equity in earnings from unconsolidated subsidiaries		4.2			5.0	(16.0	)%		13.6			15.2	(10.5	)%
Net realized gains		2.9			1.6	81.3	%		6.1			2.2	177.3	%
Other income		0.1			—	—			0.2			—	—
Total revenues		241.5			201.8	19.7	%		697.7			600.7	16.1	%
Losses and LAE		348.3			67.7	—			575.5			191.0	—
Underwriting and operating expenses		31.3			35.5	(11.8	)%		110.9			112.9	(1.8	)%
Total losses and expenses		379.6			103.2	—			686.4			303.9	125.9	%
(Loss) income before income taxes		(138.1	)		98.6	—			11.3			296.8	(96.2	)%
Income tax (benefit) expense		(72.9	)		27.8	—			(33.9	)		83.7	(140.5	)%
Net (loss) income	$	(65.2	)	$	70.8	(192.1	)%	$	45.2		$	213.1	(78.8	)%

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Premiums written and earned — PMI’s net premiums written refers to the amount of premiums recorded based on effective coverage during a given period, net of refunds and premiums ceded primarily under captive reinsurance agreements. Under captive reinsurance agreements, PMI transfers portions of its risk written on loans originated by certain lender-customers to captive reinsurance companies affiliated with such lender-customers. In return, portions of PMI’s gross premiums written are ceded to those captive reinsurance companies. PMI’s premiums earned refers to the amount of premiums recognized as earned, net of changes in unearned premiums. The components of PMI’s net premiums written and premiums earned are as follows:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2007			2006			Percentage Change		2007			2006			Percentage Change
	(Dollars in millions)								(Dollars in millions)
Gross premiums written	$	266.5		$	205.8		29.5	%	$	743.4		$	617.4		20.4	%
Ceded premiums, net of assumed		(47.0	)		(42.1	)	11.6	%		(131.1	)		(125.2	)	4.7	%
Refunded premiums		(5.1	)		(3.2	)	59.4	%		(12.8	)		(9.4	)	36.2	%
Net premiums written	$	214.4		$	160.5		33.6	%	$	599.5		$	482.8		24.2	%
Premiums earned	$	205.5		$	168.1		22.2	%	$	594.7		$	503.5		18.1	%

The increases in gross and net premiums written and premiums earned in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 were primarily due to higher levels of primary NIW, higher insured loans sizes, and higher average primary premium rates. PMI’s average primary premium rates increased primarily as a result of changes in the business mix of PMI’s portfolio. (For a discussion of these changes, see Credit and Portfolio Characteristics, below.)

As of September 30, 2007, 50.2% of PMI’s primary insurance in force and 50.2% of primary risk in force were subject to captive reinsurance agreements compared to 53.9% and 54.4% as of September 30, 2006. These decreases were primarily due to a higher percentage of NIW generated by products that are generally not subject to captive reinsurance agreements.

Net investment income – The increases in net investment income in the third quarter and first nine months of 2007 compared to the same periods in 2006 were primarily due to an increase in municipal bond refundings in 2007. The pre-tax book yield as of September 30, 2007 and September 30, 2006 was 5.31% and 5.33%, respectively.

Equity in earnings from unconsolidated subsidiaries — U.S. Mortgage Insurance Operations’ equity in earnings are derived entirely from the results of operations of CMG MI. Equity in earnings from CMG MI decreased in the third quarter and first nine months of 2007 compared to the same periods in 2006 primarily as a result of higher losses and underwriting expenses, partially offset by higher premiums earned.

Losses and LAE — PMI’s losses and LAE represent claims paid, certain expenses related to default notification and claim processing and changes to loss reserves during the applicable period. Because losses and LAE includes changes to loss reserves, it reflects our best estimate of PMI’s future claim payments and costs to process claims relating to PMI’s current inventory of loans in default. Claims paid including LAE includes amounts paid on primary and pool insurance claims, and LAE. PMI’s losses and LAE and related claims data are shown in the following table.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007		2006		Percentage Change		2007		2006		Percentage Change
	(Dollars in millions, except claim size)
Claims paid including LAE	$	95.9	$	65.0	47.5	%	$	244.4	$	178.0	37.3	%
Change in net loss reserves		252.4		2.7	—			331.1		13.0	—
Losses and LAE	$	348.3	$	67.7	—		$	575.5	$	191.0	—
Number of primary claims paid		2,675		2,346	14.0	%		7,373		6,442	14.5	%
Average primary claim size (in thousands)	$	32.8	$	24.4	34.4	%	$	29.9	$	24.2	23.6	%

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Continuing deterioration in the U.S. housing and mortgage markets has caused PMI’s losses and LAE and default inventory to increase significantly in the third quarter and first nine months of 2007. We increased PMI’s net loss reserves in the third quarter and first nine months of 2007 by $252.4 million and $331.1 million, respectively, as a result of the increase in PMI’s default inventory (discussed under Defaults below), higher claim rates and higher average claim sizes. Higher claim rates have been driven by home price declines and diminished availability of certain loan products, both of which constrain refinancing opportunities, and a decrease in the cure rate. The increase in PMI’s average claim sizes has been driven by higher loan sizes and coverage levels in PMI’s portfolio, and declining home prices which limit PMI’s loss mitigation opportunities. We expect claim rates and average claim sizes to continue to increase and our third quarter of 2007 loss reserve increase reflects this expectation. Future claim rates or claim sizes beyond our current expectations will negatively impact losses and LAE. Changes in economic conditions, including mortgage interest rates, job creations, unemployment rates and home prices could significantly impact our reserve estimates, and therefore, PMI’s losses and LAE. In addition, changes in economic conditions may not necessarily be reflected in PMI’s loss development in the quarter or year in which such changes occur.

The increases in claims paid including LAE in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 were primarily due to the higher claim rates and higher average claim sizes discussed above. Because we expect claim rates and claim sizes to continue to increase, we also expect PMI’s claims paid to be higher in the fourth quarter of 2007 than in the current period. Primary claims paid were $87.7 million and $220.4 million in the third quarter and first nine months of 2007, respectively, compared to $57.3 million and $155.6 million in the corresponding periods in 2006. Pool insurance claims paid were $5.4 million and $15.1 million in the third quarter and first nine months of 2007, respectively, compared to $5.0 million and $14.5 million in the corresponding periods in 2006.

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Defaults — PMI’s primary mortgage insurance 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, the master policies require an insured to notify PMI 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, we do not consider a loan to be in default until the borrower has missed two consecutive payments. Depending upon its scheduled payment date, a loan delinquent for two consecutive monthly payments could be reported to PMI between the 31^st and the 60^th day after the first missed payment.

PMI’s primary default data are presented in the table below.

	As of September 30,				Percent Change/ Variance
	2007		2006
Flow policies in force	651,354		610,129		6.8%
Structured policies in force	134,947		104,613		29.0%
Primary policies in force	786,301		714,742		10.0%
Flow loans in default	35,026		28,151		24.4%
Structured loans in default	15,716		10,422		50.8%
Primary loans in default	50,742		38,573		31.5%
Primary default rate	6.45	%	5.40	%	1.05 pps
Primary default rate for flow transactions	5.38	%	4.61	%	0.77 pps
Primary default rate for structured transactions	11.65	%	9.96	%	1.69 pps

PMI’s primary default rate was 5.64% at June 30, 2007 and 5.55% at December 31, 2006. Primary loans in default as of September 30, 2007 were 50,742 compared to 42,349 as of June 30, 2007 and 39,997 as of December 31, 2006. The increases in PMI’s primary default inventory and default rate in 2007 have been driven by the continued development of PMI’s 2005 portfolio and adverse and accelerated development of PMI’s 2006 and 2007 insured loan portfolios. PMI’s 2005 and 2006 insured books have been particularly affected by delinquencies in its structured finance channel of 2/28 hybrid ARMs, adjustable rate mortgages where the interest rate on the note is fixed for an initial two year period and floats thereafter. As of September 30, 2007, risk in force from 2/28 hybrid ARMs in all book years originated through PMI’s structured finance channel represented 3.8% of PMI’s primary risk in force and delinquent risk in force from 2/28 hybrid ARMs originated through structured finance represented 16.7% of delinquent primary risk in force. PMI’s 2007 book, which is still in its initial stage of development, has been affected by higher than expected levels of delinquent high LTV loans, loans above 97% LTV, in its flow channel. As of September 30, 2007, risk in force from high LTV loans in all book years originated through PMI’s flow channel represented 19.5% of PMI’s primary risk in force and delinquent flow high LTV loan risk in force represented 19.5% of PMI’s delinquent primary risk in force. Delinquency development of high LTV loans originated in 2007 is more rapid than development in 2006 of high LTV loans originated in that year.

Declining home prices, particularly in California and Florida, and economic conditions in Michigan, Indiana, Ohio, and Illinois have also negatively affected the development of PMI’s 2005, 2006 and 2007 portfolios. As of September 30, 2007, risk in force from California and Florida insured loans represented 7.7% and 10.8% of PMI’s primary risk in force, respectively.

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Delinquent risk in force from California and Florida represented 10.7% and 13.5% of PMI’s delinquent primary risk in force, respectively. These delinquency percentages represent significant increases since December 31, 2006, when California and Florida delinquencies were below PMI’s average primary delinquency rate. As of September 30, 2007, risk in force from the Midwestern states noted above represented 13.8% of PMI’s primary risk in force and delinquent risk in force from those states represented 17.7% of delinquent primary risk in force.

PMI’s delinquent loan inventory typically increases in the fourth quarter of each year due to seasonality. As the 2005, 2006 and 2007 books continue to age under difficult market conditions, we expect PMI’s default inventory and default rate to be higher in the fourth quarter of 2007 than in the current period (even after adjusting for expected seasonality).

PMI’s modified pool default data are presented in the table below.

	As of September 30,				Percent Change/ Variance
	2007		2006
Modified pool with deductible
Loans in default	13,272		8,830		50.3%
Policies in force	236,025		189,123		24.8%
Default rate	5.62	%	4.67	%	0.95 pps
Modified pool without deductible
Loans in default	6,298		2,245		180.5%
Policies in force	71,334		40,754		75.0%
Default rate	8.83	%	5.51	%	3.32 pps
Total modified pool
Loans in default	19,570		11,075		76.7%
Policies in force	307,359		229,877		33.7%
Default rate	6.37	%	4.82	%	1.55 pps

The increase in PMI’s total modified pool default rate from September 30, 2006 to September 30, 2007 was primarily due to the increase in loans in default, partially offset by increase in new modified pool policies written since September 30, 2006. The increases in loans in default and policies in force for modified pool without deductible were due to a large modified pool transaction in which PMI insured predominantly seasoned, less-than-A quality loans. We expect higher default rates for less-than-A quality loans, particularly when due to their seasoning they are approaching or in their peak period of loss development. More generally, we expect PMI’s modified pool loans in default to increase as PMI’s modified pool portfolio seasons. However, we believe that PMI’s modified pool insurance products’ risk reduction features, including a stated stop loss limit, exposure limits on each individual loan in the pool and, in some cases, deductibles, reduce our potential loss exposure on loans insured by those products.

Total pool loans in default (which includes modified and other pool products) as of September 30, 2007 and 2006 were 23,789 and 15,253, respectively. The default rates for total pool loans as of September 30, 2007 and 2006 were 6.18% and 4.81%, respectively.

44

Total underwriting and operating expenses — PMI’s total underwriting and operating expenses are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007		2006		Percentage Change		2007		2006		Percentage Change
	(Dollars in millions)						(Dollars in millions)
Amortization of deferred policy acquisition costs	$	12.8	$	12.8	—		$	38.0	$	39.4	(3.6	)%
Other underwriting and operating expenses		18.5		22.7	(18.5	)%		72.9		73.5	(0.8	)%
Total underwriting and operating expenses	$	31.3	$	35.5	(11.8	)%	$	110.9	$	112.9	(1.8	)%
Policy acquisition costs incurred and deferred	$	12.2	$	11.8	3.4	%	$	37.8	$	35.8	5.6	%

PMI’s policy acquisition costs are those costs that vary with, and are related to, our acquisition, underwriting and processing of new mortgage insurance policies, including contract underwriting and sales related activities. To the extent that we are compensated by customers for contract underwriting, those underwriting costs are not deferred. We defer policy acquisition costs when incurred and amortize these costs in proportion to estimated gross profits for each policy year by type of insurance contract (i.e. monthly, annual and single premium). Policy acquisition costs incurred and deferred are variable and fluctuate with the volume of new insurance applications processed and NIW. The decrease in amortization of deferred policy acquisition costs in the first nine months of 2007 compared to the corresponding period in 2006 was primarily due to expense savings realized from field office restructurings in 2006.

Other underwriting and operating expenses generally consist of all costs that are not attributable to the acquisition of new business and are recorded as expenses when incurred. Other underwriting and operating expenses decreased in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 primarily as a result of lower employee compensation expenses and pension costs. PMI incurs underwriting expenses related to contract underwriting services for mortgage loans without mortgage insurance coverage. These costs are allocated to PMI Mortgage Services Co., or MSC, which is reported in our Corporate and Other segment, thereby reducing PMI’s underwriting and operating expenses. Contract underwriting expenses allocated to MSC were $3.8 million and $9.9 million in the third quarter and first nine months of 2007, respectively, compared to $3.0 million and $10.1 million in the corresponding periods in 2006.

Ratios — PMI’s loss, expense and combined ratios are shown below.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007		2006		Variance	2007		2006		Variance
Loss ratio	169.5	%	40.3	%	129.2 pps	96.8	%	37.9	%	58.9 pps
Expense ratio	14.6	%	22.1	%	(7.5) pps	18.5	%	23.4	%	(4.9) pps
Combined ratio	184.1	%	62.4	%	121.7 pps	115.3	%	61.3	%	54.0 pps

PMI’s loss ratio is the ratio of losses and LAE to premiums earned. The loss ratio increased in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 as a result of higher losses and LAE, partially offset by higher premiums earned.

PMI’s expense ratio is the ratio of total underwriting and operating expenses to net premiums written. The decreases in PMI’s expense ratio were primarily due to increases in net premiums written and decreases in employee compensation expenses in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006. The combined ratio is the sum of the loss ratio and the expense ratio.

45

Primary NIW— The components of PMI’s primary NIW are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007		2006		Percentage Change		2007		2006		Percentage Change
	(Dollars in millions)						(Dollars in millions)
Primary NIW:
Flow channel	$	11,091	$	6,015	84.4	%	$	28,883	$	16,773	72.2	%
Structured finance channel		3,404		1,641	107.4	%		8,180		6,031	35.6	%
Total primary NIW	$	14,495	$	7,656	89.3	%	$	37,063	$	22,804	62.5	%

The increases in NIW in the third quarter and first nine months of 2007 were primarily attributable to higher levels of NIW generated by PMI’s flow channel. The increases in PMI’s flow channel NIW were driven by a larger private mortgage insurance market. We believe that the private mortgage insurance market grew in 2007 primarily as a result of a decline in the origination of alternative loan products, particularly 80/20 loans, that do not require mortgage insurance. We believe that the decline in the use of alternative products was due to diminished demand in the capital markets for these products. We also believe that the private mortgage insurance market increased as a result of tax deductibility for eligible borrowers of borrower-paid mortgage insurance premiums relating to loans closed in 2007.

We expect PMI’s NIW in the fourth quarter of 2007 to decline from the third quarter. We also expect PMI’s NIW to be lower in 2008 than in 2007. Our expectations are based upon the continuing slowdown in the mortgage origination and secondary mortgage markets and the previously described changes to PMI’s pricing and underwriting guidelines with respect to high LTV and Alt-A loans.

Modified pool insurance — PMI currently offers modified pool insurance products that may be attractive to investors and lenders seeking a reduction in the severity of the impact of borrower defaults beyond the protection provided by existing primary insurance or with respect to loans that do not require primary insurance, or for capital relief purposes. PMI wrote $41.5 million of modified pool risk in the third quarter of 2007 compared to $83.1 million in the corresponding period in 2006. We expect this trend to continue in the fourth quarter of 2007 and 2008. Modified pool risk in force was $2.8 billion at September 30, 2007, $2.5 billion at December 31, 2006, and $2.1 billion as of September 30, 2006.

46

Insurance and risk in force — PMI’s primary insurance in force and primary and pool risk in force are shown in the table below.

	As of September 30,						Percent Change/ Variance
	2007			2006
	(Dollars in millions)
Primary insurance in force	$	119,969		$	100,282		19.6%
Primary risk in force	$	30,078		$	25,048		20.1%
Pool risk in force*	$	3,476		$	2,773		25.4%
Policy cancellations—primary (year-to-date)		19,729			23,611		(16.4)%
Persistency - primary		73.3	%		67.3	%	6.0 pps

* Includes modified pool and other pool risk in force.

Primary insurance in force and risk in force as of September 30, 2007 increased from September 30, 2006 primarily as a result of lower policy cancellations and higher levels of NIW. The improvement in PMI’s persistency rate, which is based on the percentage of primary insurance in force at the beginning of a 12-month period that remains in force at the end of that period, reflects lower levels of residential mortgage refinance activity and home price declines.

The following table sets forth the percentages of PMI’s primary risk in force as of September 30, 2007 and December 31, 2006 in the ten states with the highest risk in force in PMI’s primary portfolio.

	As of September 30, 2007		As of December 31, 2006
Florida	10.8	%	10.7	%
California	7.7	%	7.0	%
Texas	7.2	%	7.4	%
Illinois	5.1	%	5.1	%
Georgia	4.7	%	4.7	%
Ohio	3.9	%	4.3	%
New York	3.6	%	3.8	%
Pennsylvania	3.4	%	3.6	%
New Jersey	3.1	%	3.1	%
Washington	3.0	%	2.9	%

47

Credit and portfolio characteristics — PMI insures less-than-A quality loans and Alt-A loans through all of its acquisition channels. Less-than-A quality loans generally include loans with credit scores less than 620. We consider a loan Alt-A if it has a credit score of 620 or greater, and the borrower requests and is given the option of providing reduced documentation verifying income, assets, deposit information, and/or employment. The following table presents PMI’s less-than-A quality loans and Alt-A loans as percentages of its flow channel and structured finance channel primary NIW:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2007				2006				2007				2006
	(Dollars in millions)								(Dollars in millions)
Less-than-A quality loan amounts and as a percentage of:
Primary NIW - flow channel	$	1,166	10.5	%	$	313	5.2	%	$	2,534	8.8	%	$	825	4.9	%
Primary NIW - structured finance channel		638	18.7	%		72	4.4	%		1,506	18.4	%		564	9.4	%
Total primary NIW	$	1,804	12.4	%	$	385	5.0	%	$	4,040	10.9	%	$	1,389	6.1	%
Alt-A loan amounts and as a percentage of:
Primary NIW - flow channel	$	3,161	28.5	%	$	1,728	28.7	%	$	9,877	34.2	%	$	4,644	27.7	%
Primary NIW - structured finance channel		51	1.5	%		1,078	65.7	%		1,367	16.7	%		3,198	53.0	%
Total primary NIW	$	3,212	22.2	%	$	2,806	36.7	%	$	11,244	30.3	%	$	7,842	34.4	%

The following table presents PMI’s ARMs (mortgage loans with interest rates that may adjust prior to their fifth anniversary) and high LTV loans (loans exceeding 97% LTV) as percentages of its flow channel and structured finance channel primary NIW:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2007				2006				2007				2006
	(Dollars in millions)								(Dollars in millions)
ARM amounts and as a percentage of:
Primary NIW - flow channel	$	477	4.3	%	$	986	16.4	%	$	1,687	5.8	%	$	2,897	17.3	%
Primary NIW - structured finance channel		640	18.8	%		450	27.4	%		2,175	26.6	%		3,140	52.1	%
Total primary NIW	$	1,117	7.7	%	$	1,436	18.8	%	$	3,862	10.4	%	$	6,037	26.5	%
High LTV loan amounts and as a percentage of:
Primary NIW - flow channel	$	3,776	34.0	%	$	1,247	20.7	%	$	9,917	34.3	%	$	3,108	18.5	%
Primary NIW - structured finance channel		709	20.8	%		226	13.8	%		2,537	31.0	%		578	9.6	%
Total primary NIW	$	4,485	30.9	%	$	1,473	19.2	%	$	12,454	33.6	%	$	3,686	16.2	%

Interest only loans, also known as deferred amortization loans, and payment option ARMs have more exposure to declining home prices than fixed rate loans or traditional ARMs. Borrowers with interest only loans do not reduce principal during an initial deferral period. With a payment option ARM, a borrower generally has the option every month to make a payment consisting of principal and interest, interest only, or an amount established by the lender that may be less than the interest owed in which case the interest shortfall is added to the principal amount of the loan. The following table presents PMI’s interest only loans and payment option ARMs as percentages of its flow channel and structured finance channel primary NIW:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2007				2006				2007				2006
	(Dollars in millions)								(Dollars in millions)
Interest only loans amounts and as a percentage of:
Primary NIW - flow channel	$	2,565	23.1	%	$	857	14.2	%	$	7,203	24.9	%	$	2,298	13.7	%
Primary NIW–structured finance channel		31	0.9	%		380	23.2	%		1,014	12.4	%		1,443	23.9	%
Total primary NIW	$	2,596	17.9	%	$	1,237	16.2	%	$	8,217	22.2	%	$	3,741	16.4	%
Payment option ARMs amounts and as a percentage of:
Primary NIW - flow channel	$	321	2.9	%	$	721	12.0	%	$	1,014	3.5	%	$	2,060	12.3	%
Primary NIW - structured finance channel		—	—			—	—			—	—			—	—
Total primary NIW	$	321	2.2	%	$	721	9.4	%	$	1,014	2.7	%	$	2,060	9.0	%

48

The following table presents PMI’s less-than-A quality loans, Alt-A loans, ARMs, high LTV, interest only, and payment option ARMs loans as percentages of primary risk in force:

	As of September 30,
	2007		2006
As a percentage of primary risk in force:
Less-than-A quality loans (FICO scores below 620)	8.1	%	8.3	%
Less-than-A quality loans with FICO scores below 575 *	2.2	%	2.2	%
Alt-A loans	23.4	%	18.6	%
ARMs	14.1	%	19.4	%
High LTV loans	23.8	%	15.9	%
Interest only	14.2	%	8.2	%
Payment option ARMs	3.9	%	4.5	%

* Less-than-A with FICO scores below 575 is a subset of PMI’s less-than-A quality loan portfolio.

As shown in the table above, PMI’s primary risk in force as of September 30, 2007 consisted of higher percentages of high LTV, interest only and Alt-A loans compared to September 30, 2006. We believe that these percentage increases generally reflected higher concentrations of these loans in the mortgage origination and private mortgage insurance markets in 2006 and early 2007. In the second and third quarters of 2007, however, the percentages of PMI’s NIW comprised of Alt-A loans and ARMs significantly decreased as a result of changes in the mortgage origination market and PMI’s underwriting guidelines. We expect these decreases to continue. The higher percentages of high LTV loans in PMI’s primary risk in force and NIW is consistent with trends in the mortgage origination market and reflects the decline in alternative loan product originations (particularly 80/20 loans) which serve as substitutes for low down payment mortgages that typically require mortgage insurance. As a result of changes made to PMI’s pricing and underwriting guidelines, we expect the percentage of NIW comprised of high LTV loans to decline in the fourth quarter and through 2008.

As discussed above, PMI has experienced higher than expected delinquency rates on high LTV loans and 2/28 hybrid ARMs. In general, we expect these loans, as well as Alt-A loans and less-than-A quality loans, to experience higher default and claim rates, and we incorporate these assumptions into our underwriting approach, portfolio limits, pricing and loss and claim estimates. PMI’s percentages of primary NIW and risk in force comprised of interest only loans have increased in 2007 compared to 2006. In 2007, interest only loans have been insured primarily through PMI’s flow channel and such loans are primarily sold to the GSEs. The vast majority of interest only loans insured in 2007 have ten year terms and are subject to additional underwriting criteria to limit the potential for layered risk. While PMI’s Alt-A portfolio has generally performed within our expectations to date, continued market stress could negatively affect this portfolio’s future loss development.

49

International Operations

Reporting of financial and statistical information for International Operations is subject to foreign currency rate fluctuations in translation to U.S. dollar reporting. PMI Canada, our Canadian mortgage insurer, began offering residential mortgage insurance products in 2007. Our International Operations segment’s net income is summarized as follows:

	Three Months Ended September 30,							Nine Months Ended September 30,
	2007			2006		Percentage Change		2007			2006		Percentage Change
	(USD in millions)							(USD in millions)
PMI Australia	$	19.7		$	24.7	(20.2	)%	$	62.2		$	70.7	(12.0	)%
PMI Europe		(8.4	)		2.0	—			(3.8	)		8.4	(145.2	)%
PMI Asia		2.9			2.7	7.4	%		7.4			4.4	68.2	%
PMI Canada		(0.3	)		—	—			(0.7	)		—	—
International Operations net income	$	13.9		$	29.4	(52.7	)%	$	65.1		$	83.5	(22.0	)%

The decreases in International Operations’ net income in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 were primarily due to higher losses and LAE in Australia and unrealized mark-to-market losses on PMI Europe’s CDS contracts accounted for as derivatives, partially offset by higher premiums earned in Australia.

The changes in the average foreign currency exchange rates from the third quarter and first nine months of 2006 to the corresponding periods in 2007 positively impacted International Operations’ net income by $1.5 million, and $5.3 million, respectively. The foreign currency translation impact is calculated using the period over period change in the average exchange rate to the current period ending net income in the local currency. The average exchange rates between U.S. dollars and Hong Kong dollars did not fluctuate significantly in 2007 compared to 2006.

In 2007, we purchased Australian dollar and Euro foreign currency put options designed to partially mitigate the negative financial impact of a potential strengthening of the U.S. dollar relative to the Australian dollar or the Euro. The options had an aggregate pre-tax cost of $1.3 million. International Operations’ net income for the first nine months of 2007 was reduced by $1.3 million pre-tax, related to these put options.

50

PMI Australia

The table below sets forth the financial results of PMI Australia:

	Three Months Ended September 30,						Percent Change/ Variance		Nine Months Ended September 30,						Percent Change/ Variance
	2007			2006					2007			2006
	(USD in millions)								(USD in millions)
Net premiums written	$	55.2		$	47.5		16.2	%	$	152.6		$	130.7		16.8	%
Premiums earned	$	44.2		$	39.8		11.1	%	$	120.7		$	111.2		8.5	%
Net investment income		18.8			14.2		32.4	%		52.2			39.7		31.5	%
Net realized investment gains		—			2.8		—			—			2.7		—
Other income (loss)		0.5			—		—			0.4			(0.4)		—
Total revenues		63.5			56.8		11.8	%		173.3			153.2		13.1	%
Losses and LAE		21.8			10.5		107.6	%		48.2			18.5		160.5	%
Other underwriting and operating expenses		13.7			11.2		22.3	%		36.3			33.4		8.7	%
Total losses and expenses		35.5			21.7		63.6	%		84.5			51.9		62.8	%
Income before income taxes		28.0			35.1		(20.2)	%		88.8			101.3		(12.3)	%
Income tax expense		8.3			10.4		(20.2)	%		26.6			30.6		(13.1)	%
Net income	$	19.7		$	24.7		(20.2)	%	$	62.2		$	70.7		(12.0)	%
Loss ratio		49.4	%		26.4	%	23.0	pps		39.9	%		16.6	%	23.3	pps
Expense ratio		24.7	%		23.6	%	1.1	pps		23.8	%		25.5	%	(1.7)	pps

The average USD/AUD currency exchange rates were 0.8480 and 0.8219 in the third quarter and first nine months of 2007, respectively, compared to 0.7572 and 0.7479 in the corresponding periods in 2006. Changes in the average USD/AUD currency exchange rates positively impacted PMI Australia’s net income in the third quarter and first nine months of 2007 by $2.1 million and $5.6 million, respectively.

Premiums written and earned — PMI Australia’s insurance portfolio consists primarily of single premium policies. Written premiums are earned in accordance with the expected expiration of policy risk. Accordingly, written premium associated with a single premium policy is recognized as earned over a period up to nine years, with the majority of the premium recognized as earned in years two through four. In the event of policy cancellation, any unearned portion of the associated premium is recognized as earned upon notice of cancellation. The increases in PMI Australia’s premiums written and earned in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 were driven by higher average loan balances, growth in its flow business and a strengthening Australian dollar relative to U.S. dollar.

Net investment income — The increases in net investment income in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 were due to the growth of PMI Australia’s investment portfolio, a strengthening Australian dollar relative to the U.S. dollar and a higher book yield. The pre-tax book yield was 6.20% and 5.97% as of September 30, 2007 and 2006, respectively. The increase in the book yield in 2007 was primarily due to a higher interest rate environment.

51

Losses and LAE — PMI Australia’s losses and LAE and related claims data are shown in the following table:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007		2006		Percentage Change		2007		2006		Percentage Change
	(USD in millions except average claim size)
Claims paid including LAE	$	16.8	$	4.5	—		$	32.5	$	8.9	—
Change in net loss reserves		5.0		6.0	(16.7	)%		15.7		9.6	63.5	%
Losses and LAE	$	21.8	$	10.5	107.6	%	$	48.2	$	18.5	160.5	%
Average claim size (USD in thousands)	$	68.0	$	56.7	19.9	%	$	64.6	$	48.6	32.9	%
Number of claims paid		247		80	—			503		184	173.4	%

The increases in claims paid including LAE in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 were attributable to increases in interest rates in 2006 and 2007, and moderating home price appreciation and home prices declines in some markets which in turn, caused PMI Australia’s claim rates and average claim sizes to increase. We increased PMI Australia’s net loss reserves in the third quarter of 2007 by $5.0 million primarily due to higher average claim sizes and claim rates and increases in PMI Australia’s default inventory.

Additional default data is presented in the following table:

	As of September 30,
	2007		2006		Percentage Change
Policies in force	1,102,881		1,026,990		7.4	%
Loans in default	2,919		2,099		39.1	%
Default rate	0.26	%	0.20	%	0.06	pps
Flow default rate	0.37	%	0.29	%	0.08	pps
RMBS (residential mortgage-backed securities) default rate	0.11	%	0.07	%	0.04	pps

Underwriting and operating expenses — Underwriting and operating expenses in the third quarter and first nine months of 2007 increased compared to the corresponding periods in 2006 primarily due to a stronger Australian dollar relative to the U.S. dollar and growth in the business, partially offset by a decrease in profit sharing commissions due to increased claim payments and changes to PMI Australia’s reinsurance arrangements.

52

NIW, insurance and risk in force — PMI Australia’s NIW includes flow channel insurance and insurance on RMBS. RMBS transactions include insurance on seasoned portfolios comprised of prime credit quality loans that have LTVs often below 80%. The following table presents the components of PMI Australia’s NIW, insurance in force and risk in force:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007		2006		Percentage Change	2007		2006		Percentage Change
	(USD in millions)					(USD in millions)
Flow insurance written	$	6,142	$	5,376	14.2 %	$	16,401	$	14,590	12.4 %
RMBS insurance written		3,594		3,899	(7.8)%		13,029		16,934	(23.1)%
Total NIW	$	9,736	$	9,275	5.0 %	$	29,430	$	31,524	(6.6)%

	As of September 30,
	2007		2006		Percentage Change
	(USD in millions)
Insurance in force	$	182,797	$	135,001	35.4	%
Risk in force	$	168,282	$	123,159	36.6	%

Total NIW for the first nine months of 2007 decreased compared to the corresponding period in 2006 primarily due to the successful execution of major RMBS transactions in 2006. The increases in insurance in force and risk in force as of September 30, 2007 compared to September 30, 2006 were driven by continued business writings in excess of policy terminations and a stronger Australian dollar against the U.S. dollar.

PMI Europe

The following table sets forth the financial results of PMI Europe:

	Three Months Ended September 30,							Nine Months Ended September 30,
	2007			2006		Percentage Change		2007			2006			Percentage Change
	(USD in millions)							(USD in millions)
Net premiums written	$	4.4		$	2.9	51.7	%	$	11.3		$	7.8		44.9	%
Premiums earned	$	3.6		$	4.1	(12.2	)%	$	10.8		$	11.9		(9.2	)%
Income from credit default swaps		0.2			1.0	(80.0	)%		3.6			4.7		(23.4	)%
Unrealized loss on credit default swaps		(8.6	)		—	—			(8.6	)		—		—
Net (loss) income from credit default swaps		(8.4	)		1.0	—			(5.0	)		4.7		—
Net investment income		2.1			2.4	(12.5	)%		6.7			7.0		(4.3	)%
Net realized (losses) gains		(0.2	)		0.7	(128.6	)%		(0.2	)		1.1		(118.2	)%
Other loss		—			—	—			(0.1	)		(0.1	)	—
Total revenues		(2.9	)		8.2	(135.4	)%		12.2			24.6		(50.4	)%
Losses and LAE		2.7			1.5	80.0	%		4.7			2.3		104.3	%
Other underwriting and operating expenses		4.2			3.6	16.7	%		10.6			9.3		14.0	%
Total losses and expenses		6.9			5.1	35.3	%		15.3			11.6		31.9	%
(Loss) income before taxes		(9.8	)		3.1	—			(3.1	)		13.0		(123.8	)%
Income tax (benefit) expense		(1.4	)		1.1	—			0.7			4.6		(84.8	)%
Net (loss) income	$	(8.4	)	$	2.0	—		$	(3.8	)	$	8.4		(145.2	)%

The average USD/Euro currency exchange rate was 1.3746 for the third quarter of 2007 and 1.3447 for the first nine months of 2007 compared to 1.2746 and 1.2455 for the corresponding periods in 2006. Changes in the average USD/Euro currency exchange rates negatively impacted PMI Europe’s financial results in the third quarter and first nine months of 2007 by $0.6 million and $0.3 million, respectively.

53

Premiums written and earned — Net premiums written increased in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 primarily due to primary NIW, particularly in Italy. The decreases in premiums earned in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 were due primarily to decreases in premiums earned associated with the Royal & Sun Alliance (“R&SA”) insurance portfolio acquired in 2003. The decreases in premiums earned were partially offset by premiums earned on new business written.

Net (loss) income from credit default swaps — Changes in the fair value of CDS derivative contracts may occur as a result of a number of factors, including changes in market spreads and to the extent actual claims payments differ from estimated claims payments. We recorded an unrealized mark-to-market loss of $8.6 million on PMI Europe’s CDS derivative contracts in the third quarter of 2007 as a result of significant widening of market spreads. Credit deterioration predominately in the U.S. sub-prime market has impacted market spreads worldwide, including spreads on PMI Europe’s CDS portfolio which relates only to European prime mortgage risks. Continuing volatility of market spreads may lead to positive or negative fair value adjustments of these contracts in the future. In our view, the volatility of these market spreads does not reflect the credit quality of PMI Europe’s CDS portfolio and we believe these spread-driven changes in fair value will have little or no impact on future estimated net cash flows.

Net investment income — PMI Europe’s net investment income consists primarily of interest income from its investment portfolio and gains and losses on foreign currency re-measurement. The pre-tax book yield increased slightly to 4.40% as of September 30, 2007 from 4.35% as of September 30, 2006. The decreases in net investment income in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 were primarily due to foreign currency re-measurement.

Losses and LAE — PMI Europe’s losses and LAE include claim payments and changes in reserves during the applicable period with respect to mortgage insurance in force and credit default swaps accounted for as insurance. Claim payments totaled $1.2 million and $3.4 million in the third quarter and first nine months of 2007 compared to $0.5 million and $1.3 million for the corresponding periods in 2006. We increased PMI Europe’s loss reserves by $1.5 million and $1.3 million in the third quarter and first nine months of 2007 primarily due to higher delinquencies associated with certain credit default swaps accounted for as insurance and PMI Europe’s Italian primary mortgage insurance portfolio.

Underwriting and operating expenses — The increases in underwriting and operating expenses in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 were primarily due to expenses related to our continuing expansion in Europe and also due to a strengthening of the Euro against the U.S. dollar.

Risk in force — PMI Europe’s risk in force increased to $5.7 billion as of September 30, 2007 from $4.4 billion as of September 30, 2006 as a result of new credit default swaps written during the period and increased primary insurance written together with the strengthening of the Euro against the U.S. dollar.

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PMI Asia

The following table sets forth the financial results of PMI Asia:

	Three Months Ended September 30,							Nine Months Ended September 30,
	2007		2006			Percentage Change		2007		2006 *		Percentage Change
	(USD in millions)							(USD in millions)
Net reinsurance premiums written	$	2.5	$	1.5		66.7	%	$	7.0	$	4.7	48.9	%
Reinsurance premiums earned	$	3.0	$	2.8		7.1	%	$	8.2	$	8.1	1.2	%
Net investment income		0.7		0.7		—			1.9		1.1	72.7	%
Total revenues		3.7		3.5		5.7	%		10.1		9.2	9.8	%
Losses and LAE		—		(0.2	)	—			—		0.6	—
Underwriting and operating expenses		0.4		0.4		—			1.4		0.8	75.0	%
Total losses and expenses		0.4		0.2		100.0	%		1.4		1.4	—
Net income before taxes		3.3		3.3		—			8.7		7.8	11.5	%
Income tax expense		0.4		0.6		(33.3	)%		1.3		3.4	(61.8	)%
Net income	$	2.9	$	2.7		7.4	%	$	7.4	$	4.4	68.2	%

* 2006 comparative numbers include results of PMI’s Hong Kong Branch.

The average USD/HKD currency exchange rate was 0.1281 for the third quarter of 2007 and 0.1280 for the first nine months of 2007 compared to 0.1286 and 0.1288 for the corresponding periods in 2006.

Premiums written and earned — Effective June 30, 2006, PMI Asia assumed all mortgage risk previously ceded to PMI’s Hong Kong branch. The increases in reinsurance premiums written and earned in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 were primarily due to higher levels of mortgage origination activity in Hong Kong in 2007. The increases in gross reinsurance premiums were partially offset by the increased retention of risk by PMI Asia’s leading customer.

Net investment income — Net investment income increased in the first nine months of 2007 compared to the corresponding period in 2006 primarily due to growth in PMI Asia’s investment portfolio as a result of the transfer of PMI’s Hong Kong investment portfolio to PMI Asia. As of September 30, 2007, PMI Asia had total cash and investments of $68.9 million.

Income taxes — The transfer of PMI’s Hong Kong mortgage reinsurance portfolio to PMI Asia resulted in a $1.1 million tax charge in the second quarter of 2006. PMI Asia’s statutory tax rate has been 17.5% since the transfer.

PMI Canada

PMI Canada began offering residential mortgage insurance products in 2007. In the third quarter of 2007, PMI Canada incurred $1.3 million in operating expenses and generated $0.8 million in net investment income (pre-tax).

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Financial Guaranty

The following table sets forth the financial results of our Financial Guaranty segment. Other than equity in earnings/losses from unconsolidated subsidiaries, the results reflect the performance of PMI Guaranty.

	Three Months Ended September 30,							Nine Months Ended September 30,
	2007			2006		Percentage Change		2007			2006		Percentage Change
	(Dollars in millions)							(Dollars in millions)
Net premiums written	$	0.2		$	—	—		$	6.4		$	—	—
Premiums earned	$	0.4		$	—	—		$	1.2		$	—	—
Net investment income		2.3			—	—			7.0			—	—
Equity in earnings (losses) from unconsolidated subsidiaries:
FGIC		(28.9	)		23.6	—			27.9			70.4	(60.4	)%
RAM Re		2.2			2.9	(24.1	)%		7.9			5.8	36.2	%
Equity in (losses) earnings from unconsolidated subsidiaries		(26.7	)		26.5	—			35.8			76.2	(53.0	)%
Net realized investment losses		(0.4	)		—	—			(0.4	)		—	—
Total revenues		(24.4	)		26.5	(192.1	)%		43.6			76.2	(42.8	)%
Losses and loss adjustment expenses		—			—	—			—			—	—
Amortization of deferred policy acquisition costs		0.3			—	—			0.6			—	—
Other underwriting and operating expenses		0.5			—	—			1.4			—	—
Interest expense		0.7			—	—			2.2			—	—
Total losses and expenses		1.5			—	—			4.2			—	—
(Loss) income before income taxes		(25.9	)		26.5	(197.7	)%		39.4			76.2	(48.3	)%
Income tax (benefit) expense		(1.5	)		2.8	(153.6	)%		4.9			7.4	(33.8	)%
Net (loss) income	$	(24.4	)	$	23.7	—		$	34.5		$	68.8	(49.9	)%

The net loss from our Financial Guaranty segment in the third quarter of 2007 and the decrease in net income in the first nine months of 2007 from the corresponding period in 2006 were primarily due to FGIC’s net unrealized mark-to-market losses of $206.6 million and $222.6 million in the third quarter and first nine months of 2007, respectively, related to derivative contracts issued by FGIC in CDS form on mortgage-related collateralized debt obligations. FGIC’s net unrealized mark-to-market losses were partially offset by its increase in premiums earned and reduction in contingent tax reserves in 2007.

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The increase in RAM Re’s net income in the first nine months of 2007 compared to the corresponding period in 2006 stems primarily from growth in premiums earned and investment income. The decrease in RAM Re’s net income in the third quarter of 2007 compared to the corresponding period in 2006 is primarily due to negative incurred losses relating to a reduction of previously established case reserves in the same period of 2006. On November 5, 2007, RAM Re announced a $14.7 million loss for its third quarter of 2007 due primarily to an unrealized mark-to-market loss of $28.4 million on its credit derivative portfolio as a result of widening credit spreads. As we report our equity in earnings/losses from RAM Re on a one quarter lag, our 23.7% share of RAM Re’s third quarter results will be reflected in our consolidated financial results in the fourth quarter of 2007.

PMI Guaranty began operations in the fourth quarter of 2006. PMI Guaranty’s net income of $1.2 million and $3.9 million for the third quarter and first nine months of 2007 was derived from investment income and earned premiums.

The table below shows FGIC’s financial results for the third quarter and first nine months of 2007 and 2006.

	Three Months Ended September 30,						Percentage Change		Nine Months Ended September 30,						Percentage Change
	2007			2006					2007			2006
	(Dollars in thousands)								(Dollars in thousands)
Net premiums written	$	93,917		$	66,590		41.0	%	$	278,291		$	283,820		(1.9	)%
Net premiums earned	$	74,619		$	62,738		18.9	%	$	231,795		$	194,045		19.5	%
Net investment income		40,247			36,166		11.3	%		116,632			103,066		13.2	%
Interest income—investment held by variable interest entity		10,901			10,033		8.7	%		31,013			24,628		25.9	%
Net realized gains (losses)		54			(4	)	—			425			47		—
Realized gains on credit derivative contracts		374			—		—			503			1,843		(72.7	)%
Net unrealized (losses) gains on credit derivative contracts		(206,595	)		1,110		—			(222,580	)		(1,504	)	—
Other income		167			490		(65.9	)%		1,512			1,532		(1.3	)%
Total revenues		(80,233	)		110,533		(172.6	)%		159,300			323,657		(50.8	)%
Losses and LAE		(2,031	)		520		—			(6,237	)		(1,679	)	—
Underwriting expenses		23,638			21,231		11.3	%		75,794			68,817		10.1	%
Policy acquisition costs deferred, net		(8,858	)		(8,736	)	1.4	%		(30,613	)		(30,243	)	1.2	%
Amortization of deferred policy acquisition costs		3,848			1,930		99.4	%		11,502			7,486		53.6	%
Interest expense and other operating expenses		6,918			6,550		5.6	%		19,946			19,673		1.4	%
Interest expense—debt held by variable interest entity		10,901			10,033		8.7	%		31,013			24,628		25.9	%
Total expenses		34,416			31,528		9.2	%		101,405			88,682		14.3	%
(Loss) income before income taxes		(114,649	)		79,005		—			57,895			234,975		(75.4	)%
Income tax (benefit) expense		(49,354	)		19,413		—			(19,107	)		57,479		(133.2	)%
Net (loss) income		(65,295	)		59,592		—			77,002			177,496		(56.6	)%
Preferred stock dividends		(4,854	)		(4,543	)	6.8	%		(14,566	)		(13,627	)	6.9	%
Net (loss) income available to common shareholders		(70,149	)		55,049		—			62,436			163,869		(61.9	)%
The PMI Group’s ownership interest in common equity		42.0	%		42.0	%	—			42.0	%		42.0	%	—
The PMI Group’s proportionate share of net income available to common stockholders		(29,454	)		23,113		—			26,216			68,804		(61.9	)%
The PMI Group’s proportionate share of management fees and other		552			554		(0.4	)%		1,656			1,657		(0.1	)%
Equity in (losses) earnings from FGIC	$	(28,902	)	$	23,667		—		$	27,872		$	70,461		(60.4	)%

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Premiums written and earned — FGIC’s net premiums written and earned increased in the third quarter of 2007 compared to the corresponding period in 2006 due to an increase in international finance transactions. Net premiums written decreased in the first nine months of 2007 compared to the corresponding period in 2006 primarily due to the business mix in FGIC’s public finance sector and limited activity in structured finance, along with a decrease in business assumed from other insurers and an increase in business ceded to other insurers. FGIC recorded earned premiums from refundings of $6.8 million and $38.3 million in the third quarter and first nine months of 2007, respectively, compared to $5.8 million and $28.6 million for the corresponding periods in 2006. A refunding occurs when an insured credit is called or legally defeased by the issuer prior to the stated maturity. When a credit insured by FGIC has been refunded prior to the end of the expected policy coverage period, any remaining unearned premium is recognized at that time.

Net investment income — Net investment income increased in the third quarter and the first nine months of 2007 from the corresponding periods in 2006 primarily due to the growth of FGIC’s investment portfolio. FGIC’s investment portfolio is comprised primarily of U.S. municipal bonds with an average rating of AA. The book yield of FGIC’s investment portfolio was 4.02% and 3.90% as of September 30, 2007 and 2006, respectively.

Net unrealized gains/losses — FGIC incurred net unrealized mark-to-market losses on derivative contracts of $206.6 million and $222.6 million for the third quarter and first nine months of 2007 compared to a net gain of $1.1 million and a net loss of $1.5 million for the corresponding periods in 2006. The 2007 unrealized mark-to-market losses were related to derivative contracts issued by FGIC in CDS form on CDOs, a portion of which are collateralized by asset-backed securities, including mortgage-backed securities. The unrealized mark-to-market losses were caused primarily by widening of credit spreads.

Losses and LAE — FGIC’s loss and loss adjustment expenses provided a benefit of $2.0 million in the third quarter of 2007 compared to an expense of $0.5 million for the corresponding period in 2006. The benefit reflects a reduction in Katrina-related watchlist reserves, as well as a reduction in par outstanding on a healthcare credit on the watchlist offset by the addition of a reserve related to a 2005 second lien mortgage-backed transaction. Loss expenses provided a benefit of $6.2 million for the first nine months of 2007 compared to a benefit of $1.7 million for the first nine months of 2006. The 2007 benefit was primarily attributable to $4.5 million in claim reimbursements received by FGIC during the second quarter for claims paid during 2006 and 2005 relating to an insured obligation of an investor-owned utility impacted by Hurricane Katrina.

Income tax (benefit) expense — FGIC’s income tax expenses for 2007 include previously unrecognized tax benefits of $12.2 million. The tax benefits were recognized in connection with the completion of an IRS examination of FGIC tax returns for 2003 and 2004.

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Corporate and Other

Our Corporate and Other segment financial results are summarized as follows:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2007			2006			Percentage Change		2007			2006			Percentage Change
	(Dollars in millions)								(Dollars in millions)
Net investment income	$	1.9		$	5.2		(63.5	)%	$	7.0		$	17.9		(60.9	)%
Net realized investment losses		(1.9	)		(4.3	)	(55.8	)%		(3.2	)		(4.4	)	(27.3	)%
Other income		4.6			3.2		43.8	%		11.3			10.7		5.6	%
Total revenue		4.6			4.1		12.2	%		15.1			24.2		(37.6	)%
Share-based compensation expense		2.9			2.3		26.1	%		13.5			9.9		36.4	%
Other operating expenses		14.0			20.1		(30.3	)%		47.4			54.8		(13.5	)%
Interest expense		7.6			9.4		(19.1	)%		22.7			25.6		(11.3	)%
Total expenses		24.5			31.8		(23.0	)%		83.6			90.3		(7.4	)%
Loss before tax benefit		(19.9	)		(27.7	)	(28.2	)%		(68.5	)		(66.1	)	3.6	%
Income tax benefit		(8.9	)		(8.0	)	11.3	%		(22.8	)		(19.9	)	14.6	%
Net loss	$	(11.0	)	$	(19.7	)	(44.2	)%	$	(45.7	)	$	(46.2	)	(1.1	)%

Net investment income — The decreases in net investment income in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 were due to a decrease in the size of the investment portfolio as a result of repurchases of common shares and capital contributions to certain wholly-owned subsidiaries since September 30, 2006.

Share-based compensation expenses — The increases in share-based compensation in the third quarter and first nine months of 2007 from the corresponding periods in 2006 were primarily due to our acceleration of out-of-the-money stock options in 2005 which reduced our share-based compensation expense in 2006.

Other operating expenses — Other operating expenses decreased in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006, consists primarily of payroll expenses and expenses associated with contract underwriting.

Interest expense — Interest expense decreased in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 due primarily to lower debt levels in the third quarter of 2007 compared to the corresponding period in 2006.

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Liquidity and Capital Resources

Sources and Uses of Funds

The PMI Group Liquidity — The PMI Group’s liquidity is primarily dependent upon: (i) The PMI Group’s subsidiaries’ ability to pay dividends to The PMI Group; (ii) financing activities in the capital markets; and (iii) maturing or refunded investments and investment income from The PMI Group’s stand-alone investment portfolio. The PMI Group’s ability to access these sources depends on, among other things, the financial performance of The PMI Group’s subsidiaries, regulatory restrictions on the ability of The PMI Group’s insurance subsidiaries to pay dividends, The PMI Group’s and its subsidiaries’ ratings by the rating agencies, and restrictions and agreements to which The PMI Group or its subsidiaries are subject to that restrict their ability to pay dividends, incur debt or issue equity securities.

The PMI Group’s principal uses of liquidity are the payment of operating costs, income taxes (which are predominantly reimbursed by its subsidiaries), principal and interest on its capital instruments, payments of dividends to shareholders, repurchases of its common shares, purchases of investments, and capital investments in and for its subsidiaries.

In the normal course of business, we evaluate The PMI Group’s capital and liquidity needs in light of its debt-related costs, holding company expenses, our dividend policy, and rating agency considerations. If we wish to provide additional capital to our existing operations, make new equity investments or increase our existing equity investments, we may need to increase the cash and investment securities held by The PMI Group. Our ability to raise additional funds for these purposes will depend on our ability to access the debt or equity markets and/or cause our insurance subsidiaries to pay dividends, subject to rating agency and insurance regulatory considerations and risk-to-capital limitations.

The PMI Group’s available funds, consisting of cash and cash equivalents and investments, were $78.6 million at September 30, 2007 and $182.1 million at December 31, 2006. It is our present intention to maintain at least $75 million of liquidity at our holding company in connection with rating agency considerations. The PMI Group’s liquidity is enhanced by its $400 million credit facility (described below) and approved dividends payable by PMI Mortgage Insurance Co. (also described below). Based upon all factors, we believe that we have sufficient liquidity to meet all of our short-and medium-term obligations and that we maintain excess liquidity to support our operations as needed.

U.S. Mortgage Insurance Operations Liquidity — The principal uses of U.S. Mortgage Insurance Operations’ liquidity are the payment of operating expenses, claim payments, taxes, dividends to The PMI Group, and the growth of its investment portfolio. The principal sources of U.S. Mortgage Insurance Operations’ liquidity are written premiums and net investment income. PMI received an $18.3 million dividend from CMG MI in June 2007.

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International Operations and Financial Guaranty Liquidity — The principal uses of these segments’ liquidity are the payment of operating expenses, claim payments, taxes, and growth of its investment portfolio. The principal sources of these segments’ liquidity are written premiums, investment maturities and net investment income.

Credit Facility

Our $400 million revolving credit facility can be utilized for working capital, capital expenditures and other business purposes. The facility may be increased to $500 million at our request subject to approval by our lenders. The facility includes a $50 million letter of credit sub-limit. The facility contains certain financial covenants and restrictions, including an adjusted consolidated net worth threshold and a risk-to-capital ratio threshold of 23 to 1. There are no amounts outstanding related to the facility. There were three outstanding letters of credit totaling approximately $1.7 million as of September 30, 2007.

Common Share Repurchases

In February 2007, our Board of Directors authorized a common share repurchase program in an amount not to exceed $150 million. Pursuant to this program, in June 2007, we repurchased 468,500 common shares for $22.7 million, or $48.48 per common share. In July 2007, our Board of Directors increased the $150 million repurchase authorization to $300 million. From July 1, 2007 through September 30, 2007, we repurchased 5,454,381 common shares for $178.0 million, or $32.64 per common share. While approximately $100.0 million remains on the $300 million repurchase authorization, management presently has no intention of repurchasing common shares in the fourth quarter of 2007.

Dividends to The PMI Group

PMI’s ability to pay dividends to The PMI Group is affected by state insurance laws, credit agreements, rating agencies, and the discretion of insurance regulatory authorities. The laws of Arizona, PMI’s state of domicile for insurance regulatory purposes, provide that PMI may pay dividends out of any available surplus account, without prior approval of the Director of the Arizona Department of Insurance, during any 12-month period in an amount not to exceed the lesser of 10% of policyholders’ surplus as of the preceding year end or the prior calendar year’s net investment income. A dividend that exceeds the foregoing threshold is deemed an “extraordinary dividend” and requires the prior approval of the Director of the Arizona Department of Insurance. In December 2006, the Director of the Arizona Department of Insurance approved an extraordinary dividend request of $250 million and a $100 million installment was paid to The PMI Group in the form of a return of capital. In April 2007, an additional $200 million extraordinary dividend was approved by the Director of the Arizona Department of Insurance. In the second and third quarters of 2007, PMI paid $165 million in dividends to The PMI Group. As of September 30, 2007, there was $185 million of remaining approved dividends.

Other states may also limit or restrict PMI’s ability to pay shareholder dividends. For example, California and New York prohibit mortgage insurers from declaring dividends except from the surplus of undivided profits over the aggregate of their paid-in capital, paid-in surplus and contingency reserves.

PMI’s ability to pay dividends is also subject to restriction under the terms of a runoff support agreement with Allstate Insurance Corporation. Under the Allstate agreement, PMI may not pay a dividend if, after the payment of that dividend, PMI’s risk-to-capital ratio would equal or exceed 23 to 1. As of September 30, 2007, PMI’s risk-to-capital ratio was 9.6 to 1 compared to 8.2 to 1 as of September 30, 2006.

In addition to its consolidated subsidiaries, The PMI Group may in the future derive funds from its unconsolidated equity investments, including its investment in FGIC. FGIC’s ability to pay dividends is subject to restrictions contained in applicable state insurance laws and regulations, FGIC Corporation’s certificate of incorporation, a stockholders agreement between The PMI Group and other investors in FGIC Corporation, and covenants included in its 6.0% senior notes.

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Consolidated Contractual Obligations

Our consolidated contractual obligations include reserves for losses and LAE, long-term debt obligations, operating lease obligations, and purchase obligations. Most of our purchase obligations are capital expenditure commitments that will be used for technology improvements. We have lease obligations under certain non-cancelable operating leases. In addition, we may be committed to fund, if called upon to do so, $6.7 million of additional equity in certain limited partnership investments.

Consolidated Investments:

Net Investment Income

Net investment income consists of:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Dollars in thousands)						(Dollars in thousands)
Fixed income securities	$	45,348		$	38,163		$	126,773		$	114,129
Equity securities		6,456			3,899			16,007			9,867
Short-term investments		4,418			8,323			18,878			23,692
Investment income before expenses		56,222			50,385			161,658			147,688
Investment expenses		(814	)		(705	)		(2,492	)		(2,127	)
Net investment income	$	55,408		$	49,680		$	159,166		$	145,561

Net investment income increased in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006 primarily due to growth in PMI Australia’s investment portfolio, a stronger Australian dollar relative to U.S. dollar and an increase in our consolidated book yield. As of September 30, 2007, our consolidated pre-tax book yield was 5.47% compared to 5.38% as of September 30, 2006. This increase was driven primarily by interest rate increases in Australia.

Investment Portfolio by Operating Segment

The following table summarizes the estimated fair value of the consolidated investment portfolio as of September 30, 2007 and December 31, 2006. Amounts shown under “Corporate and Other” include the investment portfolio of The PMI Group, and amounts shown under “Financial Guaranty” include the investment portfolio of PMI Guaranty:

	U.S. Mortgage Insurance Operations		International Operations		Financial Guaranty		Corporate and Other		Consolidated Total
	(Dollars in thousands)
September 30, 2007
Fixed income securities:
U.S. municipal bonds	$	1,553,999	$	—	$	167,276	$	13,465	$	1,734,740
Foreign governments		—		628,558		—		—		628,558
Corporate bonds		3,176		894,141		—		36,925		934,242
U.S. government and agencies		7,826		—		—		971		8,797
Mortgage-backed securities		2,121		—		—		1,727		3,848
Total fixed income securities		1,567,122		1,522,699		167,276		53,088		3,310,185
Equity securities:
Common stocks		135,738		44,650		—		—		180,388
Preferred stocks		283,051		—		26,880		1,275		311,206
Total equity securities		418,789		44,650		26,880		1,275		491,594
Short-term investments		951		29,409		—		1,301		31,661
Total investments	$	1,986,862	$	1,596,758	$	194,156	$	55,664	$	3,833,440

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	U.S. Mortgage Insurance Operations		International Operations		Financial Guaranty		Corporate and Other		Consolidated Total
	(Dollars in thousands)
December 31, 2006
Fixed income securities:
U.S. municipal bonds	$	1,547,548	$	—	$	77,803	$	13,599	$	1,638,950
Foreign governments		—		499,844		—		—		499,844
Corporate bonds		5,220		629,736		—		39,253		674,209
U.S. government and agencies		8,021		—		—		1,082		9,103
Mortgage-backed securities		2,546		—		—		2,201		4,747
Total fixed income securities		1,563,335		1,129,580		77,803		56,135		2,826,853
Equity securities:
Common stocks		127,825		34,438		—		—		162,263
Preferred stocks		232,736		—		16,025		—		248,761
Total equity securities		360,561		34,438		16,025		—		411,024
Short-term investments		929		52,827		—		1,300		55,056
Total investments	$	1,924,825	$	1,216,845	$	93,828	$	57,435	$	3,292,933

Our consolidated investment portfolio holds primarily investment grade securities comprised of readily marketable fixed income and equity securities. At September 30, 2007, the fair value of these securities in our consolidated investment portfolio increased to $3.8 billion as of September 30, 2007 from $3.3 billion as of December 31, 2006. The increase was due primarily to investment in securities from cash held by PMI Guaranty and increases in foreign currency translation rates.

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Our consolidated investment portfolio consists primarily of publicly traded municipal bonds, U.S. and foreign government bonds and corporate bonds. In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, our entire investment portfolio is designated as available-for-sale and reported at fair value with changes in fair value recorded in accumulated other comprehensive income.

Capital Support Obligations

PMI has entered into various capital support agreements with PMI Australia, PMI Europe, PMI Guaranty, and PMI Canada that could require PMI to make additional capital contributions to those subsidiaries for rating agency purposes. The PMI Group guarantees the performance of PMI’s capital support obligations to PMI Australia, PMI Europe and PMI Guaranty. The capital support agreement and corresponding guarantee for PMI Guaranty and PMI Canada are limited to $650 million and $300 million, respectively. In 2001, PMI executed a capital support agreement whereby it agreed to contribute funds, under specified conditions, to maintain CMG MI’s risk-to-capital ratio at or below 18.0 to 1. PMI’s obligation under the agreement is limited to an aggregate of $37.7 million.

Cash Flows

On a consolidated basis, our principal sources of funds are cash flows generated by our insurance subsidiaries and investment income derived from our investment portfolios. One of the primary goals of our cash management policy is to ensure that we have sufficient funds on hand to pay obligations when they are due. We believe that we have sufficient cash to meet these and other of our short- and medium-term obligations.

Consolidated cash flows generated by operating activities, including premiums, investment income, underwriting and operating expenses and losses, were $431.4 million in the first nine months of 2007 compared to $264.2 million in the first nine months of 2006. Cash flows from operations increased primarily due to increases in premiums written.

Consolidated cash flows used in investing activities in the first nine months of 2007, including purchases and sales of investments and capital expenditures, were $579.4 million compared to $149.6 million in the corresponding period in 2006. The increase in cash flows used in investing activities in the first nine months of 2007 compared to the corresponding period in 2006 was due primarily to decreased proceeds from sales and maturities of fixed income securities and increased purchases of fixed income securities.

Consolidated cash flows used in financing activities, including purchases of common shares and dividends paid to shareholders, were $193.5 million in the first nine months of 2007 compared to $37.1 million in the first nine months of 2006. The difference was primarily due to proceeds from issuance of long term debt in 2006.

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Ratings

The rating agencies have assigned the following ratings to The PMI Group and certain of its subsidiaries:

	Standard & Poor’s	Fitch	Moody’s	DBRS
Insurer Financial Strength Ratings
PMI Mortgage Insurance Co.	AA	AA	Aa2	AA
PMI Insurance Co.	AA	AA	Aa2	—
PMI Australia (1)	AA	AA	Aa2	—
PMI Canada (1)	—	—	—	AA
PMI Europe (1)	AA	AA	Aa3	—
PMI Guaranty	AA	AA	Aa3	—
CMG MI	AA-	AA	—	—
FGIC	AAA	AAA	Aaa	—
RAM Re	AAA	—	Aa3	—
Senior Unsecured Debt
The PMI Group	A	A	A1	—
Capital Securities				—
PMI Capital I	BBB+	A-	A2	—

⁽¹⁾ Refers only to licensed insurance subsidiaries.

In August 2007, Fitch downgraded its insurer financial strength ratings for PMI Mortgage Insurance Co. and PMI Guaranty to AA from AA+. Fitch noted that these rating actions were the result of revisions Fitch made to its capital model for U.S. mortgage insurers. Fitch affirmed the ratings of PMI Australia, PMI Europe and the senior unsecured debt of The PMI Group.

In October 2007, Standard & Poor’s placed its AA counterparty credit and financial strength ratings on PMI Mortgage Insurance Co., PMI Guaranty, PMI Europe and PMI Australia and its AA financial strength rating on PMI Insurance Co. on CreditWatch with negative implications. At the same time, Standard & Poor’s placed its A counterparty credit rating on The PMI Group on CreditWatch with negative implications. In taking these actions, Standard & Poor’s indicated that these ratings will likely be removed from CreditWatch and affirmed with a negative or stable outlook if Standard & Poor’s concludes PMI’s near-term operating performance is not significantly different than its peers and that the group is unlikely to report an underwriting loss in 2009. Standard & Poor’s also indicated that the rating could be lowered by one notch if Standard & Poor’s believes PMI’s operating performance compares unfavorably to its peers in the next two years or that the group is likely to report an underwriting loss for 2009.

In October 2007, Fitch downgraded its debt ratings of The PMI Group to A from A+, and the debt ratings of PMI Capital I to A- from A. Fitch affirmed its AA insurer financial strength ratings of PMI Mortgage Insurance Co., PMI Insurance Co., PMI Australia, PMI Europe and PMI Guaranty Co. Fitch also revised the Rating Outlook on all ratings to Negative from Stable. Also in October, Fitch affirmed its AA insurer financial rating for CMG MI with a Rating Outlook of Stable.

The above actions followed the announcement of our net loss in the third quarter of 2007. Fitch indicated that the downgrade of debt ratings reflects a normalization of the notching between the operating company’s insurer financial strength rating and the holding company’s senior debt ratings to three notches and that the Rating Outlook revision to Negative for PMI Guaranty Co., PMI Insurance Co., PMI Europe, and PMI Australia is exclusively related to the Rating Outlook of and the capital support provided by PMI Mortgage Insurance Co via net worth maintenance agreements, reinsurance support, or other guarantees to these entities.

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On November 5, 2007, Fitch issued a press release concerning the process it will employ in updating its analysis of the CDOs of asset-backed securities (ABS) insured by the financial guaranty industry. Fitch indicated that it was updating its capital adequacy analysis in light of recent rating actions with respect to ABS CDOs having subprime mortgage-backed securities exposure, and that it expects to complete this capital analysis within four to six weeks. Fitch also discussed its preliminary observations on the relative probability that each triple-A rated financial guarantor may experience erosion of its capital cushion under Fitch’s updated stress analysis. Fitch’s preliminary observation is that FGIC would have a “high probability” of experiencing erosion of its capital cushion under Fitch’s updated stress analysis, without taking into account any steps FGIC takes to mitigate risk or enhance its capital position. Fitch noted that it would be willing to consider in its capital analysis the impact of actions taken by a financial guarantor to mitigate risk or enhance its capital position during the interim period. Fitch stated that at the conclusion of its updated stress analysis, it would expect to place on “Rating Watch Negative” the Insurer Financial Strength rating of any financial guarantor whose capital ratio falls below Fitch’s triple-A benchmark. Fitch would then expect to provide such a financial guarantor approximately one month to execute a risk mitigation strategy or raise capital so as to meet Fitch’s triple-A capital standards; failure to do so would result in a downgrade of the guarantor’s rating.

The rating agencies have indicated that they are engaged in ongoing monitoring of the mortgage insurance and financial guaranty industries and the mortgage-backed securities market to assess the adequacy of, and where necessary refine, their capital models. Determinations of ratings by the rating agencies are affected by a variety of factors, including macroeconomic conditions, economic conditions affecting the mortgage insurance industry, changes in regulatory conditions that may affect demand for mortgage insurance, competition, and the need for us to make capital contributions to our subsidiaries and underwriting and investment losses. A downgrade of our insurance subsidiaries’ ratings could have a material, negative affect on our consolidated financial condition and results of operations.

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CRITICAL ACCOUNTING ESTIMATES

“Management’s Discussion and Analysis of Financial Condition and Results of Operation,” as well as disclosures included elsewhere in this report, are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingencies. Actual results may differ significantly from these estimates. We believe that the following critical accounting estimates involved significant judgments used in the preparation of our consolidated financial statements.

Reserves for Losses and LAE

We establish reserves for losses and LAE to recognize the liability of unpaid losses related to insured mortgages that are in default. We do not rely on a single estimate to determine our loss and LAE reserves. To ensure the reasonableness of our ultimate estimates, we develop scenarios using generally recognized actuarial projection methodologies that result in various possible losses and LAE. Each scenario in the loss and LAE reserve model is assigned a different weight and is based upon actual claims experience in prior years to project the current liability. Our best estimate as of September 30, 2007 with respect to our consolidated loss and LAE reserves was slightly above the midpoint of the actuarially determined range.

Changes in loss reserves can materially affect our consolidated net income. The process of reserving for losses requires us to forecast the interest rate, employment and housing market environments, which are highly uncertain. Therefore, the process requires significant management judgment and estimates. The use of different estimates would have resulted in the establishment of different reserves. In addition, changes in the accounting estimates are reasonably likely to occur from period to period based on the economic conditions. We review the judgments made in our prior period estimation process and adjust our current assumptions as appropriate. While our assumptions are based in part upon historical data, the loss provisioning process is complex and subjective and, therefore, the ultimate liability may vary significantly from our estimates.

The following table shows the reasonable range of loss and LAE reserves, as determined by our actuaries, and recorded reserves for losses and LAE (gross of reinsurance recoverables) as of September 30, 2007 and December 31, 2006 on a segment and consolidated basis:

	As of September 30, 2007						As of December 31, 2006
	Low		High		Recorded		Low		High		Recorded
	(Dollars in millions)						(Dollars in millions)
U.S. Mortgage Insurance Operations	$	565.3	$	768.6	$	698.2	$	330.5	$	411.8	$	366.2
International Operations		58.7		87.6		72.1		39.4		64.1		48.5
Consolidated loss and LAE reserves	$	624.0	$	856.2	$	770.3	$	369.9	$	475.9	$	414.7

U.S. Mortgage Insurance Operations—We establish PMI’s reserves for losses and LAE based upon our estimate of unpaid losses and LAE on (i) reported mortgage loans in default and (ii) estimated defaults incurred but not reported to PMI by its customers. We believe the amounts recorded represent the most likely outcome within the actuarial ranges.

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Our best estimate of PMI’s reserves for losses and LAE is derived primarily from our analysis of PMI’s default and loss experience. The key assumptions used in the estimation process are expected claim rates, average claim sizes and costs to settle claims. We evaluate our assumptions in light of PMI’s historical patterns of claim payments, loss experience in past and current economic environments, the seasoning of PMI’s various books of business, PMI’s coverage levels, the credit quality profile of PMI’s portfolios, and the geographic mix of PMI’s business. Our assumptions are influenced by historical loss patterns and are adjusted to reflect recent loss trends. Our assumptions are also influenced by our assessment of current and future economic conditions, including trends in housing prices, unemployment and interest rates. Our estimation process uses generally recognized actuarial projection methodologies. As part of our estimation process, we also evaluate various scenarios representing possible losses and LAE under different economic assumptions. We established PMI’s reserves at September 30, 2007 at a level slightly above the midpoint of the actuarial range based on, among other reasons, our evaluation of PMI’s estimated future claim rates and average claim sizes.

Our increases to the reserve balance in the first nine months of 2007 were primarily due to PMI’s higher default inventory, and higher expected claim rates and claim sizes on reported delinquencies. The table below provides a reconciliation of our U.S. Mortgage Insurance segment’s beginning and ending reserves for losses and LAE for the nine months ended September 30, 2007 and 2006:

	2007			2006
	(Dollars in millions)
Balance at January 1,	$	366.2		$	345.5
Reinsurance recoverables		(2.9	)		(2.5	)
Net balance at January 1,		363.3			343.0
Losses and LAE incurred (principally with respect to defaults occurring in):
Current year		419.6			190.0
Prior years		155.9			1.0
Total incurred		575.5			191.0
Losses and LAE payments (principally with respect to defaults occurring in):
Current year		(12.3	)		(7.2	)
Prior years		(232.1	)		(170.8	)
Total payments		(244.4	)		(178.0	)
Net balance at September 30,		694.4			356.0
Reinsurance recoverables		3.8			2.8
Balance at September 30,	$	698.2		$	358.8

The above loss reserve reconciliation shows the components of our losses and LAE reserve changes for the periods presented. Losses and LAE payments of $244.4 million and $178.0 million for the nine months ended September 30, 2007 and 2006, respectively, reflect amounts paid during the periods presented and are not subject to estimation. Total incurred of $575.5 million and $191.0 million for the nine months ended September 30, 2007 and 2006, respectively, are management’s best estimates of ultimate losses and LAE and, therefore, are subject to change. The changes in our estimates are principally reflected in the losses and LAE incurred line item which shows an increase to incurred related to prior years of $155.9 million for the nine months ended September 30, 2007 and an increase to incurred related to prior years of $1.0 million for the same period ended 2006. The table below breaks down the nine months ended September 30, 2007 and 2006 changes in reserves related to prior years by particular accident years:

	Losses and LAE Incurred								Changes in Incurred
Accident Year (year in which default occurred)	September 30, 2007		December 31, 2006		September 30, 2006		December 31, 2005		2007 vs. 2006		2006 vs. 2005
	(Dollars in millions)
2000 and prior	$	—	$	—	$	—	$	—		—		(0.1	)
2001		185.7		185.3		185.4		184.8		0.4		0.6
2002		224.3		221.7		221.7		220.2		2.6		1.5
2003		225.0		220.2		220.9		217.6		4.8		3.3
2004		238.0		229.1		230.3		224.7		8.9		5.6
2005		263.0		240.4		237.1		247.0		22.6		(9.9	)
2006		377.4		260.8		190.0		—		116.6		—
Total									$	155.9	$	1.0

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The $155.9 million increase and $1.0 million increase related to prior years in the first nine months of 2007 and 2006, respectively, were due to re-estimations of ultimate loss rates from those established at the original notice of default, updated through the periods presented. These re-estimations of ultimate loss rates are the result of management’s periodic review of estimated claim amounts in light of actual claim amounts, loss development data and ultimate claim rates. The $155.9 million increase in prior years’ reserves during the first nine months of 2007 was driven by higher claim rates and claim sizes, and a decrease in PMI’s cure rate. Future declines in PMI’s cure rate, or higher default or claim rates could lead to further increases in losses and LAE.

The following table shows a breakdown of reserves for losses and LAE by primary and pool insurance:

	September 30, 2007		December 31, 2006
	(Dollars in thousands)
Primary insurance	$	651,250	$	332,900
Pool insurance		46,988		33,282
Total reserves for losses and LAE	$	698,238	$	366,182

The following table shows a breakdown of reserves for losses and LAE by loans in default, incurred but not reported or IBNR, and the cost to settle claims, or LAE:

	September 30, 2007		December 31, 2006
	(Dollars in thousands)
Loans in default	$	637,453	$	319,074
IBNR		34,769		33,300
Cost to settle claims (LAE)		26,016		13,808
Total reserves for losses and LAE	$	698,238	$	366,182

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To provide a measure of sensitivity on pre-tax income to changes in loss reserve estimates, we estimate that: (i) for every 5% change in our estimate of the future average claim sizes or every 5% change in our estimate of the future claim rates with respect to the September 30, 2007 reserves for losses and LAE, the effect on pre-tax income would be an increase or decrease of approximately $31.9 million; (ii) for every 5% change in our estimate of incurred but not reported loans in default as of September 30, 2007, the effect on pre-tax income would be approximately $1.7 million; and (iii) for every 5% change in our estimate of the future cost of claims settlement expenses as of September 30, 2007, the effect on pre-tax income would be approximately $1.3 million.

These sensitivities are hypothetical and should be viewed in that light. For example, the relationship of a change in assumption relating to future average claim sizes, claim rates or cost of claims settlement to the change in value may not be linear. Also, the effect of a variation in a particular assumption on the value of the loss and LAE reserves is calculated without changing any other assumption. Changes in one factor may result in changes in another which might magnify or counteract the sensitivities. Changes in factors such as persistency or cure rates can also affect the actual losses incurred. To the extent persistency increases and assuming all other variables remain constant, the absolute dollars of claims paid will increase as insurance in force will remain in place longer, thereby generating a higher potential for future incidences of loss. Conversely, if persistency were to decline, absolute claim payments would decline. In addition, changes in cure rates would positively or negatively affect total losses if cure rates increased or decreased, respectively.

International Operations— PMI Australia’s reserves for losses and LAE are based upon estimated unpaid losses and LAE on reported defaults and estimated defaults incurred but not reported. The key assumptions we use to derive PMI Australia’s loss and LAE reserves include estimates of PMI Australia’s expected claim rates, average claim sizes, LAE, and net expected future claim recoveries. These assumptions are evaluated in light of similar factors used by PMI. In connection with the preparation and filing of this report, our actuaries determined an actuarial range for PMI Australia’s reserves for losses and LAE, at September 30, 2007, of $45.6 million to $61.8 million. As of September 30, 2007, PMI Australia’s recorded reserves for losses and LAE were $51.3 million, which approximated the actuarial mid-point, and represented our best estimate. In arriving at this estimate, we reviewed the key assumptions described above, the analysis performed by our actuaries and current economic and real estate market condition in Australia. Our estimate of $51.3 million is a 68.8% increase from PMI Australia’s reserve balance of $30.4 million at December 31, 2006. This increase was primarily due to higher claim rates and average claim sizes. PMI Australia’s default inventory increased to 2,919 loans as of September 30, 2007 from 2,281 loans as of December 31, 2006.

PMI Europe establishes loss reserves for all of its insurance and reinsurance business and for credit default swap transactions consummated before July 1, 2003. Revenue, losses and other expenses associated with credit default swaps executed on or after July 1, 2003 are recognized through derivative accounting treatment. PMI Europe’s loss reserving methodology contains two components: case reserves and IBNR reserves. Case and IBNR reserves are based upon factors which include, but are not limited to, our analysis of arrears and loss payment reports, loss assumptions derived from pricing analyses, our view of current and future economic conditions and industry information. Our actuaries calculated a range for PMI Europe’s loss reserves at September 30, 2007 of $12.9 million to $25.5 million. PMI Europe’s recorded loss reserves at September 30, 2007 were $20.6 million, which represented our best estimate and an increase of $2.7 million from PMI Europe’s loss reserve balance of $17.9 million at December 31, 2006. The increase to PMI Europe’s loss reserves in the third quarter of 2007 was primarily due to the seasoning of credit default swap transactions accounted for as insurance and flow business.

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PMI Asia’s loss reserves at September 30, 2007 were $0.2 million, which represents our best estimate. Our actuaries calculated a range for PMI Asia’s loss reserves at September 30, 2007 of $0.2 million to $0.3 million.

The following table shows a breakdown of International Operations’ loss and LAE reserves:

	September 30, 2007		December 31, 2006
	(Dollars in thousands)
Loans in default	$	65,243	$	41,992
IBNR		5,662		5,751
Cost to settle claims (LAE)		1,243		811
Total loss and LAE reserves	$	72,148	$	48,554

The following table provides a reconciliation of our International Operations segment’s beginning and ending reserves for losses and LAE for the nine months ended September 30, 2007 and 2006:

	2007			2006
	(Dollars in millions)
Balance at January 1,	$	48.5		$	23.3
Reinsurance recoverables		(0.8	)		(0.8	)
Net balance at January 1,		47.7			22.5
Losses and LAE incurred (principally with respect to defaults occurring in):
Current year		34.1			14.7
Prior years		18.7			6.7
Total incurred		52.8			21.4
Losses and LAE payments (principally with respect to defaults occurring in):
Current year		(1.8	)		(0.7	)
Prior years		(34.1	)		(9.6	)
Total payments		(35.9	)		(10.3	)
Foreign currency translations		6.6			0.9
Net balance at September 30,		71.2			34.5
Reinsurance recoverables		0.9			0.9
Balance at September 30,	$	72.1		$	35.4

The increase in incurred related to prior years of $18.7 million and $6.7 million in the first nine months of 2007 and 2006, respectively, was primarily due to our re-estimate of expected claim sizes and claim rates for PMI Australia. These increases were primarily the result of moderating home price appreciation and hime price declines in certain areas and interest rate increases in 2006 and 2007.

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Investment Securities

Other-Than-Temporary Impairment—We have a committee review process for all securities in our investment portfolio, including a review for impairment losses. Factors considered when assessing impairment include:

• a decline in the market value of a security below cost or amortized cost for a continuous period of at least six months;

• the severity and nature of the decline in market value below cost regardless of the duration of the decline;

• recent credit downgrades of the applicable security or the issuer by the rating agencies;

• the financial condition of the applicable issuer;

• whether scheduled interest payments are past due; and

• whether we have the ability and intent to hold the security for a sufficient period of time to allow for anticipated recoveries in fair value.

If we believe a decline in the value of a particular investment is temporary and we have the intent and ability to hold to recovery, we record the decline as an unrealized loss on our consolidated balance sheet under “accumulated other comprehensive income” in shareholders’ equity. If we believe the decline is other-than-temporary, we write-down the carrying value of the investment and record a realized loss in our consolidated statement of operations under “net realized investment gains.” Our assessment of a decline in value includes management’s current assessment of the factors noted above. If that assessment changes in the future, we may ultimately record a loss after having originally concluded that the decline in value was temporary.

The following table shows our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2007:

	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
Fixed income securities:
U.S. municipal bonds	$	258,307	$	(3,538	)	$	—	$	—		$	258,307	$	(3,538	)
Foreign governments		312,697		(8,456	)		245,458		(8,336	)		558,155		(16,792	)
Corporate bonds		487,484		(11,407	)		298,948		(11,214	)		786,432		(22,621	)
U.S. government and agencies		—		—			243		(2	)		243		(2	)
Total fixed income securities		1,058,488		(23,401	)		544,649		(19,552	)		1,603,137		(42,953	)
Equity securities:
Common stocks		15,040		(687	)		—		—			15,040		(687	)
Preferred stocks		184,391		(5,979	)		—		—			184,391		(5,979	)
Total equity securities		199,431		(6,666	)		—		—			199,431		(6,666	)
Short-term investments		1,413		(2	)		—		—			1,413		(2	)
Total	$	1,259,332	$	(30,069	)	$	544,649	$	(19,552	)	$	1,803,981	$	(49,621	)

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Unrealized losses on fixed income securities were primarily due to an increase in interest rates in 2006 and 2007 and are not considered to be other-than-temporarily impaired as we have the intent and ability to hold such investments until they recover in value or mature. We determined that the decline in the market value of certain investments met the definition of other-than-temporary impairment and recognized realized losses of $1.9 million and $3.2 million in the third quarter and first nine months of 2007.

Revenue Recognition

We generate a significant portion of our revenues from mortgage insurance premiums on either a monthly, annual or single payment basis. Premiums written on a monthly basis are earned as coverage is provided. Premiums written on an annual basis are earned on a monthly pro-rata basis over the year of coverage. 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. If single premium policies related to insured loans are cancelled due to repayment by the borrower, and the premium is non-refundable, then the remaining unearned premium related to each cancelled policy is recognized to earned premiums upon notification of the cancellation. The length of the earnings pattern for single premium products is based on a range of seven to fifteen years, and the rates used to determine the earnings of single premiums are estimates based on actuarial analysis of the expiration of risk. Single premiums written accounted for 19.2% and 13.9% of gross premiums written in the first nine months of 2007 and 2006, respectively, and came predominantly from PMI Australia in our International Operations segment. The premium earnings process generally begins upon receipt of the initial premium payment. The premiums earnings pattern methodology is an estimation process and, accordingly, we review the premium earnings cycle for each policy acquisition year (“Book Year”) annually and any adjustments to these estimates are reflected for each Book Year as appropriate.

Deferred Policy Acquisition Costs

Our policy acquisition costs are those costs that vary with, and are primarily related to, our acquisition, underwriting and processing of new mortgage insurance policies, including contract underwriting and sales related activities. To the extent that we are compensated by customers for contract underwriting, those underwriting costs are not deferred. We defer policy acquisition costs when incurred and amortize these costs in proportion to estimated gross profits for each policy year by type of insurance contract (i.e. monthly, annual and single premium). The amortization estimates for each underwriting year are monitored regularly to reflect actual experience and any changes to persistency or loss development by type of insurance contract. The rate of amortization is not adjusted for monthly and annual policy cancellations unless it is determined that the policy cancellations are of such magnitude that the recoverability of the deferred costs is not probable. We estimate that, due principally to scheduled amortization, our annual cancellation rate would generally need to exceed 60% before it would become probable that deferred policy costs associated with PMI’s monthly and annual premium policies would not be recoverable. Since 1993, PMI’s highest annual cancellation rate was 56%, which occurred in 2003. No impairment for monthly or annual policies was recognized for that year. The deferred costs related to single premium policies are adjusted as appropriate for policy cancellations to be consistent with our revenue recognition policy. We review our estimation process, specifically related to single premium policies, on a regular basis and any adjustments made to the estimates are reflected in the current period’s consolidated net income. Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed recoverable amounts, after considering investment income.

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FASB Project

In 2004, the SEC staff reviewed the accounting practices for loss reserves of publicly held financial guaranty industry companies and upon noting various differences in the accounting practices requested the Financial Accounting Standards Board (“FASB”) Staff to review and potentially clarify the applicable existing accounting guidance. An exposure draft, Accounting for Financial Guarantee Insurance Contracts, An Interpretation of SFAS No. 60 was issued in April 2007. The draft excludes mortgage guarantee insurance and credit insurance from the scope of the proposed interpretation. The FASB held a public round table meeting with respondents to the exposure draft in September 2007 to discuss significant issues raised in the comment letters. The exposure draft is scheduled to be re-deliberated in the fourth quarter of 2007 and it is anticipated that the final pronouncement will be issued in the first quarter of 2008. It is possible that, upon issuance of the final pronouncement, FGIC, RAM Re and PMI Guaranty may be required to change certain aspects of their accounting for loss reserves, premium income and deferred acquisition costs. It is not possible to predict the impact, if any, that the FASB’s review may have on our consolidated results of operations, financial condition or cash flows or those of our unconsolidated subsidiaries.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of September 30, 2007, our consolidated investment portfolio was $3.8 billion. The fair value of investments in our portfolio is calculated from independent market quotations, and is interest rate sensitive and subject to change based on interest rate movements. As of September 30, 2007, 86.4% of our investments were long-term fixed income securities, primarily including U.S. municipal bonds. As interest rates fall, the fair value of fixed income securities generally increases, and as interest rates rise, the fair value of fixed income securities generally decreases. The following table summarizes the estimated change in fair value and the accounting effect on comprehensive income (pre-tax) for our consolidated investment portfolio based upon specified changes in interest rates as of September 30, 2007:

	Estimated Increase (Decrease) in Fair Value
	(Dollars in thousands)
300 basis point decline	$	352,481
200 basis point decline	$	249,182
100 basis point decline	$	137,496
100 basis point rise	$	(157,481	)
200 basis point rise	$	(346,614	)
300 basis point rise	$	(522,126	)

These hypothetical estimates of changes in fair value are primarily related to our fixed-income securities as the fair values of fixed-income securities generally fluctuate with increases or decreases in interest rates. The weighted average option-adjusted duration of our consolidated investment portfolio including cash and cash equivalents was 4.8 as of September 30, 2007.

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As of September 30, 2007 $1.3 billion, excluding cash and cash equivalents of our invested assets, was held by PMI Australia and was predominantly denominated in Australian dollars. The value of the Australian dollar strengthened relative to the U.S. dollar to 0.8879 as of September 30, 2007 compared to 0.7886 as of December 31, 2006. As of September 30, 2007, $0.2 billion, excluding cash and cash equivalents of our invested assets, was held by PMI Europe and was denominated primarily in Euros. The value of the Euro appreciated relative to the U.S. dollar to 1.4261 at September 30, 2007 compared to 1.3199 at December 31, 2006. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures—Based on their evaluation as of September 30, 2007, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective.

Changes in Internal Control Over Financial Reporting—There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On July 26, 2007, our Board of Directors authorized an additional $150 million to the Company’s existing common share repurchase program, bringing the total authorization to $300 million. The following table contains information with respect to purchases made by or on behalf of the Company during the three months ended September 30, 2007.

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased/delivered	Average Price Paid per Share (1)	Total Number of Shares Purchased/delivered as Part of Publicly Announced Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs at Month End
07/01//07- 07/31/07	632,495	$45.87	632,495	$249,036,161
08/01/07- 08/31/07	3,698,900	$31.26	3,698,900	133,413,765
09/01/07- 09/30/07	1,122,986	$29.75	1,122,986	100,004,015
Total	5,454,381	$32.64	5,454,381	$100,004,015

(1) The average price paid per common share repurchased includes commissions.

ITEM 6. EXHIBITS

The exhibits listed in the accompanying Index to Exhibits are furnished as part of this Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	The PMI Group, Inc.
November 6, 2007	/s/ Donald P. Lofe, Jr.
	Donald P. Lofe, Jr.
	Executive Vice President and
	Chief Financial Officer
	(Duly Authorized Officer and Principal Financial Officer)
November 6, 2007	/s/ Thomas H. Jeter
	Thomas H. Jeter
	Senior Vice President, Chief Accounting
	Officer and Corporate Controller

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INDEX TO EXHIBITS

Exhibit Number	Description of Exhibit
10.1*	The PMI Group, Inc. 2005 Officer Deferred Compensation Plan (September 19, 2007 Restatement), incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed September 25, 2007 (File No. 001-13664).
10.2*	The PMI Group, Inc. Amended and Restated Equity Incentive Plan (Amended September 19, 2007), incorporated by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed September 25, 2007 (File No. 001-13664).
10.3*	The PMI Group, Inc. Bonus Incentive Plan (September 19, 2007 Amendment and Restatement), incorporated by reference to Exhibit 10.3 to the registrant’s current report on Form 8-K filed September 25, 2007 (File No. 001-13664).
10.4*	The PMI Group, Inc. Supplemental Employee Retirement Plan Effective April 1, 1995 (Amended and Restated as of September 1, 2007), incorporated by reference to Exhibit 10.4 to the registrant’s current report on Form 8-K filed September 25, 2007 (File No. 001-13664).
10.5*	The PMI Group, Inc. Additional Benefits Plan (September 1, 2007 Restatement), incorporated by reference to Exhibit 10.5 to the registrant’s current report on Form 8-K filed September 25, 2007 (File No. 001-13664).
10.6*	The PMI Group, Inc. 2005 Directors’ Deferred Compensation Plan (September 20, 2007 Restatement).
10.7*	The PMI Group, Inc. Retirement Plan (September 1, 2007 Restatement).
31.1	Certification of Chief Executive Officer.
31.2	Certification of Chief Financial Officer.
32.1	Certification of Chief Executive Officer.
32.2	Certification of Chief Financial Officer.
99.1	PMI Mortgage Insurance Ltd. And Subsidiaries Consolidated Financial Statements as of September 30, 2007 and December 31, 2006 and for the three and nine months ended September 30, 2007 and 2006

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EX-10.6

Exhibit 10.6

THE PMI GROUP, INC.

2005 DIRECTORS’ DEFERRED COMPENSATION PLAN

(September 20, 2007 Restatement)

TABLE OF CONTENTS

		Page
SECTION 1 DEFINITIONS		1
1.1	“Affiliate”	1
1.2	“Beneficiary”	1
1.3	“Board of Directors”	1
1.4	“Change in Control Event”	1
1.5	“Code”	3
1.6	“Committee”	3
1.7	“Company”	3
1.8	“Compensation”	3
1.9	“Compensation Deferrals”	3
1.10	“Disability” or “Disabled”	3
1.11	“Nonemployee Director”	4
1.12	“Participant”	4
1.13	“Participant’s Account” or “Account”	4
1.14	“Payment Date”	4
1.15	“Plan”	4
1.16	“Plan Year”	4
1.17	“Separation from Service”	4
1.18	“Specified Participant”	4
1.19	“Unforeseeable Emergency”	5
SECTION 2 PARTICIPATION		5
2.1	Participation	5
2.2	Cancellation of Compensation Deferrals	6
2.3	Termination of Participation	7
SECTION 3 COMPENSATION DEFERRAL ELECTIONS		7
3.1	Compensation Deferrals	7
3.2	Crediting of Compensation Deferrals	8
3.3	Deemed Investment Return on Accounts	8
3.4	Form of Payment	8
3.5	Term of Deferral	8
3.6	Changes in Elections as to Form of Payment and/or Term of Deferral	8

-i-

TABLE OF CONTENTS

(Continued)

		Page
SECTION 4 ACCOUNTING		9
4.1	Participants’ Accounts	9
4.2	Participants Remain Unsecured Creditors	9
4.3	Accounting Methods	9
4.4	Reports	9
SECTION 5 DISTRIBUTIONS		9
5.1	Normal Time for Distribution	9
5.2	Special Rule for Change in Control Event	10
5.3	Special Rule for Death	10
5.4	Special Rule for Disability	10
5.5	Special Rule for Separation From Service	10
5.6	Required Six-Month Delay of Payment to a Specified Participant	11
5.7	Delay of Payment Permitted Under Certain Circumstances	11
5.8	Acceleration of Payment(s) Permitted Under Certain Circumstances	12
5.9	Beneficiary Designations	13
5.10	Unforeseeable Emergency	14
5.11	Payments to Incompetents	14
5.12	Undistributable Accounts	14
5.13	Payment in Cash or its Equivalent.	15
SECTION 6 PARTICIPANT’S INTEREST IN ACCOUNT		15
SECTION 7 ADMINISTRATION OF THE PLAN		15
7.1	Committee	15
7.2	Actions by Committee	15
7.3	Powers of Committee	15
7.4	Decisions of Committee and its Delegates	16
7.5	Administrative Expenses	16
7.6	Eligibility to Participate	16
7.7	Indemnification	16

-ii-

TABLE OF CONTENTS

(Continued)

		Page
SECTION 8 UNFUNDED PLAN		17
SECTION 9 MODIFICATION OR TERMINATION OF PLAN		17
9.1	Company’s Obligation is Limited	17
9.2	Right to Amend or Terminate	17
9.3	Effect of Termination	17
9.4	Acceleration of Distributions Permitted on Certain Terminations	17
SECTION 10 GENERAL PROVISIONS		18
10.1	Inalienability	18
10.2	Rights and Duties	18
10.3	No Enlargement of Rights	18
10.4	Compensation Deferrals Not Counted Under Other Employee Benefit Plans	18
10.5	Applicable Law	18
10.6	Severability	18
10.7	Captions	18
10.8	No Guarantees Regarding Tax Treatment	18
EXECUTION		19

-iii-

THE PMI GROUP, INC.

2005 DIRECTORS’ DEFERRED COMPENSATION PLAN

(September 20, 2007 Restatement)

THE PMI GROUP, INC., a Delaware corporation, having established The PMI Group, Inc. 2005 Directors’ Deferred Compensation Plan (the “Plan), effective as of January 1, 2005, for the benefit of members of the Company’s Board of Directors who are employees of neither the Company nor any of its Affiliates in order to provide such directors with certain deferred compensation benefits, hereby amends and restates the Plan in its entirety, effective as of September 20, 2007, as set forth below.

The Plan is an unfunded deferred compensation plan that is intended to (a) comply with the requirements of section 409A of the Internal Revenue Code of 1986, as amended, and (b) be exempt from the provisions of the Employee Retirement Income Security Act of 1974, as amended.

SECTION 1

DEFINITIONS

The following words and phrases shall have the following meanings unless a different meaning is plainly required by the context:

1.1 “Affiliate” shall mean each corporation, trade or business which is, together with the Company, a member of a controlled group of corporations or an affiliated service group or under common control (within the meaning of section 414(b), (c) or (m) of the Code), but only for the period during which such other entity is so affiliated with the Company. Notwithstanding the foregoing, in applying sections 1563(a)(1), (2) and (3) of the Code for purposes of determining a controlled group of corporations under section 414(b) of the Code and in applying Treasury regulation section 1.414(c)-2 for purposes of determining trades or businesses that are under common control for purposes of section 414(c) of the Code, the phrase “at least 50 percent” will be used instead of “at least 80 percent” at each place it appears in such sections.

1.2 “Beneficiary” shall mean the person or persons entitled to receive the balance credited to a Participant’s Account under the Plan upon the death of a Participant, as provided in Section 5.3.

1.3 “Board of Directors” shall mean the Board of Directors of the Company, as constituted from time to time, except that any action that could be taken by the Board of Directors may also be taken by a duly authorized Committee of the Board of Directors.

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1.4 “Change in Control Event” means a change in the ownership of the Company, a change in the effective control of the Company, or a change in the ownership of a substantial portion of the assets of the Company as determined in accordance with section 409A(a)(2)(A)(v) of the Code and Treasury regulation section 1.409A-3(i)(5), and as set forth below:

(a) A change in the ownership of the Company occurs on the date that any one person or more than one person acting as a group (a “Person”), acquires ownership of the stock of the Company that, together with the stock held by such Person, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company; provided, however, that for purposes of this subsection (a), the acquisition of additional stock by any one Person who is considered to own more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company shall not be considered to cause a change in the ownership of the Company (or to cause a change in the effective control of the Company within the meaning of subsection (b) below). An increase in the percentage of stock owned by any one Person as a result of a transaction in which the Company acquires its stock in exchange for property shall be treated as an acquisition of stock for purposes of this subsection (a). This subsection (a) applies only when there is a transfer of stock of the Company (or issuance of stock of the Company) and the Company’s stock remains outstanding after the transaction;

(b) A change in the effective control of the Company occurs on the date that either: (1) any one Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) ownership of the stock of the Company possessing thirty percent (30%) or more of the total voting power of the stock of the Company; or (2) a majority of the members of the Board of Directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board of Directors prior to the date of the appointment or election. A change in effective control also may occur in a transaction in which either of the two corporations involved in the transaction has a Change in Control Event under subsection (a) above or (c) below. For purposes of this subsection (b), if any one Person is considered to effectively control the Company within the meaning of this subsection (b), the acquisition of additional control of the Company by such Person shall not be considered to cause a change in the effective control of the Company (or to cause a change in the ownership of the Company within the meaning of subsection (a) above); or

(c) A change in the ownership of a substantial portion of the Company’s assets occurs on the date that any one Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) assets from the Company that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. For this purpose, “gross fair market value” means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. However, there is no Change in Control Event under this subsection (c) when there is a transfer of assets of the Company to an entity that is controlled by the shareholders of the Company immediately after the transfer, as provided below. A transfer of assets by the Company shall not be treated as a change in the ownership of such assets if the assets are transferred to: (1) a shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to the Company’s stock; (2) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the Company; (3) a Person, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock

2

of the Company; or (4) an entity, at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a Person described in clause (3) above. For purposes of this subsection (c) and except as otherwise provided, a person’s status is determined immediately after the transfer of the assets.

For purposes of this Section 1.4, persons will not be considered to be acting as a group solely because they purchase or own stock of the Company at the same time. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the Company, and if a person, including an entity, owns stock in both the Company and another corporation and the Company and the other corporation enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders only with respect to the ownership in the Company before the transaction giving rise to the change and not with respect to the ownership interest in the other corporation. Section 318(a) of the Code also applies to determine stock ownership. Stock underlying a vested option is considered owned by the individual who holds the vested option (and the stock underlying an unvested option is not considered owned by the individual who holds the unvested option); provided, however, that if a vested option is exercisable for stock that is not substantially vested (as defined by Treasury regulation sections 1.83-3(b) and (j)), the stock underlying the option is not treated as owned by the individual who holds the option.

1.5 “Code” shall mean the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code shall include such section, any valid regulation or other Treasury Department or Internal Revenue Service guidance promulgated thereunder, and any comparable provision of any future legislation amending, supplementing or superseding such section.

1.6 “Committee” shall mean the committee appointed by (and serving at the pleasure of) the Board of Directors to administer the Plan. As of the effective date of the Plan, the members of the Committee shall be the Governance and Nominating Committee of the Board of Directors.

1.7 “Company” shall mean The PMI Group, Inc., a Delaware corporation, or any successor thereto.

1.8 “Compensation” shall mean the annual cash retainer, retainer for serving as a committee chairperson (if any), and meeting fees (if any) of a Participant. A Participant’s Compensation shall not include any other type of remuneration.

1.9 “Compensation Deferrals” shall mean the amounts credited to Participants’ Accounts under the Plan pursuant to their deferral elections made in accordance with Section 2.1.

1.10 “Disability” or “Disabled” shall mean the Participant is (a) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less

3

than twelve (12) months and is evidenced by a certificate of a physician satisfactory to the Committee stating that such Disability exists and is likely to result in death or last for at least twelve (12) months, or (b) by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Company. The Committee shall determine whether or not a Participant is Disabled based on such evidence as the Committee deems necessary or advisable. Notwithstanding the foregoing, a Participant shall be deemed to be Disabled if the Participant is determined to be totally disabled by the Social Security Administration.

1.11 “Nonemployee Director” means a member of the Board of Directors who is an employee of neither the Company nor of any Affiliate.

1.12 “Participant” shall mean a Nonemployee Director who (a) has become a Participant in the Plan pursuant to Section 2.1, and (b) has not ceased to be a Participant pursuant to Section 2.3.

1.13 “Participant’s Account” or “Account” shall mean, as to any Participant, the separate account maintained on the books of the Company in order to reflect his or her interest under the Plan.

1.14 “Payment Date” shall mean the first day of a calendar month.

1.15 “Plan” shall mean The PMI Group, Inc. 2005 Directors’ Deferred Compensation Plan, as set forth in this instrument and as heretofore or hereafter amended from time to time.

1.16 “Plan Year” shall mean the twelve month period beginning January 1 and ending December 31.

1.17 “Separation from Service” shall mean a cessation of the Director’s service on the Board for any reason, (as determined in accordance with section 409A(a)(2)(A)(i) of the Code and Treasury regulation section 1.409A-1(h)), including, but not by way of limitation, a termination by resignation, death, Disability or retirement. For this purpose, the employment relationship shall be treated as continuing intact while the Participant is on military leave, sick leave or other bona fide leave of absence, except that if the period of such leave exceeds six (6) months and the Participant does not retain a right to reemployment under an applicable statute or by contract, then the employment relationship shall be deemed to have terminated on the first day immediately following such six-month period. A leave of absence constitutes a bona fide leave of absence only if there is a reasonable expectation that the Participant will return to perform services for the Company or an Affiliate.

1.18 “Specified Participant” shall mean a Participant who, as of the date of his or her Separation from Service, is a key employee of the Company. For this purpose, a Participant shall be deemed to be a “key employee” of the Company if he or she meets the requirements of

4

section 416(i)(1)(A)(i), (ii) or (iii) of the Code (applied in accordance with the regulations thereunder and disregarding section 416(i)(5) of the Code) at any time during the 12-month period ending on September 30 (the “Identification Date”). In this connection, the definition of compensation under Treasury regulation section 1.415(c)-2(a) will be used, applied as if no safe harbor provided in Treasury regulation section 1.415(c)-2(d) were used, no elective special timing rules provided in Treasury regulation section 1.415(c)-2(e) were used, and no elective special rules provided in Treasury regulation section 1.415(c)-2(g) were used. If a Participant is a key employee of the Company as of any Identification Date, then he or she will be treated as such for the entire 12-month period beginning on the first day of the fourth month following the Identification Date.

1.19 “Unforeseeable Emergency” shall mean (a) a severe financial hardship to a Participant resulting from an illness or accident of the Participant or his or her spouse, Beneficiary or dependent (as defined in section 152 of the Code, but without regard to subsections (b)(1), (b)(2) and (d)(1)(B) thereof)), (b) loss of the Participant’s property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by insurance, for example, not as a result of a natural disaster), or (c) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The Committee will determine whether or not a Participant has incurred an Unforeseeable Emergency based on such evidence as the Committee deems necessary or advisable.

SECTION 2

PARTICIPATION

2.1 Participation. Each Nonemployee Director’s decision to become a Participant shall be entirely voluntary.

2.1.1 Current Nonemployee Directors. A Nonemployee Director may elect to become a Participant in the Plan by electing, no later than December 31, 2004, to make Compensation Deferrals under the Plan. An election under this Section 2.1.1 to make Compensation Deferrals shall be effective only for the 2005 Plan Year. Any Compensation Deferral elections for subsequent Plan Years shall be made pursuant to Section 2.1.3.

2.1.2 Initial Elections by New Nonemployee Directors.

(a) General. Each individual who first becomes a Nonemployee Director on or after January 1, 2005 may elect to become a Participant in the Plan by electing, within thirty (30) days of the effective date of his or her appointment or election to the Board of Directors, to make Compensation Deferrals under the Plan. However, no such election may be made if the Nonemployee Director was previously eligible to participate in another plan that is required to be aggregated with this Plan under section 409A of the Code.

5

(b) Effect of Election. An election under this Section 2.1.2 to make Compensation Deferrals shall be effective only (a) with respect to Compensation that is payable for services performed after the timely filing of the election, and (b) for the remainder of the Plan Year with respect to which the election is made. Any Compensation Deferral elections for subsequent Plan Years shall be made pursuant to Section 2.1.3.

2.1.3 Elections for Subsequent Plan Years. A Nonemployee Director may elect to become a Participant (or to continue or reinstate his or her active participation) in the Plan for any subsequent Plan Year by electing, no later than December 31 of the immediately preceding Plan Year, to make Compensation Deferrals under the Plan. An election under this Section 2.1.3 to make Compensation Deferrals shall be effective only for the Plan Year with respect to which the election is made.

2.1.4 No Election Changes During Plan Year. After the beginning of a Plan Year, a Participant shall not be permitted to change, terminate or revoke his or her Compensation Deferral election for such Plan Year, except to the limited extent provided in Section 2.2.

2.1.5 Specific Timing and Method of Election. Notwithstanding any contrary provision of this Section 2.1, the Committee, in its sole discretion, shall determine the manner and deadlines for Participants to make Compensation Deferral elections under the Plan. The deadlines prescribed by the Committee may be earlier than the deadlines specified in this Section 2.1, but shall not be later than such specified deadlines.

2.1.6 USERRA Rights. Notwithstanding the foregoing provisions of this Section 2.1, in accordance with Treasury regulation section 1.409A-2(a)(15) the Committee may (in its discretion) provide a participant with a Compensation Deferral election to satisfy the requirements of the Uniformed Services Employment and Reemployment Rights Act of 1994, as amended (“USERRA”), if applicable.

2.2 Cancellation of Compensation Deferrals. Notwithstanding any contrary provision of Section 2.1:

2.2.1 Hardship Distribution Under 401(k) Plans. In the event that a Participant receives a hardship distribution from The PMI Group, Inc. Savings and Profit-Sharing Plan or any other plan (maintained by the Company or an Affiliate) which contains a qualified cash or deferred arrangement under section 401(k) of the Code (collectively, the “401(k) Plans”), the Participant’s Compensation Deferrals under the Plan (if any) shall be cancelled for a period of six (6) months from the date that the Participant received such hardship distribution or the remainder of the Plan Year in which the Participant received such hardship distribution (whichever period is longer). Notwithstanding the preceding, the Participant’s Compensation Deferrals shall not be so cancelled if the Committee determines that such cancellation is not required in order to preserve the tax-qualification of the 401(k) Plans.

2.2.2 Unforeseeable Emergency. In the event that a Participant incurs an Unforeseeable Emergency, the Committee, in its sole discretion, may cancel the Participant’s Compensation Deferrals (if any) under the Plan for the remainder of the Plan Year in which the Participant incurred the Unforeseeable Emergency.

6

2.2.3 Eligible Disability. In the event that a Participant incurs an Eligible Disability (as defined below), the Committee, in its sole discretion, may cancel the Participant’s Compensation Deferrals (if any) under the Plan, provided that such cancellation occurs by the later of the end of the Participant’s taxable year or the fifteenth (15^th) day of the third month following the date on which the Participant incurs the Eligible Disability. For purposes of this Section 2.2.3, “Eligible Disability” means any medically determinable physical or mental impairment resulting in the Participant’s inability to perform the duties as a member of the Board of Directors or any substantially similar position, where such impairment can be expected to result in death or can be expected to last for a continuous period of not less than six (6) months. The Committee shall determine whether or not a Participant has incurred an Eligible Disability based on such evidence as the Committee deems necessary or advisable

2.2.4 Irrevocability of Prior Compensation Deferrals. Notwithstanding the foregoing, a Participant’s election to make Compensation Deferrals under Section 2.1 shall be irrevocable as to amounts already deferred as of the effective date of any cancellation in accordance with this Section 2.2.

2.2.5 Resumption of Compensation Deferrals. A Participant whose Compensation Deferrals have been cancelled pursuant to this Section 2.2 may later resume making Compensation Deferrals under the Plan only in accordance with Section 2.1.3.

2.3 Termination of Participation. A Nonemployee Director who has become a Participant shall remain a Participant until his or her entire Account balance is distributed. However, a Nonemployee Director who has become a Participant may or may not be an active Participant making Compensation Deferrals for a particular Plan Year, depending upon whether he or she has elected to make Compensation Deferrals for such Plan Year.

SECTION 3

COMPENSATION DEFERRAL ELECTIONS

3.1 Compensation Deferrals. At the times and in the manner prescribed in Section 2.1, each Nonemployee Director may elect to defer portions of his or her Compensation and to have the amounts of such Compensation Deferrals credited to his or her Account. For each Plan Year, a Nonemployee Director may elect to defer an amount equal to any percentage or any specific dollar amount of his or her Compensation, provided that the percentage or dollar amount elected by the Participant shall result in an expected Compensation Deferral of not less than $5,000 of his or her Compensation. Notwithstanding any contrary provision of the Plan, the Committee may reduce a Participant’s Compensation Deferrals to the extent necessary to satisfy any deductions required by law.

7

3.2 Crediting of Compensation Deferrals. The amounts deferred pursuant to Section 3.1 shall reduce the Participant’s Compensation for the Plan Year and shall be credited to the Participant’s Account as of the date on which the amounts (but for the Compensation Deferral) otherwise would have been paid to the Participant, as of a date determined by the Company. For each Plan Year, the exact dollar amount to be deferred from each Compensation payment shall be determined by the Committee under such formulae as it shall adopt from time to time.

3.3 Deemed Investment Return on Accounts. Although no assets will be segregated or otherwise set aside with respect to a Participant’s Account, the amount that is ultimately payable to the Participant with respect to his or her Account shall be determined as if such Account had been invested in common stock of the Company (including reinvestment of any deemed dividends). The Committee, in its sole discretion, shall adopt (and may modify from time to time) such rules and procedures as it deems necessary or appropriate to implement the deemed investment of the Participants’ Accounts. However, such procedures may differ among Participants or classes of Participants, as determined by the Committee in its discretion.

3.4 Form of Payment. Subject to the provisions of Section 5, each Participant shall indicate on his or her deferral election (made pursuant to Section 3.1) the form of payment for the Compensation Deferrals (and deemed investment returns, gains and losses thereon) made pursuant to such election. A Participant may elect (a) a lump sum cash payment, or (b) a fixed number of substantially equal annual cash installment payments (not to exceed ten (10)). A Participant’s election as to the form of payment shall apply to all amounts credited to the Participant’s Account for the Plan Year with respect to which the election is made, and except to the limited extent provided in Section 3.6, shall be irrevocable.

3.5 Term of Deferral. Subject to the provisions of Section 5, each Participant shall indicate on his or her deferral election (made pursuant to Section 3.1) the time for payment for the Compensation Deferrals (and deemed investment returns, gains and losses thereon) made pursuant to such election. A Participant may elect a term of deferral equal to any whole number of months (not less than twelve (12)) specified in his or her deferral election. In addition, pursuant to such procedures as the Committee (in its discretion) may adopt from time to time, a Participant may elect a term of deferral which ends upon the later (or earlier) of the expiration of a specified period or the occurrence of a specific event, provided that such election satisfies the requirements of section 409A of the Code (e.g., attainment of a specific age or Separation from Service) and subject to Section 5 of the Plan. A Participant’s election as to the term of deferral shall apply to all amounts credited to the Participant’s Account for the Plan Year with respect to which the election is made, and except to the limited extent provided in Section 3.6, shall be irrevocable.

3.6 Changes in Elections as to Form of Payment and/or Term of Deferral. Subject to the provisions of Section 5, a Participant may change his or her election under Section 3.4 and/or Section 3.5 for amounts credited to the Participant’s Account for any Plan Year, provided that any such election shall be effective no earlier than twelve (12) months after the election is made and only if (a) the election is made not less than twelve (12) months before the date payment of such amounts

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was previously scheduled to be made or commenced, (b) the newly-elected scheduled payment commencement date is at least five (5) years after the date payment of such amounts was previously scheduled to be made or commenced, and (c) payment of such amounts has not actually commenced. For example, if a Participant initially elected to receive his or her 2005 Plan Year Compensation Deferrals (and deemed investment returns, gains and losses thereon) in the form of five (5) substantially equal annual cash installment payments, with the first installment payable on July 1, 2008, the Participant instead may elect to receive payment of such amounts in the form of a lump sum cash payment, provided that such election is made on or before June 30, 2007 (that is, not less twelve (12) months before the date on which payment of such amounts previously was scheduled to commence) and the newly-elected scheduled payment date is July 1, 2013 or later (that is, at least five (5) years after the date payment of such amounts was previously scheduled to commence).

SECTION 4

ACCOUNTING

4.1 Participants’ Accounts. For each Plan Year, at the direction of the Committee, there shall be established and maintained on the books of the Company, a separate Account or Accounts for each Participant to which shall be credited all Compensation Deferrals made by the Participant during such Plan Year, and deemed investment returns, gains and losses on such Compensation Deferrals.

4.2 Participants Remain Unsecured Creditors. All amounts credited to a Participant’s Account under the Plan shall continue for all purposes to be a part of the general assets of the Company. Each Participant’s interest in the Plan shall make him or her only a general, unsecured creditor of the Company.

4.3 Accounting Methods. The accounting methods or formulae to be used under the Plan for the purpose of maintaining the Participants’ Accounts, including the calculation and crediting (or debiting) of deemed investment returns, gains and losses, shall be determined by the Committee, in its sole discretion. The accounting methods or formulae selected by the Committee may be revised from time to time.

4.4 Reports. Each Participant shall be furnished with periodic statements of his or her Account, reflecting the status of his or her interest in the Plan, at least annually.

SECTION 5

DISTRIBUTIONS

5.1 Normal Time for Distribution. Subject to the other provisions of this Section 5, distribution of the balance credited to a Participant’s Account shall be made or commenced on the Payment Date that immediately follows the end of the term(s) of deferral elected by the Participant under Section 3.5 or 3.6 (as applicable) or as soon as administratively practicable thereafter, and in

9

the form elected by the Participant under Section 3.4 or 3.6 (as applicable), in accordance with the following rules. If the Participant elected to receive annual cash installment payments, his or her first installment shall be equal to the balance then credited to his or her Account, divided by the number of installments to be made. Each subsequent annual installment shall be paid to the Participant on each anniversary of the first installment payment or as soon as administratively practicable thereafter. The amount of each subsequent installment shall be equal to the balance then credited to the Participant’s Account, divided by the number of installments remaining to be paid. While a Participant’s Account is in installment payout status, the unpaid balance credited to the Participant’s Account shall continue to be credited (or debited) with deemed investment returns, gains and losses in accordance with Section 3.3.

5.2 Special Rule for Change in Control Event. If there is a Change in Control Event, the balance then credited to a Participant’s Account shall be distributed to him or her in a lump sum cash payment on the Payment Date that immediately follows the date of the Change in Control Event or as soon as administratively practicable thereafter. Deemed investment returns, gains and losses shall be credited (or debited) prior to any such accelerated distribution in accordance with Section 3.3. The amount of any such accelerated lump sum distribution shall also include any amount that the Participant deferred but which has not yet been credited to his or her Account.

5.3 Special Rule for Death. If a Participant dies, the balance then credited to his or her Account shall be distributed to the Participant’s Beneficiary in a lump sum cash payment on the Payment Date that immediately follows the Participant’s death or as soon as administratively practicable thereafter. However, if a Participant dies without having effectively designated a Beneficiary, or if no Beneficiary survives the Participant, such distribution shall be made to the Participant’s surviving spouse or if no surviving spouse, then to a domestic partner where recognized by applicable law, or if the Participant is not survived by his or her spouse or domestic partner to the Participant’s estate. Deemed investment returns, gains and losses shall be credited (or debited) prior to any such accelerated distribution in accordance with Section 3.3.

5.4 Special Rule for Disability. If a Participant becomes Disabled, the balance then credited to his or her Account shall be distributed to the Participant in a lump sum cash payment on the Payment Date that immediately follows the date on which the Participant became Disabled or as soon as administratively practicable thereafter. Deemed investment returns, gains and losses shall be credited (or debited) prior to any such accelerated distribution in accordance with Section 3.3.

5.5 Special Rule for Separation From Service. If a Participant incurs a Separation from Service, any amount that is credited to his or her Account shall be distributed to the Participant in a lump sum cash payment on the Payment Date that immediately follows January 15 of the second calendar year following the year in which the Participant incurred the Separation from Service or as soon as administratively practicable thereafter; provided, however, that amounts that would otherwise be distributed pursuant to an effective election of up to ten (10) annual installments shall continue to be distributed pursuant to such effective election. Any amount to be distributed pursuant to the preceding sentence shall continue to be credited (or debited) with deemed investment returns,

10

gains and losses in accordance with Section 3.3 until the date of payment. For example, if a Participant incurs a Separation from Service during July 2007, and an amount remains credited to his or her Account on January 15, 2009 (after application of the other provisions of Section 5), then such amount (as increased or decreased by deemed investment returns, gains and losses thereon) shall be distributed to the Participant in a lump sum cash payment on February 1, 2009 or as soon as administratively practicable thereafter (assuming such amount would otherwise be distributed pursuant to an effective election other than an election of up to ten (10) annual installments). Alternatively, if the Participant had made an effective election of up to ten (10) annual installments, then his or her Compensation Deferrals (as increased or decreased by deemed investment returns, gains and losses thereon) subject to such effective election shall continue to be distributed pursuant to the ten-year schedule.

5.6 Required Six-Month Delay of Payment to a Specified Participant. Notwithstanding any contrary Plan provision and subject to the provisions of Section 5.3, 5.8.1 and 5.8.2, any payment(s) that are otherwise required to be made under the Plan to a Specified Participant due to his or her Separation from Service shall be accumulated during the first six (6) months following the Separation from Service and shall instead be paid on the Payment Date that immediately follows the end of such six-month period or as soon as administratively practicable thereafter.

5.7 Delay of Payment Permitted Under Certain Circumstances. Notwithstanding any contrary provision of Section 5:

5.7.1 Payments Subject to Section 162(m) of the Code. Any payment scheduled to be made under the Plan shall be delayed to the extent that the Company reasonably anticipates that if the payment were made as scheduled, its deduction with respect to such payment otherwise would not be permitted due to the application of section 162(m) of the Code. Any such delayed payment shall be made either (a) during the Participant’s first taxable year in which the Company reasonably anticipates, or should reasonably anticipate, that if the payment is made during such year, the deduction of such payment will not be barred by the application of section 162(m) of the Code, or (b) during the period beginning with the date of the Participant’s Separation from Service and ending on the later of (i) the last day of the Company’s fiscal year in which the Participant incurs the Separation from Service or (ii) the fifteenth (15^th) day of the third month following the Separation from Service. If any such payment is delayed to a date on or after the Participant’s Separation from Service, the payment shall be considered a payment due to the Participant’s Separation from Service for purposes of Section 5.6, and in the case of a Specified Participant, the date that is six (6) months after the Participant’s Separation from Service will be substituted for any reference to the Participant’s Separation from Service in the immediately preceding sentence. If any scheduled payment to a Participant in the Company’s fiscal year is delayed in accordance with this Section 5.7.1, then all scheduled payments to that Participant that could be delayed hereunder also shall be delayed. Notwithstanding the foregoing, a distribution of a Participant’s Account shall be made without regard to the deductibility limitation of section 162(m) of the Code if the time for distribution is accelerated pursuant to Section 5.2, 5.3, or 5.4.

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5.7.2 Payments That Would Violate Federal Securities Laws or Other Applicable Law. Any payment scheduled to be made under the Plan shall be delayed if the Company reasonably anticipates that the making of the payment will violate federal securities laws or other applicable law. Any such delayed payment shall be made at the earliest date at which the Company reasonably anticipates that the making of the payment will not cause such violation. For this purpose, the making of a payment under the Plan that would cause inclusion in gross income or the application of any penalty provision or other provision of the Code will not be treated as a violation of applicable law.

5.7.3 Going Concern. Any payment scheduled to be made under the Plan shall be delayed if the Company reasonably anticipates that the making of the payment would jeopardize the Company’s ability to continue as a going concern. Any such delayed payment shall be made in the first taxable year in which the payment will not negatively affect the Company’s status as an ongoing concern.

5.7.4 Other Events and Conditions. Any payment scheduled to be made under the Plan shall be delayed upon such other events and conditions as may be prescribed in generally applicable guidance published in the Internal Revenue Bulletin.

5.7.5 Continued Deemed Investment During Any Delay in Payment. During any delay in payment under this Section 5.7, the unpaid amount shall continue to be credited (or debited) with deemed investment returns, gains and losses in accordance with Section 3.3.

5.8 Acceleration of Payment(s) Permitted Under Certain Circumstances. Notwithstanding any foregoing provision of Section 5 and except as otherwise provided below, a Participant’s Account balance may be distributed to the extent permitted below:

5.8.1 Conflicts of Interest. A Participant’s Account balance may be distributed in an immediate lump sum cash payment to the extent permitted in Treasury regulation section 1.409A-3(j)(4)(iii), as directed by the Committee (in its discretion) if the payment is a necessary part of a course of action that results in compliance with a federal, state , local or foreign ethics law or conflicts of interest law that would be violated absent such course of action.

5.8.2 Payment of Employment Taxes. A Participant’s Account balance may be distributed in an immediate lump sum cash payment to the extent permitted in Treasury regulation section 1.409A-3(j)(4)(vi), as directed by the Committee (in its discretion), to cover any, employment tax withholding obligation that arise with respect to the deferred compensation under the Plan.

5.8.3 Income Inclusion Under Section 409A of the Code. Subject to Section 5.6, a Participant’s Account balance may be distributed in an immediate lump sum cash payment to the extent permitted in Treasury regulation section 1.409A-3(j)(4)(vii), as directed by the Committee (in its discretion), at any time the Plan fails to meet the requirements of Code Section 409A and the Treasury regulations thereon.

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5.8.4 Payment of State, Local or Foreign Taxes. Subject to Section 5.6, a Participant’s Account balance may be distributed in an immediate lump sum cash payment to the extent permitted in Treasury regulation section 1.409A-3(j)(4)(xi), as directed by the Committee (in its discretion), ), to cover any state or local income tax, foreign or other tax withholding obligation that arise with respect to the deferred compensation under the Plan.

5.8.5 Certain Offsets. Subject to Section 5.6, a Participant’s Account balance may be distributed in an immediate lump sum cash payment to the extent permitted in Treasury regulation section 1.409A-3(j)(4)(xiii), as directed by the Committee (in its discretion) to cover a debt owed to the Company if the Participant incurred the debt in the ordinary course of the service relationship, the offset does not exceed $5,000 per calendar year and the payment occurs on the due date of the debt.

5.8.6 Bona Fide Disputes as to a Right to a Payment. Subject to Section 5.6, a Participant’s Account balance may be distributed in an immediate lump sum cash payment to the extent permitted in Treasury regulation section 1.409A-3(j)(4)(xiv), as directed by the Committee (in its discretion) as a result of a settlement of a bona fide dispute between the Company and the Participant as to whether the Participant’s entitlement to a deferred compensation payment.

5.8.7 Other 409A Permitted Acceleration. Subject to Section 5.6, a Participant’s Account balance may be distributed in an immediate lump sum cash payment to the extent permitted in Treasury regulation section 1.409A-3(j)(4), as directed by the Committee (in its discretion).

5.9 Beneficiary Designations. Each Participant may, pursuant to such procedures as the Committee may specify, designate one or more Beneficiaries.

5.9.1 Spousal Consent. If a Participant designates a person other than or in addition to his or her spouse as a primary Beneficiary, the designation shall be ineffective unless the Participant’s spouse consents to the designation. Any spousal consent required under this Section 5.9 shall be ineffective unless it (a) is set forth in writing in a form specified in the discretion of the Committee, (b) acknowledges the effect of the Participant’s designation of another person as his or her Beneficiary under the Plan, and (c) is signed by the spouse and witnessed by an authorized agent of the Committee or a notary public. Notwithstanding this consent requirement, if the Participant establishes to the satisfaction of the Committee that written spousal consent may not be obtained because the spouse cannot be located, his or her designation shall be effective without spousal consent. Any spousal consent required under this Section 5.9 shall be valid only with respect to the spouse who signs the consent. A Participant may revoke his or her Beneficiary designation at any time, provided that such revocation is in writing.

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5.9.2 Changes and Failed Designations. A Participant may designate different Beneficiaries (or may revoke a prior Beneficiary designation) at any time by delivering a new designation (or revocation of a prior designation) in accordance with Section 5.9.1. Any designation or revocation shall be effective only if it is received by the Committee. However, when so received, the designation or revocation shall be effective as of the date the notice is executed (whether or not the Participant still is living), but without prejudice to the Committee on account of any payment made before the change is recorded. The last effective designation received by the Committee shall supersede all prior designations. If a Participant dies without having effectively designated a Beneficiary, or if no Beneficiary survives the Participant, the Participant’s Account shall be payable to his or her surviving spouse, or, if the Participant is not survived by his or her spouse, the Account shall be paid to his or her estate.

5.10 Unforeseeable Emergency. If a Participant incurs an Unforeseeable Emergency, the Committee, in its sole discretion, may determine that all or part of the Participant’s Account balance shall be paid to him or her in a lump sum cash payment on the Payment Date that immediately follows the date on which the Committee determines that the Participant has incurred the Unforeseeable Emergency or as soon as administratively practicable thereafter; provided, however, that the amount paid to the Participant pursuant to this Section 5.10 shall be limited to the amount reasonably necessary to satisfy the Unforeseeable Emergency (which may include amounts necessary to pay any federal, state, local or foreign income taxes or penalties reasonably anticipated to result from the payment). Also, no payment under this Section 5.10 shall be made to the extent that the Participant’s Unforeseeable Emergency is or may be relieved by the cancellation of the Participant’s Compensation Deferrals in accordance with Section 2.2.2.

5.11 Payments to Incompetents. If any individual to whom a benefit is payable under the Plan is a minor or legally incompetent, the Committee shall determine whether payment shall be made directly to the individual, any person acting as his or her custodian or legal guardian under the California Uniform Transfers to Minors Act, his or her legal representative or a near relative, or directly for his or her support, maintenance or education.

5.12 Undistributable Accounts. Each Participant and (in the event of death) his or her Beneficiary shall keep the Committee advised of his or her current address. If the Committee is unable to locate the Participant or Beneficiary to whom a Participant’s Account is payable under this Section 5, the Participant’s Account shall continue to be credited (or debited) with deemed investment returns, gains and losses in accordance with Section 3.3. Accounts that, in accordance with the preceding sentence, have been undistributable for a period of thirty-five (35) months shall be forfeited as of the end of the thirty-fifth month. If a Participant whose Account was forfeited under this Section 5.12 (or his or her Beneficiary) files a claim for distribution of the Account after the date on which it was forfeited, and if the Committee determines that such claim is valid, then the forfeited balance shall be paid by the Company in a lump sum cash payment as soon as practicable thereafter (without interest or any deemed investment returns, gains or losses after the date of forfeiture).

14

5.13 Payment in Cash or its Equivalent. All payments from the Plan shall be made in cash or its equivalent.

SECTION 6

PARTICIPANT’S INTEREST IN ACCOUNT

Subject to Sections 8 (relating to creditor status) and 9.2 (relating to amendment and/or termination of the Plan), a Participant’s interest in the balance credited to his or her Account at all times shall be one hundred percent (100%) vested and nonforfeitable.

SECTION 7

ADMINISTRATION OF THE PLAN

7.1 Committee. The Plan shall be administered by the Committee. The Committee shall have the authority to control and manage the operation and administration of the Plan. Any member of the Committee may resign at any time by notice in writing mailed or delivered to the Secretary of the Company.

7.2 Actions by Committee. Each decision of a majority of the members of the Committee then in office shall constitute the final and binding act of the Committee. The Committee may act with or without a meeting being called or held and shall keep minutes of all meetings held and a record of all actions taken by written consent.

7.3 Powers of Committee. The Committee shall have all powers and discretion necessary or appropriate to supervise the administration of the Plan and to control its operation in accordance with its terms, including, but not by way of limitation, the following discretionary powers:

(a) To interpret and determine the meaning and validity of the provisions of the Plan and to determine any question arising under, or in connection with, the administration, operation or validity of the Plan or any amendment thereto;

(b) To determine any and all considerations affecting the eligibility of any Nonemployee Director to become a Participant or remain a Participant in the Plan;

(c) To cause one or more separate Accounts to be maintained for each Participant;

(d) To cause Compensation Deferrals and deemed investment returns, gains and losses to be credited to Participants’ Accounts;

(e) To establish and revise a method or procedure for the deemed investment of Participants’ Accounts, as provided in Section 3.3;

15

(f) To establish and revise an accounting method or formula for the Plan, as provided in Section 4.3;

(g) To determine the manner and form for making elections under the Plan;

(h) To determine the status and rights of Participants and their spouses, Beneficiaries or estates;

(i) To employ such counsel, agents and advisers, and to obtain such legal, clerical and other services, as it may deem necessary or appropriate in carrying out the provisions of the Plan;

(j) To establish, from time to time, rules for the performance of its powers and duties and for the administration of the Plan;

(k) To arrange for annual distribution to each Participant of a statement of benefits accrued under the Plan;

(l) To publish a claims and appeal procedure pursuant to which individuals or estates may claim Plan benefits and appeal denials of such claims;

(m) To delegate to any one or more of its members or to any other person, severally or jointly, the authority to perform for and on behalf of the Committee one or more of the functions of the Committee under the Plan; and

(n) To decide all issues and questions regarding Account balances, and the time, form, manner and amount of distributions to Participants in accordance with the Plan’s terms.

7.4 Decisions of Committee and its Delegates. All actions, interpretations, and decisions of the Committee (and its delegates) shall be conclusive and binding on all persons, and shall be given the maximum possible deference allowed by law.

7.5 Administrative Expenses. All expenses incurred in the administration of the Plan by the Committee, or otherwise, including legal fees and expenses, shall be paid and borne by the Company.

7.6 Eligibility to Participate. No member of the Committee who is also a Nonemployee Director shall be excluded from participating in the Plan if otherwise eligible, but he or she shall not be entitled, as a member of the Committee, to act or pass upon any matters pertaining specifically to his or her own Account under the Plan.

7.7 Indemnification. The Company shall, and hereby does, indemnify and hold harmless the members of the Committee (and its delegates), from and against any and all losses, claims, damages or liabilities (including attorneys’ fees and amounts paid, with the approval of the Board of

16

Directors, in settlement of any claim) arising out of or resulting from the implementation of a duty, act or decision with respect to the Plan, so long as such duty, act or decision does not involve gross negligence or willful misconduct on the part of any such individual.

SECTION 8

UNFUNDED PLAN

All amounts credited to a Participant’s Account under the Plan shall continue for all purposes to be a part of the general assets of the Company. The interest of the Participant in his or her Account, including his or her right to distribution thereof, shall be an unsecured claim against the general assets of the Company. Nothing contained in the Plan shall give any Participant or Beneficiary any interest in or claim against any specific assets of the Company.

SECTION 9

MODIFICATION OR TERMINATION OF PLAN

9.1 Company’s Obligation is Limited. The Company intends to continue the Plan indefinitely, and to maintain each Participant’s Account until it is scheduled to be paid to him or her in accordance with the provisions of the Plan. However, the Plan is voluntary on the part of the Company, and the Company does not guarantee to continue the Plan. The Company at any time may, by amendment of the Plan, suspend Compensation Deferrals or may discontinue Compensation Deferrals, with or without cause. Complete discontinuance of all Compensation Deferrals shall be deemed a termination of the Plan.

9.2 Right to Amend or Terminate. The Board of Directors may, in its sole discretion, amend or terminate the Plan, or any part thereof, at any time and for any reason, provided that no amendment or termination of the Plan shall, without the consent of the Participant, reduce the balance then credited to the Participant’s Account.

9.3 Effect of Termination. If the Plan is terminated pursuant to this Section 9, the balances credited to the Accounts of the affected Participants shall be distributed to them at the time and in the manner set forth in Section 5, except as provided in Section 9.4.

9.4 Acceleration of Distributions Permitted on Certain Terminations. Notwithstanding any contrary Plan provision, if the Plan is terminated and liquidated pursuant to this Section 9 and in accordance with the requirements of section 409A of the Code and Treasury regulation section 1.409A-3(j)(4)(ix), the balances credited to the Accounts of the affected Participants may be distributed to them in lump sum cash payments as soon as may be permitted under section 409A of the Code and Treasury regulation section 1.409A-3(j)(4)(ix), as directed by the Committee (in its discretion).

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SECTION 10

GENERAL PROVISIONS

10.1 Inalienability. In no event may any Participant, Beneficiary, spouse or estate sell, transfer, anticipate, assign, hypothecate, or otherwise dispose of any right or interest under the Plan; and such rights and interests shall not at any time be subject to the claims of creditors nor be liable to attachment, execution or other legal process. Accordingly, for example, a Participant’s interest in the Plan is not transferable pursuant to a domestic relations order.

10.2 Rights and Duties. Neither the Company nor the Committee shall be subject to any liability or duty under the Plan except as expressly provided in the Plan, or for any action taken, omitted or suffered in good faith.

10.3 No Enlargement of Rights. Neither the establishment or maintenance of the Plan, the making of any Compensation Deferrals nor any action of the Company or the Committee, shall be held or construed to confer upon any individual any right to be continued as a member of the Board of Directors.

10.4 Compensation Deferrals Not Counted Under Other Employee Benefit Plans. Compensation Deferrals under the Plan will not be considered for purposes of contributions or benefits under any other employee benefit plan sponsored by the Company or any Affiliate, except to the extent specifically provided in any such plan.

10.5 Applicable Law. The Plan is intended to comply with the provisions of section 409A of the Code. Notwithstanding any contrary Plan provision, the Plan shall be construed, administered and enforced in a manner that is consistent with such intent. The provisions of the Plan also shall be construed, administered and enforced in accordance with the laws of the State of California (other than its conflict of laws provisions).

10.6 Severability. If any provision of the Plan is held invalid or unenforceable, its invalidity or unenforceability shall not affect any other provisions of the Plan, and in lieu of each provision which is held invalid or unenforceable, there shall be added as part of the Plan a provision that shall be as similar in terms to such invalid or unenforceable provision as may be possible and be valid, legal, and enforceable.

10.7 Captions. The captions contained in and the table of contents prefixed to the Plan are inserted only as a matter of convenience and for reference and in no way define, limit, enlarge or describe the scope or intent of the Plan nor in any way shall affect the construction of any provision of the Plan.

10.8 No Guarantees Regarding Tax Treatment. Participants (or their Beneficiaries) shall be responsible for all taxes with respect to any benefits under the Plan. The Committee and the Company make no guarantees regarding the tax treatment to any person of any Compensation Deferrals or payments made under the Plan.

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EXECUTION

IN WITNESS WHEREOF, The PMI Group, Inc., by its duly authorized officer, has executed this restated Plan on the date indicated below.

	THE PMI GROUP, INC.
Dated: September 24, 2007	By	/s/ Charles Broom
		Charles Broom
	Title:	Senior Vice President

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EX-10.7

Exhibit 10.7

EXECUTION COPY

THE PMI GROUP, INC. RETIREMENT PLAN

(September 1, 2007 Restatement)

TABLE OF CONTENTS

		Page
INTRODUCTION		1
ARTICLE 1 DEFINITIONS		2
1.01	“Account”	2
1.02	“Accrued Benefit”	2
1.03	“Active Participant”	3
1 04	“Actuarial Equivalent”	3
1.05	“Actuary”	3
1.06	“Adjustment Factor”	3
1.07	“Affiliated Employer”	4
1.08	“Annual Allocation”	4
1.09	“Applicable Interest Rate” ,	4
1.10	“Applicable Mortality Table”	4
1.11	“Beneficiary”	4
1.12	“Benefit Accrual Service”	5
1.13	“Benefit Commencement Date”	5
1.14	“Board” or “Board of Directors”	5
1.15	“Break in Service”	5
1.16	“Code”	5
1.17	“Committee”	5
1.18	“Compensation”	5
1.19	“Compensation Limit”	6
1.20	“Covered Compensation”	6
1.21	“Deferred Vested Benefit”	6
1.22	“Early Retirement Benefit”	6
1.23	“Early Retirement Date”	6
1.24	“Effective Date”	6
1.25	“Eligible Employee”	7
1.26	“Employee”	7
1.27	“Employee’s Age”	7
1.28	“Employer”	7
1.29	“Employment Commencement Date”	7
1.30	“ERISA”	7
1.31	“Final Average Compensation”	7
1.32	“Fund”	8
1.33	“Funding Agent”	8
1.34	“Highly Compensated Employee” and “Highly Compensated Former Employee”	8
1.35	“Hour of Service”	8
1.36	“Interest Credits”	8
1.37	“Joint Annuitant”	8
1.38	“Joint & Survivor Annuity”	8
1.39	“Leased Employee”	9
1.40	“Limitation Year”	9

-i-

TABLE OF CONTENTS

(continued)

		Page
1.41	“Maternity or Paternity Absence”	9
1.42	“Named Fiduciary”	9
1.43	“Normal Retirement Age”	9
1.44	“Normal Retirement Benefit”	9
1.45	“Normal Retirement Date”	9
1.46	“One-Year Break in Service”	9
1.47	“Participant”	9
1.48	“Participating Employer”	9
1.49	“Participation”	9
1.50	“PBGC”	9
1.51	“Period of Benefit Accrual Service”	10
1.52	“Period of Service”	10
1.53	“PIN”	10
1.54	“Plan”	10
1.55	“Plan Sponsor”	10
1.56	“Plan Year”	10
1.57	“Postponed Retirement Benefit”	10
1.58	“Postponed Retirement Date”	10
1.59	“Predecessor Employer”	10
1.60	“Predecessor to this Plan”	10
1.61	“Qualified Election”	10
1.62	“Qualified Joint & Survivor Annuity”	11
1.63	“Qualified Preretirement Survivor Annuity”	11
1.64	“Reemployment Date”	11
1.65	“Retirement Date”	11
1.66	“Severance Period”	11
1.67	“Spouse”	12
1.68	“Termination”	12
1.69	“Termination Date”	12
1.70	“Trust”	12
1.71	“Trustee”	12
1.72	“Year of Benefit Accrual Service”	12
1.73	“Year of Vesting Service”	12
ARTICLE 2 SERVICE COUNTING RULES		14
2.01	Period of Service — General Rule	14
2.02	Period of Service — Computation	14
2.03	Benefit Accrual Service	15
2.04	Service — General Rule	15
ARTICLE 3 ELIGIBILITY FOR PARTICIPATION AND TRANSFERS		16
3.01	Eligibility to Become a Participant	16

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TABLE OF CONTENTS

(continued)

		Page
3.02	Transfer to Another Plan	16
ARTICLE 4 RETIREMENT ELIGIBILITY AND SUSPENSION OF BENEFITS		17
4.01	Retirement	17
4.02	Suspension of Benefits — Postponed Retirement	17
4.03	Suspension of Benefits — Rehires	17
4.04	Suspension of Benefit Notice	17
4.05	Section 203(a)(3)(B) Service	17
4.06	Recommencement of Benefits	18
4.07	Required Commencement at Age 70 1/2	18
4.08	Required Commencement — Conditions	18
4.09	Blocking	18
ARTICLE 5 FINAL AVERAGE COMPENSATION AMOUNT OF RETIREMENT BENEFIT		19
5.01	Normal Retirement Benefit	19
5.02	Postponed Retirement Benefit	20
5.03	Early Retirement Benefit	20
5.04	Accrued Benefit — Participant Who Has Attained Retirement Age	22
5.05	Accrued Benefit — Participant Who has Not Attained Normal Retirement Age	22
5.06	Adjustment for Suspension of Benefits	23
5.07	Freeze of Article 5 Benefit Accrual	23
ARTICLE 6 CASH BALANCE AMOUNT OF RETIREMENT BENEFIT		24
6.01	Cash Balance Accounts	24
6.02	Annual Allocation to Accounts	24
6.03	Interest Credits	24
6.04	Normal Retirement Benefit	24
6.05	Postponed Retirement Benefit	25
6.06	Early Retirement Benefit	25
6.07	Participant Who has Not Attained Normal Retirement Age	25
ARTICLE 7 REQUIRED BENEFIT LIMITATIONS		26
7.01	Code Section 415 Limits	26
7.02	Special Limitation for 25 Highest-Paid Employees	28
7.03	Exceptions to Special Limitation	28
7.04	Distributions Allowed if Security Furnished	28
7.05	Plan Termination Limit	29
7.06	Highly Compensated Employee or Former Employee	29
7.07	Definitions	29

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TABLE OF CONTENTS

(continued)

		Page
ARTICLE 8 VESTING		31
8.01	General Rule	31
8.02	Vesting at Normal Retirement Age	31
8.03	Vesting Before Normal Retirement Age	31
8.04	Vesting Upon Plan Termination	31
8.05	Vesting Service Disregarded	31
8.06	Repayment of Cash-Out	32
8.07	Vesting Service	33
ARTICLE 9 QUALIFIED PRERETIREMENT SURVIVOR ANNUITY		34
9.01	Preretirement Spousal Death Benefit	34
ARTICLE 10 FORMS OF BENEFIT		36
10.01	Qualified Joint & Survivor Annuity	36
10.02	Involuntary Lump Sum Payment	36
10.03	Right to Elect	36
10.04	Election of Forms	36
10.05	Benefit Commencement	37
10.06	Optional Forms of Retirement Benefit	37
10.07	Beneficiary	39
10.08	Eligible Rollover Distributions	39
10.09	Minimum Distribution Requirements	40
ARTICLE 11 FUNDING		47
11.01	Funding Agreement	47
11.02	Non-Diversion of the Fund	47
ARTICLE 12 PLAN ADMINISTRATION		48
12.01	Appointment of Committee	48
12.02	Powers and Duties	48
12.03	Actions by the Committee	49
12.04	Interested Committee Members	50
12.05	Indemnification	50
12.06	Conclusiveness of Action	50
12.07	Payment of Expenses	50
ARTICLE 13 FUNDING POLICY AND CONTRIBUTIONS		51
13.01	Employer Contributions	51
13.02	Participant Contributions	51
13.03	Contingent Nature of Contributions	51

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TABLE OF CONTENTS

(continued)

		Page
ARTICLE 14 AMENDMENT, TERMINATION AND MERGER OF THE PLAN		52
14.01	Right to Amend the Plan	52
14.02	Right to Terminate the Plan	52
14.03	Allocation of Assets and Surplus	52
14.04	Plan Mergers, Consolidations, and Transfers	52
14.05	Amendment of Vesting Schedule	53
ARTICLE 15 TOP-HEAVY PLAN PROVISIONS		54
15.01	General Rule	54
15.02	Vesting Provision	54
15.03	Minimum Benefit Provision	54
15.04	Coordination With Other Plans	55
15.05	Top-Heavy Plan Defined	55
15.06	Key Employee	57
15.07	Non-Key Employee	57
15.08	Collective Bargaining Rules	57
ARTICLE 16 MISCELLANEOUS		58
16.01	Limitation on Distributions	58
16.02	Limitation on Reversion of Contributions	58
16.03	Voluntary Plan	58
16.04	Nonalienation of Benefits	58
16.05	Inability to Receive Benefits	59
16.06	Missing Persons	59
16.07	Military Service	59
16.08	Limitation of Third-Party Rights	59
16.09	Invalid Provisions	59
16.10	One Plan	59
16.11	Use and Form of Words	59
16.12	Headings	60
16.13	Governing Law	60

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INTRODUCTION

The PMI Group, Inc., having established The PMI Group, Inc. Retirement Plan (the “Plan”) effective as of April 1, 1995, and having amended and/or restated the Plan on several subsequent occasions, hereby amends and restates the Plan in its entirety, effective as of September 1, 2007 (except as otherwise provided herein). This amended and restated Plan converts the Plan into a cash balance plan and in addition, is intended as good faith compliance with the requirements of the Pension Protection Act of 2006 (the “PPA”) and is to be construed in accordance with the PPA and applicable guidance issued thereunder. The Plan is intended to qualify under Section 401(a) of the Internal Revenue Code of 1986, as amended.

ARTICLE 1

DEFINITIONS

1.01 “Account”. shall mean a hypothetical account balance established and maintained for each Participant under the provisions of Article 6. A Participant’s Account is a nominal account, and is used to determine the amount of retirement benefits payable under Article 6. The Participant shall have no actual individual account, and shall have no claim to any particular assets of the Plan. The Participant’s Account will be charged with the amount of any distributions paid to him or her under the Plan based on benefits payable under Article 6.

1.02 “Accrued Benefit”. shall mean the amount of annual pension benefit, payable as a straight life annuity, commencing at Normal Retirement Age, as shall be considered accrued at any time for a Participant in accordance with the provisions of Article 5, plus the Actuarial Equivalent of the Participant’s Account as shall be considered accrued at any time for a Participant under the provisions of Article 6, if applicable.

(a) For a Participant who is an Active Participant on September 1, 2007, and who does not terminate his or her employment on or before December 31, 2010, then pursuant to Section 5.07 and Section 6.02, the Participant’s Accrued Benefit shall not be less than the sum of:

(1) The Participant’s Accrued Benefit ending on or before December 31, 2010, as determined in accordance with Article 5 of the Plan, plus

(2) The Participant’s Accrued Benefit beginning after December 31, 2010, as determined in accordance with Article 6 of the Plan.

(b) For a Participant who is an Active Participant on September 1, 2007, and who does terminate his or her employment on or after September 1, 2007 and is subsequently rehired and becomes an Active Participant, the Participant’s Accrued Benefit shall not be less than the sum of:

(1) The Participant’s Accrued Benefit as determined in accordance with Article 5 of the Plan, plus

(2) The Participant’s Accrued Benefit as determined in accordance with Article 6 of the Plan beginning on and after the Participant’s date of re-eligibility to participate in the Plan.

(c) For a Participant who is an Active Participant on September 1, 2007, who does terminate his or her employment on or after September 1, 2007 but before January 1, 2011, and who is not subsequently rehired, the Participant’s Accrued Benefit shall be determined only in accordance with Article 5 of the Plan.

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(d) For a Participant who is not an Active Participant on September 1, 2007 and becomes an Active Participant, the Participant’s Accrued Benefit shall be determined only in accordance with Article 6 of the Plan.

(e) For new hires and re-hires, a Participant’s Accrued Benefit under Article 6 shall only take into account participation on or after September 1, 2007. For Active Participants who do not terminate his or her employment on or before December 31, 2010, a Participant’s Accrued Benefit under Article 6 shall begin January 1, 2011.

(f) Notwithstanding the foregoing, any determination with respect to a Participant’s Accrued Benefit shall be made in conformance with Code Section 41 l(b)(5)(B)(iii) and any successor provision thereto.

1.03 “Active Participant”. shall mean a Participant who also is an Eligible Employee.

1.04 “Actuarial Equivalent”. shall mean:

(a) In the case of a benefit accrued under Article 5 of the Plan, the equivalent present value of the benefit that would otherwise have been provided to the Participant, determined on the basis of appropriate actuarial assumptions and methods that may differ from those used in establishing Plan costs and liabilities. Interest shall be calculated using the Applicable Interest Rate and mortality shall be calculated using the Applicable Mortality Table, and

(b) In the case of a benefit accrued under Article 6 of the Plan, the present value of the Accrued Benefit of any Participant shall be equal to the amount determined as the balance of the Participant’s Account, determined on the basis of appropriate actuarial assumptions and methods that may differ from those used in establishing Plan costs and liabilities.

The actuarial assumptions may be changed from time to time by an amendment to the Plan. No Participant shall be deemed to have any right, vested or nonvested, regarding the continued use of previously adopted actuarial assumptions, except as may be required by Code Section 41 l(d)(6) and the regulations thereunder.

For all purposes except where specifically defined to the contrary, Actuarial Equivalence will be based on the “Applicable Interest Rate” and the “Applicable Mortality Table” as those terms are defined herein and in Section 417(e) of the Code as updated from time to time. Notwithstanding the foregoing, the determination of present value shall be made in conformance with Code Section 417(e)(3) and any successor provision thereto.

1.05 “Actuary”. shall mean that individual who is an “enrolled actuary” as defined in Section 7701(a)(35) of the Code or that firm of actuaries that has on its staff such an actuary, appointed by the Committee.

1.06 “Adjustment Factor”. shall mean the cost of living adjustment factor prescribed by the Secretary of the Treasury under Section 415(d) of the Code for years beginning after

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December 31, 1987, applied to such items and in such manner as the Secretary of the Treasury shall prescribe from time to time.

1.07 “Affiliated Employer”. shall mean any corporation, trade, or business, which, together with the Plan Sponsor, is a member of a “controlled group of corporations,” a group under “common control,” or an “affiliated service group,” all as determined under Sections 414(b), (c), (m), (o) of the Code, provided that solely for purposes of Section 7.01, the rule set forth in Section 415(h) of the Code also shall apply.

1.08 “Annual Allocation”. shall mean a credit to the Participant’s Account as a percentage of Compensation. The Annual Allocation shall be credited to a Participant’s Account as of the last day of the Plan Year. The credit shall be equal to eight (8) percent, multiplied by the Compensation earned by the Participant for that Plan Year. If a Participant terminates employment with the Employer prior to the end of the Plan Year, the Annual Allocation for such Participant for such Plan Year shall be equal to eight (8) percent multiplied by the Compensation earned by the Participant through the end of the month during which the Participant’s employment is terminated.

1.09 “Applicable Interest Rate”. shall mean the rate of interest described in Code Section 417(e) as specified by the Commissioner of the Internal Revenue Service, for the fifth month preceding the start of the Plan Year or such other time as the Secretary of the Treasury shall prescribe.

1.10 “Applicable Mortality Table”. shall mean for Plan Years beginning on or before December 31, 2007, the applicable mortality table described in Code Section 417(e)(3)(A)(ii)(I) and for Plan Years beginning after December 31, 2007, the applicable mortality table described in Code Section 417(e)(3)(B).

1.11 “Beneficiary”. shall mean the individual person, or persons, or entity (including a trust), or estate that is determined in accordance with the rules set forth below:

(a) A Participant’s Beneficiary is the person, entity or trust that a Participant designated most recently to the Committee on such form and in such manner as is reasonably required by the Committee. Except as limited by the Qualified Election rules set forth in Section 1.61, a Participant may change his or her Beneficiary at any time by providing a new written election to the Committee on such form and in such manner as is reasonably required by the Committee.

(b) If, subsequent to the death of a Participant, the Participant’s Beneficiary dies while entitled to receive benefits under the Plan, the contingent Beneficiary shall succeed to such rights, if any.

(c) If a Participant has failed to make a Beneficiary designation or no Beneficiary or contingent Beneficiary has been designated who is alive, the term “Beneficiary” means:

(1) the Participant’s Spouse, or

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(2) if no Spouse is alive or no other person is designated, the deceased Participant’s estate.

(d) Notwithstanding the foregoing, the Spouse of a Participant shall be his or her Beneficiary, unless that Spouse has consented to the designation of another as the Participant’s Beneficiary pursuant to a Qualified Election.

(e) The marriage of a Participant to a Spouse shall nullify and invalidate any prior Beneficiary designation.

1.12 “Benefit Accrual Service”. shall mean the period of service of a Participant that is used to calculate the amount of the Participant’s Accrued Benefit, determined in accordance with Article 2.

1.13 “Benefit Commencement Date”. shall mean the first day of the month coincident with or following the Participant’s Termination Date or the date when the Participant first becomes eligible to begin to receive benefits, unless the Participant elects to postpone receiving benefits until a later date, even though the first payment may not actually have been made at that date.

1.14 “Board” or “Board of Directors”. shall mean the Board of Directors of the Plan Sponsor, except that any action that could be taken by the Board may also be taken by a duly authorized Committee of the Board.

1.15 “Break in Service”. shall mean a Termination followed by the completion of a One-Year Break in Service.

1.16 “Code”. shall mean the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code shall include such section, any valid regulation promulgated, or official guidance issued thereunder, and any comparable provision of any future legislation amending, supplementing or superseding such section.

1.17 “Committee”. shall mean the committee of individuals appointed by the Board to be responsible for the operation and administration of the Plan in accordance with the provisions of Article 12.

1.18 “Compensation”. shall mean an Employee’s wages, salaries, fees for professional services, and other amounts received (without regard to whether or not an amount is paid in cash) for services actually rendered in the course of employment with the Employer to the extent that amounts are includable in gross income (including overtime pay, bonuses, commissions, tips, or expense reimbursements from a nonaccountable plan (as described in Treasury Regulation 1.62-2(c)). Compensation shall also include any remuneration that is currently excluded from the Participant’s gross income by reason of the application of Sections 125(a), 402(e)(3), 402(h)(1)(B), 401(k), or 132(f)(4) of the Code. Notwithstanding the foregoing, Compensation with respect to any Employee shall exclude:

(a) Any compensation directly paid or payable as fringe benefits;

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(b) Any contributions made by the Employer for or on account of the Employees under this Plan, or under any other employee benefit plan other than as specifically excepted herein;

(c) Any compensation paid or payable by reason of services performed prior to the date the Employee becomes a Participant;

(d) Any compensation paid or payable by reason of services performed after the date the Employee ceased to be a Participant;

(e) Any compensation paid as part of a severance plan or agreement;

(f) Amounts in excess of the Compensation Limit; and

(g) Any equity-based compensation (including, but not limited to, stock options, restricted or unrestricted stock and performance shares) under the Plan Sponsor’s Equity Incentive Plan or any similar equity-based plan or arrangement sponsored by an Affiliated Employer, whether such compensation is paid in shares of stock or cash.

Notwithstanding the foregoing, the term Compensation shall be at all times consistently interpreted to mean the “safe harbor” simplified definition of compensation set forth in Treasury Regulation 1.415-2(d)(2) and any successor provision or official interpretation therefor.

1.19 “Compensation Limit”. shall mean the dollar limit prescribed in Section 401(a)(17) of the Code (e.g., $225,000 for 2007), as adjusted pursuant to Sections 401(a)(17)(B) and 415(d) of the Code. Notwithstanding the foregoing, in determining benefit accruals in Plan Years beginning after December 31, 2001, the Compensation Limit for determination periods beginning before January 1, 2002 shall be $200,000.

1.20 “Covered Compensation”. shall mean, with respect to any Participant, the average of the contribution and benefit bases in effect under Section 230 of the Social Security Act for each year in the 35-year period ending with the year in which the Participant attains Social Security retirement age, as calculated under Section 401(l)(5)(e)(i) of the Code using the unrounded values.

1.21 “Deferred Vested Benefit”. shall mean the benefit to which a vested Participant would be entitled after a Break in Service, as calculated in accordance with Article 5 and Article 6.

1.22 “Early Retirement Benefit”. shall mean the benefit to which a Participant would be entitled in the event of his or her retirement at his or her Early Retirement Date, as calculated in accordance with Article 5 and Article 6.

1.23 “Early Retirement Date”. shall mean the date on which a Participant becomes eligible and elects to retire with an early retirement benefit under the Plan, as determined in accordance with Section 5.03.

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1.24 “Effective Date”. shall mean September 1, 2007, except as otherwise provided herein; provided, however, that any provision of the Plan necessary or appropriate to comply with the Pension Protection Act of 2006 or any other applicable legislation shall be effective as of the date specified in such legislation.

1.25 “Eligible Employee”. shall mean every Employee of the Employer, except for an individual who is:

(a) an individual included in a unit of Employees whose compensation and conditions of employment are established by the terms of a collective bargaining agreement between an Employer and employee representatives, as described in Section 7701(a)(46) of the Code, where retirement benefits were the subject of good faith bargaining, unless and until such collective bargaining agreement provides that the Plan will apply to such individual,

(b) as to any period of time, classified or treated by an Employer as an independent contractor, a consultant, a Leased Employee, or an employee of an employment agency or any entity other than an Employer, even if such individual is subsequently determined to have been a common-law employee of an Employer during such period.

1.26 “Employee”. shall mean an individual who is (a) employed by the Employer or an Affiliated Employer as a common-law employee, or (b) a Leased Employee. However, if Leased Employees constitute less than twenty (20) percent of the nonhighly compensated work force (within the meaning of Section 414(n)(5)(c)(ii) of the Code), the term “Employee” shall not include those Leased Employees who are covered by a plan described in Section 414(n)(5) of the Code.

1.27 “Employee’s Age”. shall mean the number of months following the Employee’s date of birth and ending on his or her death, divided by 12 and rounded to three decimal places. For the purposes of calculations involving the age of the Employee, the Employee shall be assumed to have been born on the first day of the month coincident with or following the Employee’s date of birth and shall be assumed to have lived through the last day of the month in which the date of the event for which the Employee’s age is being calculated occurs. Linear interpolation shall be used, where necessary, in calculations involving the Employee’s Age.

1.28 “Employer”. shall mean the Plan Sponsor and any Participating Employer. “Employer” when used in this Plan shall refer to such designated entities either individually or collectively, as the context may require.

1.29 “Employment Commencement Date”. shall mean the date on which the Employee first is credited with an Hour of Service.

1.30 “ERISA”. shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. Reference to a specific section of ERISA shall include such section, any valid regulation promulgated or official guidance issued thereunder, and any comparable provision of any future legislation amending, supplementing or superseding such section.

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1.31 “Final Average Compensation”. shall mean the highest amount obtainable by averaging the annual Compensation of a Participant paid in any five (5) consecutive calendar years out of the last ten (10) calendar years, but in no event, later than December 31, 2010, which is the last calendar year. In calculating Final Average Compensation for a Participant who is being credited with Service under Section 2.01(d) of this Plan (relating to a Participant receiving benefits under a long-term disability plan), it shall be assumed that such Participant continued to earn at the rate equal to his or her Final Average Compensation as calculated under this Section on the date he first commenced to receive Service credit under Section 2.01(d).

1.32 “Fund”. shall mean any fund provided for in a trust arrangement or an insurance contract or a combination of both, which is held by a Funding Agent, to which contributions under the Plan on and after the Effective Date will be made, and out of which benefits are paid to the Participants or otherwise provided for, and, in each case, pursuant to the Plan’s terms.

1.33 “Funding Agent”. shall mean a Trustee or insurance company or any duly appointed successor or successors selected to hold a Fund.

1.34 “Highly Compensated Employee” and “Highly Compensated Former Employee”. shall mean an Employee who is determined to be a Highly Compensated Employee or Highly Compensated Former Employee under the provisions of Article 7 of the Plan.

1.35 “Hour of Service”. shall mean each hour for which an Employee is directly or indirectly paid or entitled to payment by Employer or Affiliated Employer for the performance of duties in accordance with Department of Labor Regulation Section 2530.200b-2(a)(l).

1.36 “Interest Credits”. shall mean the amount credited to a Participant’s Account as interest in a Plan Year. Such amount shall be credited as of the last day of each Plan Year, and shall be equal to:

(a) the rate of interest on 30-year Treasury securities as specified by the Commissioner of the Internal Revenue Service for the month of November preceding the Plan Year, multiplied by

(b) the sum of:

(1) the Participant’s Account as of the first day of the Plan Year, minus

(2) any distributions credited against the Participant’s Account during the Plan Year.

Notwithstanding the foregoing, such amount for any Plan Year shall be calculated at a rate that is not greater than the market rate of return, as defined in Section 41 l(b)(5)(b)(i) and Section 41 l(b)(5)(b)(vi) of the Code and any successor provisions thereto.

1.37 “Joint Annuitant”. shall mean the Beneficiary who will receive retirement benefits after the death of the Participant on the basis of the provisions of a Joint & Survivor Annuity, as described in Article 10.

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1.38 “Joint & Survivor Annuity”. shall mean a retirement benefit under which equal monthly installments are payable during the joint lifetimes of the retired Participant and the Joint Annuitant, and under which, upon the earlier death of the retired Participant, the same amount, or fifty (50) percent as elected by the Participant prior to his or her Benefit Commencement Date, continues to be paid to the Joint Annuitant for the Joint Annuitant’s lifetime.

1.39 “Leased Employee”. shall mean any individual who, pursuant to an agreement between the Employer or an Affiliated Employer and any other individual, has performed services for the Employer or Affiliated Employer (or for such Employer or Affiliated Employer and related individuals determined in accordance with Section 414(n)(6) of the Code) (the “Recipient Employer”) on a substantially full-time basis for a period of at least one (1) year, and such services are performed under the primary direction of or control by the Recipient Employer.

1.40 “Limitation Year”. shall mean the twelve (12)-month period beginning on each January 1 and ending on each December 31.

1.41 “Maternity or Paternity Absence”. means an absence from employment by reason of the pregnancy of an Employee, the birth of a child of the Employee, the placement of a child in connection with the child’s adoption by the Employee, or the caring for a child during the period immediately following the birth or adoption, which the Employee certifies to the Employer.

1.42 “Named Fiduciary”. shall mean a fiduciary designated as such under the provisions of Article 12.

1.43 “Normal Retirement Age”. shall mean the age at which the Employee reaches his or her Normal Retirement Date as defined in Section 1.45.

1.44 “Normal Retirement Benefit”. shall mean the benefit to which a Participant would be entitled, as calculated in accordance with Article 5 and Article 6, in the event of the Participant’s retirement on the Participant’s Normal Retirement Date.

1.45 “Normal Retirement Date”. shall mean the first day of the month coincident with or next following the Participant’s sixty-fifth (65^th) birthday.

1.46 “One-Year Break in Service”. shall mean a Severance Period of twelve (12) consecutive months.

1.47 “Participant”. shall mean any Eligible Employee who becomes a Participant in the Plan pursuant to Article 3 and shall include any individual who has separated from Service or ceased to be an Eligible Employee who has not received a full distribution from the Plan of his or her Accrued Benefit.

1.48 “Participating Employer”. shall mean any Affiliated Employer that an officer of the Plan Sponsor designates in writing as an Employer under the Plan.

1.49 “Participation”. shall mean Service while an Active Participant.

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1.50 “PBGC”. shall mean the Pension Benefit Guaranty Corporation.

1.51 “Period of Benefit Accrual Service”. shall mean as to each Participant, each period beginning on the date of his or her commencement as an Eligible Employee and ending on his or her next Termination Date.

1.52 “Period of Service”. shall mean as to each Employee (a) each period beginning on his or her Employment Commencement Date or Reemployment Date and ending on his or her next Termination Date, and (b) to the extent not counted under (a), each absence of twelve (12) months or less from service with the Employer and all Affiliated Employers, which began by reason of, or within which occurred, such Employee’s resignation, retirement, discharge, or death. For purposes of applying this Section 1.52, an Employee’s Period of Service shall include periods of employment with any other employer which is a “predecessor employer” of an Affiliated Employer (within the meaning of Section 414(a) of the Code).

1.53 “PIN”. shall mean the number (if any) assigned to a Participant by the Committee (or its delegate) pursuant to Section 12.02(a)(12) for purposes of identifying his or her Minimum Benefit.

1.54 “Plan”. shall mean The PMI Group, Inc. Retirement Plan, as set forth in this document and as heretofore or hereafter amended from time to time.

1.55 “Plan Sponsor”. shall mean The PMI Group, Inc.

1.56 “Plan Year”. shall mean the twelve (12) consecutive month period beginning each January 1 and ending on each December 31.

1.57 “Postponed Retirement Benefit”. shall mean the benefit to which a Participant would be entitled in the event of his or her retirement after his or her Normal Retirement Date, as calculated in accordance with Article 5 and Article 6.

1.58 “Postponed Retirement Date”. shall mean the first day of the calendar month coincident with or next following the Participant’s Termination Date, if such date is later than the Participant’s Normal Retirement Date.

1.59 “Predecessor Employer”. shall mean, with respect to an Employee, one or more of the following organizations or units, if the Employee was previously employed by them: PMI Mortgage Insurance Company, American Pioneer Title Insurance Company, PMI Mortgage Services Company, and PMI Reinsurance Company.

1.60 “Predecessor to this Plan”. shall mean any plan for which this Plan is a restatement, any plan that has been merged into this Plan or any predecessor to this Plan, or any other plan sponsored by an entity that became a Participating Employer or a predecessor to this Plan for any of its employees who had been participants in such other plan.

1.61 “Qualified Election”. shall mean an election that must satisfy the following requirements:

(a) it must be in writing,

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(b) it must be consented to in writing by the Participant’s Spouse,

(c) it must designate a Beneficiary (or a form of benefits) which may not be changed without the consent of the Spouse (or the consent the Participant’s Spouse must expressly permit the Participant to designate a Beneficiary without requiring further consent from the Participant’s Spouse),

(d) such Spouse’s consent must acknowledge the effect of the election, and

(e) such Spouse’s consent must be witnessed by an authorized Plan representative or notary public.

Spousal consent is not required if the Participant establishes to the satisfaction of an authorized Plan representative that such consent is not necessary because there is no Spouse, or cannot be obtained because the Spouse cannot be located, or because the Participant has a court order indicating that he or she has been abandoned (within the meaning of local law), or is legally separated, unless a “qualified domestic relations order” (as defined in Code Section 414(p)) provides otherwise, or because of other circumstances as the Secretary of the Treasury may prescribe by regulation.

Any consent by a Spouse (or establishment that the consent of a Spouse is not necessary or cannot be obtained) shall be effective only as to such Spouse.

If the Participant’s Spouse is legally incompetent to give consent, consent by the Spouse’s legal guardian shall be deemed to be consent by the Spouse upon a written showing of such legal rights by the guardian (or by the legal representative to the guardian) that is satisfactory to the Committee or a designee thereof.

1.62 “Qualified Joint & Survivor Annuity”. shall mean, for a Participant with a Spouse, a Joint and Survivor Annuity with the Participant’s Spouse as Joint Annuitant and a fifty (50) percent survivor benefit. For a Participant with no Spouse, it shall mean a benefit payable in the form of an annuity for the life of the Participant. The Qualified Joint & Survivor Annuity for a Participant with a Spouse shall be at least the Actuarial Equivalent, determined under the applicable factors of Article 10 of the Participant’s Accrued Benefit or, if greater in Actuarial Equivalent value, any optional form of benefit then available to the Participant under the Plan.

1.63 “Qualified Preretirement Survivor Annuity”. shall mean the benefit payable under the terms of Sections 9.01(a) or 9.0l(b).

1.64 “Reemployment Date”. shall mean the date on which an Employee first completes one (1) Hour of Service after a Termination Date.

1.65 “Retirement Date”. shall mean a Participant’s Normal, Early or Postponed Retirement Date.

1.66 “Severance Period”. shall mean each period beginning on an Employee’s Termination Date and ending on his or her next Reemployment Date.

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1.67 “Spouse”. shall mean the person to whom the Participant is legally married on the date the Participant receives the Participant’s benefit payment from the Plan, or the Participant’s date of death, if earlier.

1.68 “Termination”. shall mean the cessation of active employment with the Employer or an Affiliated Employer. Transfer of an Employee from the Employer to an Affiliated Employer, from an Affiliated Employer to the Employer, or from the Employer or Affiliated Employer to or another Affiliated Employer, or to a purchaser of stock (or other ownership interest) or assets, shall not be deemed for any purpose under the Plan to be a Termination, unless specifically prescribed by Internal Revenue Service rules and other official guidance.

1.69 “Termination Date”. shall mean the date that is the earlier of (a) the date on which an Employee dies, resigns, retires or is discharged from employment with the Employer and Affiliated Employers, or (b) the first anniversary of the first date of a period in which an Employee remains absent from service with the Employer and all Affiliated Employers for any reason other than his or her death, resignation, retirement or discharge, or if the absence is on account of a Maternity or Paternity Absence, the second anniversary of the first date of the Employee’s absence from service with the Employer and all Affiliated Employers. In accordance with Treasury Regulation Section 1.410(a)-9, the period between the first and second anniversaries of absence from service as the result of Maternity or Paternity Absence (the “Second Year”) is neither a Period of Service nor a Severance Period. Accordingly, an Employee shall receive no credit for a Year of Benefit Accrual Service or a Year of Vesting Service during the Employee’s Second Year, but the Employee’s Severance Period shall not commence until the end of the Second Year.

1.70 “Trust”. shall mean any trust established under an agreement between the Employer and a Trustee under which any portion of the Fund is held, and shall include any and all amendments to the Trust agreement, or any successor agreement.

1.71 “Trustee”. shall mean any trustee holding any portion of the Fund under a Trust agreement forming a part of the Plan.

1.72 “Year of Benefit Accrual Service”. shall mean a twelve (12)-month Period of Benefit Accrual Service. Subject to Section 2.04, an Employee’s total number of Years of Benefit Accrual Service shall be calculated by assuming that the Employee (a) was hired on the first day of the month coincident with or following the Employee’s actual date of hire, and (b) incurred a Termination Date on the last day of the month in which the Employee’s actual Termination Date occurs. Years of Benefit Accrual Service shall be calculated by dividing the number of months determined in the preceding sentence by twelve (12), and rounded to three (3) decimal places. Linear interpolation shall be used where necessary.

1.73 “Year of Vesting Service”. shall mean a twelve (12)-month Period of Service. Subject to Section 8.05, an Employee’s total number of Years of Vesting Service shall be calculated by assuming that the Employee (a) was hired on the first day of the month coincident with or following the Employee’s actual date of hire, and (b) incurred a Termination Date on the last day of the month in which the Employee’s actual Termination Date occurs. Years of Vesting Service shall be calculated by dividing the number of months determined in the preceding

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sentence by twelve (12), and rounded to three (3) decimal places. Linear interpolation shall be used where necessary.

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ARTICLE 2

SERVICE COUNTING RULES

2.01 Period of Service — General Rule. An Employee shall be credited with a Period of Service for:

(a) Each period for which a person is directly or indirectly paid, or entitled to payment, by the Employer, an Affiliated Employer or a Predecessor Employer for the performance of duties. This Service shall be credited to the person during the appropriate Computation Period in which the duties are performed;

(b) Each period for which a person is directly or indirectly paid, or entitled to payment, by the Employer, an Affiliated Employer or a Predecessor Employer for reasons other than for the performance of duties (such as vacation, holiday, illness, incapacity including disability, jury duty, military duty, leave of absence, or a leave of absence pursuant to the Family Leave Act, or layoff). This Service shall be credited to the Employee during the Computation Period in which the nonperformance of duties occurs, but the total credit for any single continuous period during which the employee performs no duties (whether or not in a single Computation Period) of such Service shall not exceed 501 hours. The computation of non-work hours described in this sub-paragraph will be computed in accordance with the provisions of the Department of Labor Regulation Section 2530.200b-2;

(c) Each period for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to by the Employer, an Affiliated Employer or Predecessor Employer. This Service will be credited to the person for the Plan Year to which the award or agreement pertains to the extent service for any such period to which the back pay award relates has not already been credited by the Employer;

(d) Each period for which an Employee is not paid or entitled to payment but during which he normally would have performed duties for the Employer or an Affiliated Employer during any period for which he is eligible to receive benefits under the long-term disability plan of the Employer or an Affiliated Employer; and

(e) Each period for which an Employee is not paid or entitled to pay but during which the Employee is absent for a period of military service for which reemployment rights are protected by law, but only if the Employee returns to employment within the time required by law.

2.02 Period of Service — Computation. For the purpose of calculating Service under the Plan, an Employee shall be assumed to have been hired on the first day of the month coincident with or following the Employee’s date of hire and shall be assumed to have been terminated on the last day of the month in which the Employee’s Termination Date occurs. Using the above assumptions, Service shall be defined to be the number of months of Service divided

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by twelve (12) and rounded to three (3) decimal places. Linear interpolation shall be used, where necessary, in calculations involving Service.

2.03 Benefit Accrual Service. Benefit Accrual Service shall include any Period of Service except in the case of an employee who was a participant in the Allstate Retirement Plan on April 1, 1995. Such prior Allstate Retirement Plan participant shall not receive any Benefit Accrual Service prior to May 1, 1995. Employees hired by the Employer between May 2, 1994 and April 30, 1995 shall begin receiving Benefit Accrual Service on their original hire date with the Employer and will participate in the Plan one year from their original hire date with the Employer.

2.04 Service — General Rule. A Participant shall be credited with a Year of Service for purposes of this Plan if the Participant performs twelve (12) months of Service during a Plan Year, except that a Year of Service shall not be credited for any Plan Years prior to a Break in Service in any of the following cases:

(a) Cash-Out Rule — The Participant has previously received a distribution of the present value of his or her entire nonforfeitable benefit, following his or her Termination Date and the Participant has not repaid in full the distribution, with interest in accordance with Section 8.06 of this Plan. For the purposes of this rule, a Participant who is not entitled to a Deferred Vested Benefit upon his or her Termination Date shall be considered to be cashed-out upon his or her Termination Date, or

(b) Rule of Parity — The Participant was not entitled to a Deferred Vested Benefit at his or her Termination Date and has incurred a number of consecutive One-Year Breaks in Service equal to the greater of five (5) or the number of Years of Service credited to him prior to the first of such consecutive One-Year Breaks in Service.

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ARTICLE 3

ELIGIBILITY FOR PARTICIPATION AND TRANSFERS

3.01 Eligibility to Become a Participant. Each individual who was a Participant in the Plan on the day before the Effective Date and is an Eligible Employee on the Effective Date, shall automatically continue as a Participant on the Effective Date. Each other Eligible Employee shall become a Participant in the Plan on the first day of the calendar month that next follows the first date on which he or she becomes an Eligible Employee.

3.02 Transfer to Another Plan. A Participant who ceases to be an Eligible Employee without incurring a Termination shall cease to accrue benefits under Article 5 and shall cease to receive an Annual Allocation under Section 6.02 of this Plan as of the date on which he or she ceased to be an Eligible Employee. Such Accrued Benefits will be frozen as of the close of the Plan Year in which he or she ceases to be an Eligible Employee, but he or she shall continue to be a Participant for other purposes under the Plan and, if the Participant continues to remain in the employ of an Affiliated Employer, he or she shall continue to earn Vesting Service.

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ARTICLE 4

RETIREMENT ELIGIBILITY AND SUSPENSION OF BENEFITS

4.01 Retirement. A Participant who reaches his or her Retirement Date shall be entitled to retire from employment with the Employer and Affiliated Employers and receive benefits in accordance with Article 5 and Article 6.

4.02 Suspension of Benefits — Postponed Retirement. If a Participant’s Service continues after his or her Normal Retirement Age and such Service after Normal Retirement Age constitutes Section 203(a)(3)(B) Service (as defined in Section 4.05), such Participant’s benefits will be suspended, provided that the Committee notifies the Participant that his or her benefits have been suspended in the manner provided by Section 4.04 of this Article.

4.03 Suspension of Benefits — Rehires. If a person receiving benefits hereunder is rehired by the Employer or an Affiliated Employer, payment of those benefits will be suspended as long as the rehired Employee remains employed with the Employer or the Affiliated Employer, provided such Service constitutes Section 203(a)(3)(B) Service (as defined in Section 4.05) and provided that the Committee notifies him that benefits have been suspended, in the manner provided by Section 4.04 of this Article.

4.04 Suspension of Benefit Notice. The notice required under Sections 4.02 or 4.03 of this Article shall contain:

(a) a description of the specific reasons for the suspension of benefit payments,

(b) a general description of the Plan’s provisions relating to the suspension,

(c) a copy of such provisions,

(d) a statement to the effect that applicable Department of Labor regulations may be found in Section 2530.203-3 of the Code of Federal Regulations, and

(e) a description of the Plan’s procedure for affording a review of such suspension.

Such notice shall be furnished by personal delivery or first-class mail during the first calendar month in which payments are discontinued.

4.05 Section 203(a)(3)(B) Service. In accordance with Department of Labor Regulations Section 2530.203-3, “Section 203(a)(3)(B) Service” shall be determined on a monthly basis and an Employee shall be deemed to be in Section 203(a)(3)(B) Service in any month in which he shall perform forty (40) or more Hours of Service as defined in Department of Labor Regulations Section 2530.200b-2(a)(l) and (2). An Employee shall have the right to

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contest the determination of his or her status in accordance with the Plan’s Claims Procedures (as defined in Section 12.02(a)).

4.06 Recommencement of Benefits. Benefits that are suspended in accordance with Section 4.02 or 4.03 of this Article shall be paid in any month in which the Participant is not considered to be in Section 203(a)(3)(B) Service. If an Employee whose benefits are suspended continues or recommences Participation in this Plan and thereafter again becomes entitled to benefits hereunder by virtue of a new Early, Normal, or Postponed Retirement, previously suspended benefits shall not be recommenced, and the Participant shall be entitled only to his or her Early, Normal, or Postponed Retirement Benefit, as of the Participant’s new Early, Normal, or Postponed Retirement Date, adjusted as provided in Section 5.06.

4.07 Required Commencement at Age 70 1/2. A Participant not currently receiving benefits under this Plan who attains age 70 1/2 shall commence receiving benefits as if the Participant had retired on December 31 of the calendar year in which the Participant attains age 70 1/2, and had a Benefit Commencement Date of April 1 of the following calendar year. Each December 31 thereafter, and upon the Participant’s later actual Postponed Retirement Date, the Participant benefit payment shall be recalculated.

4.08 Required Commencement — Conditions. Notwithstanding any provision of this Plan to the contrary, all distributions under the Plan shall be made in accordance with the requirements of Section 401(a)(9) of the Code and the regulations thereunder, including the incidental death benefit requirements of Treasury Regulation Section 1.401(a)(9)-2 as provided in Section 10.09 of the Plan.

4.09 Blocking. In the event of a sale of a division or subsidiary of the Employer, a Participant shall not be considered to have attained his or her Early, Normal or Deferred Retirement Date until he shall have separated from service from the division or subsidiary that was sold by the Employer. In such event, Service with the division or subsidiary that was sold shall be considered Service with the Employer but shall not be Benefit Accrual Service, and all provisions of this Plan shall apply accordingly.

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ARTICLE 5

FINAL AVERAGE COMPENSATION AMOUNT OF RETIREMENT BENEFIT

5.01 Normal Retirement Benefit.

(a) A Participant’s Normal Retirement Benefit under Article 5 shall be equal to an annual annuity for the life of the Participant, payable monthly, commencing upon the Participant’s Normal Retirement Date. This annuity will be equal to the Participant’s Base Benefit plus the Participant’s Additional Benefit plus the Participant’s Allstate Benefit (if any); provided, however, that such annuity will not be less than the Participant’s Minimum Benefit, as described below:

(1) “Base Benefit” means an amount equal to one and fifty-five hundredths of one (1.55) percent of a Participant’s Final Average Compensation multiplied by the Participant’s Years of Benefit Accrual Service.

(2) “Additional Benefit” means an amount equal to sixty-five hundredths of one (0.65) percent of the excess of the Final Average Compensation over the Participant’s Covered Compensation, multiplied by the Participant’s Years of Benefit Accrual Service up to a maximum of thirty-five (35) years.

(3) “Allstate Benefit” means, in the case of a Participant with a frozen benefit from the Allstate Retirement Plan (the “Allstate Plan”), an amount equal to the Participant’s Final Average Compensation under this Plan at the time of termination divided by the Participant’s Average Annual Allstate Compensation, minus one, times the frozen Allstate Plan benefit.

(4) “Minimum Benefit” means $ 1,200; provided, however, that in the case of a Participant who has a PIN, “Minimum Benefit” means the Participant’s Minimum Base Benefit plus the Participant’s Minimum Additional Benefit plus the Participant’s Minimum Allstate Benefit (if any) as set forth next to such Participant’s PIN in Appendix A to the Plan.

(b) Bridge Benefit. The benefit described in this Section 5.01(b) is applicable to a Participant (if at all) only if the Participant is neither a Highly Compensated Employee nor a Highly Compensated Former Employee. If a Participant retires from employment with the Employer and Affiliated Employers after attaining at least age fifty-five (55) and with twenty (20) years of combined service with the Employer and Allstate, but did not have twenty (20) years of service with Allstate on April 1, 1995, the Participant shall be entitled to a temporary annuity equal to: (1) as reduced in (2) payable for the period described in (3) below:

(1) The monthly life annuity payable from the Allstate Retirement Plan starting at the Participant’s Normal Retirement Date under the Allstate Retirement

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Plan. (This is the accrued Allstate benefit on April 1, 1995, as communicated by Allstate.)

(2) The monthly life annuity will be reduced by one half of one (.5) percent per month (six (6) percent per year) for each month the Participant’s retirement precedes his or her Base Age under the Allstate Retirement Plan.

(3) The monthly life annuity will be paid starting on the first day of the month following retirement under the Plan until the earlier of the Participant’s death or the date on which the Participant becomes eligible to receive his or her benefit from the Allstate Retirement Plan. Alternatively, the Participant may elect to have, in the event of his or her death, the monthly life annuity continue to his or her surviving Spouse but not beyond the date when the Participant would have become eligible to receive his or her benefit from the Allstate Retirement Plan. If the Participant elects to have the full benefit continue to his or her Spouse, then the benefit in (2) will be further reduced two (2) percent. If the Participant elects to have half of the benefit continue to his or her Spouse, then the benefit in (2) will be further reduced one (1) percent.

5.02 Postponed Retirement Benefit. A participant who retires on the Postponed Retirement Date shall receive a Postponed Retirement Benefit that, subject to the provisions of the optional retirement benefit and the Joint & Survivor Annuity, shall consist of a monthly payment on the first day of each calendar month commencing with the Participant’s Postponed Benefit Date, and ending with the last such payment before the Participant’s death, equal to the greater of (a) and (b) below:

(a) the Participant’s Normal Retirement Benefit, but with Benefit Accrual Service, Compensation, and Final Average Compensation determined as of the Participant’s Postponed Retirement Date, and

(b) if no suspension of benefit notice has been issued under Article 4.02, the Participant’s Normal Retirement Benefit with Benefit Accrual Service, Compensation, and Final Average Compensation determined as of the Participant’s Normal Retirement Date with an actuarial increase from Normal Retirement Date to Postponed Retirement Date made using assumptions under Code Section 417(e)(3) to comply with Code section 41l(b)(l)(H).

5.03 Early Retirement Benefit. A Participant who retires from employment with the Employer and Affiliated Employers prior to the Participant’s Normal Retirement Date, but on or after attaining age fifty-five (55), and who has completed at such time ten (10) Years of Vesting Service, shall be entitled to an Early Retirement Benefit of an annual annuity for life, payable monthly, commencing at the date that would have been the Participant’s Normal Retirement Date. At the election of the Participant, the Participant may receive the Participant’s Early Retirement Benefit as an annuity commencing at the Participant’s Early Retirement Date, or at any date thereafter, in a reduced amount calculated by multiplying the Normal Retirement Benefit (based upon the Participant’s years of credit Service and Final Average

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Compensation as of the Participant’s Early Retirement Date) calculated under Section 5.01 by the appropriate factor as defined below and using linear interpolation for partial years as necessary.

The Base Benefit as described in Section 5.01 will be reduced by four and eight tenths of one (4.8) percent for each year before the Base Retirement Age as defined in the following table:

Year of Birth	Base Retirement Age
Before 1942	Age 60
1942-1944	Age 61
1945-1947	Age 62
1948-1950	Age 63
1951-1953	Age 64
After 1953	Age 65

The Additional Benefit as described in Section 5.01 will be reduced by eight (8) percent for each year of early retirement from age sixty-two (62) to age sixty-five (65) and by four (4) percent for each year of early retirement from age fifty-five (55) to age sixty-two (62).

Notwithstanding the foregoing, Participants electing early retirement prior to December 31,1999, and prior to their sixtieth (60^th) birthday will be eligible for the “Beefed Up” provision. Under this provision, a Participant is eligible for a “Beefed Up” benefit if the Participant’s date of retirement is one (1) or more calendar years earlier than the earlier of (a) the Participant’s sixtieth (60^th) birthday, or (b) December 31, 1999. Under the provision, the Participant’s Final Average Compensation will be the greater of that which is calculated under Section 1.31 or that which would be calculated under Section 1.31 if the Participant continued to work until the earlier of the Participant’s sixtieth (60^th) birthday or December 31, 1999, and earned in each future year the same as that which the Participant earned in his or her final full year of employment.

Notwithstanding any contrary Plan provision, in the case of a Participant who elects early retirement on or after January 1, 2002, his or her Early Retirement Benefit will be determined as follows: he or she will receive the greater of:

(a) the sum of:

(1) the Base Benefit (accrued as of January 1, 2002) reduced by four and eight tenths of one (4.8) percent for each year before the Base Retirement Age as defined in the table above (the “Base Benefit Reduction Factor”),

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(2) the Additional Benefit (accrued as of January 1, 2002) reduced by eight (8) percent for each year of early retirement from age sixty-two (62) to age sixty-five (65) and by four (4) percent for each year of early retirement from age fifty-five (55) to age sixty-two (62) (the “Additional Benefit Reduction Factor”), and

(3) the Allstate Benefit (accrued as of January 1, 2002) reduced by the Base Benefit Reduction Factor, or

(b) the sum of:

(1) the Base Benefit reduced by the Base Benefit Reduction Factor,

(2) the Additional Benefit reduced by the Additional Benefit Reduction Factor, and

(3) the Allstate Benefit reduced by a blended factor equal to the benefit weighted average of the Base Benefit and Additional Benefit Reduction Factors (the “Blended Factor”).

Notwithstanding the foregoing, (x) in the case of a Participant who has a PIN and who elects early retirement on or after July 30, 2002, his or her Early Retirement Benefit will not be less than the sum of (i) the Minimum Base Benefit reduced by the Base Benefit Reduction Factor, (ii) the Minimum Additional Benefit reduced by the Additional Benefit Reduction Factor, and (iii) the Minimum Allstate Benefit (if any) reduced by the Blended Factor, and (y) in the case of a Participant whose Minimum Benefit pursuant to Section 5.01(a)(4) is $1,200 and who elects early retirement on or after July 30, 2002, his or her Early Retirement Benefit will not be less than $1,200 reduced by the Base Benefit Reduction Factor.

5.04 Accrued Benefit — Participant Who Has Attained Retirement Age. The Participant’s Accrued Benefit under this Article 5 for a Participant who has attained Retirement Age shall be the Early, Normal, or Postponed Retirement Benefit to which the Participant would be entitled if he were to retire at such time, payable as an annuity for life commencing at Normal Retirement Age or, if the Participant has attained his or her Normal Retirement Age, as of the first of the calendar month coincident with or next following the date of calculation.

5.05 Accrued Benefit — Participant Who has Not Attained Normal Retirement Age. The Participant’s Accrued Benefit under this Article 5 for a Participant who has not attained Normal Retirement Age shall be:

(a) Deferred Vested Benefit. A Participant who has incurred a Break in Service shall be entitled to an annual pension benefit, payable as a straight life annuity commencing at Normal Retirement Date equal to the Participant’s Accrued Benefit on his or her Termination Date, provided that the Participant is vested under the provisions of Article 8, unless such Participant has been cashed-out pursuant to Section 10.02.

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(b) Deferred Vested Benefit — Early Commencement. A Participant entitled to a Deferred Vested Benefit who has satisfied the Service requirement for entitlement to an Early Retirement Benefit and who subsequently satisfies the age requirements for entitlement to an Early Retirement Benefit shall be entitled to elect to receive his or her Deferred Vested Benefit at a date prior to the date on which it otherwise would be payable, in an Actuarial Equivalent amount calculated in accordance with the factors defined below and using linear interpolation for partial years as necessary:

The Base Benefit and Additional Benefit as described in Section 5.01 will be reduced by eight (8) percent for each year the benefit commences prior to age sixty-five (65) but after age sixty (60), and an additional four (4) percent for each year the benefit commences prior to age sixty (60).

5.06 Adjustment for Suspension of Benefits. The otherwise payable Early, Normal, or Postponed Retirement Benefit of any Participant who had previously become entitled to an Early, Normal, or Postponed Retirement Benefit, but whose benefit payments were suspended pursuant to the provisions of Article 4, shall be reduced by the Actuarial Equivalent of any payments previously made to him.

5.07 Freeze of Article 5 Benefit Accrual. Beginning on and after September 1, 2007, any individual who is an Active Participant on September 1, 2007, shall be eligible to accrue benefits under this Article 5 until December 31, 2010, subject to meeting the requirements of this Plan for any such benefit accruals. Any individual who is not an Active Participant on September 1, 2007, shall not be eligible to accrue benefits under this Article 5. Any individual who terminates his or her employment on and after September 1, 2007 shall no longer be eligible to accrue any benefits upon rehire under this Article 5 as of his or her Termination Date. After December 31, 2010, there shall be no accrual of benefits under this Article 5 under any circumstances by anyone, including any Active Participant, any Employee of the Employer or any Affiliated Employer, or any other person.

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ARTICLE 6

CASH BALANCE AMOUNT OF RETIREMENT BENEFIT

6.01 Cash Balance Accounts. Beginning on September 1, 2007, an Account shall be established and maintained in the name of each Active Participant eligible for an Annual Allocation under Section 6.02, Interest Credits under Section 6.03 and in the case of a Participant who has a PIN, an additional annual addition (if any) as set forth next to such Participant’s PIN in Appendix B to the Plan. Upon the Retirement Date of the Participant and the selection of a form of benefit by the Participant, the Participant’s Account shall be converted into such benefit form based on the Actuarial Equivalent form of payment defined in the Plan. Thereafter, the Participant’s Account shall be closed, and the sole benefit shall be in the form selected by the Participant.

6.02 Annual Allocation to Accounts. Annual Allocations shall be credited to the Account maintained for each Active Participant to the extent that the Participant is eligible to participate in the Plan under Section 3.01 and is no longer accruing benefits or entitled to accrue benefits under Article 5.

(a) For a Participant who is an Active Participant on September 1, 2007, and who does not incur a Termination on or before December 31, 2010, such Participant shall be eligible to receive an Annual Allocation for Plan Years beginning after December 31, 2010.

(b) For a Participant who is an Active Participant on September 1, 2007, and who does incur a Termination on or before December 31, 2010, but is subsequently rehired and becomes an Active Participant thereafter, such Active Participant shall be eligible to receive an Annual Allocation for Plan Years on or after his or her date of re-eligibility to participate in the Plan.

(c) For a Participant who is not an Active Participant on September 1, 2007, such Active Participant shall be eligible to receive an Annual Allocation to the extent the Participant is eligible to participate in the Plan under Section 3.01.

6.03 Interest Credits. The Account of each Participant shall be credited with an Interest Credit annually, even though he or she may no longer be an Employee.

6.04 Normal Retirement Benefit. A Participant, upon reaching his or her Normal Retirement Age, shall be entitled to a distribution of the benefit accrued under this Article 6 commencing upon the Participant’s Normal Retirement Date, but only to the extent that this benefit is paid with his or her benefit accrued under Section 5.01, if any. If there is no Accrued Benefit payable to the Participant under Section 5.01, then the retirement benefit under this Section 6 shall be an amount that is equal to the Actuarial Equivalent of the balance of the Participant’s Account.

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6.05 Postponed Retirement Benefit. A Participant may elect to delay commencement of the benefit accrued under this Article 6 until his or her Postponed Retirement Date, but only to the extent that this benefit is paid with his or her benefit accrued under Section 5.02, if any. If there is no Accrued Benefit payable to the Participant under Section 5.02, then the Postponed Retirement Benefit under this Section 6 shall be payable on the first day of the calendar month commencing with the Participant’s Postponed Retirement Date equal to an amount that is the Actuarial Equivalent of the balance of the Participant’s Account.

6.06 Early Retirement Benefit. A Participant, upon reaching his or her Early Retirement Date, may elect to receive a distribution of the benefit accrued under this Article 6, but only to the extent that this benefit is paid with his or her benefit accrued under Section 5.03, if any. If there is no Accrued Benefit payable to the Participant under Section 5.03, then the Early Retirement Benefit under this Section 6 shall be paid at the election of the Participant, commencing at the Participant’s Early Retirement Date, or at any date thereafter, equal to the Actuarial Equivalent of the balance of the Participant’s Account.

6.07 Participant Who has Not Attained Normal Retirement Age. If a Participant has not attained Normal Retirement Age and who has incurred a Break in Service shall be entitled to a distribution of the benefit accrued under this Article 6, commencing at Normal Retirement Date equal to the Actuarial Equivalent of the balance of the Participant’s Account (“Cash Balance Vested Benefit”) on his or her Termination Date, provided that the Participant is vested under the provisions of Article 8, unless such Participant has been cashed-out pursuant to Section 10.02. Such Cash Balance Vested Benefit will only be paid with his or her Deferred Vested Benefit accrued under Section 5.05, if any. If there is no Accrued Benefit payable to the Participant under Section 5.05, then the Cash Balance Vested Benefit under this Section 6 shall be paid at the election of the Participant, commencing at Normal Retirement Date, equal to the Actuarial Equivalent of the balance of the Participant’s Account.

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ARTICLE 7

REQUIRED BENEFIT LIMITATIONS

7.01 Code Section 415 Limits. This Article 7 shall be effective for Limitation Years ending after December 31, 2001 (except as otherwise provided below). The benefits otherwise payable to a Participant, or a Beneficiary under this Plan and, where relevant, the Accrued Benefit of a Participant, shall be limited to the extent required, and only to the extent required, by the provisions of Section 415 of the Code and rulings, notices and regulations issued thereunder. To the extent applicable, Section 415 of the Code and rulings, notices, and regulations issued thereunder are hereby incorporated by reference into this Plan. Any benefit increases resulting from the increase in the limitations of Section 415(b) of the Code will be provided to all Employees participating in the Plan who have one (1) Hour of Service on or after the first day of the first Limitation Year ending after December 31, 2001. In calculating these limits, the following rules shall apply:

(a) Section 415 Limitation. A Participant’s annual benefit (a benefit payable annually in the form of a straight life annuity) from the Plan is limited to the lesser of:

(1) $180,000, (for 2007, as adjusted by the Code), or

(2) One hundred (100) percent of the Participant’s average Compensation for his or her high three (3) years.

(b) Actuarial Equivalencies:

(1) Adjustment to Section 415 Limitation Where Benefit Begins Before Age 62. For purposes of determining the actuarial equivalent of the limitation described in Section 415(b)(2)(C) of the Code (and, except as provided in sub-paragraph (a)(2) of this Section, for purposes of determining the actuarial equivalent of the benefit as described in Section 415(b)(2)(B) of the Code), the mortality assumption used shall be the applicable mortality table based on the Internal Revenue Service Commissioner’s prevailing standard table (described in Section 807(d)(5)(A) of the Code used to determine reserves for group annuity contracts issued on the date the adjustment is being made (without regard to any other sub-paragraph of Section 807(d)(5) of the Code) and the interest rate assumption used shall be not less than the greater of five (5) percent or the interest rate specified in the Plan’s definition of Actuarial Equivalent.

(2) Adjustment For Certain Other Form of Benefit. For purposes of determining the actuarial equivalent of the benefit described in Section 415(b)(2)(B) of the Code for any form of benefit subject to Section 417(e)(3) of the Code, the mortality assumption used shall be the applicable mortality table based on the Internal Revenue Service Commissioner’s

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prevailing standard table (described in Section 807(d)(5)(A) of the Code used to determine reserves for group annuity contracts issued on the date the adjustment is being made (without regard to any other sub-paragraph of Section 807(d)(5) of the Code) and the interest rate assumption used shall be not less than the greatest of five and one-half (5.5) percent, the rate that provides a benefit of not more than one hundred and five (105) percent of the benefit that would be provided if the Applicable Interest Rate were the interest rate of assumption, or the interest rate specified in the Plan’s definition of Actuarial Equivalent.

(3) Adjustment to Section 415 Limitation Where Benefit Begins After Age 65. For purposes of determining the actuarial equivalent of the limitation described in Section 415(b)(2)(D) of the Code, the mortality assumption used shall be the applicable mortality table based on the Internal Revenue Service Commissioner’s prevailing standard table (described in Section 807(d)(5)(A) of the Code used to determine reserves for group annuity contracts issued on the date the adjustment is being made (without regard to any other sub-paragraph of Section 807(d)(5) of the Code and the interest rate assumption used shall be not greater than the lesser of five (5) percent or the interest rate specified in the Plan’s definition of Actuarial Equivalent.

(c) Cost-of-Living Adjustments — If the applicable Section 415 limits described in 7.01 (a) are increased by Section 415(d) of the Code after a benefit is in pay status by virtue of an adjustment to those limits reflecting a change in the cost-of-living index, benefit payments to a Participant or his or her Beneficiary shall be increased to the maximum extent permitted under the revised limits. However, no adjustment shall be taken into account before the year for which such adjustment takes effect. This increase shall occur only to the extent it would not cause the benefit to exceed the benefit to which the Participant or Beneficiary would have been entitled in the absence of the Section 415 limits.

(d) Surviving Spouse Payments — If, upon the death of a Participant whose benefits were limited under this Section 7.01, the Participant’s surviving Spouse shall be entitled to a benefit payment smaller than that which was payable while the Participant was alive, the benefit payments to the spouse shall equal the lesser of (1) and (2) below, where:

(1) is the benefit payment that would be payable to the surviving Spouse if benefits under this Plan had not been limited by this Section 7.01, and

(2) is the benefit payment that would be payable to the surviving Spouse if the benefit provided under this plan had been a Joint & Survivor Annuity with survivor benefits equal to fifty (50) percent of the amount payable while the Participant was alive, in an amount equal to the maximum limitations provided under this Section 7.01.

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(e) Reduction for Participation in Defined Benefit Plans — If the Participant is entitled to a benefit under any defined benefit plan that is, or ever has been, maintained by the Employer or an Affiliated Employer, the limits under this Section 7.01 shall be applied to the combined benefits payable and the benefit payable hereunder shall be reduced to the extent necessary to make the combined benefits meet the limits under this Section 7.01.

(f) Average Compensation — To calculate Average Compensation for an Employee’s high three (3) years of service, compensation shall be the Employee’s Compensation as defined in Section 1.18, and the three (3) years’ average shall be calculated using consecutive calendar years during which the Participant had the greatest aggregate Compensation from the Employer. After January 1, 2008, the average Compensation shall be limited by the Compensation Limit in effect for the particular Compensation period, pursuant to the final Section 415 regulations effective for Limitation Years beginning on or after July 1, 2007.

7.02 Special Limitation for 25 Highest-Paid Employees. The provisions of this Section 7.02 shall apply to the 25 highest-paid Highly Compensated Employees or Highly Compensated Former Employees for a Plan Year. Subject to Section 7.03, if a benefit becomes or is payable for a Plan Year to such an Employee, it cannot exceed an amount equal to the payments that would be made during the Plan Year on behalf of the Employee under a straight life annuity that is the Actuarial Equivalent of the Accrued Benefit, any other benefits under the Plan (other than a social security supplement), and a social security supplement, if any, that the Employee is entitled to receive.

7.03 Exceptions to Special Limitation. The provisions of Section 7.02 shall not apply if any one of the following requirements is satisfied:

(a) immediately after payment of the benefit described in Section 7.02, the value of the plan assets equals or exceeds one hundred and ten (110) percent of the value of current liabilities, as defined in Section 412(1)(7) of the Code and Treasury Regulation 1.401(a)(4)-5(b);

(b) the value of the benefits that would be payable to or on behalf of the Restricted Employee are less than one (1) percent of the value of current liabilities before distribution; or

(c) the value of the benefits payable or on behalf of the Restricted Employee do not exceed the amount described in Section 41l(a)(l1)(A) of the Code (for 2007 $5,000).

7.04 Distributions Allowed if Security Furnished. A benefit that is otherwise restricted pursuant to Section 7.02 may be nevertheless distributed, pursuant to Internal Revenue Service Revenue Ruling 92-76, if, in the event of a termination of the Plan, the Employee is obligated to repay the Plan any amount necessary for the distribution of assets to satisfy the requirements of Section 401(a)(4) and Treasury Regulation 1.401-4(c) of the Code. The amount the Employee shall be obligated to repay as of any measurement date shall not exceed the excess of the distributions the Employee has actually received over the amount

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that the Employee would have received had distributions commenced in a manner that would have not violated the provisions of Section 7.02 (the “Restricted Amount”), with both amounts increased by a reasonable rate of interest from the date payment was (or would have been) made to the measurement date. The Employee’s obligation to repay must be secured by either: (a) an escrow account with an initial value at the date of distribution of at least one hundred and twenty-five (125) percent of the Restricted Amount, and at all times thereafter a value of at least one hundred and ten (110) percent of the Restricted Amount, (b) a bond furnished by an insurance company, bonding company or other surety approved by the U.S. Treasury Department as an acceptable surety for federal bonds, of at least one hundred (100) percent of the Restricted Amount, or (c) a letter of credit in an amount equal to at least one hundred (100) percent of the Restricted Amount.

7.05 Plan Termination Limit. In the event of Plan termination, the benefit of any Restricted Employee shall be limited to a benefit that is nondiscriminatory under Code Section 401(a)(4).

7.06 Highly Compensated Employee or Former Employee. The term “Highly Compensated Employee” shall mean an Employee who performs service during the Determination Year and is described in one or more of the following groups in accordance with IRS regulations:

(a) was a five (5) percent owner at any time during the Determination Year or the Look-Back Year; or

(b) for the Look-Back Year had Compensation from the Employer in excess of $ 100,000 (which shall be adjusted in the same manner as Code Section 415(d)) and was in the Top-Paid Group of Employees for such Look-Back Year.

The term “Highly Compensated Former Employee” shall mean a former Employee who has a separation year prior to the Determination Year and was a Highly Compensated active Employee for either: (1) such Employee’s Separation Year or (2) any Determination Year ending on or after the Employee’s 55th birthday.

A “Separation Year” is the Determination Year in which the Employee separates from Service. Notwithstanding anything to the contrary in this Plan, Sections 414(b), (c), (m), (n), and (o) of the Code are applied prior to determining whether an Employee is a Highly Compensated Employee.

7.07 Definitions. For purposes of this Section and Section 7.06,

(a) “Compensation” shall be defined in Section 414(q)(4), which refers to meaning given such term under Code Section 415(c)(3).

(b) A “Determination Year” shall mean the Plan Year for which the determination of who is Highly Compensated is being made.

(c) A “five (5) percent owner” shall be determined within the meaning of Section 414(q)(2) of the Code.

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(d) A “Look-Back Year” shall mean the twelve (12)-month period preceding the Determination Year.

(e) The “Top-Paid Group” shall mean the top twenty (20) percent of all Employees when ranked on the basis of Compensation paid to such Employees during the year under consideration, excluding Employees who have not competed six (6) month of service, Employees who normally work less than 17 ¹/2 hours per week, Employees who normally work during not more than six (6) months during any year, Employees who have not attained age twenty-one (21), and Employees covered by an agreement which the Labor Secretary finds to be a collective bargaining agreements between Employee representatives and the Employer.

(f) The Employer shall have the right to elect to determine Highly Compensated Employees by reference to calendar-year Compensation, in accordance with IRS regulations. If the Employer so elects, the Employer must make such election with respect to all qualified plans it or any Affiliated Employer maintains.

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ARTICLE 8

VESTING

8.01 General Rule. A Participant who incurs a Break in Service at a time when he or she is not entitled to an Early, Normal or Postponed Retirement Benefit under the provisions of Article 5 and Article 6 shall not be entitled to benefits under this Plan, except as provided under the provisions of this Article.

8.02 Vesting at Normal Retirement Age. A Participant who has attained Normal Retirement Age shall be fully vested in his or her Accrued Benefit.

8.03 Vesting Before Normal Retirement Age. A Participant who incurs a Termination at a time when he or she is not entitled to an Early, Normal or Postponed Retirement Benefit under the provision of Article 5, shall be entitled to a Deferred Vested Benefit, payable as provided under Article 5, provided the Participant has attained five (5) Years of Vesting Service at the time of such Termination.

A Participant who incurs a Termination at a time when he or she is not entitled to an Early, Normal or Postponed Retirement Benefit under the provision of Article 6, shall be entitled to the Cash Balance Vested Benefit in the Participant’s Account, payable as provided under Article 6, provided the Participant has attained three (3) Years of Vesting Service at the time of such Termination.

For each Participant who both (a) became an Eligible Employee after April 1, 1995, and (b) prior to April 1, 1995, was employed by the Plan Sponsor for at least twelve (12) months, his or her Period of Service for such employment also shall be counted for purposes of determining his or her Years of Vesting Service.

8.04 Vesting Upon Plan Termination. In the event of termination or partial termination of this Plan, each affected Participant shall be one hundred (100) percent vested in his or her Accrued Benefit, but only to the extent the Plan is funded on a termination basis. The foregoing sentence shall not apply to a former Participant who has been cashed-out (including those deemed cashed-out under Section 8.05(c)) or who has incurred five (5) consecutive One-Year Breaks in Service after his or her Termination Date. Such a former Participant shall not be entitled to any additional vested benefit upon termination or partial termination of this Plan.

8.05 Vesting Service Disregarded. The Years of Vesting Service of a terminated Participant who is reemployed shall be determined in accordance with the following rules.

(a) Prior Service Disregarded. If a Participant incurs a One-Year Break in Service, and his or her vested percentage interest in his or her Accrued Benefit under the Plan was zero (0) percent when the One-Year Break in Service began, and the number of his or her consecutive One-Year Breaks in Service exceeds the greater of (1) the number of

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his or her Years of Vesting Service, or (2) five (5), then his or her Years of Vesting Service credited before the One-Year Break in Service shall be disregarded.

(b) Prior Service Counted. The Years of Vesting Service credited before a Participant’s Termination Date shall be reinstated, effective as of his or her Reemployment Date, if a Participant does not incur a One-Year Break in Service, or incurs a One-Year Break in Service, and:

(1) the Participant’s vested percentage interest in his or her Accrued Benefit under the Plan was greater than zero (0) percent when the One-Year Break in Service began, or

(2) the number of the Participant’s consecutive One-Year Breaks in Service does not exceed the greater of (A) the number of his or her Years of Vesting Service, or (B) five (5).

(c) Future Service Disregarded. In determining a Participant’s Accrued Benefit and Years of Vesting Service for purposes of the Plan, if the Participant incurs a Termination Date and the nonforfeitable percentage of his or her Accrued Benefit at that time is zero (0), he shall be deemed to have received a complete distribution of the nonforfeitable portion of his or her Accrued Benefit at the time of his or her Termination Date, and shall immediately forfeit his or her Accrued Benefit. However, such forfeited Accrued Benefit shall be restored if the Participant has a Reemployment Date within five (5) consecutive One-Year Breaks in Service following such Termination Date. The portion of a Participant’s Accrued Benefit and Years of Vesting Service previously disregarded by a prior application of this paragraph shall not be counted for the purpose of the preceding sentences.

8.06 Repayment of Cash-Out. If an Employee shall have received a full distribution of his or her nonforfeitable interest in this Plan following his Termination Date, he or she shall be entitled to repay the amount of that distribution to the Plan together with compound interest at the rate of five percent per annum for any period prior to the first day of the Plan Year beginning on or after January 1, 1988, and at the rate of one hundred and twenty (120) percent of the applicable federal midterm rate as in effect for the first month of the Plan Year for any Plan Year or portion of a Plan Year that commences on or after January 1, 1988. Any such repayment shall be made prior to the earlier of:

(a) The fifth (5th) anniversary of the date on which the Employee was rehired by the Employer, or

(b) The close of the first period of five (5) consecutive One-Year Breaks in Service following the Participant’s Termination Date.

A Participant who is deemed to have been cashed out under Section 8.05(c) because he was not entitled to a Deferred Vested Benefit on his or her Termination Date shall be deemed to have properly made a repayment upon again becoming a Participant.

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Such a deemed repayment will not restore Years of Vesting Service which would not be counted under the provisions of Section 8.05(c) (the Rule of Parity).

8.07 Vesting Service. A Participant shall be credited with a Year of Vesting Service as provided in Sections 1.73, 8.05 and 8.06, except that Vesting Service shall not include any Year of Service as defined in Section 2.04, completed prior to the date of establishment of this Plan or the Predecessor to this Plan other than a Participant’s service completed with Allstate prior to April 1, 1995, if the Participant was employed by Allstate on March 31, 1995 and by the Employer or an Affiliated Employer on April 1,1995.

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ARTICLE 9

QUALIFIED PRERETIREMENT SURVIVOR ANNUITY

9.01 Preretirement Spousal Death Benefit.

(a) Except as provided in sub-paragraph (b) below, and absent a Qualified Election to the contrary by the Participant pursuant to sub-paragraph (c) below, in the event a Participant with a vested right to his or her Accrued Benefit under the Plan dies before his or her Benefit Commencement Date, a death benefit shall be provided to the Participant’s Spouse (“Preretirement Spousal Death Benefit”) as follows:

(1) If the Participant at the date of death was eligible to retire and receive a benefit under the Plan at an Early, Normal or Postponed Retirement Date, then the Participant’s surviving Spouse shall automatically receive a death benefit in an amount equal to one-half of the amount of the retirement benefit that would have been payable to the Spouse if the Participant had retired on the day preceding his or her death, receiving a benefit in the form of a Joint & Survivor Annuity with a fifty (50) percent survivor annuity to the Spouse. The benefit payable under this Section 9.01(a)(l) shall commence to be paid to the Spouse, unless the Spouse elects otherwise, as of the first (1^st) day of the month coinciding with or next following the Participant’s death and shall be paid up to the first day of the month in which such Spouse dies.

(2) If the Participant at the date of death was not eligible to retire under the Plan and receive a benefit under the Plan at an Early, Normal, or Postponed Retirement Date, then the Participant’s surviving Spouse shall receive a death benefit in an amount equal to the amount that would have been payable to the Spouse under the normal form of payment under Section 10.01, assuming:

(A) the Participant had separated from service on the earlier of his or her Termination Date or date of his or her death;

(B) the Participant had survived to the earliest date he could have retired and received a benefit under the Plan pursuant to Article 5 and Article 6;

(C) the Participant retired on such date with a benefit in the form of a Joint & Survivor Annuity with a fifty (50) percent survivor annuity to the Spouse, but calculated using only actual Benefit Accrual Service as of the Participant’s date of death (and if the Participant was only partially vested on his or her date of death, multiplied by the

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Participant’s vested percentage as determined under Section 8.03 on the date of death); and

(D) the Participant died on the day after his or her Benefit Commencement Date.

The benefit payable under this Section 9.01(a)(2) shall commence to be paid to the Spouse, unless the Spouse elects otherwise, as of the first (1^st) day of the month coinciding with or next following the Participant’s death and shall be paid up to the first day of the month in which such Spouse dies. The Spouse may not delay commencement of this benefit beyond the Participant’s Normal Retirement Date.

(b) One-Year Rule. Notwithstanding the forgoing, the Preretirement Spousal Death Benefit described in Section 9.01 (a) shall be payable after the death of the Participant only if the Spouse had been married to the Participant throughout the one (l)-year period ending on the date of the Participant’s death.

(c) Qualified Optional Survivor Annuity. Generally, effective for Plan Years beginning after December 31, 2007, a Participant may elect to waive his or her Preretirement Spousal Death Benefit and choose a qualified optional survivor annuity, which is: (1) for the life of the Participant with a survivor annuity for the life of his or her Spouse which is equal to seventy-five (75) percent of the amount of the annuity which is payable during the joint lives of the Participant and the Spouse; and (2) the Actuarial Equivalent of a single annuity for the life of the Participant.

(d) Cash Lump Sum Option. Notwithstanding the foregoing, a Participant may elect at any time that in the event he or she dies before his or her Benefit Commencement Date, a cash lump sum equal to the Actuarial Equivalent of the Participant’s Accrued Benefit will be paid to his or her Beneficiary pursuant to a Qualified Election. In the event a Participant elects the cash lump sum benefit provided in this sub-paragraph before he or she reaches age thirty-five (35), the Participant must again make a Qualified Election after reaching such age to maintain such benefits. Any prior election will be invalid after reaching age thirty-five (35), regardless of whether or not a subsequent Qualified Election is made by the Participant. Alternatively, the Spouse or Beneficiary may elect to receive a cash lump sum equal to the Actuarial Equivalent of the Participant’s Accrued Benefit in lieu of a benefit described in Sections 9.01(a)(l), 9.01 (a)(2) or 9.01(c) above.

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ARTICLE 10

FORMS OF BENEFIT

10.01 Qualified Joint & Survivor Annuity. At the earliest time a Participant could become entitled to commence receiving payments of an Early, Normal or Postponed Retirement Benefit or of a Deferred Vested Benefit, other than an involuntary lump sum payment under the provisions of Section 10.02, benefits shall commence in the form of a Qualified Joint & Survivor Annuity (which, for a Participant who has no Spouse, includes a single life annuity) unless the Participant elects otherwise pursuant to a Qualified Election.

10.02 Involuntary Lump Sum Payment. If at any time a Participant has incurred a Termination, but has not begun to receive benefit payments, and is entitled to a benefit (whether Early, Normal, or Postponed) or to a Deferred Vested Benefit, or a Beneficiary is entitled to a death benefit hereunder, that has an Actuarial Equivalent value of $ 1,000 or less, the Actuarial Equivalent value shall be paid to such Participant or Beneficiary in a lump sum in lieu of, and in full satisfaction of, his benefit under this Plan. Neither the consent of the Beneficiary, the Participant nor of his or her Spouse shall be necessary to make such payment. Upon the making of such payment, neither the Beneficiary, the Participant nor his or her Spouse shall have any further benefit under this Plan. Participants deemed to have a zero accrued account benefit at Termination shall be deemed to have been cashed out under this Section 10.02.

10.03 Right to Elect. In lieu of the benefits provided by Section 10.01, the Participant shall have the right to elect, prior to his or her Benefit Commencement Date, an alternate form of benefit provided under the terms of this Article 10. If the Participant is married, any such election must be a Qualified Election, and processed as provided under Section 10.04 below. Any alternative form of benefit shall be the Actuarial Equivalent of the Participant’s Accrued Benefit.

10.04 Election of Forms.

(a) The Committee shall furnish to each Participant a general written explanation in non-technical terms of the availability of the various optional forms of payment under the Plan within a reasonable period of time prior to the earliest date the Participant could retire under the Plan. A Participant has a right to receive, within thirty (30) days after filing a written request with the Committee, a written explanation of the terms and conditions of the Qualified Joint & Survivor Annuity, the Participant’s right to make and the effect of an election to waive the Qualified Joint & Survivor Annuity, the rights of the Participant’s Spouse (if any), the right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint & Survivor Annuity, the right to elect, prior to his or her Benefit Commencement Date, an alternate form of benefit, and the financial effect upon the Participant, given in terms of dollars per annuity payment. Requests for additional information may be made by the Participant at any time before the ninetieth (90^th) day prior to the Benefit Commencement Date.

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(b) An election to receive an optional form of benefit may be made at any time during the election period. The election period is a period of ninety (90) days prior to the Participant’s Benefit Commencement Date. Subject to sub-paragraph (c) below, a Participant may make an election not to receive the Qualified Joint & Survivor Annuity, revoke any previous election, and if the Participant so desires, make a new election, until the expiration of the election period, pursuant to a Qualified Election.

(c) If a Participant is married, an election of a form of benefit other than the Qualified Joint & Survivor Annuity will require the written consent of the Spouse which shall be made within ninety (90) days of the date the Qualified Joint & Survivor Annuity would otherwise commence pursuant to a Qualified Election.

10.05 Benefit Commencement. Notwithstanding any pro vision of the Plan to the contrary, a Participant’s Benefit Commencement Date may be less than thirty (30) days after the written explanation described in Section 10.04 is furnished to the Participant, provided that:

(a) the Participant has been provided with information that clearly indicates that the Participant has at least thirty (30) days to consider whether to waive the Qualified Joint & Survivor Annuity and elect (with Spousal consent, if applicable) a form of distribution other than a Qualified Joint & Survivor Annuity;

(b) the Participant is permitted to revoke any affirmative distribution election at least until the Benefit Commencement Date or, if later, at any time prior to the expiration of the seven (7)-day period that begins the day after the explanation of the Qualified Joint & Survivor Annuity is provided to the Participant;

(c) the Benefit Commencement Date is a date after the date that the written explanation was provided to the Participant, but may be a date before the date that an affirmative distribution election is made by the Participant; and

(d) the distribution must not actually commence before the expiration of the foregoing seven (7)-day period.

10.06 Optional Forms of Retirement Benefit. The optional forms which a Participant may elect are any one of the following:

(a) 50 Percent or 100 Percent Joint & Survivor Annuitant Option. An Actuarial Equivalent monthly benefit payable to the Participant for life, and after his or her death in the amount of fifty (50) percent or one hundred (100) percent of such amount (as specified by the Participant prior to commencement of benefits) to the Joint Annuitant for life. Should the Joint Annuitant die prior to the Participant’s Benefit Commencement Date, any election of this option shall be automatically canceled. If the Participant should die prior to the Benefit Commencement Date, no payments shall be made under this option to the Joint Annuitant, but if the Joint Annuitant is the Spouse of the Participant, such Spouse will be entitled to the death benefit provided under Article 9.

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For Accrued Benefits provided under Article 5, the factor to convert the life annuity to the fifty (50) percent Joint & Survivor Annuitant Option above is ninety-four (94) percent plus three tenths of one (0.3) percent for each full year that the Joint Annuitant is more than five (5) years older than the Participant not to exceed ninety-nine (99) percent or minus three tenths of one (0.3) percent for each full year that the Joint Annuitant is more than five years younger than the Participant. The factor to convert the life annuity to the one hundred (100) percent Joint & Survivor Annuitant Option above is 89) percent plus one-half of one (0.5) percent for each full year that the Joint Annuitant is more than five (5) years older than the Participant not to exceed ninety-nine (99) percent or minus one-half of one (0.5) percent for each full year that the Joint Annuitant is more than five (5) years younger than the Participant.

For Accrued Benefits provided under Article 6, the factor to convert the life annuity to any Joint and Survivor Annuitant Option shall be made in conformance with Code Section 417(e) and any successor provisions thereto.

(b) 75 Percent Joint & Survivor Annuitant Option. Generally, effective for Plan Years beginning after December 31, 2007, a Participant may elect to waive his or her Qualified Joint & Survivor Annuity and choose a qualified optional survivor annuity, defined as an annuity, which is: (1) for the life of the Participant with a survivor annuity for the life of his or her Spouse which is equal to seventy-five (75) percent of the amount of the annuity which is payable during the joint lives of the Participant and the Spouse; and (2) the Actuarial Equivalent of a single annuity for the life of the Participant.

The factor to convert the life annuity to the seventy-five (75) percent Joint & Survivor Annuitant Option above will be an Actuarial Equivalent factor as provided in section 1.03 in effect on the annuity start date.

(c) Ten-Year Certain and Life Income Option. An Actuarial Equivalent monthly benefit that provides payments to the Participant for his or her lifetime with a guaranteed minimum period of at least ten (10). In the event of the death of the Participant after the Benefit Commencement Date, but prior to the Participant’s receiving for the whole Ten-Year Certain period, the remaining payments for the minimum term of years will be paid to the Participant’s Beneficiary. In the event of the death of the Participant prior to the Participant’s Benefit Commencement Date, the election of this option shall be void and of no effect.

The factor to convert the life annuity to the above option will be ninety-five (95) percent at age sixty-five (65) plus four tenths of one (0.4) percent for each full year that the benefit commencement date precedes age sixty-five (65) or minus seven tenths of one (0.7) percent for each full year that the benefit commencement date is postponed past age sixty-five (65).

(d) Straight Life Annuity Option. A Participant who has a Spouse may elect to have the Participant’s Accrued Benefit payable in equal, unreduced monthly payments during the Participant’s lifetime, with no further payments to any other person after the

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Participant’s death. If this option is elected, the retirement benefit payable to the Participant shall be the amount of retirement benefit determined under the applicable Section(s) of Article 5 and Article 6.

(e) Lump Sum Payment Option. A Participant may elect to receive a cash lump sum equal to the Actuarial Equivalent of the Participant’s vested Accrued Benefit payable to the Participant, his or her Spouse, or his or her Beneficiary pursuant to a Qualified Election.

10.07 Beneficiary. A Participant may name a Joint Annuitant who is an individual for a Joint & Survivor Annuity option. For a Ten-Year Certain and Life Income Option, the Participant may elect, in writing, an individual or individuals, or any entity or entities, including corporations, partnerships or trusts, provided that such individuals and entities are ascertainable, and the shares of each are clearly set forth.

10.08 Eligible Rollover Distributions.

(a) The following provisions of this Section 10.08 shall apply to distributions made after December 31, 2001.

(b) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee’s election under this Section, a Distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover.

(c) Notwithstanding the above, effective for distributions after December 31, 2006, a nonspouse beneficiary may elect to have all or a specified portion of an Eligible Rollover Distribution paid directly to an individual retirement account or individual retirement annuity established for the purpose of receiving such distribution as an inherited individual retirement account or annuity, in accordance with the Pension Protection Act of 2006 and applicable rules and regulations.

(d) Definitions.

(1) Eligible rollover distribution — An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the Distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee’s designated Beneficiary, or for a specified period often years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Employer securities).

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(2) Eligible retirement plan — An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403 (a) of the Code, a qualified trust described in Section 401 (a) of the Code, that accepts the Distributee’s eligible rollover distribution, an annuity contract described in Section 403(b) of the Code and an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this Plan. The foregoing definition of eligible retirement plan shall also apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the alternate payee under a qualified domestic relation order as defined in Section 414(p) of the Code.

(3) Distributee — A distributee includes an Employee or former Employee. In addition, the Employee’s or former Employee’s surviving Spouse and the Employee’s or former Employee’s Spouse or former Spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are Distributees with regard to the interest of the Spouse or former Spouse.

(4) Direct rollover — A direct rollover is a payment by the Plan to the eligible retirement plan specified by the Distributee.

10.09 Minimum Distribution Requirements.

(a) General Rules.

(1) Effective Date. The provisions of this Section 10.09 will apply for purposes of determining required minimum distributions for calendar years beginning with the 2004 calendar year.

(2) Precedence. The requirements of this Section 10.09 will take precedence over any inconsistent provisions of the Plan.

(3) Requirements of Treasury Regulations Incorporated. All distributions required under this Section 10.09 will be determined and made in accordance with sections 1.401 (a)(9)-1 through 1.401 (a)(9)-9 of the Treasury Regulations under section 401(a)(9) of the Code.

(4) TEFRA Section 242(b)(2) Elections. Notwithstanding the other provisions of this Section 10.09, other than subsection 10.09(a)(3) above, distributions may be made under a designation made before January 1, 1984, in accordance with section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act (TEFRA) and the provisions of the Plan that relate to section 242(b)(2) of TEFRA.

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(b) Time and Manner of Distribution.

(1) Required Beginning Date. The Participant’s entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant’s Required Beginning Date, as defined in the Income Tax Regulations under Section 401(a)(9) of the Code.

(2) Death of Participant Before Distributions Begin. If the Participant dies before distributions begin, the Participant’s entire interest will be distributed, or begin to be distributed, no later than as follows:

(A) If the Participant’s surviving Spouse is the Participant’s sole Designated Beneficiary as defined in subsection (f) below, then distributions to the surviving Spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70 ¹/2, if later.

(B) If the Participant’s surviving Spouse is not the Participant’s sole Designated Beneficiary as of September 30 of the year following the year of the Participant’s death, then distributions to the Designated Beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died.

(C) If there is no Designated Beneficiary as of September 30 of the year following the year of the Participant’s death, the Participant’s entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.

(D) If the Participant’s surviving Spouse is the Participant’s sole Designated Beneficiary as of September 30 of the year following the year of the Participant’s death, and the surviving Spouse dies after the Participant but before distributions to the surviving Spouse begin, this subsection 10.09(b)(2), other than subsection 10.09(b)(2)(A), will apply as if the surviving Spouse were the Participant.

For purposes of this Section 10.09(b)(2) and Section 10.09(e), distributions are considered to begin on the Participant’s Required Beginning Date (or, if Section 10.09(b)(2)(D) applies, the date distributions are required to begin to the surviving spouse under Section 10.09(b)(2)(A)). If annuity payments irrevocably commence to the Participant before the Participant’s Required Beginning Date (or to the Participant’s surviving spouse before the date distributions are required to begin to the surviving spouse under Section 10.09(b)(2)(A), the date distributions are considered to begin is the date distributions actually commence.

Any amount payable to the surviving child of the Participant in accordance with the requirements of Q& A-15 of section 1.401 (a)(9)-6 of the Treasury

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Regulations shall be treated for purposes of this Section 10.09 as if it had been paid to such Participant’s surviving Spouse to the extent such amount that is payable to the child will become payable to the Participant’s surviving Spouse upon such child’s reaching the age of majority (or upon the occurrence of such other event specified in Q&A-15 of section 1.401(a)(9)-6 of the Treasury Regulations or otherwise specified in IRS guidance under section 401 (a)(9) of the Code).

(3) Form of Distribution. Unless the Participant’s interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the Required Beginning Date, as of the first Distribution Calendar Year distributions will be made in accordance with subsections 10.09(c), (d), and (e) hereof. If the Participant’s interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of section 401(a)(9) of the Code and the Treasury Regulations. Any part of the Participant’s interest which is in the form of an individual account described in section 414(k) of the Code will be distributed in a manner satisfying the requirements of section 401(a)(9) of the Code and the Treasury Regulations that apply to individual accounts.

(4) Change in Annuity Payment Period. Once payments have commenced over a period, the period may only be changed in accordance with Q&A-13 of section 1.401(a)(9)-6 of the Treasury Regulations under the following circumstances, or as may be expressly permitted in other IRS guidance under section 401(a)(9) of the Code, if permitted under applicable provisions of the Plan:

(A) at the time the Participant retires or in connection with the termination of the Plan;

(B) where distribution prior to the change is being made in the form of a period-certain-only annuity without life contingencies; or

(C) where the annuity payments after the change are paid under a Qualified Joint and Survivor Annuity over the joint lives of the Participant and a Designated Beneficiary, the Participant’s Spouse is the sole Designated Beneficiary, and the change occurs in connection with the Participant’s becoming married to such Spouse.

In order to modify a stream of annuity payments in accordance with subsections 10.09(b)(iv)(A), (B), or (C) above, the conditions under Q&-A-13(c) of section 1.401(a)(9)-6 of the Treasury Regulations must be satisfied.

(c) Determination of Amount to be Distributed Each Year.

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(1) General Annuity Requirements. If the Participant’s interest is paid in the form of annuity distributions under the Plan, payments under the annuity will satisfy the following requirements:

(A) the annuity distributions will be paid in periodic payments made at intervals not longer than one year;

(B) the distribution period will be over a life (or lives) or over a period certain not longer than the period described in subsections 10.09(d) or (e) below;

(C) once payments have begun over a period certain, the period certain will not be changed even if the period certain is shorter than the maximum permitted; and

(D) payments will either be nonincreasing or increase only as follows:

(i) by an annual percentage increase that does not exceed the annual percentage increase in an eligible cost-of-living index, as defined in Q&A-14(b) of section 1.401 (a)(9)-6 of the Treasury Regulations, for 12-month period ending in the year during which the increase occurs or the prior year;

(ii) by a percentage increase that occurs at specified times, such as at specified ages, and does not exceed the cumulative total of annual percentage increases in an eligible cost-of-living index as defined in clause (1) above since the annuity starting date or, if later, the date of the most recent percentage increase, provided that in cases providing such a cumulative increase an actuarial increase may not be provided to reflect the fact that increases were not provided in the interim year

(iii) to the extent of the reduction in the amount of the Participant’s payments to provide for a survivor benefit upon death, but only if the Designated Beneficiary whose life was being used to determine the distribution period described in subsection 10.09(d) dies or is no longer the Participant’s Designated Beneficiary pursuant to a qualified domestic relations order within the meaning of section 414(p) of the Code;

(iv) to pay increased benefits that result from a Plan amendment;

(v) to allow a Designated Beneficiary to convert the survivor portion of a joint and survivor annuity into a single-sum distribution upon the employee’s death; or

(vi) to the extent increases are permitted in accordance with paragraph (c or (d) of Q&A-14 of section 1.401 (a)(9)-6 of the Treasury Regulations.

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(2) Amount Required to be Distributed by Required Beginning Date. The amount that must be distributed on or before the Participant’s Required Beginning Date (or, if the Participant dies before distributions begin, the date distributions are required to begin under subsection 10.09(b)(2)(A) or (B)) is the payment that is required for one payment interval. The second payment need not be made until the end of the next payment interval even if that payment interval ends in the next calendar year. Payment intervals are the periods for which payments are received, e.g., bi-monthly, monthly, semi-annually, or annually. All of the Participant’s benefit accruals as of the last day of the first Distribution Calendar Year (as defined in subsection (f) below) will be included in the calculation of the amount of the annuity payments for payment intervals ending on or after the Participant’s Required Beginning Date.

(3) Additional Accruals After First Distribution Calendar Year. Any additional benefits accruing to the Participant in a calendar year after the first Distribution Calendar Year will be distributed beginning with the first payment interval ending in the calendar year immediately following the calendar year in which such amount accrues.

(d) Requirements for Annuity Distributions That Commence During Participant’s Lifetime.

(1) Joint Life Annuities Where the Beneficiary Is Not the Participant’s Spouse. If the Participant’s interest is being distributed in the form of a joint and survivor annuity for the joint lives of the Participant and a nonspouse Beneficiary, annuity payments to be made on or after the Participant’s Required Beginning Date to the Designated Beneficiary after the Participant’s death shall not at any time exceed the applicable percentage of the annuity payment for such period that would have been payable to the Participant using the table set forth in Q&A-2 of section 1.401(a)(9)-6 of the Treasury Regulations. If the form of distribution combines a joint and survivor annuity for the joint lives of the Participant and a nonspouse Beneficiary and a period certain annuity, the requirement in the preceding sentence will apply to annuity payments to be made to the Designated Beneficiary after the expiration of the period certain.

(2) Period Certain Annuities. Unless the Participant’s Spouse is the sole designated Beneficiary and me form of distribution is a period certain and no life annuity, the period certain for an annuity distribution commencing during the Participant’s lifetime shall not exceed the applicable distribution period for the Participant under the Uniform Lifetime Table set forth in section 1.401(a)(9)-9 of the Treasury Regulations for the calendar year that contains the Annuity Starting Date. If the Annuity Starting Date precedes the year in which the Participant reaches age 70, the applicable distribution period for the Participant is the distribution period for age 70 under the Uniform Lifetime Table set forth in section 1.401(a)(9)-9 of the Treasury

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Regulations plus the excess of 70 over the age of the Participant as of the Participant’s birthday in the year that contains the Annuity Starting Date. If the Participant’s Spouse is the Participant’s sole Designated Beneficiary and the form of distribution is a period certain and no life annuity, the period certain may not exceed the longer of the Participant’s applicable distribution period, as determined under this subsection 10.09(d)(2), or the joint life and last survivor expectancy of the Participant and the Participant’s Spouse as determined under the Joint and Last Survivor Table set forth in section 1.401(a)(9)-9 of the Treasury Regulations, using the Participant’s and Spouse’s attained ages as of the Participant’s and Spouse’s birthdays in the calendar year that contains the Annuity Starting Date.

(e) Requirements for Minimum Distributions Where Participant Dies Before Date Distributions Begin.

(1) Participant Survived by Designated Beneficiary. If the Participant dies before the date distribution of his or her interest begins and there is a Designated Beneficiary, the Participant’s entire interest will be distributed, beginning no later than the time described in subsection 10.09(b)(2), over the life of the Designated Beneficiary or over a period certain not exceeding:

(A) unless the Benefit Commencement Date is before the first distribution calendar year, the Life Expectancy (as defined in subsection (f) below) of the Designated Beneficiary determined using the Designated Beneficiary’s age as of the Designated Beneficiary’s birthday in the calendar year immediately following the calendar year of the Participant’s death; or

(B) if the Benefit Commencement Date is before the first distribution calendar year, the Life Expectancy of the Designated Beneficiary determined using the Designated Beneficiary’s age as of the Designated Beneficiary’s birthday in the calendar year that contains the Benefit Commencement Date.

(2) No Designated Beneficiary. If the Participant dies before the date distributions begin and there is no Designated Beneficiary as of September 30 of the year following the year of the Participant’s death, distribution of the Participant’s entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.

(3) Death of Surviving Spouse Before Distributions to Surviving Spouse Begin. If the Participant dies before the date distribution of his or her interest begins, the Participant’s surviving Spouse is the Participant’s sole Designated Beneficiary, and the surviving Spouse dies before distributions to the surviving Spouse begin, this subsection 10.09(e) will apply as if the surviving Spouse were the Participant, except that the time by which

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distributions must begin will be determined without regard to subsection 10.09(b)(2)(A).

(f) Definitions.

(1) “Designated Beneficiary.” The individual who is designated as the Beneficiary under Section 1.11 of the Plan and is the designated beneficiary under section 401(a)(9) of the Code and section 1.401(a)(9)-4, Q&A-l, of the Treasury Regulations.

(2) “Distribution Calendar Year.” A calendar year for which a minimum distribution is required. For distributions beginning before the Participant’s death, the first Distribution Calendar Year is the calendar year immediately preceding the calendar year which contains the Participant’s Required Beginning Date. For distributions beginning after the Participant’s death, the first Distribution Calendar Year is the calendar year in which distributions are required to begin pursuant to subsection 10.09(b)(2).

(3) “Life Expectancy.” Life Expectancy as computed by use of the Single Life Table in section 1.401(a)(9)-9 of the Treasury Regulations.

(4) “Required Beginning Date.” The date specified in the Treasury Regulations under Section 401(a)(9) of the Code.

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ARTICLE 11

FUNDING

11.01 Funding Agreement. The Employer has entered into a funding arrangement with one or more Funding Agents providing for the administration of the Fund or Funds in which the assets of this Plan are held. The Employer may at any time or from time to time appoint one (1) or more investment managers, as defined under Section 3(38) of ERISA, each of which shall direct the Funding Agent in the investment or reinvestment of all or part of the Fund.

11.02 Non-Diversion of the Fund. To the extent required by law, the principal or income of any Fund shall be used solely for the exclusive benefit of Participants or Beneficiaries, or to meet the necessary expenses of the Plan, except that upon termination of the Plan, after all the liabilities under the Plan have been satisfied, any property remaining in a Fund after satisfaction of all liabilities under this Plan shall be considered the result of erroneous actuarial computation and shall be distributed by the Funding Agent to the Employer.

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ARTICLE 12

PLAN ADMINISTRATION

12.01 Appointment of Committee. A Committee consisting of at least three (3) members of management shall be appointed by the Board to administer the Plan on behalf of the Board. Vacancies in the Committee shall be filled from time to time by appointment of a new Committee member by the Board. A member of the Committee shall hold office until he gives written notice of his or her resignation to the Board, until death, or until removal by the Board.

12.02 Powers and Duties. The Committee shall have full power and discretion to administer the Plan and to construe and apply all of its provisions on behalf of the Employer. The Committee is the Named Fiduciary within the meaning of Section 402(a) of ERISA for purposes of Plan administration.

(a) The Committee’s powers and duties, unless properly delegated, shall include, but shall not be limited to:

(1) Designating agents to carry out responsibilities relating to the Plan, other than fiduciary responsibilities.

(2) Deciding questions relating to eligibility, continuity of employment, and amounts of benefits, including annually updating the respective Appendices A and B.

(3) Deciding disputes that may arise with regard to the rights of Employees, Participants and their legal representatives, or Beneficiaries under the terms of the Plan. Decisions by the Committee will be deemed final in each case.

(4) Obtaining information from the Employer with respect to its Employees as necessary to determine the rights and benefits of Participants under the Plan. The Committee may rely conclusively on such information furnished by the Employer.

(5) Compiling and maintaining all records necessary for the Plan.

(6) Authorizing the Funding Agent to make payment of all benefits as they become payable under the Plan.

(7) Engaging such legal, administrative, consulting, actuarial, investment, accounting, and other professional services as the Committee deems proper.

(8) Adopting rules and regulations for the administration of the Plan that are not inconsistent with the Plan’s terms. The Committee may, in a nondiscriminatory manner, waive the timing requirements of any notice or

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other requirements described in the Plan. Any such waiver will not obligate the Committee to waive any subsequent timing or other requirements for other Participants.

(9) Interpreting and approving qualified domestic relations orders, as defined in Section 414(p) of the Code.

(10) Making nonsubstantive amendments for the purpose of maintaining the qualified status of the Plan only.

(11) Establishing a claims and appeal procedure satisfying the minimum standards of Section 503 of ERISA (the “Claims Procedure”) pursuant to which Participants or their Spouses, Beneficiaries or estates may claim Plan benefits and appeal denials of such claims.

(12) Assigning PINs to those Participants who also are participants in the Company’s Supplemental Employee Retirement Plan.

(13) Making amendments to Appendices A and B to the Plan from time to time to any extent that it may deem advisable, provided that any such amendments shall comply with the requirements of Section 401(a)(4) of the Code.

(14) Performing other actions provided for in other parts of this Plan.

(b) The Plan Sponsor shall have responsibility for, and shall be the Named Fiduciary for, the following purposes:

(1) Selection of the funding media for the Plan, including the power to direct investments and to appoint an investment manager or managers pursuant to Section 402(c) of ERISA.

(2) Allocating fiduciary responsibilities, other than trustee responsibilities as defined in Section 405(c) of ERISA, among fiduciaries, and designation of additional fiduciaries.

(3) Selection of insurance contracts to provide benefits hereunder, or, if all assets are not held under insurance contracts, the Trustee.

(c) The Trustee, if any, shall have responsibility for, and shall be the Named Fiduciary for the care and custody of, and, to the extent investment managers are not appointed by the Plan Sponsor, management of Plan assets held by such Trustee other than insurance contracts.

12.03 Actions by the Committee. A majority of the members composing the Committee at any time will constitute a quorum. The Committee may act at a meeting, or in writing without a meeting, by the vote or assent of a majority of its members. The Committee will appoint a Committee Chairperson and a Secretary. The Secretary will record all action taken by the

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Committee. The Committee will have authority to designate in writing one of its members or any other person as the person authorized to execute papers and perform other ministerial duties on behalf of the Committee.

12.04 Interested Committee Members. No member of the Committee will participate in an action of the Committee on a matter that applies solely to that member. Such matters will be determined by a majority of the remainder of the Committee.

12.05 Indemnification. The Employers indemnify and hold the members of the Committee, jointly and severally, harmless from the effects and consequences of their acts, omissions, and conduct in their official capacities, except to the extent that the effects and consequences result from their own willful misconduct, breach of good faith, or gross negligence in the performance of their duties. The foregoing right of indemnification will not be exclusive of other rights to which each such member may be entitled by any contract or other instrument or as a matter of law.

12.06 Conclusiveness of Action. Any action on matters within the discretion of the Committee will be conclusive, final, and binding upon all Participants in the Plan and upon all persons claiming any rights, including Beneficiaries.

12.07 Payment of Expenses. The members of the Committee will serve without compensation for their services. The compensation or fees of consultants, actuaries, accountants, counsel and other specialists and any other costs of administering the Plan or Fund, including any premiums due to the PBGC, will be paid by the Fund unless, at the discretion of the Employer, paid by the Employer.

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ARTICLE 13

FUNDING POLICY AND CONTRIBUTIONS

13.01 Employer Contributions. The Employer intends to make contributions to fund this Plan at such times and in such amounts as the Actuary shall certify to the Employer as being no less than the amounts required to be contributed under Section 412 of the Code. Any actuarial gains arising under the Plan shall be used to reduce future Employer contributions to the Plan and shall not be applied to increase retirement benefits with respect to remaining Participants.

13.02 Participant Contributions. Participant contributions to the Fund are not permitted.

13.03 Contingent Nature of Contributions. Unless the Employer notifies the Committee and the Funding Agent in writing to the contrary, all contributions made to this Plan are conditioned upon their deductibility under Section 404 of the Code.

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ARTICLE 14

AMENDMENT TERMINATION AND MERGER OF THE PLAN

14.01 Right to Amend the Plan. The Board or its delegate reserves the right to modify, alter or amend this Plan from time to time to any extent that it may deem advisable including, but without limiting the generality of the foregoing, any amendment deemed necessary to ensure the continued qualification of the Plan under Section 401(a) of the Code or the appropriate provisions of any subsequent revenue law. No such amendment shall increase the duties or responsibilities of a Funding Agent without its consent thereto in writing. No such amendment(s) shall have the effect of reinvesting in the Employer the whole or any part of the principal or income of the Fund or to allow any portion of the principal or income of the Fund to be used for any purposes other than for the exclusive benefit of Participants or Beneficiaries at any time prior to the satisfaction of all the liabilities under the Plan with respect to such persons. No amendment shall (a) reduce a Participant’s Accrued Benefit on the effective date of the Plan amendment, (b) eliminate or reduce an Early Retirement Benefit, retirement-type subsidy or an optional form of benefit under the Plan with respect to the Participant’s Accrued Benefit on the date of the amendment, or (c) reduce a retired Participant’s retirement benefit as of the effective date of the amendment.

14.02 Right to Terminate the Plan. The Board of Directors of the Plan Sponsor or its delegate shall have the right to terminate this Plan at any time. In the event of such termination all affected Participants shall be vested as provided in Section 8.04.

14.03 Allocation of Assets and Surplus. In the event the Plan shall be terminated as provided in Section 14.02 above, the then present value of retirement benefits vested in each Participant shall be determined as of the discontinuance date, and the assets then held by the Funding Agents as reserves for benefits for Participants, Joint Annuitants or Beneficiaries under this Plan shall, subject to any necessary approval by the PBGC be allocated, to the extent that they shall be sufficient, after providing for expenses of administration, in the order of precedence provided for under Section 4044 of ERISA, as modified by the provisions of Treasury Regulation Section 1.414(l)-l(f) or (h) if a special schedule of benefits (as defined in such regulations) is in effect as a result of a plan merger within the five (5)-year period prior to the date of termination. The retirement benefits for which funds have been allocated in accordance with Section 4044 of ERISA shall be provided through the continuance of the existing Fund arrangements or through a new instrument entered into for that purpose and shall be paid either in a lump sum or in equal monthly installments through the purchase of a nontransferable annuity contract(s). After all liabilities of the Plan have been satisfied with respect to all Participants so affected by the Plan’s termination, the Employer shall be entitled to any balance of Plan assets that shall remain.

14.04 Plan Mergers, Consolidations, and Transfers. The Plan shall not be automatically terminated by the Employer’s acquisition by or merger into any other company, trade or business, but the Plan shall be continued after such merger provided either the successor employer agrees to continue the Plan with respect to affected Participants herein or as required by applicable

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law. All rights to amend, modify, suspend or terminate the Plan with respect to Participants of the Employer shall be transferred to the successor employer, effective as of the date of the merger or acquisition. The merger or consolidation with, or transfer of the allocable portion of the assets and liabilities of the Fund to any other qualified retirement plan trust shall be permitted only if the benefit each Plan Participant would receive, if the Plan were terminated immediately after such merger or consolidation, or transfer of the allocable portion of the assets and liabilities, would be at least as great as the benefit he would have received had this Plan been terminated immediately before the date of merger, consolidation, or transfer.

14.05 Amendment of Vesting Schedule. If the vesting pro visions of this Plan are amended, including an amendment caused by the expiration of top-heavy status under the terms of Article 15, Participants with three (3) or more Years of Vesting Service, whether or not consecutive, at the later of the date the amendment is adopted or becomes effective, shall automatically be vested, from that point forward, in the greater of the amount vested under the vesting schedule as amended or the amount vested under the vesting schedule prior to amendment.

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ARTICLE 15

TOP-HEAVY PLAN PROVISIONS

15.01 General Rule. For any Plan Year beginning after December 31, 2001 for which this Plan is a “Top-Heavy Plan” as defined in Section 15.05 below, this Plan shall be subject to the provisions of this Article 15.

15.02 Vesting Provision. Each Participant who has completed an Hour of Service during the Plan Year in which the Plan is a Top-Heavy Plan and has completed the number of Years of Vesting Service specified in the following table, shall have a vested right to the percentage of his or her Accrued Benefit under the Plan, correspondingly shown in the following tables:

Years of Vesting Service	Percentage of Accrued Benefit
Less than 1 years	0	%
1 year	0	%
2 years	0	%
3 years or more	100	%

Each Participant’s Deferred Vested Benefit shall not be less than his or her vested Accrued Benefit determined as of the last day of the last Plan Year in which the Plan was not a Top-Heavy Plan. If the Plan ceases to be a Top-Heavy Plan, an Employee with three or more years of employment, whether or not consecutive, shall have his Deferred Vested Benefit determined either in accordance with this Section 15.02 or Section 8.03, as provided in Section 14.05. Each such Participant shall have the right to elect the applicable schedule within 60 days after the day he is issued written notice by the Committee, or as otherwise provided in accordance with regulations issued under the provisions of the Code relating to changes in the vesting schedule.

15.03 Minimum Benefit Provision. If the Plan is a Top-Heavy Plan in any Plan Year, each Participant who is a Non-Key Employee shall, as of the end of that Plan Year, be entitled to an Accrued Benefit that is at least equal to the Applicable Percentage of the Participant’s Average Compensation for Years in the Testing Period. For purposes of this Section:

(a) “Applicable Percentage” shall mean the lesser of two (2) percent multiplied by Years of Service of the Participant, or twenty (20) percent,

(b) “Average Compensation for Years in the Testing Period” shall mean average annual compensation for that period of five (5) consecutive years that had the greatest aggregate compensation from the Employer. In determining consecutive years, any

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year not included as a Year of Service under the provisions of Article 2 shall be ignored.

(c) For purposes of satisfying the minimum benefit requirements of Section 416(c)(l) of the Code and the Plan, in determining Years of Service as defined in Section 2.04, with the Employer and Affiliated Employers, any service with the Employer and Affiliated Employers shall be disregarded to the extent that such service occurs during a Plan Year when the Plan benefits (within the meaning of Section 410(b) of the Code) no Key Employee or former Key Employee.

15.04 Coordination With Other Plans. In the event that another defined contribution or defined benefit plan maintained by the Employer or an Affiliated Employer provides contributions or benefits on behalf of Participants in this Plan, such other plan may be treated as part of this Plan pursuant to applicable principles under Section 416(f) of the Code in determining whether this Plan satisfies the requirements of Section 15.02. Such determination shall be made upon the advice of counsel by the Committee.

15.05 Top-Heavy Plan Defined. This Plan shall be a “Top-Heavy Plan” for any Plan Year if, as of the determination date (as defined in sub-paragraph 15.05(a)) the present value of the cumulative Accrued Benefits under the Plan for Key Employees (as defined in Section 15.06) exceeds sixty (60) percent of the present value of the cumulative Accrued Benefits under the Plan for all employees. Each plan of the employer required to be included in an aggregation group (as defined below) shall be treated as a top-heavy plan if such group is a top-heavy group (as defined below).

(a) “Determination date” means for any Plan Year the last day of the immediately preceding Plan Year.

(1) The present value shall be determined as of the most recent valuation date that is within the twelve (12)-month period ending on the determination date and as described in the regulations under the Code. Present values for purposes of determining whether this Plan is a Top-Heavy Plan shall be made in conformance with Code Section 417(e) and any successor provision thereto.

(b) “Aggregation group” means the group of plans, if any, that includes both the group of plans that are required to be aggregated and the group of plans that are permitted to be aggregated.

(1) The group of plans that are required to be aggregated (the “required aggregation group”) includes:

(A) Each plan of an Employer and Affiliated Employer in which a Key Employee is a participant,

(B) Each other plan which enables a plan in which a Key Employee is a participant to meet the requirements of the Code prohibiting discrimination as to contributions or benefits in favor of Employees

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who are officers, shareholders or the highly compensated or prescribing the minimum participation standards.

(2) The Employer may treat any plan not in the required aggregation group as being part of such group if such group would continue to meet the requirements of the Code prohibiting discrimination as to contributions or benefits in favor of employees who are officers, shareholders or the highly compensated or prescribing the minimum participation standards with such plan being taken into account.

(c) “Top-heavy group” means any aggregation group, if the sum (as of the applicable determination date) of the present value of the cumulative accrued benefits for Key Employees under all defined benefit plans included in the aggregation group plus the aggregate of the accounts of Key Employees under all defined contribution plans included in the aggregation group exceeds sixty (60) percent of the sum of the present value of the cumulative accrued benefits for all employees.

(d) In determining whether this Plan constitutes a Top-Heavy Plan, the Committee (or its agent) shall make the following adjustments in connection therewith:

(1) When more than one plan is aggregated, the Committee shall determine separately for each plan as of each plan’s determination date the present value of the accrued benefits or account balance. The results shall then be aggregated adding the results of each plan as of the determination dates for such plans that fall within the same calendar year.

(2) The present value of accrued benefits and the amounts of account balances of an Employee as of the determination date shall be increased by the distributions made with respect to the Employee under the Plan and any Plan aggregated with the Plan under Section 416(g)(2) of the Code during the one (1)-year period ending on the determination date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the Plan under Section 416(g)(2)(A)(i) of the Code. In the case of a distribution made for a reason other than separation from service, death or disability, this provision shall be applied by substituting five (5)-year period for one-year period.

(3) The accrued benefits and accounts of any individual who has not performed services for the Employer during the one (1)-year period ending on the determination date shall not be taken into account.

(4) Except to the extent provided by the Treasury Department and Internal Revenue Service regulations under Code Section 416, any rollover contribution (or similar transfer) initiated by the employee and made after December 31, 1983 to this Plan shall not be taken into account with respect to this Plan for purposes of determining whether this Plan is a top-heavy

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plan (or whether any aggregation group which includes this Plan is a top-heavy group).

(5) If an individual is a “Non-Key Employee,” as defined in Section 15.07 with respect to an applicable plan, but was a Key Employee with respect to such plan for any prior plan year, any accrued benefit and any account of such Employee shall not be taken into account.

15.06 Key Employee. The term “Key Employee” means any Employee or former Employee (including any deceased employee) who at any time during the Plan Year that includes the determination date was an officer having annual compensation greater than $145,000 (for 2007, as adjusted by the Code), a five (5) percent owner of the Employer, or a one (1) percent owner of the Employer having annual compensation of more than $150,000. For this purpose, (i) no more than fifty (50) employees (or, if lesser, the greater of three (3) employees, or ten (10) percent of the employees) shall be treated as officers. For this purpose, annual compensation means compensation within the meaning of Section 414(q)(4) of the Code, which refers to meaning given such term under Section 415(c)(3) of the Code, and it shall be adjusted at the same time and the same manner as under Section 415(d) of the Code, with certain exceptions provided under Code Section 416(i)(l) of the Code. Not withstanding the foregoing, the determination of who is a Key Employee will be made in accordance with Section 416(i)(l) of the Code and the applicable regulations and other guidance of general applicability issued thereunder.

15.07 Non-Key Employee. The term “Non-Key Employee” means any Participant who is not a Key Employee.

15.08 Collective Bargaining Rules. The provisions of Sections 15.02 and 15.03 do not apply with respect to any employee included in a unit of employees covered by an agreement which the Labor Secretary finds to be a collective bargaining agreement between employee representatives and one (1) or more employers if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such employer or employers.

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ARTICLE 16

MISCELLANEOUS

16.01 Limitation on Distributions. Notwithstanding any provision of this Plan regarding payment to Beneficiaries or Participants, or any other person, the Committee may withhold payment to any person if the Committee determines that such payment may expose the Plan to conflicting claims for payment. As a condition for any payments, the Committee may require such consent, representations, releases, waivers or other information as it deems appropriate. The Committee may, in its discretion, comply with the terms of any judgment or other judicial decree, order, settlement or agreement including, but not limited to, a qualified domestic relations order as defined in Section 414(p) of the Code.

16.02 Limitation on Reversion of Contributions. Except as provided in sub-paragraphs (a) or (b) below, Employer contributions made under the Plan will be held for the exclusive benefit of Participants, Joint Annuitants or Beneficiaries and may not revert to the Employer.

(a) A contribution made by the Employer under a mistake of fact may be returned to the Employer within one year after it is contributed to the Plan, to the extent that it exceeds the amount that would have been contributed, absent the mistake in fact.

(b) A contribution conditioned upon its deductibility under Section 404 of the Code, may be returned, to the extent the deduction is disallowed, to the Employer within one year after the disallowance.

Compensation attributable to amounts that may be returned to the Employer pursuant to this Section may not be distributed, but, in the event that there are losses attributable to such amounts, the amount returned to the Employer shall be reduced by the amount of such losses.

16.03 Voluntary Plan. The Plan is purely voluntary on the part of the Employer and neither the establishment of the Plan nor any Plan amendment nor the creation of any fund or account, nor the payment of any benefits will be construed as giving any Employee or any person legal or equitable right against the Employer, any trustee or other Funding Agent, or the Committee unless specifically provided for in this Plan or conferred by affirmative action of the Committee or the Employer according to the terms and provisions of this Plan. Such actions will not be construed as giving any Employee or Participant the right to be retained in the service of the Employer. All Employees and/or Participants will remain subject to discharge to the same extent as though this Plan had not been established.

16.04 Nonalienation of Benefits. Participants and Beneficiaries are entitled to all the benefits specifically set out under the terms of the Plan, but neither those benefits nor any of the property rights in the Plan are assignable or distributable to any creditor or other claimant of a Participant or Beneficiary. A Participant will not have the right to anticipate, assign, pledge, accelerate, or in any way dispose of or encumber any of the monies or benefits or

-58-

other property that may be payable or become payable to such Participant or his or her Beneficiary pursuant to Code Section 401(a)(13), provided, however, the Committee shall recognize and comply with a valid qualified domestic relations order as defined in Section 414(p) of the Code and other exceptions to this rule existing under applicable law.

16.05 Inability to Receive Benefits. If the Committee receives evidence that a person entitled to receive any payment under the Plan is physically or mentally incompetent to receive payment and to give a valid release, and another person or any institution is maintaining or has custody of such person, and no guardian, committee, or other representative of the estate of such person has been duly appointed by a court of competent jurisdiction, then any distribution made under the Plan may be made to such other person or institution. The release of such other person or institution will be a valid and complete discharge for the payment of such distribution.

16.06 Missing Persons. If the Committee is unable, after reasonable and diligent effort, to locate a Participant, Joint Annuitant, or Beneficiary where no contingent beneficiary is provided under the Plan, who is entitled to a distribution under the Plan, the distribution due such person will be forfeited after five years. If, however, such a person later files a claim for such benefit, it will be reinstated without any interest earned thereon. In the event that a distribution is due to a Beneficiary where a contingent beneficiary is provided under the Plan (including the situation in which the contingent beneficiary is the Participant’s estate), and the Committee is unable, after reasonable and diligent effort, to locate the Beneficiary, the benefit shall be payable to the contingent beneficiary, and such nonlocatable Beneficiary shall have no further claim or interest hereunder. Notification by certified or registered mail to the last known address of the Participant or Beneficiary will be deemed a reasonable and diligent effort to locate such person.

16.07 Military Service. Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code.

16.08 Limitation of Third-Party Rights. Nothing expressed or implied in the Plan is intended or will be construed to confer upon or give to any person, firm, or association other than the Employer, the Participants or Beneficiaries, and their successors in interest, any right, remedy, or claim under or by reason of this Plan except pursuant to a qualified domestic relations order as defined in Section 414(p) of the Code.

16.09 Invalid Provisions. In case any provision of this Plan is held illegal or invalid for any reason, the illegality or invalidity will not affect the remaining parts of the Plan. The Plan will be construed and enforced as if the illegal and invalid provisions had never been included.

16.10 One Plan. This Plan may be executed in any number of counterparts, each of which will be deemed an original and the counterparts will constitute one and the same instrument and may be sufficiently evidenced by any one counterpart.

16.11 Use and Form of Words. Whenever any words are used herein in the masculine gender, they will be construed as though they were also used in the feminine gender in all cases where that

-59-

gender would apply, and vice versa. Whenever any words are used herein in the singular form, they will be construed as though they were also used in the plural form in all cases where the plural form would apply, and vice versa.

16.12 Headings. Headings to Articles and Sections are inserted solely for convenience and reference, and in the case of any conflict, the text, rather than the headings, shall control.

16.13 Governing Law. The Plan will be governed by and construed according to the federal laws governing employee benefit plans qualified under the Code and according to the laws of the state of California where such laws are not in conflict with the federal laws.

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EXECUTION

IN WITNESS WHEREOF, The PMI Group, Inc., by its duly authorized officer, has executed this amended and restated Plan document on the date indicated below.

THE PMI GROUP, INC.
By:	/s/ Charles E. Broom
Name:	Charles E. Broom
Title:	SVP/HR
Dated:	August 28, 2007

EX-31.1

Exhibit 31.1

CERTIFICATION

I, L. Stephen Smith, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of The PMI Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 6, 2007

/s/ L. Stephen Smith

L. Stephen Smith

Chief Executive Officer

Principal Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Donald P. Lofe, Jr., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of The PMI Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 6, 2007

/s/ Donald P. Lofe, Jr.

Donald P. Lofe, Jr.

Executive Vice President

and Chief Financial Officer

Principal Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION

Pursuant to 18 U.S.C. Section 1350, I, L. Stephen Smith, Chief Executive Officer of The PMI Group, Inc. (“Company”), hereby certify that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2007 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 6, 2007	/s/ L. Stephen Smith
	L. Stephen Smith
	Chief Executive Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.

EX-32.2

Exhibit 32.2

CERTIFICATION

Pursuant to 18 U.S.C. Section 1350, I, Donald P. Lofe, Jr., Chief Financial Officer of The PMI Group, Inc. (“Company”), hereby certify that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2007 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 6, 2007	/s/ Donald P. Lofe, Jr.
	Donald P. Lofe, Jr.
	Chief Financial Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.

EX-99.1

Exhibit 99.1

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

(An Indirect Wholly-Owned Subsidiary of

The PMI Group, Inc.)

Consolidated Financial Statements

As of September 30, 2007 and December 31, 2006

And for the three and nine months ended September 30, 2007 and 2006

F-1

INDEX TO FINANCIAL STATEMENTS

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006 (Unaudited)	F-3
Consolidated Balance Sheets as of September 30, 2007 (Unaudited) and December 31, 2006	F-4
Consolidated Statements of Cash Flows for September 30, 2007 and 2006 (Unaudited)	F-5
Notes to Consolidated Financial Statements (Unaudited)	F-6

F-2

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
	(Dollars in thousands)
REVENUES
Premiums earned	$	44,226	$	39,993	$	120,694	$	115,148
Net investment income		18,707		12,995		51,914		36,072
Net realized investment gains		34		3,039		26		2,968
Other income		503		441		1,584		702
Total revenues		63,470		56,468		174,218		154,890
LOSSES AND EXPENSES
Losses and loss adjustment expenses		21,855		10,495		48,155		18,451
Amortization of deferred policy acquisition costs		4,471		3,262		11,559		11,069
Other underwriting and operating expenses		9,136		7,309		24,799		20,945
Total losses and expenses		35,462		21,066		84,513		50,465
Income before income taxes and minority interest		28,008		35,402		89,705		104,425
Income taxes		8,290		10,243		26,926		31,101
Income before minority interest		19,718		25,159		62,779		73,324
Minority interest, net		210		520		767		1,515
NET INCOME	$	19,508	$	24,639	$	62,012	$	71,809

See accompanying notes to consolidated financial statements.

F-3

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2007		December 31, 2006
	(Unaudited)
	(Dollars in thousands)
ASSETS
Investments – available-for-sale at fair value:
Fixed income securities	$	1,194,701	$	882,978
Equity securities – common		44,646		34,435
Total investments		1,239,347		917,413
Cash and cash equivalents		45,733		151,818
Related party receivables		—		1,724
Accrued investment income		20,475		13,934
Reinsurance receivables		208		7,787
Deferred policy acquisition costs		39,961		37,694
Leasehold improvements, equipment and software, net of accumulated depreciation and amortization		4,140		2,454
Deferred tax assets		780		44
Other assets		26,441		4,843
Total assets	$	1,377,085	$	1,137,711
LIABILITIES
Reserve for losses and loss adjustment expenses	$	51,284	$	30,425
Unearned premiums		448,165		367,986
Reinsurance payables		5,475		8,053
Income tax payable		5,170		5,619
Other liabilities and accrued expenses		18,903		11,173
Total liabilities		528,997		423,256
Commitments and contingencies (Note 2)
Minority interest		5,557		16,297
SHAREHOLDER’S EQUITY
Ordinary shares - no par value; 327,800 shares issued and outstanding		263,980		263,980
Retained earnings		417,750		355,738
Accumulated other comprehensive income, net of deferred taxes		160,801		78,440
Total shareholder’s equity		842,531		698,158
Total liabilities and shareholder’s equity	$	1,377,085	$	1,137,711

See accompanying notes to consolidated financial statements.

F-4

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2007			2006
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	62,012		$	71,809
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest, net		767			1,515
Net realized investment gains		(26	)		(2,968	)
Depreciation and amortization		2,619			1,897
Deferred income taxes		3,899			1,536
Policy acquisition costs incurred and deferred		(13,826	)		(11,102	)
Amortization of deferred policy acquisition costs		11,559			11,069
Changes in:
Accrued investment income		(6,541	)		(4,683	)
Net change in related party receivables		1,724			(3,594	)
Reinsurance receivables, net of reinsurance payables		5,001			321
Reserve for losses and loss adjustment expenses		20,859			10,513
Unearned premiums		80,179			28,464
Income taxes payable		(449	)		3,907
Other		(12,874	)		(1,293	)
Net cash provided by operating activities		154,903			107,391
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of fixed income securities		44,832			33,255
Proceeds from sales of equity securities		1,433			8,281
Investment purchases:
Fixed income securities		(380,180	)		(217,861	)
Equity securities – common		(5,057	)		(8,634	)
Net change in short-term investments		—			667
Capital expenditures and capitalized software, net of dispositions		(2,187	)		(177	)
Acquisition of minority interest of subsidiary		(13,429	)		—
Net cash used in investing activities		(354,588	)		(184,469	)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions from shareholder		—			62,246
Proceeds from issuance of ordinary shares to minority interest holder		424			1,272
Net cash provided by financing activities		424			63,518
Foreign currency translation value increase		93,176			7,553
Net decrease in cash and cash equivalents		(106,085	)		(6,007	)
Cash and cash equivalents at beginning of period		151,818			100,712
Cash and cash equivalents at end of period	$	45,733		$	94,705
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid, net of refunds	$	24,674		$	26,214

See accompanying notes to consolidated financial statements.

F-5

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

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 wholly-owned subsidiary, Western Lenders Mortgage Insurance Company Ltd (“Western LMI”), and its majority owned subsidiary, Permanent LMI Pty Ltd. 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 wholly-owned subsidiary of PMI Mortgage Insurance Co. (“MIC”). The ultimate parent of MIC is The PMI Group, Inc. (“The PMI Group”), a United States domiciled corporation.

On March 16, 2007, PMI Ltd acquired the 49.9% remaining outstanding common shares of Western LMI from its minority shareholder. The Company paid $13.4 million to acquire the remaining outstanding common shares of Western LMI. The Company transferred the insurance related assets and liabilities of Western LMI to PMI Ltd at their fair value on May 1, 2007. On June 30, 2007 Western LMI’s application to have its insurance license revoked was accepted. The Company intends to dissolve Western LMI in 2007.

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 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 from 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 (“RMBS”). RMBS transactions include insurance on seasoned portfolios comprised of prime credit quality loans that have loan-to-values often below 80%.

The Company’s unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), disclosure requirements for interim financial information and Article 7 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation, have been included. Interim results for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes of PMI Mortgage Insurance Ltd and subsidiaries for the years ended December 31, 2006, 2005 and 2004 included as an exhibit to The PMI Group’s annual report on Form 10-K for the year ended December 31, 2006.

F-6

NOTE 2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES

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 period. Actual results could differ from these estimates.

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 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, a realized investment loss is recognized to the extent of the decline in fair value in the current period’s consolidated net income.

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. Net investment income consists primarily of interest and dividend income, net of investment expenses. Interest income and preferred stock dividends are recognized on an accrual basis. Dividend income on common stock is recognized on the date of declaration.

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. 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.

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 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 at such time as the software is ready for its intended use on a straight-line basis over the estimated useful life of the asset, which is generally 2.5 years. The Company capitalized costs associated with software developed for internal use of $1.0 million in the first nine months of 2007.

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Reserve for Losses and Loss Adjustment Expenses – The reserve for 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 within 14 days of the end of the month when the total amount due is unpaid and in arrears by more than ninety days. 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 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 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 excess of loss recovery of claim expenses from reinsurers, and reinsurance recoverables are 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 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. Accordingly, management assesses, among other factors, risk transfer criteria for all reinsurance agreements.

Revenue Recognition – Mortgage guarantee insurance policies are contracts that are generally noncancelable by the insurer and provide payment of premiums on a monthly, annual or 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 emergence of risk of each policy, a range of eight to nine years. If single premium policies related to insured loans are canceled due to repayment by the borrower, and the premium is nonrefundable, then the remaining unearned premium related to each canceled 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 pattern for each policy acquisition year (“Book Year”) annually, and any adjustments to the estimates are reflected for each Book Year as appropriate.

Income Taxes – PMI Ltd and its subsidiaries are included in the consolidated tax return of PMI Holdings. 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 statement of operations.

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Foreign Currency Translation – The Company’s financial statements have been translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency Translation. Assets and liabilities denominated in non-U.S. dollar functional currencies are translated using the period-end spot exchange rates. Revenues and expenses are translated at monthly-average exchange rates. Gains and losses on currency remeasurement incurred by the Company represent the revaluation of assets and liabilities denominated in nonfunctional currency into the functional currency 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 included in total shareholder’s equity.

Comprehensive Income – Comprehensive income includes net income, the change in foreign currency translation gains or losses, changes in unrealized gains and losses on available-for-sale investments, and the reclassification of realized gains and losses previously reported in comprehensive income, net of related tax effects.

Share-Based Compensation – The Company applies SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), for share-based payment transactions. SFAS No. 123R requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated results of operations. For share-based payments granted and unvested upon the adoption of SFAS No. 123R, the Company recognizes the fair value of share-based payments, including employee stock options and employee stock purchase plan shares, granted to employees as compensation expense in the consolidated results of operations.

Intangible Assets – The Company capitalized certain fees incurred in relation to the acquisition of multi-year contracts with customers in the first quarter of 2007. Unless renegotiated or cancelled, contract extension at the customer’s option will require the Company to pay additional fees of $6.7 million in 2010 and 2011.

The Company amortizes these intangible assets into operating expenses, using the expected earnings patterns of the underlying books of insurance business to which the contracts are related. As of September 30, 2007, the net book value of these intangible assets was $20.5 million and is included in other assets. The Company recorded $0.5 million of amortization expense related to these net intangible assets during the first nine months in 2007.

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NOTE 3. NEW ACCOUNTING STANDARDS

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), and SFAS No. 107, Disclosures about Fair Value of Financial Instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is still evaluating the impact of SFAS No. 159 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements but does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS 157 is not currently expected to materially impact the Company’s consolidated financial condition or results of operations.

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)
As of September 30, 2007:
Fixed income securities	$	1,231,018	$	59	$	(36,376	)	$	1,194,701
Equity securities – common stocks		26,969		17,701		(24	)		44,646
Total	$	1,257,987	$	17,760	$	(36,400	)	$	1,239,347
	Cost or Amortized Cost		Gross Unrealized					Fair Value
			Gains		(Losses)
			(Dollars in thousands)
As of December 31, 2006:
Fixed income securities	$	897,414	$	99	$	(14,535	)	$	882,978
Equity securities – common stocks		23,189		11,256		(10	)		34,435
Total	$	920,603	$	11,355	$	(14,545	)	$	917,413

Aging of Unrealized Investment Losses – The following table shows the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2007:

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
As of September 30, 2007:
Fixed income securities:
Australian and New Zealand Federal and State Government bonds	$	395,117	$	(9,208	)	$	308,746	$	(11,280	)	$	703,863	$	(20,488	)
Corporate bonds		230,628		(5,570	)		258,056		(10,318	)		488,684		(15,888	)
Total fixed income securities		625,745		(14,778	)		566,802		(21,598	)		1,192,547		(36,376	)
Equity securities – common stocks		39,165		(24	)		—		—			39,165		(24	)
Total	$	664,910	$	(14,802	)	$	566,802	$	(21,598	)	$	1,231,712	$	(36,400	)

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Unrealized losses on fixed income securities were primarily due to increases in interest rates, and are not considered to be other-than-temporarily impaired as the Company has the intent and ability to hold such investments until they recover or mature. However, 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 $0.4 million in the first nine months of 2006 and the amount was insignificant in the first nine months of 2007.

Net Investment Income – Net investment income consists of the following for the three and nine months ended:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Dollars in thousands)
Fixed income securities	$	17,451		$	11,462		$	46,676		$	32,353
Equity securities		535			397			1,189			1,018
Short-term investments and cash and cash
Equivalents		1,140			1,429			5,197			3,531
Investment income before expenses		19,126			13,288			53,062			36,902
Investment expenses		(419	)		(293	)		(1,148	)		(830	)
Net investment income	$	18,707		$	12,995		$	51,914		$	36,072

NOTE 5. DEFERRED POLICY ACQUISITION COSTS

The following table summarizes deferred policy acquisition cost activity as of and for the three and nine months ended September 30, 2007 and September 30, 2006:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Dollars in thousands)
Beginning balance	$	39,495		$	36,800		$	37,694		$	35,562
Policy acquisition costs incurred and deferred		4,937			2,057			13,826			11,102
Amortization of deferred policy acquisition costs		(4,471	)		(3,262	)		(11,559	)		(11,069	)
Ending balance	$	39,961		$	35,595		$	39,961		$	35,595

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 will generally decrease because the amortization of previously deferred policy acquisition costs exceeds the amount of deferred acquisition costs incurred.

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NOTE 6. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE)

The Company establishes reserves for losses and LAE to recognize the estimated liability for potential losses and loss expenses related to insurance mortgages that are in default. The establishment of a loss reserve is subject to inherent uncertainty and requires significant judgment by management. The following table provides a reconciliation of the beginning and ending consolidated reserves for losses and LAE between January 1 and September 30, 2007 and 2006.

	2007			2006
	(Dollars in thousands)
Balance at January 1,	$	30,425		$	7,526
Reinsurance recoverables		—			—
Net balance at January 1,		30,425			7,526
Losses and LAE incurred, principally with respect to defaults occurring in:
Current year		30,372			14,531
Prior years		17,783			3,920
Total incurred		48,155			18,451
Losses and LAE payments, principally with respect to defaults occurring in:
Current year		(1,848	)		(662	)
Prior years		(30,654	)		(8,270	)
Total payments		(32,502	)		(8,932	)
Transfer of insurance portfolio from PMI Indemnity Limited		—			977
Foreign currency translation effect		5,206			17
Net ending balance at September 30,		51,284			18,039
Reinsurance recoverables		—			—
Balance at September 30,	$	51,284		$	18,039

The increases of $17.8 million in 2007 and $3.9 million in 2006 related to the prior year were primarily due to our reestimation of claim sizes and claim rates as a result of declines in regional home appreciation rates and interest rate increases. The increase in the reserves for losses and LAE at September 30, 2007 compared to September 30, 2006 was primarily due to increases in default inventory and higher average claim sizes and claim rates.

NOTE 7. INCOME TAX

The Company’s effective tax rate was 30.0% and 29.8% for 2007 and 2006 respectively, compared to the Australian statutory rate of 30.0%.

The Company adopted the provisions of FASB Interpretation Number (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. When incurred, the Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. During the nine months ended September 30, 2007 and 2006, the Company incurred no significant interest or penalties, and had no interest or penalties accrued as of September 30, 2007 or December 31, 2006. The Company remains subject to examination in Australia from 2001 to present and in New Zealand from 2002 to present.

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NOTE 8. COMPREHENSIVE INCOME

The components of comprehensive income for the three and nine months ended September 30, 2007 and 2006 are shown in the table below.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Dollars in thousands)
Net income	$	19,508		$	24,639		$	62,012		$	71,809
Other comprehensive income (loss), net of deferred taxes:
Total change in unrealized gains/losses arising during the period		(2,244	)		2,829			(10,797	)		(6,397	)
Less: realized investment gains, net of income taxes		(24	)		(2,128	)		(18	)		(2,078	)
Change in unrealized gains/losses arising during the period, net of deferred (benefits) taxes of ($972), $300, ($4,635) and ($3,632), respectively		(2,268	)		701			(10,815	)		(8,475	)
Change in foreign currency translation gains		37,195			1,732			93,176			7,553
Other comprehensive income (loss), net of deferred (benefits) taxes		34,927			2,433			82,361			(922	)
Comprehensive income	$	54,435		$	27,072		$	144,373		$	70,887

The changes in unrealized gains/losses for the third quarter and first nine months of 2007 and 2006 were primarily due to fixed income security interest rate fluctuations relative to the consolidated fixed income portfolio.

The foreign currency translation adjustments in the three and nine months ended September 30, 2007 and 2006 were due primarily to strengthening of the Australian dollar spot exchange rates relative to the U.S. dollar spot exchange rates.

NOTE 9. BENEFIT PLANS

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 2007 and 2006. 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 $1.7 million and $1.1 million for 2007 and 2006, respectively.

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 nonwork-related accident or injury. Contractors are not covered under this benefit.

Employee Stock Purchase Plan – 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.

Equity Incentive Plan – PMI Ltd’s employees participate in The PMI Group’s Amended and Restated Equity Incentive Plan (the “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.

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