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 June 30, 2008

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, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  þ	Accelerated filer  ¨	Non-accelerated filer  ¨	Smaller Reporting Company  ¨
		(Do not check if a smaller reporting company)

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	July 31, 2008	81,623,899

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 Months and Six Months Ended June 30, 2008 and 2007	3
		Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007	4
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	89
	Item 4.	Controls and Procedures	91
Part II - Other Information
	Item 1.	Legal Proceedings	91
	Item 1A.	Risk Factors	92
	Item 4.	Submission of Matters to a Vote of Security Holders	94
	Item 6.	Exhibits	95
Signatures			96
Index to Exhibits			97
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 June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
	(Dollars in thousands, except per share data)
REVENUES
Premiums earned	$	260,078		$	242,337	$	522,043		$	478,698
Net investment income		61,053			51,119		119,366			103,758
Net realized investment (losses) gains		(19,711	)		414		(56,682	)		1,992
Change in fair value of certain debt instruments		16,957			—		45,665			—
Other income		12,219			5,751		16,104			9,661
Total revenues	$	330,596		$	299,621	$	646,496		$	594,109
LOSSES AND EXPENSES
Losses and loss adjustment expenses		605,004			146,160		1,184,798			255,480
Amortization of deferred policy acquisition costs		12,031			17,010		21,927			33,455
Other underwriting and operating expenses		64,447			59,773		123,367			122,474
Interest expense		9,835			8,398		18,198			16,657
Total losses and expenses	$	691,317		$	231,341	$	1,348,290		$	428,066
(Loss) income before equity in (losses) earnings from unconsolidated subsidiaries and income taxes		(360,721	)		68,280		(701,794	)		166,043
Equity in (losses) earnings from unconsolidated subsidiaries		(21,456	)		35,748		(54,933	)		72,257
(Loss) income before income taxes		(382,177	)		104,028		(756,727	)		238,300
Income tax (benefit) expense		(135,891	)		20,195		(236,477	)		52,434
NET (LOSS) INCOME	$	(246,286	)	$	83,833	$	(520,250	)	$	185,866
PER SHARE DATA
Basic net (loss) income	$	(3.03	)	$	0.97	$	(6.41	)	$	2.14
Diluted net (loss) income	$	(3.03	)	$	0.95	$	(6.41	)	$	2.11

See accompanying notes to consolidated financial statements.

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THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30, 2008			December 31, 2007
	(Unaudited)			(Audited)
	(Dollars in thousands, except per share data)
ASSETS
Investments
Fixed income securities	$	3,846,333		$	3,266,693
Equity securities:
Common		12,484			159,936
Preferred		263,556			299,630
Short-term investments		2,277			2,892
Total investments		4,124,650			3,729,151
Cash and cash equivalents		508,319			427,912
Investments in unconsolidated subsidiaries		151,226			309,800
Related party receivables		1,497			1,433
Accrued investment income		60,178			53,329
Premiums receivable		61,899			63,458
Reinsurance receivables and prepaid premiums		10,631			10,038
Reinsurance recoverables		314,615			36,917
Deferred policy acquisition costs		69,969			59,711
Property, equipment and software, net of accumulated depreciation and amortization		155,440			161,762
Prepaid and recoverable income taxes		67,557			77,413
Deferred income tax assets		119,824			55,439
Other assets		75,352			84,077
Total assets	$	5,721,157		$	5,070,440
LIABILITIES
Reserve for losses and loss adjustment expenses	$	2,289,374		$	1,242,599
Unearned premiums		631,483			611,247
Debt (includes $308,101 measured at fair value at June 30, 2008)		604,694			496,593
Reinsurance payables		43,731			47,471
Related party payables		1,856			1,852
Other liabilities and accrued expenses		141,434			157,716
Total liabilities		3,712,572			2,557,478
Commitments and contingencies (Notes 7 and 9)
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; 81,245,237 and 81,120,144 shares outstanding		1,193			1,193
Additional paid-in capital		899,354			890,598
Treasury stock, at cost (38,068,530 and 38,193,623 shares)		(1,352,108	)		(1,354,601	)
Retained earnings		2,168,597			2,660,695
Accumulated other comprehensive income, net of deferred taxes		291,549			315,077
Total shareholders’ equity		2,008,585			2,512,962
Total liabilities and shareholders’ equity	$	5,721,157		$	5,070,440

See accompanying notes to consolidated financial statements.

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THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

	Six Months Ended June 30,
	2008			2007
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	(520,250	)	$	185,866
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Equity in losses (earnings) from unconsolidated subsidiaries		54,933			(72,257	)
Net realized investment losses (gains)		56,227			(1,912	)
Change in fair value of certain debt instruments		(45,665	)		—
Depreciation and amortization		13,717			12,378
Deferred income taxes		(64,832	)		65,985
Compensation expense related to share-based payments		6,481			10,617
Excess tax benefits on the exercise of employee stock options		—			(3,998	)
Deferred policy acquisition costs incurred and deferred		(28,269	)		(36,682	)
Amortization of deferred policy acquisition costs		21,755			33,454
Changes in:
Accrued investment income		(4,691	)		(1,310	)
Premiums receivable		1,411			3,057
Reinsurance receivables, and prepaid premiums net of reinsurance payables		(4,174	)		7,248
Reinsurance recoverables		(277,619	)		294
Prepaid and recoverable income taxes		10,580			(4,380	)
Reserve for losses and loss adjustment expenses		1,036,209			88,874
Unearned premiums		(24,353	)		21,754
Related party receivables, net of payables		85			(351	)
Other		27,374			(20,130	)
Net cash provided by operating activities		258,919			288,507
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of fixed income securities		375,533			178,631
Proceeds from sales of equity securities		141,764			28,144
Proceeds from sale of unconsolidated subsidiary		3,375			3,359
Investment purchases:
Fixed income securities		(895,949	)		(389,065	)
Equity securities		(4,973	)		(55,115	)
Net change in short-term investments		616			1,862
Distributions from unconsolidated subsidiaries, net of investments		(974	)		22,172
Capital expenditures and capitalized software, net of dispositions		(8,748	)		(11,315	)
Acquisition of minority interest from minority interest holder		—			(13,429	)
Net cash used in investing activities		(389,356	)		(234,756	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from credit facility		200,000			—
Purchase of treasury stock		—			(36,951	)
Proceeds from issuance of treasury stock		1,646			28,583
Excess tax benefits on the exercise of employee stock options		—			3,998
Dividends paid to common shareholders		(2,041	)		(9,142	)
Issuance of share capital to minority interest holders in subsidiaries		—			424
Net cash provided by (used in) financing activities		199,605			(13,088	)
Effect of exchange rate changes on cash and cash equivalents		11,239			14,352
Net increase in cash and cash equivalents		80,407			55,015
Cash and cash equivalents at beginning of year		427,912			506,082
Cash and cash equivalents at end of period	$	508,319		$	561,097
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year:
Interest paid, net of capitalization	$	15,736		$	16,277
Income taxes paid, net of refunds	$	22,029		$	51,681
Non-cash investing and financing activities:
Capital lease obligations	$	2,198		$	—

See accompanying notes to consolidated financial statements.

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THE PMI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

In connection with the preparation of its consolidated financial statements for the quarter ended March 31, 2008, the Company determined that its investment in FGIC was other-than-temporarily impaired and reduced the carrying value of its investment in FGIC from $103.6 million at December 31, 2007 to zero. To the extent that our carrying value remains zero, we will not recognize in future periods our proportionate share of FGIC’s losses, if any. Equity in earnings from FGIC could be recognized in the future to the extent those earnings are deemed recoverable. The Company is under no obligation to provide additional capital to FGIC.

During the second quarter of 2008, the Company recorded $24.3 million equity in losses of RAM Re and a $1.7 million loss in other comprehensive income from a change in unrealized gains/losses in the current quarter. The current quarter losses reduced the carrying value of the Company’s investment in RAM Re from $26.0 million at March 31, 2008 to zero. To the extent that our carrying value remains zero, we will not recognize in future periods our proportionate share of RAM Re’s losses, if any. Equity in earnings from RAM Re could be recognized in the future to the extent those earnings are deemed recoverable. The Company is under no obligation to provide additional capital to RAM Re.

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

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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 six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. 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, 2007.

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

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3% but less than 50% are primarily accounted for using the equity method of accounting. 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.

The Company reports the equity in earnings from CMG MI on a current month basis and the Company’s interest in limited partnerships are on a one-quarter lag basis. Equity in losses from FGIC are reported on a current month basis. Due to the impairment of the Company’s investment in FGIC in the first quarter of 2008, the carrying value of the Company’s investment in FGIC was reduced to zero and no equity in losses were recorded with respect to FGIC in the first half of 2008. Equity in losses from RAM Re are reported on a one-quarter lag basis. As a result of continued equity in losses from RAM Re, the Company’s investment in RAM Re has been reduced to zero at June 30, 2008. To the extent that our carrying value remains zero, we will not recognize in future periods our proportionate share of FGIC or RAM Re’s losses, if any. Equity in earnings from FGIC or RAM Re could be recognized in the future to the extent those earnings are deemed recoverable.

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.

Related Party Receivables and Payables — As of June 30, 2008, related party receivables were $1.5 million and related party payables were $1.9 million compared to $1.4 million and $1.9 million as of December 31, 2007, respectively, which were comprised of non-trade receivables and payables from unconsolidated subsidiaries.

Deferred Policy Acquisition Costs — The Company defers certain costs of 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 we provide contract underwriting services on loans that do not require mortgage insurance, associated 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. The deferred costs related to single premium policies are adjusted as appropriate for policy cancellations to be consistent with the Company’s revenue recognition policy. The amortization estimates for each underwriting year are monitored regularly to reflect actual experience and any changes to persistency or loss development. Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed recoverable amounts, after considering investment income.

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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 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 $197.4 million and $181.6 million as of June 30, 2008 and December 31, 2007, 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.

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 swap 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.

Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). The standard describes three levels of inputs that may be used to measure fair value, of which “Level 3” inputs include fair value determinations using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. Due to the lack of available market values for the Company’s credit default swap contracts, the Company’s methodology for determining the fair value of its credit default swap contracts is based on “Level 3” inputs. (See Note 8. Fair Value Disclosures, for further discussion.)

In 2008, the Company purchased foreign currency put options to partially mitigate the negative financial impact of a potential strengthening of the U.S. dollar relative to the Australian dollar. These Australian dollar put options expire ratably over the calendar year and had a combined cost of $1.1 million. In 2008, the Company recorded in other income, a realized loss of $0.3 million (pre-tax) related to amortization of option costs and an unrealized loss of $0.8 million (pre-tax) related to changes in the fair value of the put options. The foreign currency put options are recorded at fair value based on “Level 2” inputs which are prices from markets that are not active. (See Note 8. Fair Value Disclosures, for further discussion.)

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Special Purpose Entities — Certain insurance transactions entered into by PMI and PMI Europe require the use of foreign wholly-owned special purpose entities 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, we do not consider a loan to be in default until the borrower has missed two 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 due date. 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 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 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 Company establishes reserves for losses and LAE for financial guaranty contracts on a case-by-case basis when specific insured obligations are in payment default or are likely to be in payment default. These reserves represent an estimate of the present value of the anticipated shortfall between payments on insured obligations plus anticipated loss adjustment expenses and anticipated cash flows from, and proceeds to be received on, sales of any collateral supporting the obligation and/or other anticipated recoveries. The discount rate used in calculating the net present value of estimated losses is based upon the risk-free rate for the duration of the anticipated shortfall.

The Company establishes watchlist reserves for financial guaranty contracts to recognize the potential for claims against the Company on insured obligations that are not presently in payment default, but which have migrated to an impaired level where there is a substantially increased probability of default. These reserves reflect an estimate of probable loss given evidence of impairment, and a reasonable estimate of the amount of loss given default. The methodology for establishing and calculating the watchlist reserve relies on a categorization and assessment of the probability of default and loss severity in the event of default, of the specific impaired obligations on the watchlist based on historical trends and other factors. The watchlist reserves are adjusted as necessary to reflect changes in the loss expectation inherent in the group of impaired credits.

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

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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 based on the type of reinsurance coverage. 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 for 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 72.5% and 72.2% of gross premiums written from the Company’s mortgage insurance operations in the three and six months ended June 30, 2008, respectively, compared to 65.7% and 66.2% in the corresponding periods in 2007, 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.

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 35.6% and 31.2% for the three and six months ended June 30, 2008, respectively, compared to the federal statutory rate of

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35.0%. The effective tax rates for the three and six months ended June 30, 2008 reflect income derived from certain international operations, which have lower effective tax rates, combined with the Company’s municipal bond investment income. In 2007, previously deferred tax liabilities attributable to equity in earnings from FGIC and RAM Re were reversed, and in 2007 and 2008 certain deferred tax assets were established.

For the quarter ended June 30, 2008, a tax valuation allowance of approximately $232.1 million was recorded against a $279.5 million deferred tax asset related to the recognition of losses from FGIC and RAM Re in excess of our tax basis. The Company did not record a full valuation allowance against the deferred tax asset as it is management’s expectation that a portion of the tax benefit will be realized. Additional benefits could be recognized in the future due to changes in management’s expectations regarding realization of tax benefits. See Footnote 13. 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. The Company applies 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”) for pension benefits to U.S. employees. 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.

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. Foreign currency translation gains in accumulated other comprehensive income were $377.9 million as of June 30, 2008 compared with $281.0 million as of December 31, 2007. Gains and losses on foreign currency re-measurement incurred by PMI Australia and PMI Europe represent the revaluation of assets and liabilities denominated in non-functional currencies into the functional currency, the Australian dollar and the Euro, respectively.

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

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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 (losses) 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 (loss) 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 (loss) 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 the three and six months ended June 30, 2008, 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.

The following table presents basic and diluted EPS for the periods indicated and a reconciliation of the weighted average common shares used to calculate basic EPS to the weighted-average common shares used to calculate diluted EPS:

	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
	(Dollars and shares in thousands)
Net (loss) income	$	(246,286	)	$	83,833	$	(520,250	)	$	185,866
Weighted-average shares for basic EPS		81,223			86,819		81,214			86,893
Weighted-average stock options and other dilutive components		—			1,171		—			1,178
Weighted-average shares for diluted EPS		81,223			87,990		81,214			88,071
Basic EPS	$	(3.03	)	$	0.97	$	(6.41	)	$	2.14
Dilutive EPS	$	(3.03	)	$	0.95	$	(6.41	)	$	2.11
Dividends declared and accrued to common shareholders	$	0.0125		$	0.0525	$	0.0250		$	0.1050

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. The Company recognizes the fair value of share-based payments granted and unvested, including employee stock options, restricted stock units, and employee stock purchase plan shares, as compensation expense in the

13

consolidated results of operations. Share-based compensation expense for the three and six months ended June 30, 2008 was $2.1 million (pre-tax), and $6.5 million (pre-tax), respectively, compared to $3.5 million (pre-tax) and $10.6 million (pre-tax), respectively, for the corresponding periods in 2007.

Fair Value of Financial Instruments — Effective January 1, 2008, the Company adopted SFAS No. 157 and 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. 157 provides a framework for measuring fair value under GAAP. SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company elected to adopt the fair value option for certain corporate debt on the adoption date. SFAS No. 159 requires that the difference between the carrying value before election of the fair value option and the fair value of these instruments be recorded as an adjustment to beginning retained earnings in the period of adoption. The Company recognized a net of tax gain of $31.8 million to the beginning retained earnings as of January 1, 2008 related to the initial adoption of SFAS No. 159 for certain debt instruments held by the Company. For the three and six months ended June 30, 2008, the Company’s net loss included a $17.0 million and $45.7 million gain, respectively, related to the subsequent measurement of fair value for these debt instruments. We selected our 10 year and 30 year senior debt instruments for the fair value option as their market values are the most readily available. The fair value option was elected with respect to the senior debt as changes in value are expected to generally offset changes in the value of credit default swap contracts that are also accounted for at fair value. (See Note 8. Fair Value Disclosures, for further discussion.)

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. Certain items in the consolidated statements of cash flows for the six months ended June 30, 2007 were reclassified to reflect the effect of foreign currency exchange rate changes on cash and cash equivalents. In the prior year presentation, the line item, foreign currency translation value increase, reflected the exchange rate effect on all of the balance sheet items as reflected in the table below:

	Six Months Ended June 30,
	2007 as reclassified			2007 as previously reported
	(Dollars in thousands)
Net cash provided by operating activities	$	288,507		$	308,924
Net cash used in investing activities	$	(234,756	)	$	(277,815	)
Net cash used in financing activities	$	(13,088	)	$	(13,805	)
Effect of exchange rate changes on cash and cash equivalents	$	14,352		$	—
Foreign currency translation value increase	$	—		$	64,417

NOTE 3. NEW ACCOUNTING STANDARDS

In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guaranty Insurance Contracts, an Interpretation of FASB Statement No. 60 (“SFAS No. 163”) which specifically clarifies the accounting guidance for financial guaranty contracts under SFAS No. 60. SFAS No. 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. The statement also clarifies how SFAS No. 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for

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premium revenue and claim liabilities. SFAS No. 163 is effective for fiscal years and interim periods beginning after December 15, 2008. The Company is still evaluating the impact of SFAS No. 163 on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (“SFAS No. 161”) which amends and expands the disclosure requirements of Statement 133. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is still evaluating the impact of SFAS No. 161 on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment to ARB No. 51 (“SFAS No. 160”) which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of operations, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company is still evaluating the impact of SFAS No. 160 on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141R”) which requires an entity that obtains control of one or more businesses in a business combination to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in SFAS No. 141. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS No. 141R is not currently expected to significantly impact the Company’s consolidated financial statements.

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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 June 30, 2008
Fixed income securities:
Municipal bonds	$	2,072,556	$	37,141	$	(28,223	)	$	2,081,474
Foreign governments		781,922		4,263		(29,636	)		756,549
Corporate bonds		1,052,288		4,578		(59,641	)		997,225
U.S. governments and agencies		6,180		1,434		—			7,614
Mortgage-backed securities		3,298		173		—			3,471
Total fixed income securities		3,916,244		47,589		(117,500	)		3,846,333
Equity securities:
Common stocks		13,668		—		(1,184	)		12,484
Preferred stocks		311,637		247		(48,328	)		263,556
Total equity securities		325,305		247		(49,512	)		276,040
Short-term investments		2,277		—		—			2,277
Total investments	$	4,243,826	$	47,836	$	(167,012	)	$	4,124,650
	Cost or Amortized Cost		Gross Unrealized					Fair Value
			Gains		(Losses)
			(Dollars in thousands)
As of December 31, 2007
Fixed income securities:
Municipal bonds	$	1,629,076	$	77,178	$	(3,430	)	$	1,702,824
Foreign governments		659,872		3,547		(22,449	)		640,970
Corporate bonds		946,422		1,783		(37,512	)		910,693
U.S. governments and agencies		7,002		1,483		—			8,485
Mortgage-backed securities		3,551		170		—			3,721
Total fixed income securities		3,245,923		84,161		(63,391	)		3,266,693
Equity securities:
Common stocks		112,778		47,649		(491	)		159,936
Preferred stocks		333,915		624		(34,909	)		299,630
Total equity securities		446,693		48,273		(35,400	)		459,566
Short-term investments		2,891		1		—			2,892
Total investments	$	3,695,507	$	132,435	$	(98,791	)	$	3,729,151

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Net Investment Income — Net investment income consists of the following:

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(Dollars in thousands)
Fixed income securities	$	51,250		$	40,213		$	98,383		$	81,425
Equity securities		5,929			4,583			12,587			9,550
Short-term investments		4,808			7,202			10,329			14,461
Investment income before expenses		61,987			51,998			121,299			105,436
Investment expenses		(934	)		(879	)		(1,933	)		(1,678	)
Net investment income	$	61,053		$	51,119		$	119,366		$	103,758

Net realized investment (losses) gains — Net realized investment (losses) gains consist of the following:

	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
	(Dollars in thousands)
Fixed income securities:
Net (losses) gains	$	(1,022	)	$	352	$	18,469		$	795
Equity securities
Net (losses) gains		(18,682	)		49		12,956			1,275
Short-term investments
Net (losses) gains		(7	)		13		(126	)		(78	)
Investments in unconsolidated subsidiaries:
Net (losses) gains		—			—		(87,981	)		—
Net realized investment (losses) gains before income taxes		(19,711	)		414		(56,682	)		1,992
Income tax (benefit) expense		(6,899	)		145		(19,839	)		697
Total net realized investment (losses) gains after income taxes	$	(12,812	)	$	269	$	(36,843	)	$	1,295

Net realized investment (losses) gains for the first half of 2008 include an $88.0 million loss related to the Company’s impairment of its investment in FGIC in the first quarter of 2008 and a $19.0 million loss related to the Company’s other-than-temporary impairment of certain preferred securities in its U.S. investment portfolio during the second quarter of 2008.

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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 June 30, 2008 and 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)
June 30, 2008
Fixed income securities:
U.S. municipal bonds	$	971,093	$	(21,820	)	$	75,059	$	(6,403	)	$	1,046,152	$	(28,223	)
Foreign governments		170,387		(7,292	)		477,352		(22,344	)		647,739		(29,636	)
Corporate bonds		192,681		(7,494	)		701,350		(52,147	)		894,031		(59,641	)
Total fixed income securities		1,334,161		(36,606	)		1,253,761		(80,894	)		2,587,922		(117,500	)
Equity securities:
Common stocks		12,095		(1,184	)		—		—			12,095		(1,184	)
Preferred stocks		209,270		(46,386	)		3,667		(1,942	)		212,937		(48,328	)
Total equity securities		221,365		(47,570	)		3,667		(1,942	)		225,032		(49,512	)
Total	$	1,555,526	$	(84,176	)	$	1,257,428	$	(82,836	)	$	2,812,954	$	(167,012	)
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
June 30, 2007
Fixed income securities:
U.S. municipal bonds	$	324,595	$	(6,374	)	$	—	$	—		$	324,595	$	(6,374	)
Foreign governments		244,477		(8,256	)		254,824		(8,681	)		499,301		(16,937	)
Corporate bonds		480,395		(9,427	)		286,428		(10,082	)		766,823		(19,509	)
U.S. government and agencies		944		(4	)		247		(6	)		1,191		(10	)
Total fixed income securities		1,050,411		(24,061	)		541,499		(18,769	)		1,591,910		(42,830	)
Equity securities:
Common stocks		8,723		(280	)		—		—			8,723		(280	)
Preferred stocks		58,672		(952	)		—		—			58,672		(952	)
Total equity securities		67,395		(1,232	)		—		—			67,395		(1,232	)
Total	$	1,117,806	$	(25,293	)	$	541,499	$	(18,769	)	$	1,659,305	$	(44,062	)

Unrealized losses in 2008 on fixed income securities were primarily due to increases in interest rates and widening of credit spreads. Unrealized losses in 2008 on preferred securities were primarily due to the widening of credit and sector spreads. The Company determined that the decline in the fair value of certain investments in the first half of 2008 met the definition of other-than-temporary impairment and recognized realized losses of $19.0 million and $1.3 million in the first half of 2008 and 2007, respectively.

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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 June 30, 2008 and December 31, 2007:

	June 30, 2008		Ownership Percentage		December 31, 2007		Ownership Percentage
	(Dollars in thousands)
FGIC	$	—	42.0	%	$	103,644	42.0	%
CMG MI		135,580	50.0	%		131,225	50.0	%
RAM Re		—	23.7	%		60,017	23.7	%
Other		15,646	various			14,914	various
Total	$	151,226			$	309,800

Due to the impairment of its FGIC investment in the first quarter of 2008, the Company did not recognize any equity in earnings (losses) from FGIC in the three and six months ended June 30, 2008. During the second quarter of 2008, the Company recorded $24.3 million equity in losses from RAM Re and $1.7 million loss in other comprehensive income from a change in unrealized gains/losses in the current quarter, which reduced the carrying value of the Company’s investment in RAM Re from $26.0 million at March 31, 2008 to zero.

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

	Three Months Ended June 30,									Six Months Ended June 30,
	2008			Ownership Percentage		2007		Ownership Percentage		2008			Ownership Percentage		2007		Ownership Percentage
	(Dollars in thousands)									(Dollars in thousands)
FGIC	$	—		42.0	%	$	27,447	42.0	%	$	—		42.0	%	$	56,773	42.0	%
CMG MI		2,986		50.0	%		4,617	50.0	%		5,866		50.0	%		9,478	50.0	%
RAM Re		(24,321	)	23.7	%		3,395	23.7	%		(60,557	)	23.7	%		5,772	23.7	%
Other		(121	)	various			289	various			(242	)	various			234	various
Total	$	(21,456	)			$	35,748			$	(54,933	)			$	72,257

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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 and six months ended:

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(Dollars in thousands)
Beginning Balance	$	65,951		$	88,772		$	59,711		$	87,008
Policy acquisition costs incurred and deferred		16,049			21,416			32,185			39,625
Amortization of deferred policy acquisition costs		(12,031	)		(17,010	)		(21,927	)		(33,455	)
Balance at June 30,	$	69,969		$	93,178		$	69,969		$	93,178

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.

Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed recoverable amounts, after considering investment income. For the year ended December 31, 2007, as a result of a recoverability analysis of deferred costs relating to new mortgage insurance policies acquired in 2007, the Company impaired its deferred policy acquisition cost asset related to its U.S. Mortgage Operations by $33.6 million relating to the 2007 book year. The deferred policy acquisition cost asset at June 30, 2007 includes costs associated with the 2007 book year which were impaired in the fourth quarter of 2007. The deferred policy acquisition cost asset at June 30, 2008 includes only costs associated with the first half of the 2008 book of business and book years prior to 2007. For the quarter ended June 30, 2008, due to the novation agreement between PMI Guaranty Co., FGIC, and a third party financial guarantor, the Company impaired its remaining deferred policy acquisition cost assets related to PMI Guaranty Co.’s operations by $3.6 million reducing its value to zero.

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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 June 30:

	2008			2007
	(Dollars in thousands)
Balance at January 1,	$	1,242,599		$	414,736
Less: reinsurance recoverables		(36,917	)		(3,741	)
Net balance at January 1,		1,205,682			410,995
Losses and LAE incurred, principally with respect to defaults occurring in:
Current year		917,867			200,793
Prior years (1)		266,931			54,687
Total incurred		1,184,798			255,480
Losses and LAE payments, principally with respect to defaults occurring in:
Current year		(15,146	)		(1,206	)
Prior years		(408,533	)		(165,229	)
Total payments		(423,679	)		(166,435	)
Foreign currency translation effects		7,958			3,441
Net ending balance at June 30,		1,974,759			503,481
Reinsurance recoverables		314,615			3,470
Balance at June 30,	$	2,289,374		$	506,951

⁽¹⁾     The $266.9 million and the $54.7 million increases in total losses and LAE incurred in prior years were due to re-estimates of ultimate claim rates and claim sizes 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 and/or expected ultimate claim rates. The increases in prior years’ reserves in 2008 and 2007 were primarily due to the significant weakening of the U.S. housing and mortgage markets and were driven by lower cure rates, higher claim rates and higher claim sizes and, to a lesser extent, higher claim rates and claim sizes in PMI Australia.

The increase in total consolidated loss reserves at June 30, 2008 compared to June 30, 2007 was primarily due to increases in the reserve balances for U.S. Mortgage Insurance Operations as a result of an increase in the default inventory, higher claim rates and higher average claim sizes. Upon receipt of default notices, 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. FAIR VALUE DISCLOSURES

Effective January 1, 2008, the Company adopted SFAS No. 157 and SFAS No. 159. In particular, the Company elected to adopt the fair value option presented by SFAS No. 159 for certain corporate debt liabilities on the adoption date. SFAS No. 159 requires that the difference between the carrying value before election of the fair value option and the fair value of these instruments at the time of election of the fair value option be recorded as an adjustment to beginning retained earnings in the period of adoption.

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The following table presents the difference between fair values as of June 30, 2008 and the aggregate contractual principal amounts of the long-term debt for which the fair value option has been elected. Had the Company not adopted SFAS No. 159, the Company’s diluted loss per share for the three and six months ended June 30, 2008 would have been $3.17 per share and $6.77 per share, respectively.

	Fair Value (including accrued interest) as of June 30, 2008		Principal amount and accrued interest		Difference
Long-term debt
6.000% Senior Notes	$	198,303	$	252,556	$	54,253
6.625% Senior Notes	$	109,798	$	150,128	$	40,330

The change in fair value of certain of the Company’s corporate debt for which the fair value option was elected was principally due to the widening of credit spreads. For the first half of 2008, the adjustment related to widening credit spreads of the Company’s corporate debt carried at fair value was $44.7 million. The amount related to widening credit spreads was determined by comparing the actual fair values of these instruments to similar instruments having no credit risk.

SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

Level 1        Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2        Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Level 3        Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include

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financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Assets and liabilities measured at fair value on a recurring basis, including financial instruments for which the Company has elected the fair value option, are summarized below:

	June 30, 2008
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Assets/Liabilities at Fair Value
	(Dollars in thousand)
Assets
Fixed income securities	$	—	$	3,839,896	$	6,437	$	3,846,333
Equity securities		10,914		259,109		6,017		276,040
Short-term investments		2,277		—		—		2,277
Cash and cash equivalents		508,319		—		—		508,319
Accrued investment income		60,178		—		—		60,178
Foreign currency put options		—		25		—		25
Total assets	$	581,688	$	4,099,030	$	12,454	$	4,693,172
Liabilities
Credit default swaps	$	—	$	—	$	27,128	$	27,128
6.000% Senior Notes		—		198,303		—		198,303
6.625% Senior Notes		—		109,798		—		109,798
Total liabilities	$	—	$	308,101	$	27,128	$	335,229

PMI Europe’s credit default swap (“CDS”) contracts are valued using internal proprietary models because these instruments are unique, complex, and private and are often highly customized transactions, for which observable market quotes are not available. Due to the lack of observable inputs required to value CDS contracts, they are considered to be Level 3 under the SFAS No. 157 fair value hierarchy. Valuation models and the related assumptions are continuously re-evaluated by management and refined, as appropriate.

Key inputs used in the Company’s valuation of CDS contracts include the transaction notional amount, expected term, premium rates on risk layer, changes in market spreads, estimated loss rates and loss timing, and risk free interest rates. As none of the instruments that we are holding are traded, in order to obtain representative current CDS premium rates or spreads that represent an exit price for the CDS contracts, we develop an internal exit price estimate based on informal market data obtained through market surveys with investment banks, counterparty banks, and other relevant market sources in Europe. The assumed market credit spread is a significant assumption that, if changed, could result in materially different fair values. Accordingly, market perceptions of credit deterioration would result in the increase in the expected exit value (the amount required to be paid to exit the transaction due to wider credit spreads).

Fixed income and equity securities classified as Level 3 under SFAS No. 157 are not publicly or actively traded, and the prices are not readily available. The fair values of these investments are management’s best estimate and will be reassessed periodically.

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The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2008. Level 3 instruments presented in the table, including credit default swaps, and certain fixed income and equity securities, were carried at fair value prior to the adoption of SFAS No. 157.

	Total Fair Value Measurements
	Six Months Ended June 30, 2008
	(Dollars in thousands)
Level 3 Instruments Only	Fixed Income Securities			Equity Securities			Credit Default Swaps (liabilities)
Balance, January 1, 2008	$	6,444		$	7,568		$	(26,921	)
Total gains or losses
Included in earnings (1)		(7	)		(1,551	)		10,350
Included in other comprehensive income		—			—			(2,148	)
Purchase, issuance and settlements(2)		—			—			(8,409	)
Balance, June 30, 2008	$	6,437		$	6,017		$	(27,128	)

⁽¹⁾ The losses on equity and fixed income securities of $1.6 million for the six months ended June 30, 2008 are included in net investment income in the Company’s consolidated statement of operations. The gain on credit default swaps of $10.4 million for the six months ended June 30, 2008 is included in other income in the Company’s consolidated statement of operations.

⁽²⁾ The purchase, issuance and settlements of $8.4 million for the six months ended June 30, 2008 represent net cash received on credit default swaps.

NOTE 9. COMMITMENTS AND CONTINGENCIES

Income Taxes — As of June 30, 2008, no tax issues from the recently closed IRS audit would, in the opinion of management, give rise to a material assessment or have a material effect on the consolidated financial condition, results of operations or cash flows of the Company.

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.

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 June 30, 2008, the Company had committed to fund, if called upon to do so, $5.8 million of additional equity in certain limited partnership investments. In addition, the Company is under no obligation to fund FGIC or RAM Re, two unconsolidated equity investees.

Legal Proceedings — Various legal actions and regulatory reviews are currently pending that involve the Company and specific aspects of its conduct of business. Although there can be no assurance as to the ultimate disposition of these matters, in the opinion of management, based upon the information available as of the date of these financial statements, the expected 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 10. RESTRICTED CASH

Effective June 2008, PMI Guaranty, FGIC and Assured Guaranty Re Ltd (“AG Re”) executed an Agreement pursuant to which all of the direct FGIC business currently reinsured by PMI Guaranty was recaptured by FGIC and ceded by FGIC to AG Re. Pursuant to the Agreement, with respect to two of the exposures ceded to AG Re, PMI Guaranty agreed to reimburse AG Re for any losses it pays, subject to an aggregate limit of $22.9 million. PMI Guaranty has secured its obligation by depositing $22.9 million into a trust account for the benefit of AG Re and, to the extent AG Re’s obligations are less than $22.9 million, the remaining funds will be returned to PMI Guaranty. The $22.9 million deposit is included in cash and cash equivalents on the Company’s consolidated balance sheet at June 30, 2008.

PMI Europe has entered into a number of collateral support agreements in respect of certain credit default swap and reinsurance transactions it has concluded. Under these agreements PMI Europe may be required to pledge collateral for the benefit of the counterparty. PMI Europe has pledged collateral of $4.6 million for one credit default swap transaction.

NOTE 11. COMPREHENSIVE INCOME

The components of comprehensive (loss) income for the three months and six months ended June 30, 2008 and 2007 are shown in the table below.

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	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(Dollars in thousands)
Net (loss) income	$	(246,286	)	$	83,833		$	(520,250	)	$	185,866
Other comprehensive income (loss), net of deferred taxes:
Total change in unrealized gains/losses during the period		(41,902	)		(41,904	)		(102,422	)		(53,131	)
Less: realized investment (losses) gains, net of income taxes		(12,812	)		269			20,344			1,295
Change in unrealized gains/losses arising during the period, net of deferred tax benefits of $11,408, $19,820, 59,960, and $24,539, respectively		(29,090	)		(42,173	)		(122,766	)		(54,426	)
Accretion of cash flow hedges, net of deferred tax expenses		99			99			198			198
Foreign currency translation adjustment		46,649			44,068			96,896			64,417
Other comprehensive income (loss), net of deferred tax		17,658			1,994			(25,672	)		10,189
Comprehensive (loss) income	$	(228,628	)	$	85,827		$	(545,922	)	$	196,055

The changes in unrealized gains/losses in the second quarter and first half of 2008 and 2007 were primarily due to widening market spreads principally in the U.S, and to a lesser extent, increases in interest rates in Australia. The changes in foreign currency translation adjustments for 2008 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 12. 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 June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(Dollars in thousands)
Pension benefits
Service cost	$	2,302		$	2,775		$	4,654		$	5,056
Interest cost		1,658			1,744			3,351			3,085
Expected return on plan assets		(2,216	)		(2,330	)		(4,479	)		(3,841	)
Amortization of prior service cost		(432	)		(258	)		(873	)		(231	)
Recognized net actuarial loss		98			219			198			260
Net periodic benefit cost	$	1,410		$	2,150		$	2,851		$	4,329

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(Dollars in thousands)
Other post-retirement benefits
Service cost	$	123		$	125		$	245		$	250
Interest cost		176			155			353			310
Amortization of prior service cost		(189	)		(200	)		(376	)		(400	)
Recognized net actuarial loss		90			95			179			190
Net periodic post-retirement benefit cost	$	200		$	175		$	401		$	350

In January 2008, the Company contributed $10 million to its Retirement Plan. The Company currently does not expect to make additional contributions to its Retirement Plan in 2008. The benefit costs for the three months and six months ended June 30, 2008 decreased from the corresponding periods in 2007 primarily due to the amendment to the Retirement Plan in May 2007 (discussed in Note 2. Summary of Significant Accounting Policies, for further discussion).

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NOTE 13. INCOME TAXES

The components of the deferred income tax assets and liabilities for the period ended are as follows:

	June 30, 2008			December 31, 2007
	(Dollars in thousands)
Deferred tax assets:
AMT and other credits	$	55,473		$	55,473
Discount on loss reserves		23,972			18,382
Unearned premium reserves		2,475			3,157
Unrealized net losses on investments		41,585			—
Basis difference on investments in unconsolidated subsidiaries		279,532			214,258
Tax and loss bonds net of contingency reserve deductions		40,651			—
Pension costs and deferred compensation		13,875			12,987
Other assets		13,473			9,424
Total deferred tax assets		471,036			313,681
Deferred tax liabilities:
Contingency reserve deduction, net of tax and loss bonds		—			2,339
Deferred policy acquisition costs		9,801			5,581
Unrealized net gains on investments		—			10,584
Unrealized net gains on debt		37,528			—
Software development costs		18,932			21,683
Equity in earnings from unconsolidated subsidiaries		39,545			40,123
Other liabilities		13,275			9,829
Total deferred tax liabilities		119,081			90,139
Net deferred tax asset		351,955			223,542
Valuation allowance		(232,131	)		(168,103	)
Net deferred tax asset	$	119,824		$	55,439

The Company established a valuation allowance of approximately $232.1 million against a $279.5 million deferred tax asset, upon the recognition of losses from FGIC and RAM Re, in excess of tax basis. The Company did not record a full valuation against the deferred tax asset, as it is management’s expectation that some portion of the tax benefit may be realized. Additional tax benefits could be recognized in the future if management determines that realization is more likely than not to occur.

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NOTE 14. REINSURANCE

The following table shows the effects of reinsurance on premiums written, premiums earned and losses and LAE of the Company’s operations for the periods indicated:

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(Dollars in thousands)
Premiums written
Direct	$	286,227		$	294,513		$	587,158		$	574,048
Assumed		9,488			8,277			17,921			17,011
Ceded		(48,341	)		(46,813	)		(102,380	)		(91,031	)
Net premiums written	$	247,374		$	255,977		$	502,699		$	500,028
Premiums earned
Direct	$	296,213		$	282,142		$	600,201		$	555,765
Assumed		12,715			6,824			24,310			13,358
Ceded		(48,850	)		(46,629	)		(102,468	)		(90,425	)
Net premiums earned	$	260,078		$	242,337		$	522,043		$	478,698
Losses and loss adjustment expenses
Direct	$	766,146		$	145,838		$	1,423,082		$	255,327
Assumed		32,995			496			45,479			397
Ceded		(194,137	)		(174	)		(283,763	)		(244	)
Net losses and LAE	$	605,004		$	146,160		$	1,184,798		$	255,480

The majority of the Company’s existing reinsurance contracts are captive reinsurance agreements in the 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. Ceded premiums for U.S. captive reinsurance accounted for 88.8% and 89.6% of total ceded premiums written in the three and six months ended June 30, 2008, respectively, compared to 90.8% and 91.2% for the corresponding periods in 2007. Reinsurance recoverables on losses incurred in the U.S. Mortgage Insurance Operations were $313.5 million as June 30, 2008 and $35.9 million as of December 31, 2007.

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NOTE 15. DEBT AND REVOLVING CREDIT FACILITY

	June 30, 2008						December 31, 2007
	Principal Amount		Fair Value		Carrying Value		Carrying Value
	(Dollars in thousands)
6.000% Senior Notes, due September 15, 2016 (1)	$	250,000	$	198,303	$	198,303	$	250,000
6.625% Senior Notes, due September 15, 2036 (1)		150,000		109,798		109,798		150,000
Revolving Credit Facility		200,000		—		200,000		—
8.309% Junior Subordinated Debentures, due February 1, 2027		51,593		—		51,593		51,593
5.568% Senior Notes, due November 15, 2008		45,000		—		45,000		45,000
Total Debt	$	696,593	$	308,101	$	604,694	$	496,593

⁽¹⁾ The fair value and carrying value of the Company’s 6.000% Senior Notes and 6.625% Senior Notes at June 30, 2008 include accrued interest.

Effective January 1, 2008, the Company elected to adopt the fair value option presented by SFAS No. 159 for the Company’s 6.000% Senior Notes and 6.625% Senior Notes. SFAS No. 159 requires that the difference between the carrying value before election of the fair value option and the fair value of these instruments be recorded as an adjustment to beginning retained earnings in the period of adoption. See Note 8. Fair Value Disclosures, for further discussion.

In considering the initial adoption of the SFAS No. 159, the Company determined that the change in fair value of the 8.309% Junior Subordinated Debentures would not have significant impact on the Company’s consolidated financial results. Therefore, the Company did not elect to adopt the fair value option for the 8.309% Junior Subordinated Debentures. Since the 5.568% Senior Notes are scheduled to mature in 2008, the Company did not elect to adopt the fair value option for the 5.568% Senior Notes.

In early 2008 the Company amended its existing revolving credit facility (the “facility”) and in May 2008, the Company drew $200 million on the facility. The facility includes a $50 million letter of credit sub-limit. Pursuant to the terms of the amendment, the Company’s ability to borrow under the facility was subject to a number of conditions, including that the stock of PMI Mortgage Insurance Co. (“MIC”) must be pledged in favor of the lenders under the facility and noteholders under certain of the Company’s senior notes.

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NOTE 16. BUSINESS SEGMENTS

Reporting segments are based upon the Company’s internal organizational structure, the manner in which the Company’s operations are managed, the criteria used by the Company’s 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 June 30, 2008
	U.S. Mortgage Insurance Operations			International Operations			Financial Guaranty			Corporate and Other			Consolidated Total
	(Dollars in thousands)
Revenues
Premiums earned	$	203,635		$	55,552		$	880		$	11		$	260,078
Net gain from credit default swaps		—			9,550			—			—			9,550
Net investment income		29,255			27,763			2,009			2,026			61,053
Net realized investment losses		(12,900	)		(2,172	)		(4,636	)		(3	)		(19,711	)
Change in fair value of certain debt instruments		—			—			—			16,957			16,957
Other (loss) income		(91	)		(559	)		—			3,319			2,669
Total revenues		219,899			90,134			(1,747	)		22,310			330,596
Losses and expenses
Losses and LAE		552,476			25,848			26,680			—			605,004
Amortization of deferred policy acquisition costs		3,819			4,612			3,600			—			12,031
Other underwriting and operating expenses		24,159			17,529			1,614			21,145			64,447
Interest expense (income)		29			(77	)		731			9,152			9,835
Total losses and expenses		580,483			47,912			32,625			30,297			691,317
(Loss) income before equity in earnings (losses) from unconsolidated subsidiaries		(360,584	)		42,222			(34,372	)		(7,987	)		(360,721	)
Equity in earnings (losses) from unconsolidated subsidiaries		2,986			—			(24,321	)		(121	)		(21,456	)
(Loss) income before income taxes		(357,598	)		42,222			(58,693	)		(8,108	)		(382,177	)
Income tax (benefit) expense		(131,739	)		11,119			(12,587	)		(2,684	)		(135,891	)
Net (loss) income	$	(225,859	)	$	31,103		$	(46,106	)	$	(5,424	)	$	(246,286	)

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	Three Months Ended June 30, 2007
	U.S. Mortgage Insurance Operations		International Operations			Financial Guaranty		Corporate and Other			Consolidated Total
	(Dollars in thousands)
Revenues
Premiums earned	$	195,385	$	46,384		$	552	$	16		$	242,337
Net gain from credit default swap		—		1,579			—		—		$	1,579
Net investment income		25,966		20,581			2,314		2,258			51,119
Net realized investment gains (losses)		981		53			—		(620	)		414
Other income (loss)		17		(614	)		—		4,769			4,172
Total revenues		222,349		67,983			2,866		6,423			299,621
Losses and expenses
Losses and LAE		134,384		11,776			—		—			146,160
Amortization of deferred policy acquisition costs		12,610		4,131			269		—			17,010
Other underwriting and operating expenses		26,759		12,657			432		19,925			59,773
Interest expense		39		—			732		7,627			8,398
Total losses and expenses		173,792		28,564			1,433		27,552			231,341
Income (loss) before equity in earnings (losses) from unconsolidated subsidiaries		48,557		39,419			1,433		(21,129	)		68,280
Equity in earnings from unconsolidated subsidiaries		4,617		—			30,842		289			35,748
Income (loss) before income taxes		53,174		39,419			32,275		(20,840	)		104,028
Income tax expense (benefit)		11,627		11,322			3,261		(6,015	)		20,195
Net income (loss)	$	41,547	$	28,097		$	29,014	$	(14,825	)	$	83,833

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	Six Months Ended June 30, 2008
	U.S. Mortgage Insurance Operations			International Operations			Financial Guaranty			Corporate and Other			Consolidated Total
	(Dollars in thousands)
Revenues
Premiums earned	$	411,459		$	109,269		$	1,292		$	23		$	522,043
Net gain from credit default swaps		—			10,350			—			—			10,350
Net investment income		57,255			54,635			4,239			3,237			119,366
Net realized investment gains (losses)		28,651			7,298			(4,636	)		(14	)		31,299
Change in fair value of certain debt instruments		—			—			—			45,665			45,665
Impairment of unconsolidated subsidiary		—			—			(87,981	)		—			(87,981	)
Other (loss) income		(167	)		(641	)		—			6,562			5,754
Total revenues		497,198			180,911			(87,086	)		55,473			646,496
Losses and expenses
Losses and LAE		1,089,509			65,523			29,766			—			1,184,798
Amortization of deferred policy acquisition costs		8,070			9,946			3,911			—			21,927
Other underwriting and operating expenses		46,498			34,391			3,050			39,428			123,367
Interest expense (income)		61			(77	)		1,462			16,752			18,198
Total losses and expenses		1,144,138			109,783			38,189			56,180			1,348,290
(Loss) income before equity in earnings (losses) from unconsolidated subsidiaries		(646,940	)		71,128			(125,275	)		(707	)		(701,794	)
Equity in earnings (losses) from unconsolidated subsidiaries		5,866			—			(60,557	)		(242	)		(54,933	)
(Loss) income before income taxes		(641,074	)		71,128			(185,832	)		(949	)		(756,727	)
Income tax (benefit) expense		(242,738	)		22,249			(15,488	)		(500	)		(236,477	)
Net (loss) income	$	(398,336	)	$	48,879		$	(170,344	)	$	(449	)	$	(520,250	)

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	Six Months Ended June 30, 2007
	U.S. Mortgage Insurance Operations		International Operations			Financial Guaranty		Corporate and Other			Consolidated Total
	(Dollars in thousands)
Revenues
Premiums earned	$	389,144	$	88,766		$	759	$	29		$	478,698
Net gain from credit default swaps		—		3,407			—		—			3,407
Net investment income		54,288		39,745			4,635		5,090			103,758
Net realized investment gains (losses)		3,248		90			—		(1,346	)		1,992
Other income (loss)		4		(225	)		—		6,475			6,254
Total revenues		446,684		131,783			5,394		10,248			594,109
Losses and expenses
Losses and LAE		227,168		28,312			—		—			255,480
Amortization of deferred policy acquisition costs		25,192		7,892			371		—			33,455
Other underwriting and operating expenses		54,420		23,230			886		43,938			122,474
Interest expense		39		6			1,463		15,149			16,657
Total losses and expenses		306,819		59,440			2,720		59,087			428,066
Income (loss) before equity in earnings from unconsolidated subsidiaries		139,865		72,343			2,674		(48,839	)		166,043
Equity in earnings from unconsolidated subsidiaries		9,478		—			62,545		234			72,257
Income (loss) before income taxes		149,343		72,343			65,219		(48,605	)		238,300
Income tax expense (benefit)		38,920		21,120			6,341		(13,947	)		52,434
Net income (loss)	$	110,423	$	51,223		$	58,878	$	(34,658	)	$	185,866

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	June 30, 2008
	U.S. Mortgage Insurance Operations		International Operations		Financial Guaranty		Corporate and Other			Consolidated Total
	(Dollars in thousands)
Assets
Cash and investments, at fair value	$	2,322,306	$	1,866,537	$	166,980	$	277,146		$	4,632,969
Investments in unconsolidated subsidiaries		135,580		—		—		15,646			151,226
Reinsurance recoverable		313,549		1,066		—		—			314,615
Deferred policy acquisition costs		22,532		47,437		—		—			69,969
Property, equipment and software, net of accumulated depreciation and amortization		70,330		6,906		162		78,042			155,440
Other assets		264,577		70,678		67,520		(5,837	)		396,938
Total assets	$	3,128,874	$	1,992,624	$	234,662	$	364,997		$	5,721,157
Liabilities
Reserve for losses and LAE	$	2,132,632	$	149,501	$	7,241	$	—		$	2,289,374
Unearned premiums		96,739		533,906		820		18			631,483
Debt		—		—		50,000		554,694			604,694
Other liabilities (assets)		115,973		75,273		2,897		(7,122	)		187,021
Total liabilities		2,345,344		758,680		60,958		547,590			3,712,572
Shareholders’ equity (deficit)		783,530		1,233,944		173,704		(182,593	)		2,008,585
Total liabilities and shareholders’ equity	$	3,128,874	$	1,992,624	$	234,662	$	364,997		$	5,721,157
	December 31, 2007
	U.S. Mortgage Insurance Operations		International Operations		Financial Guaranty		Corporate and Other			Consolidated Total
	(Dollars in thousands)
Assets
Cash and investments, at fair value	$	2,155,173	$	1,693,230	$	201,632	$	107,028		$	4,157,063
Investments in unconsolidated subsidiaries		131,225		—		163,661		14,914			309,800
Reinsurance recoverable		35,930		987		—		—			36,917
Deferred policy acquisition costs		10,474		45,327		3,910		—			59,711
Property, equipment and software, net of accumulated depreciation and amortization		75,884		6,549		187		79,142			161,762
Other assets		188,018		54,594		52,918		49,657			345,187
Total assets	$	2,596,704	$	1,800,687	$	422,308	$	250,741		$	5,070,440
Liabilities
Reserve for losses and LAE	$	1,133,080	$	106,869	$	2,650	$	—		$	1,242,599
Unearned premiums		107,200		497,309		6,709		29			611,247
Debt		—		—		50,000		446,593			496,593
Other liabilities (assets)		129,246		75,416		2,892		(515	)		207,039
Total liabilities		1,369,526		679,594		62,251		446,107			2,557,478
Shareholders’ equity (deficit)		1,227,178		1,121,093		360,057		(195,366	)		2,512,962
Total liabilities and shareholders’ equity	$	2,596,704	$	1,800,687	$	422,308	$	250,741		$	5,070,440

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NOTE 17. SUBSEQUENT EVENTS

The Company will be closing its operations in Canada, PMI Canada, and repatriating its excess capital to PMI Mortgage Insurance Co., its parent. In order to repatriate excess capital, we must facilitate the removal of PMI Canada’s risk in force and obtain certain regulatory approvals. The Company expects to repatriate approximately $60 million in excess capital in 2008 to PMI. We estimate that the costs associated with exiting Canada will be between $10 million and $13 million, pre-tax.

PMI Guaranty Co. received all regulatory approvals and entered into an agreement to transfer its entire FGIC-related reinsurance portfolio to a third party. In early August of 2008, PMI Guaranty paid approximately $144 million of its excess capital to The PMI Group. The PMI Group expects to reinvest at least 80% of the capital into U.S. Mortgage Insurance Operations before the end of the third quarter of 2008.

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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. Forward-looking statements in this report include discussions of future potential trends relating to losses, claims paid, loss reserves, persistency, new insurance written, the make-up of our various insurance portfolios, capital initiatives, and captives. 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 “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007 and in Part II, Item 1A herein. 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. 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 Six Months Ended June 30, 2008

For the quarter and six months ended June 30, 2008, we recorded consolidated net losses of $246.3 million and $520.3 million, respectively, compared to consolidated net income of $83.8 million and $185.9 million for the corresponding periods in 2007. Losses in our U.S. Mortgage Insurance Operations and Financial Guaranty segments were the primary drivers of our net consolidated losses. U.S. Mortgage Insurance Operations’ net losses for the second quarter and first half of 2008 were primarily driven by increases in losses and loss adjustment expenses (“LAE”) from the corresponding periods in 2007. Our Financial Guaranty segment’s net losses for the second quarter and first half of 2008 were primarily due to losses associated with a novation agreement executed by PMI Guaranty and equity in losses from RAM Re in the second quarter, and the impairment of our investment in FGIC in the first quarter of 2008. Our financial results for the second quarter and first half of 2008 were positively impacted by net income in our International Operations segment and the change in fair value with regard to certain of our senior debt instruments in our Corporate and Other segment.

Overview of Our Business

We provide credit enhancement products that expand homeownership and strengthen communities by delivering innovative solutions to financial markets worldwide. 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. The results of 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”). U.S. Mortgage Insurance Operations recorded net losses of $225.9 million and $398.3 million for the second quarter and first half of 2008, respectively, compared to net income of $41.5 million and $110.4 million for the corresponding periods in 2007.

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• International Operations. We offer mortgage insurance and other credit enhancement products in Australia, New Zealand, Europe, and Asia. Net income from our International Operations segment was $31.1 million and $48.9 million for the second quarter and first half of 2008, respectively, compared to $28.1 million and $51.2 million for the corresponding periods in 2007.

• Financial Guaranty. Our Financial Guaranty segment includes our wholly-owned surety company, PMI Guaranty Co., our investment in RAM Holdings Ltd., whose wholly-owned subsidiary, RAM Reinsurance Company, Ltd., or RAM Re, provides financial guaranty reinsurance, and our investment in FGIC Corporation, whose wholly-owned subsidiary, Financial Guaranty Insurance Company (collectively, “FGIC”), is a financial guarantor. PMI Guaranty received all regulatory approvals and entered into an agreement to transfer its entire FGIC-related reinsurance portfolio to a third party. In early August of 2008, PMI Guaranty paid approximately $144 million of its excess capital to The PMI Group. The PMI Group expects to reinvest at least 80% of the capital into U.S. Mortgage Insurance Operations before the end of the third quarter of 2008. As of June 30, 2008, the carrying values of our investments in FGIC and RAM Re were zero due to other-than-temporary impairment in our FGIC investment and equity in losses in RAM Re. Our Financial Guaranty segment generated net losses of $46.1 million and $170.4 million for the second quarter and first half of 2008, respectively, compared to net income of $29.0 million and $58.9 million for the corresponding periods in 2007.

• Corporate and Other. Our Corporate and Other segment consists of corporate debt and expenses 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 $5.4 million and $0.5 million for the second quarter and first half of 2008, respectively, compared to $14.8 million and $34.7 million for the corresponding periods in 2007.

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. The significant weakening of the U.S. residential mortgage, housing, credit, and capital markets continues to negatively affect our U.S. Mortgage Insurance Operations segment and will continue to do so throughout the remainder of 2008. PMI’s losses and LAE were $552.5 million and $1,089.5 million for the second quarter and first half of 2008, respectively, compared to $134.4 million and $227.2 million for the corresponding periods in 2007. We increased PMI’s net loss reserves in the second quarter and first half of 2008 by $353.7 million and $721.9 million, respectively, as a result of increases 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 result in a decrease in the percentage of the default inventory that is returning to current status. The increases in PMI’s average claim size have been driven by, among other things, higher loan

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sizes, and declining home prices which limit PMI’s loss mitigation opportunities. These factors also led to an increase in claims paid including LAE in the second quarter and first half of 2008 to $198.8 million and $367.6 million, respectively, compared to $75.7 million and $148.5 million in the corresponding periods in 2007. We expect claim rates and average claim sizes to continue to increase in the second half of 2008. Future increases in claim rates and average claim sizes beyond our current expectations will negatively impact losses and LAE. Changes in economic conditions, including mortgage interest rates, job creation, unemployment rates and home prices could significantly impact our reserve estimates, and therefore, PMI’s losses and LAE.

• Defaults. PMI’s primary default inventory increased to 80,895 as of June 30, 2008 from 63,197 as of December 31, 2007 and 42,349 as of June 30, 2007. PMI’s primary default rate increased to 10.3% as of June 30, 2008 from 7.9% as of December 31, 2007 and 5.6% as of June 30, 2007. We expect PMI’s primary default inventory and default rate to continue to increase in the second half of 2008. The increases in PMI’s primary default inventory and default rate in the first half of 2008 were driven by a number of factors including:

Declining home prices - Declining home prices have made it significantly more difficult for certain borrowers to refinance their mortgages or sell their homes, and are negatively affecting PMI’s default inventory and default rate.

Decline in cure rate - The decline in the percentage of defaults that cure has also negatively affected PMI’s default inventory and default rate. The decline in the percentage of defaults that cure has resulted from, among other things, a slowdown in the time to resolution of defaults (either through cure or claim payment), some of which is attributable to significant backlogs in workout activity by loan servicers attempting to resolve delinquencies and prevent foreclosures.

Above-97s - PMI has experienced higher than expected levels of delinquent Above-97s, mortgages with loan-to-value ratios (“LTVs”) exceeding 97%, in its flow and structured channels. As of June 30, 2008, risk in force from Above-97s in all book years represented 24.0% of PMI’s primary risk in force. The default rate for Above-97s in PMI’s primary portfolio as of June 30, 2008 was 12.4% compared to 9.1% as of December 31, 2007 and 6.0% as of June 30, 2007. PMI’s 2007 book, which is still in its early stage of loss development, has been particularly affected by high levels of delinquent Above-97s. At June 30, 2008, of the 24.0% of PMI’s primary risk in force from Above-97s, approximately half was from our 2007 book year. We no longer insure Above-97s except under commitments issued prior to March 1, 2008.

Alt-A loans - We define Alt-A loans as loans where the borrower’s FICO score is 620 or higher and the borrower requests and is given the option of providing reduced documentation verifying the borrower’s income, assets, deposit information, or employment. Risk in force from Alt-A loans represented 21.9% of PMI’s primary risk in force as of June 30, 2008 compared to 22.8% as of December 31, 2007 and 23.0% as of June 30, 2007. The default rate for Alt-A loans was 21.7% as of June 30, 2008 compared to 13.9% as of December 31, 2007 and 7.3% as of June 30, 2007. Throughout 2007, in our bulk channel,

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we tightened our underwriting guidelines related to Alt-A loans. For the flow channel, we tightened our Alt-A underwriting guidelines effective January 1, 2008 and subsequently eliminated all Alt-A loan eligibility effective June 1, 2008. However, due primarily to commitments issued in 2007, approximately 11% of new insurance written in 2008 was Alt-A. We expect the percentage of Alt-A loans in our portfolio to continue to decline. In addition to Above-97s and Alt-A, PMI insures loans with other higher risk characteristics and such loans may possess one or more of such characteristics.

Geographic factors - Declining home prices, particularly in California and Florida, and weak economic conditions in California, as well as in Michigan, Indiana, Ohio, and Illinois (the “Auto States”), have negatively affected the development of PMI’s portfolio. PMI’s default rates in California and Florida increased above PMI’s average default rate as of June 30, 2008. PMI’s default rates in California and Florida were below PMI’s average default rate, as of June 30, 2007. The default rate from California as of June 30, 2008 was 18.0% compared to 10.9% as of December 31, 2007 and 5.3% as of June 30, 2007. The default rate from Florida as of June 30, 2008 was 18.2% compared to 10.6% as of December 31, 2007 and 5.1% as of June 30, 2007. As of June 30, 2008, risk in force from California and Florida insured loans represented 8.4% and 10.8% of PMI’s primary risk in force, respectively. The default rate of the Auto States as of June 30, 2008 was 12.1% compared to 10.6% as of December 31, 2007 and 8.3% as of June 30, 2007. As of June 30, 2008, risk in force from the Auto States represented 13.4% of PMI’s primary risk in force. Effective March 1, 2008, PMI implemented a Distressed Market Policy. For those areas (principally metropolitan statistical areas (MSAs)) that are designated as distressed, PMI caps the maximum insured loan to value ratio generally at 90% (certain distressed areas may be eligible up to 95% LTV) and prescribes additional limiting criteria for certain property types and loan purposes. PMI’s distressed markets list is reviewed and updated on a quarterly basis or as needed depending on our on-going assessment of the market.

Portfolio Seasoning - We generally expect the majority of default and claims activity on insured loans in PMI’s current portfolio to occur in the second through fourth years after loan origination. We are currently experiencing accelerated delinquency and loss development consistent with falling home prices in many MSAs, especially with loans originated in 2007, which represent approximately 33% of PMI’s primary risk in force at June 30, 2008.

• Rating Agency Actions. On April 8, 2008, Standard & Poor’s lowered its insurer financial strength ratings on PMI to “A+” from “AA”. On June 5, 2008, Fitch lowered its insurer financial strength ratings on PMI to “A+” from “AA”, and its long-term issuer rating of The PMI Group to “BBB+” from “A”. On July 9, 2008, Moody’s lowered its insurer financial strength rating on PMI to “A3” from “Aa2” and The PMI Group’s senior debt rating to “Baa3” from “A1”. As a result of Standard & Poor’s downgrade of PMI’s rating, Fannie Mae and Freddie Mac (collectively, the “GSEs”) each required us to submit a written remediation plan outlining, among other things, the steps we are taking or plan to take to bolster PMI’s financial strength and ultimately restore PMI’s financial

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strength ratings to the “AA” or equivalent category. We have submitted remediation plans to the GSEs and have discussed the plans with them. Freddie Mac has stated that it will continue to treat PMI as a Type I mortgage insurer but that its forbearance from enforcing Type II insurer requirements is wholly discretionary and subject to change and is dependent upon its evaluation of monthly updates regarding PMI’s progress in implementing its remediation plan. Fannie Mae has reviewed our remediation plan and continues to consider PMI an eligible mortgage insurer. (See Part II, Item 1A. Risk Factors – We have been negatively impacted by recent downgrades of the insurer financial strength ratings of some of our wholly-owned insurance subsidiaries. Additional adverse rating agency actions with respect to our insurance subsidiaries could further harm our financial condition and our business.)

• Credit and Portfolio Characteristics. PMI’s primary risk in force as of June 30, 2008 consisted of slightly lower percentages of Above-97s, Alt-A, interest only, and less-than-A quality loans (loans with FICO scores lower than 620) compared to December 31, 2007. Primarily as a result of changes in PMI’s pricing and underwriting guidelines in 2007 and 2008, the percentages of PMI’s NIW comprised of Above-97s, Alt-A, interest only, and less-than A quality loans in the second quarter and first half of 2008 significantly decreased compared to the fourth quarter of 2007. See U.S. Mortgage Insurance Operations – Credit and portfolio characteristics, below. As a result of these pricing and underwriting guideline changes, we expect the percentage of PMI’s risk in force comprised of these types of loans to continue to decline in the second half of 2008. However, PMI has issued commitments to insure such loans prior to the effective date of our underwriting guideline changes, and a portion of these commitments will convert to NIW after the effective date of the guideline changes.

• New Insurance Written (NIW). PMI’s primary NIW decreased by 60.8% in the second quarter and by 52.7% in the first half of 2008 compared to the corresponding periods in 2007. These decreases were due to changes to PMI’s pricing and underwriting guidelines that have decreased the types of loans that PMI will insure and, to a lesser extent, the continuing slowdown in the mortgage origination and non-agency mortgage capital markets and increased competition from the Federal Housing Administration’s mortgage insurance programs. We expect PMI’s NIW generated through both its flow and structured finance channels will be lower in 2008 than in 2007.

• 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 79.6% as of June 30, 2008, 75.5% as of December 31, 2007 and 71.7% as of June 30, 2007. The increase in PMI’s persistency rate reflects home price declines and lower levels of residential mortgage refinance activity. If these trends continue, we expect that policy cancellation rates will continue to slow and PMI’s persistency rate will continue to improve.

• 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 June 30, 2008, 53.0% of PMI’s primary insurance in force was subject to captive reinsurance agreements compared to 50.3% as of June 30, 2007. As of June 30, 2008, we recorded

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$308.8 million in reinsurance recoverables from captive arrangements related to PMI’s gross loss reserves. Due to the delay between establishing a reserve and the payment of claims, we have only received $0.3 million and $0.8 million in claim payments from captive trusts in the second quarter and first half of 2008, respectively. As of June 30, 2008, assets in captive trust accounts held for the benefit of PMI totaled approximately $787.8 million. We expect that claim payments from captive trusts assets will increase in 2008 and substantially increase in 2009. For business written on or after June 1, 2008, the GSEs prohibit mortgage insurers from ceding gross risk or gross premiums greater than 25% to captive reinsurers. We amended all applicable captive contracts to comply with the GSEs’ requirement.

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

• PMI Australia. As a result of the recent downgrades of PMI Mortgage Insurance Co., PMI Australia’s parent company, PMI Australia has been downgraded by and received insurer financial strength ratings of “AA-”, “AA-” and “Aa3” from Standard & Poor’s, Fitch and Moody’s, respectively. PMI Australia’s ability to attract new business and to compete is highly dependent on its perceived value and strength as a counterparty as reflected in part by its insurer financial strength ratings. Accordingly, the downgrades of PMI Australia, and future adverse rating agency actions if any, will likely negatively impact PMI Australia. PMI Australia had net income of $24.0 million and $54.5 million in the second quarter and first half of 2008, respectively, compared to $24.4 million and $42.5 million in the corresponding periods in 2007. The decrease in net income in the second quarter of 2008 compared to the second quarter of 2007 was primarily due to higher losses and LAE of $22.3 million, partially offset by higher premiums earned. The increase in net income in the first half of 2008 compared to the corresponding period in 2007 was primarily due to higher premiums earned and higher net investment income in 2008 compared to the corresponding period in 2007, partially offset by higher losses and LAE.

• PMI Europe. We are reconfiguring PMI Europe to conserve and enhance capital and reduce expenses while maintaining a presence in Europe. We will continue to service existing customers out of our Dublin, Ireland office. As a result of the recent downgrades of PMI Mortgage Insurance Co., PMI Europe’s parent company, PMI Europe has been downgraded by and has received insurer financial strength ratings of “A+”, “A+” and “A3” from Standard & Poor’s, Fitch and Moody’s, respectively. As a result of the downgrades, certain derivative counterparties may require PMI Europe to post collateral or terminate certain contracts. (See also Part II, Item 1A. Risk Factors – We have been negatively impacted by recent downgrades of the insurer financial strength ratings of some of our wholly-owned insurance subsidiaries. Additional adverse rating agency actions with respect to our insurance subsidiaries could further harm our financial condition and our business.). PMI Europe had net income of $5.8 million in the second quarter of 2008 and a net loss of $8.1 million for the first half of 2008 compared to net income of $1.7 million and $4.6 million in the corresponding periods in 2007. The increase in net income in the second quarter of 2008 compared to the second quarter of 2007 was primarily due to changes in the fair value of PMI Europe’s credit default swap (“CDS”) derivative contracts in the second quarter of 2008 resulting from the significant widening of The PMI Group’s CDS spreads during the period. This widening of spreads reduced the value of PMI Europe’s credit derivative liabilities related to nonperformance risk. The tightening of European residential mortgage-backed securities (“RMBS”) credit spreads during the period and increased cash flows from new contracts concluded in the fourth quarter of 2007 also impacted the fair value of PMI Europe’s CDS. As a result of these factors, PMI Europe recorded a $9.5 million mark-to-market gain in the second quarter of 2008 related to the credit derivative

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liabilities. The loss in the first half of 2008 was primarily driven by an increase in loss reserves of $19.5 million in the first half of 2008 due primarily to the deteriorating performance of certain U.S. exposures on which PMI Europe provided reinsurance coverage in 2005 and increased defaults in the Italian primary flow business.

• PMI Asia. PMI Asia’s claim payment obligations are guaranteed by PMI Europe. As a result of the downgrade of PMI Europe’s insurer financial strength rating, PMI Asia’s largest customer notified us that it would significantly reduce the percentage of its mortgage insurance business that it will cede to PMI Asia. This action will significantly reduce PMI Asia’s gross reinsurance premiums in the future. Additional adverse rating agency actions relating to PMI and PMI Europe could result in further ceding reductions, or a termination of the relationship, by this customer. PMI Asia had net income of $2.5 million and $5.2 million in the second quarter and first half of 2008, respectively, compared to $2.3 million and $4.5 million in the corresponding periods in 2007.

• PMI Canada. On August 5, 2008, we determined to close our operations in Canada, PMI Canada, and repatriate its excess capital to PMI. In order to repatriate excess capital we must facilitate the removal of PMI Canada’s risk in force and obtain certain regulatory approvals. We expect to be able to repatriate to PMI approximately $60 million in 2008. We estimate that the costs associated with exiting Canada will be between $10 million and $13 million, pre-tax.

• Rating Agency and Capital Constraints. As discussed above, the ratings of our international subsidiaries and/or their ability to compete for business, are dependent in part upon the financial strength, performance, and capital support of PMI, The PMI Group or other insurance subsidiaries within The PMI Group. Continued adverse loss development in our U.S. Mortgage Insurance Operations could further weaken the perceived counterparty strength of our international insurance subsidiaries and limit new business opportunities. In addition to rating agency actions, capital constraints at both The PMI Group and PMI, as well as at our international subsidiaries, are limiting certain of our international subsidiaries’ abilities to engage in new business transactions. (See also Part II, Item 1A. Risk Factors – We have been negatively impacted by recent downgrades of the insurer financial strength ratings of some of our wholly-owned insurance subsidiaries. Additional adverse rating agency actions with respect to our insurance subsidiaries could further harm our financial condition and our business.)

• 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 our other functional foreign currencies. The changes in the average foreign currency exchange rates from the second quarter and first half of 2007 compared to the corresponding periods in 2008 positively affected International Operations’ net income by $3.6 million and $5.5 million, respectively. The 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 functional currency.

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

• RAM Re. Equity in losses from RAM Re in the second quarter and first half of 2008 were $24.3 million and $60.6 million, respectively, compared to equity in earnings of $3.4 million and $5.7 million in the corresponding periods in 2007. The equity in losses from RAM Re in the second quarter and first half of 2008 were due primarily to RAM Re’s net unrealized mark-to-market losses of $166.4 million and $315.8 million, respectively, on its credit derivative portfolio as a result of widening credit spreads and increases in loss reserves of $30.5 million and $76.7 million, respectively, primarily related to continuing deterioration in the performance of residential mortgage-backed securities (“RMBS”). As of June 30, 2008, the carrying value of our investment in RAM Re was reduced to zero as a result of equity in loss recorded in the current quarter combined with our impairment charge of $38.5 million in the fourth quarter of 2007. To the extent cumulative equity in earnings/losses is negative, no equity in losses relating to RAM Re will be recorded. Equity in earnings from RAM Re could be recognized in the future to the extent those earnings are deemed recoverable.

• PMI Guaranty. PMI Guaranty had net losses of $21.8 million and $23.1 million for the second quarter and first half of 2008, respectively, compared to net income of $1.4 million and $2.7 million for the corresponding periods in 2007. Effective June 2008, PMI Guaranty, FGIC and Assured Guaranty Re Ltd (“AG Re”) executed an Agreement pursuant to which all of the direct FGIC business currently reinsured by PMI Guaranty was recaptured by FGIC and ceded by FGIC to AG Re. The 2008 net loss was primarily due to total incurred losses of $26.7 million recorded in the second quarter of 2008 primarily related to this Agreement. With respect to two of the exposures ceded to AG Re, PMI Guaranty agreed to reimburse AG Re for any losses it pays, subject to an aggregate limit of $22.9 million. PMI Guaranty has secured its obligation by depositing $22.9 million into a trust account for the benefit of AG Re and, to the extent AG Re’s obligations are less than $22.9 million, the remaining funds will be returned to PMI Guaranty. In conjunction with the Agreement, PMI Guaranty impaired all remaining deferred policy acquisition cost assets in the second quarter as it determined such costs were not recoverable. In early August of 2008, PMI Guaranty paid approximately $144 million of its excess capital to The PMI Group. The PMI Group expects to reinvest at least 80% of the capital into U.S. Mortgage Insurance Operations before the end of the third quarter of 2008.

• FGIC. In connection with the preparation of our consolidated financial statements for the quarter ended March 31, 2008, we determined that our investment in FGIC was other-than-temporarily impaired and reduced the carrying value of our investment in FGIC from $103.6 million at December 31, 2007 to zero. To the extent cumulative equity in earnings/losses is negative, no equity in losses relating to FGIC will be recorded. Equity in earnings from FGIC could be recognized in the future to the extent those earnings are deemed recoverable. We are under no obligation, nor intend, to provide additional capital to FGIC.

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• Valuation Allowance. For the quarter ended June 30, 2008, a tax valuation allowance of approximately $232.1 million was recorded against a $279.5 million deferred tax asset related to the recognition of losses from FGIC and RAM Re in excess of our tax basis. We did not record a full valuation allowance against the deferred tax asset as it is management’s expectation that a portion of the tax benefit will be realized. Additional benefits could be recognized in the future due to changes in management’s expectations regarding realization of tax benefits.

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

• Fair Value Measurement of Financial Instruments. Effective January 1, 2008, we adopted SFAS No. 159. SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement of certain financial assets and liabilities on a contract-by-contract basis. We elected to adopt the fair value option for certain corporate debt. For the second quarter and first half of 2008, our net losses included decreases in fair value (representing increase in revenue) of $17.0 million and $45.7 million, respectively, related to the subsequent measurement of fair value for these debt instruments. The changes in the fair value of liabilities for which the fair value was elected were primarily due to widening of credit spreads and interest rate fluctuations. (See Item I, Note 8. Fair Value Disclosures, for further discussion.)

• 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 $1.5 million and $3.0 million for the second quarter and first half of 2008, respectively, compared to $1.3 million and $3.6 million in the corresponding periods in 2007.

• Share-Based Compensation. During the second quarter and first half of 2008, we incurred pre-tax share-based compensation expense of $2.1 million and $6.5 million, respectively, compared to $3.5 million and $10.6 million in the corresponding periods in 2007. We expect share-based compensation expenses to be lower for the year ended December 31, 2008. The decrease in share-based compensation expense is due to a decrease in the fair value of the share-based compensation granted and fewer options granted in 2008.

• 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 June 30,							Six Months Ended June 30,
	2008			2007		Percentage Change		2008			2007		Percentage Change
	(Dollars in millions, except per share data)							(Dollars in millions, except per share data)
REVENUES:
Premiums earned	$	260.1		$	242.3	7.3	%	$	522.0		$	478.7	9.0	%
Net investment income		61.1			51.1	19.6	%		119.4			103.8	15.0	%
Net realized investment (losses) gains		(19.7	)		0.4	—			(56.7	)		2.0	—
Change in fair value of certain debt instruments		17.0			—	—			45.7			—	—
Other income		12.1			5.9	105.1	%		16.1			9.6	67.7	%
Total revenues		330.6			299.7	10.3	%		646.5			594.1	8.8	%
LOSSES AND EXPENSES:
Losses and loss adjustment expenses		605.0			146.2	—			1,184.8			255.5	—
Amortization of deferred policy acquisition costs		12.0			17.0	(29.4	)%		21.9			33.5	(34.6	)%
Other underwriting and operating expenses		64.5			59.8	7.9	%		123.4			122.5	0.7	%
Interest expense		9.8			8.4	16.7	%		18.2			16.6	9.6	%
Total losses and expenses		691.3			231.4	198.7	%		1,348.3			428.1	—
(Loss) income before equity in (losses) earnings from unconsolidated subsidiaries and income taxes		(360.7	)		68.3	—			(701.8	)		166.0	—
Equity in (losses) earnings from unconsolidated subsidiaries		(21.5	)		35.7	(160.2	)%		(54.9	)		72.3	(175.9	)%
(Loss) income before taxes		(382.2	)		104.0	—			(756.7	)		238.3	—
Income tax (benefit) expense		(135.9	)		20.2	—			(236.4	)		52.4	—
Net (loss) income	$	(246.3	)	$	83.8	—		$	(520.3	)	$	185.9	—
Diluted (loss) earnings per share	$	(3.03	)	$	0.95	—		$	(6.41	)	$	2.11	—

For the quarter and six months ended June 30, 2008, we recorded consolidated net losses of $246.3 million and $520.3 million, respectively, compared to consolidated net income of $83.8 million and $185.9 million for the corresponding periods in 2007. Losses in our U.S. Mortgage Insurance Operations and Financial Guaranty segments were the primary drivers of our net consolidated losses. U.S. Mortgage Insurance Operations’ net losses for the second quarter and first half of 2008 were primarily driven by increases in losses and loss adjustment expenses (“LAE”) from the corresponding periods in 2007. Our Financial Guaranty segment’s net losses for the second quarter and first half of 2008 were primarily due to losses associated with a novation agreement executed by PMI Guaranty and equity in losses from RAM Re in the second quarter, and the impairment of our investment in FGIC in the first quarter of 2008. Our financial results for the second quarter and first half of 2008 were positively impacted by net income in our International Operations segment and the change in fair value with regard to certain of our senior debt instruments in our Corporate and Other segment.

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The increases in premiums earned in the second quarter and first half of 2008 compared to the corresponding periods in 2007 were driven by higher premiums earned in the U.S. and Australia. The increases in premiums earned in the U.S. were primarily due to insurance in force growth and higher average insured loan sizes as of June 30, 2008 compared to June 30, 2007. The increases in the premiums earned in Australia were driven by the higher levels of policy terminations, combined with the continued strengthening of the Australian dollar relative to the U.S. dollar.

The increases in net investment income in the second quarter and first half of 2008 compared to the same periods in 2007 were primarily due to the growth of PMI’s and PMI Australia’s investment portfolios and the strengthening of the Australian dollar relative to the U.S. dollar. The increases in our investment portfolio were partially offset by a decrease in our pre-tax book yield. Our consolidated pre-tax book yield was 5.13% and 5.43% as of June 30, 2008, and 2007, respectively.

The net realized investment loss in the second quarter of 2008 was primarily due to an other-than-temporary impairment of $19.0 million of certain preferred securities in our U.S. investment portfolio. The net realized investment loss in the first half of 2008 was primarily due to the impairment of our investment in FGIC offset by gains on the sale of common stock in PMI’s and PMI Australia’s investment portfolios.

The change in fair value of certain debt instruments in the second quarter and first half of 2008 resulted from our adoption of SFAS No. 159 effective January 1, 2008. The changes in fair value of $17.0 million and $45.7 million in the second quarter and first half of 2008, respectively, were primarily due to changes in interest rates and credit spreads.

The increases in our losses and LAE in the second quarter and first half of 2008 compared to the corresponding periods in 2007 were primarily due to loss reserve increases and higher claims paid in the U.S. and, to a lesser extent, PMI Australia. The increases in U.S. Mortgage Insurance Operations’ losses and LAE in the second quarter and first half of 2008 were due to a $353.7 million and $721.9 million addition to net loss reserves and a $198.8 million and $367.6 million claims paid for the respective periods. These increases reflect the significant weakening of the housing and mortgage markets which drove higher default inventories, claim rates and average claim sizes.

The decreases in amortization of deferred policy acquisition costs in the second quarter and first half of 2008 compared to the corresponding periods in 2007 were primarily due to our $33.6 million impairment in the fourth quarter of 2007 of PMI’s deferred policy acquisition costs associated with PMI’s 2007 book year. As a result of the impairment in the fourth quarter of 2007, current period amortization includes only costs associated with book years prior to 2007 and the first half of 2008. PMI’s deferred policy acquisition cost asset increased to $22.5 million at June 30, 2008 from $10.5 million at December 31, 2007. PMI’s deferred policy acquisition cost asset was $43.9 million as of June 30, 2007.

The increases in other underwriting and operating expenses in the second quarter and first half of 2008 compared to the corresponding periods in 2007 were primarily due to increases in expense in the International Operations segment, partially offset by lower employee compensation expenses in the U.S. Mortgage Insurance Operations.

Our equity in losses from unconsolidated subsidiaries in the second quarter and first half of 2008 were due to RAM Re’s net unrealized mark-to-market losses on its credit derivative

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portfolio and its loss reserve increases primarily related to continuing deterioration in the performance of RMBS. Equity in losses from RAM Re have reduced the carrying value of our investment in RAM Re to zero as of June 30, 2008.

We recorded income tax benefits of $135.9 million and $236.4 million in the second quarter and first half of 2008, respectively, compared to income tax expenses of $20.2 million and $52.4 million in the corresponding periods in 2007. The effective tax rates were 35.6% and 31.2% for the second quarter and first half of 2008, respectively, compared to 19.4% and 22.0% for the corresponding periods in 2007. The changes in our effective tax rates were primarily due to changes in the composition of earnings. Our effective tax rates in the second quarter and first half of 2007 were lower due to equity in earnings from FGIC, which had a lower effective tax rate. As we have recorded no equity in losses from FGIC in the first half of 2008, our effective tax rates are higher in the second quarter and first half of 2008 as compared to the corresponding periods in 2007.

Segment Results

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

	Three Months Ended June 30,								Six Months Ended June 30,
	2008			2007			Percentage Change		2008			2007			Percentage Change
	(Dollars in millions)								(Dollars in millions)
U.S. Mortgage Insurance Operations	$	(225.9	)	$	41.5		—		$	(398.3	)	$	110.4		—
International Operations		31.1			28.1		10.7	%		48.9			51.2		(4.5	)%
Financial Guaranty		(46.1	)		29.0		—			(170.4	)		58.9		—
Corporate and Other		(5.4	)		(14.8	)	(63.5	)%		(0.5	)		(34.7	)	(98.6	)%
Consolidated net (loss) income*	$	(246.3	)	$	83.8		—		$	(520.3	)	$	185.9		—

* May not total due to rounding

U.S. Mortgage Insurance Operations

The results of U.S. Mortgage Insurance Operations include the operating results of PMI. CMG MI is accounted for under the equity method of accounting and its results are recorded as equity in earnings from unconsolidated subsidiaries. U.S. Mortgage Insurance Operations’ results are summarized in the table below.

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	Three Months Ended June 30,							Six Months Ended June 30,
	2008			2007		Percentage Change		2008			2007		Percentage Change
	(Dollars in millions)							(Dollars in millions)
Net premiums written	$	196.1		$	189.2	3.6	%	$	401.1		$	385.1	4.2	%
Premiums earned	$	203.6		$	195.4	4.2	%	$	411.5		$	389.1	5.8	%
Net investment income		29.3			26.0	12.7	%		57.3			54.3	5.5	%
Net realized investment (losses) gains		(12.9	)		0.9	—			28.6			3.2	—
Other loss		(0.1	)		—	—			(0.2	)		—	—
Total revenues		219.9			222.3	(1.1	)%		497.2			446.6	11.3	%
Losses and LAE		552.5			134.4	—			1,089.5			227.2	—
Underwriting and operating expenses		28.0			39.4	(28.9	)%		54.6			79.6	(31.4	)%
Total losses and expenses		580.5			173.8	—			1,144.1			306.8	—
(Loss) income before equity in earnings from unconsolidated subsidiaries and income taxes		(360.6	)		48.5	—			(646.9	)		139.8	—
Equity in earnings from unconsolidated subsidiaries		3.0			4.6	(34.8	)%		5.9			9.5	(37.9	)%
(Loss) income before income taxes		(357.6	)		53.1	—			(641.0	)		149.3	—
Income tax (benefit) expense		(131.7	)		11.6	—			(242.7	)		38.9	—
Net (loss) income	$	(225.9	)	$	41.5	—		$	(398.3	)	$	110.4	—

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 June 30,								Six Months Ended June 30,
	2008			2007			Percentage Change		2008			2007			Percentage Change
	(Dollars in millions)								(Dollars in millions)
Gross premiums written	$	251.7		$	236.4		6.5	%	$	514.6		$	476.8		7.9	%
Ceded and refunded premiums, net of assumed		(55.6	)		(47.2	)	17.8	%		(113.5	)		(91.7	)	23.8	%
Net premiums written	$	196.1		$	189.2		3.6	%	$	401.1		$	385.1		4.2	%
Premiums earned	$	203.6		$	195.4		4.2	%	$	411.5		$	389.1		5.8	%

The increases in gross and net premiums written and premiums earned in the second quarter and first half of 2008 compared to the corresponding periods in 2007 were primarily due to higher persistency and increases in PMI’s average premium rates and insured loan sizes, partially offset by lower NIW. (See Credit and Portfolio Characteristics, below.)

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Lower levels of NIW will negatively impact our premiums written and earned in future periods. Higher persistency could partially offset this trend. (See Primary NIW, below.)

As of June 30, 2008, 53.0% of PMI’s primary insurance in force and 53.1% of its risk in force were subject to captive reinsurance agreements compared to 50.3% and 50.2%, respectively, as of June 30, 2007. For business written on or after June 1, 2008, the GSEs prohibit mortgage insurers from ceding gross risk or gross premiums greater than 25% to captive reinsurers. We amended all applicable captive contracts to comply with the GSEs’ requirement.

Net investment income — Net investment income increased in the second quarter and first half of 2008 primarily due to increased holdings of fixed income securities in PMI’s investment portfolio at June 30, 2008 compared to the corresponding period in 2007, partially offset by a decrease in pre-tax book yield. PMI’s pre-tax book yield was 4.90% at June 30, 2008 compared to 5.26% at June 30, 2007. Fixed income securities in PMI’s portfolio increased to $2.0 billion as of June 30, 2008 from $1.5 billion as of June 30, 2007.

Net realized investment (losses) gains — The net realized investment loss in the second quarter of 2008 was due to an other-than-temporary impairment of $13.2 million of PMI’s preferred securities as a result of declines in the market values of the securities. The increase in net realized investment gains in the first half of 2008 compared to the same period in 2007 was primarily due to gains on the sale of certain equity investments in PMI’s portfolio in the first quarter of 2008.

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 June 30,						Six Months Ended June 30,
	2008		2007		Percentage Change		2008		2007		Percentage Change
	(Dollars in millions, except claim size)						(Dollars in millions, except claim size)
Claims paid including LAE	$	198.8	$	75.7	162.6	%	$	367.6	$	148.5	147.5	%
Change in net loss reserves		353.7		58.7	—			721.9		78.7	—
Losses and LAE	$	552.5	$	134.4	—		$	1,089.5	$	227.2	—
Number of primary claims paid		4,329		2,336	85.3	%		8,051		4,698	71.4	%
Average primary claim size (in thousands)	$	43.9	$	29.0	51.4	%	$	42.8	$	28.2	51.8	%

The increases in claims paid including LAE in the second quarter and first half of 2008 compared to the corresponding periods in 2007 were driven by higher average primary claim sizes and the increase in the number of primary claims paid (or claim rate). The increases in PMI’s average claim size have been driven by higher loan sizes and coverage levels in PMI’s

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portfolio, and declining home prices which limit PMI’s loss mitigation opportunities. Higher claim rates have been driven by, among other things, home price declines and diminished availability of certain loan products, both of which constrain refinancing opportunities, and result in a decrease in the percentage of the default inventory that is returning to current status. Because we expect claim rates and claim sizes to continue to increase, we expect PMI’s claims paid to be significantly higher in 2008 than in 2007. Primary claims paid were $189.9 million and $344.6 million in the second quarter and first half of 2008, respectively, compared to $67.8 million and $132.7 million in the corresponding periods in 2007. Pool insurance claims paid were $4.1 million and $13.3 million in second quarter and first half of 2008, respectively, compared to $4.9 million and $9.7 million in the corresponding periods in 2007. For a discussion of the changes in net loss reserves for the second quarter and first half of 2008 and 2007, see Conditions and Trends Affecting our Business – U.S. Mortgage Insurance Operations – Losses and LAE, above.

As of June 30, 2008, we recorded $308.8 million in reinsurance recoverables from captives related to gross loss reserves. Due to the delay between establishing a reserve and the payment of claims, we have only received $0.3 million and $0.8 million in claim payments from captive trusts in the second quarter and first half of 2008, respectively. As of June 30, 2008, assets in captive trust accounts held for the benefit of PMI totaled approximately $787.8 million.

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 due date.

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

	As of June 30,				Percentage Change/ Variance
	2008		2007
Flow channel
Loans in default	61,100		29,480		107.3%
Policies in force	660,058		626,729		5.3%
Default rate	9.26	%	4.70	%	4.56 p	ps
Structured channel
Loans in default	19,795		12,869		53.8%
Policies in force	121,809		124,106		(0.19)%
Default rate	16.25	%	10.37	%	5.88	pps
Total primary
Loans in default	80,895		42,349		91.0%
Policies in force	781,867		750,835		4.1%
Default rate	10.35	%	5.64	%	4.71	pps

The increases in PMI’s primary default inventory and default rate in the first half of 2008 are discussed in Conditions and Trends Affecting our Business – U.S. Mortgage Insurance Operations – Losses and LAE, above.

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

	As of June 30,				Percentage change/ variance
	2008		2007
Modified pool with deductible
Loans in default	24,457		10,840		125.6	%
Policies in force	221,492		235,751		(6.0	)%
Default rate	11.04	%	4.60	%	6.44	pps
Modified pool without deductible
Loans in default	8,456		5,414		56.2	%
Policies in force	59,320		75,158		(21.1	)%
Default rate	14.25	%	7.20	%	7.05	pps
Total modified pool
Loans in default	32,913		16,254		102.5	%
Policies in force	280,812		310,909		(9.7	)%
Default rate	11.72	%	5.23	%	6.49	pps

The increases in loans in default for modified pool with deductible were due to deterioration in the 2007 book and the continued seasoning of the 2006 book. We generally expect PMI’s modified pool loans in default to increase as the modified pool portfolio seasons. The increases in loans in default 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 have entered their peak period of loss development. However,

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we also 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 June 30, 2008 and 2007 were 37,640 and 20,238, respectively. The default rates for total pool loans as of June 30, 2008 and 2007 were 10.76% and 5.17%, respectively.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2008		2007		Percentage Change		2008		2007		Percentage Change
	(Dollars in millions)						(Dollars in millions)
Amortization of deferred policy acquisition costs	$	3.8	$	12.6	(69.8	)%	$	8.1	$	25.2	(67.9	)%
Other underwriting and operating expenses		24.2		26.8	(9.7	)%		46.5		54.4	(14.5	)%
Total underwriting and operating expenses	$	28.0	$	39.4	(28.9	)%	$	54.6	$	79.6	(31.4	)%
Policy acquisition costs incurred and deferred	$	10.4	$	13.3	(21.8	)%	$	20.1	$	25.6	(21.5	)%

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 we provide contract underwriting services on loans that do not require mortgage insurance, associated 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 second quarter and first half of 2008 compared to the corresponding periods in 2007 was primarily due to our $33.6 million impairment in the fourth quarter of 2007 of PMI’s deferred policy acquisition costs associated with PMI’s 2007 book year. As a result of this impairment, current period amortization includes only costs associated with book years prior to 2007 and the first half of 2008. PMI’s deferred policy acquisition cost asset increased to $ 22.5 million at June 30, 2008 from $10.5 million at December 31, 2007. PMI’s deferred policy acquisition cost asset was $43.9 million as of June 30, 2007.

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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 second quarter and first half of 2008 compared to the corresponding periods in 2007 primarily as a result of lower employee compensation expenses and lower pension costs resulting from an amendment to our retirement plan in the second quarter of 2007.

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 $3.1 million and $6.1 million in the second quarter and first half of 2008, respectively, compared to $3.6 million and $6.1 million in the corresponding periods in 2007.

Equity in earnings from unconsolidated subsidiaries — U.S. Mortgage Insurance Operations’ equity in earnings is derived entirely from the results of operations of CMG MI. Equity in earnings from CMG MI decreased to $3.0 million and $5.9 million in the second quarter and first half of 2008, respectively, compared to $4.6 million and $9.5 million in the corresponding periods in 2007 primarily as a result of higher losses, partially offset by higher premiums earned.

Income taxes — U.S. Mortgage Insurance Operations statutory tax rate is 35%. The tax benefit recorded in the U.S. Mortgage Insurance Operations segment reflects tax benefits attributable to tax exempt interest and dividends and favorable interim period adjustments, resulting in an effective tax rate of 36.8% and 37.9% for the second quarter and first half of 2008, respectively.

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2008		2007		Variance	2008		2007		Variance
Loss ratio	271.3	%	68.8	%	202.5 pps	264.8	%	58.4	%	206.4 pps
Expense ratio	14.3	%	20.8	%	(6.5) pps	13.6	%	20.7	%	(7.1 ) pps
Combined ratio	285.6	%	89.6	%	196.0 pps	278.4	%	79.1	%	199.3 pps

PMI’s loss ratio is the ratio of losses and LAE to premiums earned. The loss ratio increased in the second quarter and first half of 2008 compared to the corresponding periods in 2007 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 in the second quarter and first half of 2008 compared to the corresponding periods in 2007 were primarily due to an increase in net premiums written and decreases in amortization of deferred acquisition costs and employee compensation expenses.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2008		2007		Percentage Change		2008		2007		Percentage Change
	(Dollars in millions)						(Dollars in millions)
Primary NIW:
Flow channel	$	4,364	$	10,268	(57.5	)%	$	10,316	$	17,792	(42.0	)%
Structured finance channel		184		1,337	(86.2	)%		351		4,776	(92.7	)%
Total primary NIW	$	4,548	$	11,605	(60.8	)%	$	10,667	$	22,568	(52.7	)%

The decreases in PMI’s primary NIW in the second quarter and first half of 2008 compared to the corresponding periods in 2007 were due to changes to PMI’s pricing and underwriting guidelines that have decreased the types of loans that PMI will insure, the continuing slowdown in the mortgage origination and non-agency mortgage capital markets and increased competition from the Federal Housing Administration. We expect PMI’s NIW generated through both its flow and structured finance channels to continue to be lower in 2008 than in 2007.

Modified pool insurance —PMI wrote $0 and $4.1 million of modified pool risk in the second quarter and first half of 2008, respectively, compared to $107.1 million and $209.5 million of modified pool risk in the corresponding periods in 2007. This decline was driven by a reduction in demand for this product by our customers. We expect to continue to write less modified pool risk in 2008 than in prior years. Modified pool risk in force was $2.3 billion as of June 30, 2008, $2.9 billion as of December 31, 2007 and $2.8 billion as of June 30, 2007.

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 June 30,						Percentage Change/ Variance
	2008			2007
	(Dollars in millions)
Primary insurance in force	$	123,151		$	111,667		10.3	%
Primary risk in force	$	30,633		$	28,091		9.0	%
Pool risk in force*	$	2,812		$	3,461		(18.8	)%
Policy cancellations—primary (year-to-date)		11,139			13,536		(17.7	)%
Persistency—primary		79.6	%		71.7	%	7.9	pps

* Includes modified pool and other pool risk in force. As of June 30, 2008, we adjusted pool risk in force to appropriately reflect the effect of loan repayments on risk limits.

Primary insurance in force and risk in force as of June 30, 2008 increased from June 30, 2007 primarily as a result of higher persistency. The increase 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 June 30, 2008 and December 31, 2007 in the ten states with the highest risk in force in PMI’s primary portfolio.

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	Percent of Primary Risk in Force as of June 30, 2008		Percent of Primary Risk in Force as of December 31, 2007
Florida	10.8	%	10.8	%
California	8.4	%	8.1	%
Texas	7.2	%	7.2	%
Illinois	5.0	%	5.0	%
Georgia	4.7	%	4.7	%
Ohio	3.8	%	3.8	%
New York	3.7	%	3.6	%
Pennsylvania	3.3	%	3.3	%
Washington	3.1	%	3.1	%
New Jersey	3.0	%	3.0	%

Credit and portfolio characteristics — 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, or employment. In the second quarter and first half of 2008, PMI’s NIW consisted of significantly lower percentages of less-than-A quality and Alt-A loans primarily as a result of changes in PMI’s pricing and underwriting guidelines. 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 June 30,								Six Months Ended June 30,
	2008				2007				2008				2007
	(Dollars in millions)								(Dollars in millions)
Less-than-A quality loan amounts and as a percentage of :
Primary NIW- flow channel	$	29	0.7	%	$	847	8.2	%	$	281	2.7	%	$	1,279	7.2	%
Primary NIW- structured finance channel		10	5.4	%		331	24.8	%		25	7.1	%		868	18.2	%
Total primary NIW	$	39	0.9	%	$	1,178	10.2	%	$	306	2.9	%	$	2,147	9.5	%
Alt-A loan amounts and as a percentage of:
Primary NIW- flow channel	$	362	8.3	%	$	3,495	34.0	%	$	1,172	11.4	%	$	6,715	37.7	%
Primary NIW- structured finance channel		4	2.2	%		250	18.7	%		8	2.3	%		1,316	27.6	%
Total primary NIW	$	366	8.0	%	$	3,745	32.3	%	$	1,180	11.1	%	$	8,031	35.6	%

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

	Three Months Ended June 30,								Six Months Ended June 30,
	2008				2007				2008				2007
	(Dollars in millions)								(Dollars in millions)
ARM amounts and as a percentage of :
Primary NIW- flow channel	$	93	2.1	%	$	552	5.4	%	$	169	1.6	%	$	1,213	6.8	%
Primary NIW- structured finance channel		13	7.1	%		392	29.3	%		31	8.8	%		1,534	32.1	%
Total primary NIW	$	106	2.3	%	$	944	8.1	%	$	200	1.9	%	$	2,747	12.2	%
Above-97 loan amounts and as a percentage of:
Primary NIW- flow channel	$	103	2.4	%	$	3,492	34.0	%	$	970	9.4	%	$	6,142	34.5	%
Primary NIW- structured finance channel		57	31.0	%		580	43.4	%		110	31.3	%		1,825	38.2	%
Total primary NIW	$	160	3.5	%	$	4,072	35.1	%	$	1,080	10.1	%	$	7,967	35.3	%

The decreases shown above in the percentages of PMI’s NIW consisting of ARMs and Above-97s were driven primarily by changes in PMI’s pricing and underwriting guidelines. We no longer insure Above-97s, except under commitments issued prior to March 1, 2008.

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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. In the second quarter and first half of 2008, interest only loans were insured primarily through PMI’s flow channel and such loans were primarily sold to the GSEs. The vast majority of interest only loans insured in the second quarter and first half of 2008 have ten year terms and are subject to additional underwriting criteria to limit the potential for layered risk. 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 as percentages of its flow channel and structured finance channel primary NIW and payment option ARMs as percentages of its flow channel primary NIW:

	Three Months Ended June 30,								Six Months Ended June 30,
	2008				2007				2008				2007
	(Dollars in millions)								(Dollars in millions)
Interest only loan amounts and as a percentage of :
Primary NIW- flow channel	$	279	6.4	%	$	2,569	25.0	%	$	777	7.5	%	$	4,637	26.1	%
Primary NIW- structured finance channel		7	3.8	%		153	11.4	%		9	2.6	%		983	20.6	%
Total primary NIW	$	286	3.8	%	$	2,722	23.5	%	$	786	7.4	%	$	5,620	24.9	%
Payment option ARMs amounts and as a percentage of:
Primary NIW- flow channel	$	19	0.4	%	$	378	3.7	%	$	42	0.4	%	$	789	4.4	%
Total primary NIW	$	19	0.4	%	$	378	3.3	%	$	42	0.4	%	$	789	3.5	%

The following table presents PMI’s less-than-A quality loans, Alt-A loans, ARMs, Above-97s, interest only, and payment option ARMs loans as percentages of primary risk in force:

	June 30, 2008		December 31, 2007		June 30, 2007
As a percentage of primary risk in force:
Less-than-A Quality loans (FICO scores below 620)	7.7	%	8.1	%	7.9	%
Less-than-A Quality loans with FICO scores below 575 *	2.0	%	2.2	%	2.1	%
Alt-A loans	21.9	%	22.8	%	23.0	%
ARMs (excluding 2/28 Hybrid ARMs)	8.8	%	9.5	%	11.2	%
2/28 Hybrid ARMs **	2.8	%	3.3	%	4.8	%
Above-97s (above 97% LTV’s)	24.0	%	24.6	%	22.4	%
Interest Only	13.8	%	14.2	%	13.6	%
Payment Option ARMs	3.7	%	3.8	%	4.2	%

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

** 2/28 Hybrid ARMs are loans whose interest rate is fixed for an initial two year period and floats thereafter.

PMI expects higher default and claim rates on Above-97s, Alt-A, interest only, and less-than-A quality loans. In addition, PMI insures loans that may possess one or more of the characteristics. While we incorporate these assumptions into our underwriting approach, portfolio limits, pricing and loss and claim estimates, there can be no assurance that the premiums earned with respect to such insured loans will be adequate to cover related incurred losses.

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International Operations

International Operations’ results include our Australian subsidiaries, collectively referred to as PMI Australia; our Irish subsidiaries, collectively referred to as PMI Europe; PMI Asia; and PMI Canada.

Reporting of financial and statistical information for International Operations is subject to foreign currency rate fluctuations in translation to U.S. dollar reporting. Our International Operations segment’s net income is summarized as follows:

	Three Months Ended June 30,								Six Months Ended June 30,
	2008			2007			Percentage Change		2008			2007			Percentage Change
	(USD in millions)								(USD in millions)
PMI Australia	$	24.0		$	24.4		(1.6	)%	$	54.5		$	42.5		28.2	%
PMI Europe		5.8			1.7		—			(8.1	)		4.6		—
PMI Asia		2.5			2.3		8.7	%		5.2			4.5		15.6	%
PMI Canada		(1.2	)		(0.3	)	—			(2.7	)		(0.4	)	—
International Operations net income	$	31.1		$	28.1		10.7	%	$	48.9		$	51.2		(4.5	)%

The increase in International Operations’ net income in the second quarter of 2008 compared to the corresponding period in 2007 was primarily due to changes in PMI Europe’s CDS derivative contracts, higher premiums earned and net investment income in PMI Australia, partially offset by higher losses and LAE in Australia. The decrease in net income in the first half of 2008 compared to the corresponding period in 2007 was primarily due to higher losses and LAE in Australia and Europe, partially offset by higher premiums earned, net investment income and net realized investment gains in Australia.

The changes in the average foreign currency exchange rates from the second quarter and first half of 2007 to the corresponding periods in 2008 positively impacted International Operations’ net income by $3.6 million and $5.5 million, respectively, primarily due to the strengthening of the Australian dollar relative to the U.S. dollar. 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.

In 2008, we purchased Australian dollar 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. The options had an aggregate pre-tax cost of $1.1 million. International Operations’ net income for the second quarter and first half of 2008 was reduced by $0.6 million and $1.1 million pre-tax, respectively, related to these put options.

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PMI Australia

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

	Three Months Ended June 30,						Percentage Change/ Variance		Six Months Ended June 30,						Percentage Change/ Variance
	2008			2007					2008			2007
	(USD in millions)								(USD in millions)
Net premiums written	$	41.6		$	59.1		(29.6	)%	$	81.1		$	97.3		(16.6	)%
Premiums earned	$	48.8		$	40.1		21.7	%	$	96.1		$	76.5		25.6	%
Net investment income		23.3			17.3		34.7	%		44.7			33.4		33.8	%
Net realized investment (losses) gains		(1.7	)		—		—			8.0			—		—
Other loss		(0.6	)		(0.6	)	—			(0.7	)		(0.1	)	—
Total revenues		69.8			56.8		22.9	%		148.1			109.8		34.9	%
Losses and LAE		22.3			10.1		120.8	%		43.0			26.3		63.5	%
Other underwriting and operating expenses		13.1			11.9		10.1	%		27.2			22.7		19.8	%
Total losses and expenses		35.4			22.0		60.9	%		70.2			49.0		43.3	%
Income before income taxes		34.4			34.8		(1.1	)%		77.9			60.8		28.1	%
Income taxes		10.4			10.4		—			23.4			18.3		27.9	%
Net income	$	24.0		$	24.4		(1.6	)%	$	54.5		$	42.5		28.2	%
Loss ratio		45.8	%		25.2	%	20.6	pps		44.7	%		34.4	%	10.3	pps
Expense ratio		31.8	%		20.1	%	11.7	pps		33.6	%		23.3	%	10.3	pps

The average USD/AUD currency exchange rate was 0.9443 and 0.9248 in the second quarter and first half of 2008, respectively, compared to 0.8312 and 0.8088 in the corresponding periods in 2007. The change in the average USD/AUD currency exchange rates from the second quarter of 2007 to the second quarter in 2008 and from the first half of 2007 to the first half of 2008 positively impacted PMI Australia’s net income by $2.9 million and $6.9 million, respectively. Net income from PMI Australia in the second quarter and first half of 2008 includes pre-tax foreign currency put option costs of $0.6 million and $1.1 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 decreases in PMI Australia’s premiums written in the second quarter and first half of 2008 compared to the corresponding periods in 2007 were driven by lower levels of RMBS and flow business. The increases in premiums earned in the second quarter and first half of 2008 compared to the corresponding periods in 2007 were driven by the realization of unearned premiums from previous years and to a lesser extent by higher levels of terminations, combined with continued strengthening of the Australian dollar relative to the U.S. dollar.

Net investment income — The increases in net investment income in the second quarter and first half of 2008 compared to the corresponding periods in 2007 were due to positive cash flows from operations, a strengthening Australian dollar relative to the U.S. dollar and a higher book

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yield. PMI Australia’s investment portfolio, including cash and cash equivalents, increased to $1.4 billion as of June 30, 2008 from $1.2 billion as of June 30, 2007. The pre-tax book yield was 6.42% and 6.15% at June 30, 2008 and 2007, respectively. The increase in book yield in 2008 was primarily due to increases in market interest rates.

Net realized investment gains (losses) — Net realized investment losses in the second quarter of 2008 were primarily driven by an other-than-temporary impairment of certain investments of $1.4 million. Net realized investment gains in the first half of 2008 were due primarily to gains from the sale of equity securities. In the first quarter of 2008, PMI Australia sold principally all of its equity portfolio. The proceeds from the sale were used to purchase fixed income securities.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2008		2007		Percentage Change		2008		2007		Percentage Change
	(USD in thousands, except average claim size)						(USD in thousands, except average claim size)
Claims paid including LAE	$	13,390	$	7,317	83.0	%	$	27,808	$	15,706	77.1	%
Change in net loss reserves		8,939		2,827	—			15,155		10,595	43.0	%
Losses and LAE	$	22,329	$	10,144	120.1	%	$	42,963	$	26,301	63.4	%
Average claim size	$	73.2	$	56.3	30.0	%	$	72.4	$	61.4	17.9	%
Number of claims paid		183		130	40.8	%		384		256	50.0	%

The increases in claims paid including LAE in the second quarter and first half of 2008 compared to the corresponding periods in 2007 were attributable to increased delinquent loans resulting in higher claim payments driven by higher interest rates, moderating or declining home prices, and strengthening of the Australian dollar relative to the U.S. dollar. We increased PMI Australia’s net loss reserves in the second quarter and first half of 2008 by $8.9 million and $15.2 million, respectively, primarily due to an increase in PMI Australia’s default inventory, higher claim rates and higher average claim sizes.

Default data is presented in the following table:

	As of June 30,
	2008		2007		Percentage Change/Variance
Policies in force	995,065		1,103,205		(9.8	)%
Loans in default	3,573		3,156		13.2	%
Total default rate	0.36	%	0.29	%	0.07	pps
Flow default rate	0.44	%	0.41	%	0.03	pps
RMBS (residential mortgage-backed securities) default rate	0.22	%	0.10	%	0.12	pps

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Underwriting and operating expenses — Underwriting and operating expenses increased in the second quarter and first half of 2008 compared to the corresponding period in 2007 primarily due to the stronger Australian dollar relative to the U.S. dollar.

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 June 30,						Six Months Ended June 30,
	2008		2007		Percentage Change		2008		2007		Percentage Change
	(USD in millions)						(USD in millions)
Flow insurance written	$	4,493	$	5,959	(24.6	)%	$	9,147	$	10,259	(10.8	)%
RMBS insurance written		982		6,151	(84.0	)%		1,390		9,435	(85.3	)%
Total NIW	$	5,475	$	12,110	(54.8	)%	$	10,537	$	19,694	(46.5	)%

	As of June 30,
	2008		2007
	(USD in millions)
Insurance in force	$	184,846	$	172,861
Risk in force	$	169,800	$	158,235

Total NIW for the second quarter and first half of 2008 decreased compared to the corresponding periods in 2007 primarily due to a significant reduction in RMBS and flow transactions due to uncertainty in credit markets and increases in interest rates. The decrease was partially offset by a strengthening of the Australian dollar relative to the U.S. dollar. (See also Part II, Item 1A. Risk Factors – We have been negatively impacted by recent downgrades of the insurer financial strength ratings of some of our wholly-owned insurance subsidiaries. Additional adverse rating agency actions with respect to our insurance subsidiaries could further harm our financial condition and our business.) The increases in insurance in force and risk in force as of June 30, 2008 compared to June 30, 2007 were driven primarily by a stronger Australian dollar against the U.S. dollar.

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PMI Europe

The following table sets forth the financial results of PMI Europe for the periods set forth below:

	Three Months Ended June 30,							Six Months Ended June 30,
	2008			2007		Percentage change		2008			2007			Percentage change
	(USD in millions)							(USD in millions)
Net premiums written	$	6.1		$	3.5	74.3	%	$	11.5		$	6.9		66.7	%
Premiums earned	$	3.7		$	3.5	5.7	%	$	6.8		$	7.1		(4.2	)%
Net gains from credit default swaps		9.5			1.6	—			10.3			3.4		—
Net investment income		3.0			2.2	36.4	%		7.0			4.6		52.2	%
Net realized (losses) gains		(0.5	)		—	—			(0.7	)		0.1		—
Other loss		—			—	—			—			(0.1	)	—
Total revenues		15.7			7.3	115.1	%		23.4			15.1		55.0	%
														%
Losses and LAE		3.6			1.6	125.0	%		22.6			2.0		—
Other underwriting and operating expenses		6.0			3.4	76.5	%		10.9			6.4		70.3	%
Total losses and expenses		9.6			5.0	92.0	%		33.5			8.4		—
Income (loss) before taxes		6.1			2.3	165.2	%		(10.1	)		6.7		—
Income tax expense (benefit)		0.3			0.6	(50.0	)%		(2.0	)		2.1		(195.2	)%
Net income (loss)	$	5.8		$	1.7	—		$	(8.1	)	$	4.6		—

The average USD/Euro currency exchange rate was 1.5632 and 1.5312 in the second quarter and first half of 2008, respectively, compared to 1.3483 and 1.3297 in the corresponding periods in 2007. The changes in the average USD/Euro currency exchange rates positively impacted PMI Europe’s financial results by $0.8 million in the second quarter of 2008 and negatively impacted the financial results by $1.0 million in the first half of 2008.

Premiums written and earned — Net premiums written increased in the second quarter and first half of 2008 compared to the corresponding periods in 2007 primarily due to growth in new reinsurance written in the U.K. The decrease in premiums earned in the first half of 2008 compared to the corresponding period in 2007 was due primarily to decreases in premiums earned associated with the Royal & SunAlliance (“R&SA”) insurance portfolio acquired in 2003. We recognize premiums associated with the acquired portfolio in accordance with established earnings patterns that are based upon management’s estimation of the expiration of the portfolio’s risk. As the portfolio continues to age, we expect premiums earned and risk in force associated with the portfolio to continue to decline. The decrease in earned premiums was partially offset by increased earnings from new business writings and the strengthening of the Euro against the U.S. dollar. The increase in premiums earned in the second quarter of 2008 compared to the same period in 2007 was due to the strengthening of the Euro against the U.S. dollar.

Net gains from credit default swaps — PMI Europe is currently a party to fourteen credit default swap contracts that are classified as derivatives. Net gains from its credit default swaps were primarily a result of changes in the fair value of the derivative contracts in the second quarter of 2008 due to the significant widening of TPG’s CDS spreads during the period which

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reduced the value of PMI Europe’s credit derivative liabilities related to nonperformance risk and the tightening of European residential mortgage-backed securities (“RMBS”) credit spreads during the period. Gains also resulted from increased cash flows from new contracts concluded in the fourth quarter of 2007. As a result of these factors, we recorded mark-to-market gains of $9.5 million and $10.3 million for the second quarter and first half of 2008, respectively, related to the credit derivative liabilities.

Net investment income — PMI Europe’s net investment income consists primarily of interest income from its investment portfolio including cash deposits, and gains and losses on foreign currency re-measurement. The pre-tax book yield was 4.38% and 4.18% for June 30, 2008 and 2007, respectively. The increase in net investment income in the second quarter and first half of 2008 compared to the corresponding periods in 2007 was primarily due to an increase in book yield, foreign currency re-measurement and an increase in PMI Europe’s investment portfolio, including cash and cash equivalents.

Losses and LAE — PMI Europe’s losses and LAE includes claim payments and changes in reserves. Claim payments (excluding payments for CDS accounted as derivatives) totaled $1.7 million and $3.1 million in the second quarter and first half of 2008, respectively, compared to $1.4 million and $2.3 million in the corresponding periods in 2007. We increased PMI Europe’s loss reserves by $1.9 million in the second quarter of 2008 due to increased delinquencies from European mortgage insurance contracts. PMI Europe’s loss reserves increased by $19.5 million in the first half of 2008 primarily due to the deteriorating performance of certain U.S. exposures on which PMI Europe provided reinsurance coverage in 2005 and increased defaults on the Italian primary flow business.

Underwriting and operating expenses — The increases in underwriting and operating expenses in the second quarter and first half of 2008 compared to the corresponding periods in 2007 were primarily due to expenses related to increased personnel in Europe principally in 2008 and also due to the strengthening of the Euro relative to the U.S. dollar.

Risk in force — PMI Europe’s risk in force as of June 30, 2008 decreased from $9.4 billion at December 31, 2007 to $9.2 billion. The decrease was primarily due to a number of credit default swap contracts being called as scheduled.

Income taxes — The effective tax rate for PMI Europe for the six months ended June 30, 2008 is primarily driven by the Irish statutory tax rate of 12.5%. The tax rate for 2007 reflected certain U.S. tax expense derived from PMI Europe earnings that were allocated to the international business segment.

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PMI Asia

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

	Three Months Ended June 30,							Six Months Ended June 30,
	2008			2007		Percentage Change		2008			2007		Percentage Change
	(USD in millions)							(USD in millions)
Net reinsurance premiums written	$	3.4		$	2.8	21.4	%	$	6.5		$	4.5	44.4	%
Reinsurance premiums earned	$	3.0		$	2.7	11.1	%	$	6.2		$	5.2	19.2	%
Net investment income		0.7			0.6	16.7	%		1.4			1.2	16.7	%
Total revenues		3.7			3.3	12.1	%		7.6			6.4	18.8	%
Losses and LAE		(0.1	)		—	—			(0.1	)		—	—
Underwriting and operating expenses		0.9			0.5	80.0	%		1.7			0.9	88.9	%
Total losses and expenses		0.8			0.5	60.0	%		1.6			0.9	77.8	%
Income before taxes		2.9			2.8	3.6	%		6.0			5.5	9.1	%
Income tax expense		0.4			0.5	(20.0	)%		0.8			1.0	(20.0	)%
Net income	$	2.5		$	2.3	8.7	%	$	5.2		$	4.5	15.6	%

The average USD/HKD currency exchange rate was 0.1282 and 0.1283 for the second quarter and first half of 2008, respectively, compared to 0.1279 and 0.1280 for the corresponding periods in 2007. Changes in the average USD/HKD currency exchange rates from the second quarter of 2007 to the second quarter and first half of 2008 did not significantly impact PMI Asia’s net income.

Premiums written and earned — The increases in reinsurance premiums written and earned in the second quarter and first half of 2008 compared to the corresponding periods in 2007 were primarily due to higher levels of mortgage origination activity in Hong Kong in 2008, partially offset by the increased retention of risk and premium by PMI Asia’s leading customer due to the recent downgrades of PMI Europe which provides claim payment guarantee for PMI Asia. (See Part II, Item 1A. Risk Factors – We have been negatively impacted by recent downgrades of the insurer financial strength ratings of some of our wholly-owned insurance subsidiaries. Additional adverse rating agency actions with respect to our insurance subsidiaries could further harm our financial condition and our business.)

Income taxes — PMI Asia’s statutory tax rate is 16.5%. The income tax expense in the first half of 2008 was positively affected by tax exempt income from tax exempt bonds purchased in 2007.

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PMI Canada

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

	Three Months Ended June 30,								Six Months Ended June 30,
	2008			2007			Percentage Change		2008			2007			Percentage Change
	(USD in millions)								(USD in millions)
Net premiums written	$	—		$	—		—		$	2.3		$	—		—
Premiums earned	$	0.1		$	—		—		$	0.2		$	—		—
Net investment income and other		0.8			0.5		60.0	%		1.6			0.5		—
Total revenues		0.9			0.5		80.0	%		1.8			0.5		—
Losses and LAE		—			—		—			0.1			—		—
Underwriting and operating expenses		2.1			1.0		110.0	%		4.4			1.1		—
Total losses and expenses		2.1			1.0		110.0	%		4.5			1.1		—
Loss before taxes		(1.2	)		(0.5	)	140.0	%		(2.7	)		(0.6	)	—
Income tax expense		—			(0.2	)	(100.0	)%		—			(0.2	)	(100.0	)%
Net Loss	$	(1.2	)	$	(0.3	)	—		$	(2.7	)	$	(0.4	)	—

The average USD/CAD currency exchange rate was 0.9903 and 0.9929 in the second quarter and first half of 2008 compared to 0.9111 and 0.8822 in the corresponding periods in 2007. The changes in the average USD/CAD currency exchange rates negatively impacted PMI Canada’s financial results by $0.1 million and $0.3 million in the second quarter and first half of 2008, respectively.

We will be closing our operations in Canada, PMI Canada, and repatriating its excess capital to PMI. In order to repatriate excess capital we must facilitate the removal of PMI Canada’s risk in force and obtain certain regulatory approvals. We expect to be able to repatriate approximately $60 million in 2008. We estimate the costs associated with exiting Canada will be between $10 million and $13 million, pre-tax.

Premiums written and earned — The premiums written and earned in the first half of 2008 were due to a bulk primary transaction in January 2008 resulting in premiums written of $2.3 million and NIW of $85.1 million. (See Part II, Item 1A. Risk Factors – We have been negatively impacted by recent downgrades of the insurer financial strength ratings of some of our wholly-owned insurance subsidiaries. Additional adverse rating agency actions with respect to our insurance subsidiaries could further harm our financial condition and our business.)

Underwriting and Operating Expense — Underwriting and operating expense increased to $2.1 million and $4.4 million in the second quarter and first half of 2008, respectively, from $1.0 million and $1.1 million in the corresponding periods in 2007 due to the growth and development in the Canadian operations, primarily related to increases in employee and infrastructure costs associated with the development.

Income Taxes — PMI Canada’s combined federal and provincial statutory tax rate is approximately 33.5%. No tax benefit has been recorded for the first half of 2008. If management determines that net operating losses will more likely than not be utilized, future tax benefit could be recognized.

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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 for the periods ended:

	Three Months Ended June 30,							Six Months Ended June 30,
	2008			2007		Percentage change		2008			2007		Percentage change
	(Dollars in millions)							(Dollars in millions)
Net premiums written	$	0.3		$	1.4	(78.6	)%	$	0.3		$	6.2	(95.2	)%
Premiums earned	$	0.8		$	0.5	60.0	%	$	1.3		$	0.8	62.5	%
Net investment income		2.0			2.3	(13.0	)%		4.2			4.6	(8.7	)%
Net realized losses		(4.6	)		—	—			(4.6	)		—	—
Impairment of unconsolidated subsidiary		—			—	—			(88.0	)		—	—
Total revenues		(1.8	)		2.8	(164.3	)%		(87.1	)		5.4	—
Losses and LAE		26.7			—	—			29.8			—	—
Amortization of deferred policy acquisition costs		3.6			0.3	—			3.9			0.4	—
Other underwriting and operating expenses		1.6			0.4	—			3.0			0.9	—
Interest expense		0.7			0.7	—			1.5			1.4	7.1	%
Total losses and expenses		32.6			1.4	—			38.2			2.7	—
(Loss) income before equity in (losses) earnings from unconsolidated subsidiaries and income taxes		(34.4	)		1.4	—			(125.3	)		2.7	—
Equity in (losses) earnings from unconsolidated subsidiaries		(24.3	)		30.8	(178.9	)%		(60.6	)		62.5	(197.0	)%
(Loss) income before taxes		(58.7	)		32.2	—			(185.9	)		65.2	—
Income tax (benefit) expense		(12.6	)		3.2	—			(15.5	)		6.3	—
Net (loss) income	$	(46.1	)	$	29.0	—		$	(170.4	)	$	58.9	—

Equity in losses from RAM Re in the second quarter and first half of 2008 were $24.3 million and $60.6 million, respectively, compared to equity in earnings of $3.4 million and $5.7 million in the corresponding periods in 2007. These decreases were due primarily to RAM Re’s net unrealized mark-to-market losses of $166.4 million and $315.8 million on its credit derivative portfolio as a result of widening credit spreads and increases in loss reserves of $30.5 million and $76.7 million primarily related to continuing deterioration in the performance of RMBS. Equity in losses from RAM Re reduced the carrying value of our investment in RAM Re to zero as of June 30, 2008. We report our equity in earnings/losses from RAM Re on a one quarter lag. To the extent that our carrying value remains zero, we will not recognize in future periods our proportionate share of RAM Re’s losses, if any. Equity in earnings from RAM Re could be recognized in the future to the extent those earnings are deemed recoverable.

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PMI Guaranty had a net loss of $21.8 million and $23.1 million for the second quarter and first half of 2008, respectively, compared to net income of $1.4 million and $2.7 million for the corresponding periods in 2007. The 2008 losses were primarily driven by total incurred losses of $26.7 million recorded in the second quarter primarily associated with the commutation of certain risks by PMI Guaranty under an agreement entered into with FGIC and AG Re, pursuant to which all of the direct FGIC business currently reinsured by PMI Guaranty was recaptured by FGIC and ceded by FGIC to AG Re. See Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Conditions and Trends Affecting our Business – PMI Guaranty.

The $88.0 million impairment of unconsolidated subsidiary in the first half of 2008 represents our impairment of our investment in FGIC in the first quarter of 2008. To the extent that our carrying value remains zero, we will not recognize in future periods our proportionate share of FGIC’s losses, if any. Equity in earnings from FGIC could be recognized in the future to the extent those earnings are deemed recoverable.

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Corporate and Other

The results of our Corporate and Other segment include income and operating expenses related to contract underwriting, and net investment income, interest expense and corporate overhead of The PMI Group, our holding company. Our Corporate and Other segment results are summarized as follows:

	Three Months Ended June 30,								Six Months Ended June 30,
	2008			2007			Percentage Change		2008			2007			Percentage Change
	(Dollars in millions)								(Dollars in millions)
Net investment income	$	2.0		$	2.3		13.0	%	$	3.2		$	5.1		(37.3	)%
Net realized investment losses		—			(0.6	)	—			—			(1.3	)	—
Change in fair value of certain debt instruments		17.0			—		—			45.7			—		—
Other income		3.3			4.8		(31.3	)%		6.5			6.5		—
Total revenues		22.3			6.5		—			55.4			10.3		—
Share-based compensation expense		2.1			3.5		(40.0	)%		6.5			10.6		(38.7	)%
Other operating expenses		19.0			16.5		15.2	%		32.9			33.3		(1.2	)%
Total other operating expenses		21.1			20.0		5.5	%		39.4			43.9		(10.3	)%
Interest expense		9.2			7.6		21.1	%		16.8			15.2		(10.5	)%
Total expenses		30.3			27.6		9.8	%		56.2			59.1		(4.9	)%
Loss before equity in (losses) earnings from unconsolidated subsidiaries and income taxes		(8.0	)		(21.1	)	(62.1	)%		(0.8	)		(48.8	)	(98.4	)%
Equity in (losses) earnings from unconsolidated subsidiaries		(0.1	)		0.3		(133.3	)%		(0.2	)		0.2		(200.0	)%
Net (loss) income before income taxes		(8.1	)		(20.8	)	(61.1	)%		(1.0	)		(48.6	)	(97.9	)%
Income tax benefit		(2.7	)		(6.0	)	(55.0	)%		(0.5	)		(13.9	)	(96.4	)%
Net loss	$	(5.4	)	$	(14.8	)	(63.5	)%	$	(0.5	)	$	(34.7	)	(98.6	)%

Change in fair value of certain debt instruments — The change in fair value of certain debt instruments in the second quarter and first half of 2008 resulted from our adoption of SFAS No. 159 effective January 1, 2008. In connection with our adoption of SFAS No. 159, we elected the fair value option presented by SFAS No. 159 with respect to certain of our long term debt instruments. The realized gains of $17.0 million and $45.7 million in the second quarter and first half of 2008, respectively, were due to fluctuations of fair value in the first half of 2008 primarily due to changes in credit spreads and interest rates. (See Item 1, Note 8. Fair Value Disclosures.)

Share-based compensation expenses — The decreases in share-based compensation in the second quarter and first half of 2008 from the corresponding periods in 2007 were primarily due to a decrease in the number and fair value of share-based compensation granted in 2008. We expect share-based compensation expenses to be lower for the year ended December 31, 2008 than 2007.

Other operating expenses — The changes in other operating expenses in the second quarter and first half of 2008 compared to the corresponding periods in 2007 were due to increased legal fees partially offset by decreases in employee compensation costs and contract underwriting remedies.

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Income taxes — The tax rates of 33.3% for the second quarter and 50.0% for the first half of 2008 are higher than the 2007 tax rates of 28.8% and 28.6% for the corresponding periods in 2007 due primarily to increased allocations of certain federal and state taxes to the Corporate and Other business segment.

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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 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.

The PMI Group’s available funds, consisting of cash and cash equivalents and investments, were $251.6 million at June 30, 2008 compared to $201.5 million at June 30, 2007. It is our present intention to maintain at least $75 million of liquidity at our holding company in connection with rating agency considerations.

As a result of higher losses and LAE in 2007 and the first half of 2008, higher projected losses for the second half of 2008 and potential growth in insurance in force, we will likely need to raise significant amounts of additional capital in 2008 and 2009. Although we do not yet know what form these capital raising activities will take, we expect to seek to raise additional capital through a variety of types of transactions. On an ongoing basis, we intend to explore available alternatives to enhance our liquidity at PMI and The PMI Group, including disposition of equity investments (which could include certain wholly-owned subsidiaries) or portions thereof, debt or equity offerings, obtaining reinsurance for our insurance subsidiaries’ existing or future books of business, and/or limiting the new insurance written by our insurance subsidiaries. Given current market conditions generally and in our industry, there can be no assurance that we will be able to consummate any capital raising transactions on favorable terms or at all.

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. Due to the factors described above, we anticipate that PMI Mortgage Insurance Co. will require significant additional capital in 2008 and 2009.

International Operations and Financial Guaranty Liquidity — The principal uses of these segments’ liquidity are the payment of operating expenses, claim payments, and taxes and growth of its investment portfolio. The principal sources of these segments’ liquidity are written premiums, investment maturities and net investment income. We have in the past dedicated increasing amounts of capital resources to expand our International Operations. Capital constraints described above may prevent us from continuing to expend such resources, which in turn may limit our international subsidiaries’ abilities to engage in capital intensive transactions in 2008 and thereafter. Negative rating agency actions with respect to PMI and certain of our

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International subsidiaries have negatively affected, and could further negatively affect in the future, the financial condition and results of operations of our International operations. (See Part II, Item 1A. Risk Factors – We have been negatively impacted by recent downgrades of the insurer financial strength ratings of some of our wholly-owned insurance subsidiaries. Additional adverse rating agency actions with respect to our insurance subsidiaries could further harm our financial condition and our business.)

Credit Facility

In the first quarter of 2008 we amended our existing revolving credit facility. The amendment to the credit facility reduced the amount available under the facility from $400 million to $300 million, subject to additional reductions in the event of certain asset sales or equity or debt issuances, with the maximum amount by which the facility can be reduced equal to $150 million. The facility includes a $50 million letter of credit sub-limit. Pursuant to the terms of the amendment, our ability to borrow under the facility was subject to a number of conditions, including that the stock of PMI Mortgage Insurance Co. (“MIC”) be pledged in favor of the lenders under the facility and noteholders under certain of our senior notes. On April 24, 2008, we satisfied this condition by entering into a Shared Collateral Pledge Agreement with U.S. Bank National Association as collateral agent (the “Collateral Agent”), pursuant to which we granted a security interest in the stock of MIC in favor of the Collateral Agent, for the benefit of both the lenders under the revolving credit facility and the noteholders under certain of our senior notes. In May 2008, we borrowed $200 million under the facility. There are three outstanding letters of credit totaling approximately $2 million.

The amendment contains changes and additions to the existing financial covenants. The amendment reduces the requirement for our Adjusted Consolidated Net Worth (as defined in the facility) from $2.19 billion to $1.5 billion. In addition, under the amended facility, mark-to-market unrealized losses and gains on swap contracts with respect to PMI Europe, FGIC and RAM Re are excluded from the calculation of Adjusted Consolidated Net Worth and accumulated other comprehensive income is included. The amended facility contains a risk-to-capital ratio requirement of 20 to 1 with respect to MIC and a maximum total debt to total capitalization percentage requirement of 35%.

The amended facility also contains additional covenants and restrictions. Among these are restrictions on asset dispositions and investments. The amended facility includes additional events of default, including MIC receiving a notice from either of the GSEs that it has been suspended as an approved mortgage insurer and having failed to cure such suspension within 30 days, MIC being disqualified or terminated as an approved mortgage insurer by either of the GSEs, MIC failing to maintain a financial strength rating of at least Baa from Moody’s and failing to maintain a financial strength rating of at least BBB from Standard & Poor’s, or our material insurance subsidiaries (as defined in the facility) being subject to certain regulatory actions or restrictions by their respective primary insurance regulators that are not cured within specified periods of time. Upon an event of default, we could have to repay all outstanding indebtedness and would be unable to draw on the facility, and the lenders would have the right to terminate their loan commitments under the facility. In addition, an event of default under the facility also could trigger an event of default under our outstanding senior notes.

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

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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 2007, PMI paid $165 million in dividends to The PMI Group. We do not anticipate that PMI will pay any dividends to The PMI Group in 2008. Any payment of the remaining $185 million of approved dividends by PMI to The PMI Group requires prior written notice to the Director of the Arizona Department of Insurance, who could withdraw approval of such dividend.

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 June 30, 2008, PMI’s risk-to-capital ratio was 12.6 to 1 compared to 8.6 to 1 at June 30, 2007.

PMI Guaranty Co. received all regulatory approvals and entered into an agreement to transfer its entire FGIC-related reinsurance portfolio to a third party. In early August of 2008, PMI Guaranty paid approximately $144 million of its excess capital to The PMI Group. The PMI Group expects to reinvest at least 80% of the capital into U.S. Mortgage Insurance Operations before the end of the third quarter of 2008.

Consolidated Contractual Obligations

Our consolidated contractual obligations include reserves for losses and LAE, long-term debt obligations, operating lease obligations, capital 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, $5.8 million of additional equity in certain limited partnership investments.

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Consolidated Investments

Net Investment Income

Net investment income consists of:

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(Dollars in thousands)						(Dollars in thousands)
Fixed income securities	$	51,250		$	40,213		$	98,383		$	81,425
Equity securities		5,929			4,583			12,587			9,550
Short-term investments		4,808			7,202			10,329			14,461
Investment income before expenses		61,987			51,998			121,299			105,436
Investment expenses		(934	)		(879	)		(1,933	)		(1,678	)
Net investment income	$	61,053		$	51,119		$	119,366		$	103,758

The increases in net investment income in the second quarter and first half of 2008 compared to the same periods in 2007 were primarily due to the growth of PMI’s and PMI Australia’s investment portfolio and the strengthening of the Australian dollar relative to the U.S. dollar. PMI’s net investment income was negatively affected by a decrease in pre-tax book yield, partially offset by growth in the portfolio. Our consolidated pre-tax book yield was 5.13% and 5.43% as of June 30, 2008, and 2007, respectively.

Investment Portfolio by Operating Segment

The following table summarizes the estimated fair value of the consolidated investment portfolio as of June 30, 2008 and December 31, 2007. Amounts shown under “Corporate and Other” consist of the investment portfolio of The PMI Group, and amounts shown under “Financial Guaranty” consist of the investment portfolio of PMI Guaranty:

	U.S. Mortgage Insurance Operations		International Operations		Financial Guaranty		Corporate and Other		Consolidated Total
	(Dollars in thousands)
June 30, 2008
Fixed income securities:
U.S. Municipal bonds	$	1,950,602	$	—	$	117,607	$	13,265	$	2,081,474
Foreign governments		—		756,549		—		—		756,549
Corporate bonds		675		961,471		—		35,079		997,225
U.S. government and agencies		7,453		—		—		161		7,614
Mortgage-backed securities		1,896		—		—		1,575		3,471
Total fixed income securities		1,960,626		1,718,020		117,607		50,080		3,846,333
Equity securities:
Common stocks		10,927		570		—		987		12,484
Preferred stocks		243,459		—		20,097		—		263,556
Total equity securities		254,386		570		20,097		987		276,040
Short-term investments		977		—		—		1,300		2,277
Total investments	$	2,215,989	$	1,718,590	$	137,704	$	52,367	$	4,124,650

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	U.S. Mortgage Insurance Operations		International Operations		Financial Guaranty		Corporate and Other		Consolidated Total
	(Dollars in thousands)
December 31, 2007
Fixed income securities:
U.S. Municipal bonds	$	1,521,367	$	—	$	167,915	$	13,542	$	1,702,824
Foreign governments		—		640,970		—		—		640,970
Corporate bonds		675		873,228		—		36,790		910,693
U.S. government and agencies		7,511		—		—		974		8,485
Mortgage-backed securities		2,053		—		—		1,668		3,721
Total fixed income securities		1,531,606		1,514,198		167,915		52,974		3,266,693
Equity securities:
Common stocks		116,005		42,689		—		1,242		159,936
Preferred stocks		277,165		—		22,465		—		299,630
Total equity securities		393,170		42,689		22,465		1,242		459,566
Short-term investments		951		641		—		1,300		2,892
Total investments	$	1,925,727	$	1,557,528	$	190,380	$	55,516	$	3,729,151

Our consolidated investment portfolio holds primarily investment grade securities comprised of readily marketable fixed income and equity securities. At June 30, 2008, the fair value of these securities in our consolidated investment portfolio increased to $4.1 billion as of June 30, 2008 from $3.7 billion as of December 31, 2007. The increase was due primarily to growth in PMI’s and PMI Australia’s investment portfolio and increases in foreign currency translation rates and changes in the composition of our investment portfolio. In the first quarter of 2008 we sold a significant portion of certain investments in PMI’s and PMI Australia’s investment portfolios. The decrease in equity securities in PMI and PMI Australia’s investment portfolios was offset by increased purchases of fixed income securities.

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.

The following table summarizes the rating distributions of our consolidated investment portfolio (including cash and cash equivalents, excluding common stocks) as of June 30, 2008:

	U.S. Mortgage Insurance Operations		International Operations		Financial Guaranty		Corporate and Other		Consolidated Total
AAA or equivalent	39	%	58	%	31	%	85	%	49	%
AA	36	%	25	%	51	%	9	%	31	%
A	20	%	13	%	16	%	5	%	16	%
BBB	5	%	4	%	2	%	1	%	4	%
Below investment grade	—		—		—		—		—
Total	100	%	100	%	100	%	100	%	100	%

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As of June 30, 2008, approximately $955.8 million, or 20.7% of our consolidated investment portfolio (including cash and cash equivalents, excluding common stocks) was insured by monoline financial guarantors. The financial guarantors include MBIA, FGIC, FSA, AMBAC and others. The table below presents the fair value of securities and the percentage of our consolidated investment portfolio that are insured by these financial guarantors as of June 30, 2008.

	Fair Value (in millions)		% of Consolidated Investments
MBIA	$	270.8	5.9	%
FGIC		214.8	4.6	%
FSA		167.9	3.6	%
AMBAC		206.8	4.5	%
Other		95.5	2.1	%
Total	$	955.8	20.7	%

We do not rely on the financial guarantees as a principal source of repayment when evaluating securities for purchase. Rather, securities are evaluated primarily based on the underlying issuer’s credit quality. During 2008, several of the financial guarantors listed above were downgraded by one or more of the rating agencies. A downgrade of a financial guarantor may have an adverse effect on the fair value of investments insured by the downgraded financial guarantor. If we determine that declines in the fair values of our investments are other-than-temporary, we record a realized loss. The table below illustrates, as of June 30, 2008, the underlying rating distributions of our consolidated investment portfolio (including cash and cash equivalents, excluding common stocks), excluding the benefit of the financial guarantees provided by these financial guarantors. Underlying ratings, excluding the benefit of financial guarantors, are based upon the higher underlying rating assigned by S&P or Moody’s when an underlying rating exists from either rating agency or, when an external rating is not available, the underlying rating is included in the not rated category.

	U.S . Mortgage Insurance Operations		International Operations		Financial Guaranty		Corporate and Other		Consolidated Total
AAA or equivalent	31	%	58	%	16	%	85	%	44	%
AA	29	%	24	%	39	%	9	%	26	%
A	34	%	13	%	37	%	5	%	24	%
BBB	5	%	5	%	2	%	1	%	5	%
Below investment grade	—		—		—		—		—
Not rated	1	%	—		6	%	—		1	%
Total	100	%	100	%	100	%	100	%	100	%

Capital Support Obligations

PMI has entered into capital support agreements with PMI Australia, PMI Europe, PMI Guaranty and PMI Canada. The PMI Group guarantees the performance of PMI’s capital support obligations to PMI Australia, PMI Europe and PMI Guaranty. PMI’s capital support agreements with PMI Australia and PMI Europe could require PMI to make additional capital contributions to those subsidiaries. As a result of PMI Guaranty’s novation agreement and its cessation of new business writings and the termination of our Canadian operations in PMI Canada, we do not

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believe that there are material support obligations remaining under PMI’s capital support agreements with PMI Guaranty and PMI Canada, nor under the corresponding guarantee from The PMI Group with respect to PMI Guaranty.

PMI also has 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 19.0 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. However, as described above, we expect that we will need to raise significant additional capital in 2008 as the result of rating agency capital requirements to maintain our and our insurance subsidiaries’ ratings.

Consolidated cash flows generated by operating activities, including premiums, investment income, underwriting and operating expenses and losses, were $ 258.9 million in the first six months of 2008 compared to $288.5 million in the first six months of 2007. Cash flows from operations decreased primarily due to increases in claim payments from PMI. We expect cash flows from operating activities to be negatively affected throughout 2008 due to payment of claims from loss reserves recorded by PMI in 2007 and 2008.

Consolidated cash flows used in investing activities in the first six months of 2008, including purchases and sales of investments and capital expenditures, were $389.4 million compared to consolidated cash flows used in investing activities of $234.8 million in the first six months of 2007. The increase in cash flows used in investing activities in the first six months of 2008 compared to the corresponding period in 2007 was due primarily to increased purchases of fixed income securities.

Consolidated cash flows provided by financing activities, were $199.6 million in the first six months of 2008 compared to $13.1 million of cash used in the first six months of 2007. The significant increase in cash provided by financing activities in 2008 was due to the $200 million of proceeds from our line of credit in the first half of 2008.

Ratings

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

	Standard & Poor’s	Fitch	Moody’s	DBRS
Insurer Financial Strength Ratings
PMI Mortgage Insurance Co.	A+	A+	A3	AA
PMI Insurance Co.	A+	A+	A3	—
PMI Australia	AA-	AA-	Aa3	—
PMI Canada	—	—	—	AA
PMI Europe	A+	A+	A3	—

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	Standard & Poor’s	Fitch	Moody’s	DBRS
PMI Guaranty	A+	A+	A3	—
CMG MI	AA-	AA	—	—
FGIC	BB	CCC	B1	—
RAM Re	AA	—	Aa3	—
Senior Unsecured Debt
The PMI Group	BBB+	BBB+	Baa3	—
Capital Securities
PMI Capital I	BBB-	BBB	Ba1	—

Recent Developments Relating to Mortgage Insurance Companies and PMI Guaranty Ratings

On April 8, 2008, Standard & Poor’s downgraded its counterparty credit and insurer financial strength ratings on PMI Mortgage Insurance Co., PMI Insurance Co., PMI Guaranty and PMI Europe from “AA” (CreditWatch with Negative Implications) to “A+” (Negative Outlook). Standard & Poor’s also downgraded its counterparty credit rating on The PMI Group from “A” (CreditWatch with Negative Implications) to “BBB+” (Negative Outlook). In taking these actions, Standard & Poor’s noted that the downgrades reflected, among other things, “weaker-than-expected results for the fourth quarter of 2007 and the continued deterioration in key variables that influence claims for mortgage insurance.” Also on April 8, 2008, Standard & Poor’s placed its “AA-” counterparty credit and insurer financial strength ratings on CMG MI on CreditWatch with Negative Implications. Standard & Poor’s indicated that it had taken this action in order to review the impact that the downgrade of PMI Mortgage Insurance Co. will have on CMG MI.

On April 9, 2008, Standard & Poor’s downgraded its financial strength rating on PMI Australia from “AA” (CreditWatch with Negative Implications) to a rating of “AA-” (CreditWatch with Negative Implications). In taking its actions, Standard & Poor’s noted that the CreditWatch “reflects PMI Group’s intention to implement various operational measures to further protect the Australian subsidiary’s financial strength at the “AA-” level . . . Should the[se] segmented rating measures not be implemented, it is likely the rating will be equated with that of PMI.”

On April 15, 2008, Standard & Poor’s removed its “AA-” counterparty credit and insurer financial strength ratings on CMG MI from CreditWatch with Negative Implications. At the same time, Standard & Poor’s affirmed its ratings on CMG MI with a negative outlook. In taking these actions, Standard & Poor’s indicated that it viewed the April 8, 2008 downgrade of PMI Mortgage Insurance Co. as not having a material impact on CMG MI’s financial strength.

On June 5, 2008, Fitch lowered its insurer financial strength ratings on PMI, PMI Europe, and PMI Guaranty to “A+” (Rating Watch Negative) from “AA” (Rating Watch Negative) and its long-term issuer rating of The PMI Group to “BBB+” (Rating Watch Negative) from “A” (Rating Watch Negative). Fitch also lowered its insurer financial strength rating on PMI Australia to a rating of “AA-” from “AA” while improving its rating outlook of PMI Australia from “Rating Watch Negative” to “Negative Outlook”.

On June 26, 2008, Standard & Poor’s affirmed PMI Australia’s insurer financial strength rating at “AA-” and improved its rating outlook to “Negative Outlook” from “CreditWatch with Negative Implications”.

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On July 9, 2008, Moody’s lowered its insurer financial strength rating on PMI to “A3” (Negative Outlook) from “Aa2” (On Review for Possible Downgrade), and The PMI Group’s senior debt rating to “Baa3” (Negative Outlook) from “A1” (On Review for Possible Downgrade). Moody’s also lowered the ratings of PMI Europe and PMI Guaranty Co. to “A3” (Negative Outlook) from “Aa3” (On Review for Possible Downgrade), and the ratings of PMI Australia to a rating of “Aa3” (On Review for Possible Downgrade) from “Aa2” (On Review for Possible Downgrade).

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 business prospects, regulatory conditions, competition, underwriting and investment losses and the perceived need for additional capital. There can be no assurance that our wholly-owned insurance subsidiaries will not be downgraded in the future.

Any additional ratings downgrade in the future, or the announcement of a potential downgrade or other concern relating to the financial strength of our wholly-owned insurance subsidiaries could have a material adverse effect on our business prospects, our ability to compete, our holding company debt ratings, the ratings or performance of our other insurance subsidiaries (who may receive capital support from the downgraded subsidiary), or the ratings of CMG MI. (See Part II, Item 1A. Risk Factors – We have been negatively impacted by recent downgrades of the insurer financial strength ratings of some of our wholly-owned insurance subsidiaries. Additional adverse rating agency actions with respect to our insurance subsidiaries could further harm our financial condition and our business.)

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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 U.S. generally accepted accounting principles. 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.

Changes in loss reserves can materially affect our consolidated net income. The process of estimating loss reserves 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 recoverables) as of June 30, 2008 and December 31, 2007 on a segment and consolidated basis:

	As of June 30, 2008						As of December 31, 2007
	Low		High		Recorded		Low		High		Recorded
	(Dollars in millions)						(Dollars in millions)
U.S. Mortgage Insurance Operations	$	1,800.0	$	2,450.0	$	2,132.6	$	933.8	$	1,348.7	$	1,133.1
International Operations		117.6		191.8		149.5		74.6		152.8		106.9
PMI Guaranty (1)		7.3		7.3		7.3		2.6		2.6		2.6
Consolidated loss and LAE reserves	$	1,924.9	$	2,649.1	$	2,289.4	$	1,011.0	$	1,504.1	$	1,242.6

⁽¹⁾ PMI Guaranty does not prepare an actuarial range.

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 June 30, 2008 based on, among other factors, our evaluation of PMI’s estimated future claim rates and average claim sizes. Management’s best estimate of reserves for losses at June 30, 2008 was approximately the mid-point of the actuarial range.

Our increases to the reserve balance in the first half of 2008 were primarily due to PMI’s higher default inventory and higher expected claim rates and claim sizes on reported delinquencies. Continuing deterioration of the U.S. housing and mortgage markets caused PMI’s default inventory, claim rates and claim sizes to increase in the first half of 2008. Higher claim rates have been driven by, among other things, home price declines and diminished availability of certain loan products, both of which constrain refinancing opportunities, and result in a decrease in the percentage of the default inventory that is returning to current status. The increase in PMI’s average claim sizes has been driven by high loan sizes and coverage levels in PMI’s portfolio and declining home prices which limit PMI’s loss mitigation opportunities. The table below provides a reconciliation of our U.S. Mortgage Insurance segment’s beginning and ending reserves for losses and LAE for the six months ended June 30, 2008 and 2007:

	Six Months Ended June 30,
	2008			2007
	(Dollars in millions)
Balance at January 1	$	1,133.1		$	366.2
Reinsurance recoverables		(35.9	)		(2.9	)
Net balance at January 1		1,097.2			363.3
Losses and LAE incurred (principally with respect to defaults occuring in):
Current year		843.6			181.5
Prior years		245.9			45.7
Total incurred		1,089.5			227.2
Losses and LAE payments (principally with respect to defaults occuring in):
Current year		(5.5	)		(1.0	)
Prior years		(362.1	)		(147.5	)
Total payments		(367.6	)		(148.5	)
Net balance at June 30		1,819.1			442.0
Reinsurance recoverables		313.5			2.6
Balance at June 30	$	2,132.6		$	444.6

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The above loss reserve reconciliation shows the components of our losses and LAE reserve changes for the periods presented. Losses and LAE payments of $367.6 million and $148.5 million for the periods ended June 30, 2008 and 2007, respectively, reflect amounts paid during the periods presented and are not subject to estimation. Total losses and LAE incurred of $1.1 billion and $227.2 million for the six months ended June 30, 2008 and 2007, 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 losses and LAE incurred related to prior years of $245.9 million and $45.7 million for the six months ended June 30, 2008 and 2007, respectively. The table below breaks down the six months ended June 30, 2008 and 2007 changes in reserves related to prior years by particular accident years:

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	Losses and LAE Incurred								Change in Incurred
Accident Year (year in which default occurred)	June 30, 2008		December 31, 2007		June 30, 2007		December 31, 2006		June 30, 2008 vs. December 31, 2007			June 30, 2007 vs. December 31, 2006
2001 and Prior	$	—	$	—	$	—	$	—	$	(0.3	)	$	(0.3	)
2002		224.6		225.1		222.2		221.7		(0.5	)		0.5
2003		225.8		226.8		220.8		220.2		(1.0	)		0.6
2004		240.5		241.3		230.9		229.1		(0.8	)		1.8
2005		271.1		270.8		248.5		240.4		0.3			8.1
2006		410.3		410.3		295.9		260.8		—			35.0
2007		1,141.3		893.1		181.5		—		248.2			—
Total									$	245.9		$	45.7

The $ 245.9 million and $ 45.7 million increases related to prior years in the first half of 2008 and 2007, respectively, were due to re-estimations of ultimate loss rates from those established at the original notice of default, updated through the periods presented. The $ 245.9 million increase in prior years’ reserves during the first half of 2008 reflected the significant weakening of the housing and mortgage markets and was driven by lower cure rates, higher claim rates and higher claim sizes. The $ 45.7 million increase in prior years’ reserves during the first half of 2007 was driven by higher than estimated claim sizes on pending delinquencies, partially offset by a reduction in the incurred but not reported estimate. 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. Future declines in PMI’s cure rate, or higher default and claim rates or claim sizes 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:

	June 30, 2008		December 31, 2007
	(Dollars in thousands)
Primary insurance	$	2,037,433	$	1,054,326
Pool insurance		95,199		78,754
Total reserves for losses and LAE	$	2,132,632	$	1,133,080

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:

	June 30, 2008		December 31, 2007
	(Dollars in thousands)
Loans in default	$	2,057,681	$	1,062,150
IBNR		49,474		45,453
Cost to settle claims (LAE)		25,477		25,477
Total reserves for losses and LAE	$	2,132,632	$	1,133,080

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To provide a measure of sensitivity of 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 June 30, 2008 reserves for losses and LAE, the effect on pre-tax income would be an increase or decrease of approximately $102.9 million; (ii) for every 5% change in our estimate of incurred but not reported loans in default as of June 30, 2008, the effect on pre-tax income would be approximately $2.5 million; and (iii) for every 5% change in our estimate of the future cost of claims settlement expenses as of June 30, 2008, the effect on pre-tax income would be approximately $1.3 million.

If either the claim rate or claim size, or a combination of the claim rate and claim size, were to increase approximately 16% above our current estimates, we would reach the top of our actuarially determined range. Conversely, if the claim rate or claim size, or a combination of the claim rate and claim size, were to decrease by approximately 15% of our current estimates, we would reach the bottom end of our actuarially determined range.

The establishment of loss reserves is subject to inherent uncertainty and requires judgment by management. The actual amount of claim payments may vary substantially from the loss reserve estimates. 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 June 30, 2008, of $75.5 million to $102.4 million. As of June 30, 2008, PMI Australia’s recorded reserves for losses and LAE were $86.7 million, which 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 $86.7 million is a 33.2% increase from PMI Australia’s reserve balance of $65.1 million at December 31, 2007. This increase was primarily due to the increase in PMI Australia’s default inventory in 2008 and higher claim rates and average claim sizes. PMI Australia’s default inventory increased to 3,573 loans as of June 30, 2008 from 2,666 loans as of December 31, 2007.

PMI Europe establishes loss reserves for all of its insurance and reinsurance business and for credit default swap transactions entered into 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

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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 June 30, 2008 of $42.0 million to $89.0 million. PMI Europe’s recorded loss reserves at June 30, 2008 were $62.6 million, which represented our best estimate and an increase of $21.0 million from PMI Europe’s loss reserve balance of $41.6 million at December 31, 2007. The increase to PMI Europe’s loss reserves in 2008 was primarily due to the deteriorating performance of several U.S. exposures on which PMI Europe provided reinsurance coverage.

PMI Asia’s loss reserves at June 30, 2008 were $0.2 million, which represents our best estimate. Our actuaries calculated a range for PMI Asia’s loss reserves at June 30, 2008 of $0.1 million to $0.2 million.

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

	June 30, 2008		December 31, 2007
	(Dollars in thousands)
Loans in default	$	125,287	$	92,914
IBNR		22,207		12,204
Cost to settle claims (LAE)		2,007		1,751
Total loss and LAE reserves	$	149,501	$	106,869

The following table provides a reconciliation of our International Operations segment’s beginning and ending reserves for losses and LAE for the six months ended June 30, 2008 and 2007:

	2008			2007
	(Dollars in millions)
Balance at January 1	$	106.9		$	48.5
Reinsurance recoverables		(1.0	)		(0.8	)
Net balance at January 1		105.9			47.7
Losses and LAE incurred (principally with respect to defaults occurring in)
Current year		42.5			19.3
Prior years		23.0			9.0
Total incurred		65.5			28.3
Losses and LAE payments (principally with respect to defaults occurring in)
Current year		(0.8	)		(0.2	)
Prior years		(30.2	)		(17.7	)
Total payments		(31.0	)		(17.9	)
Foreign Currency Translation		8.0			3.4
Net balance at June 30		148.4			61.5
Reinsurance recoverables		1.1			0.9
Balance at June 30	$	149.5		$	62.4

The increases in losses and LAE incurred relating to prior years of $ 23.0 million and $9.0 million in the first six months of 2008 and 2007, respectively, were primarily due to a loss provision related to deteriorating performance of several U.S. exposures on which PMI Europe provided reinsurance coverage.

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PMI Guaranty – PMI Guaranty’s loss reserves of $7.3 million include $22.9 million related to the agreement between PMI Guaranty, FGIC, and AG Re under which PMI Guaranty commuted certain risks with FGIC. PMI Guaranty’s loss reserves were partially offset by anticipated non-reinsurance recoveries of $15.7 million that are related to a separate insurance contract.

Investment Securities

Other-Than-Temporary Impairment — We have a committee review process for all securities in our investment portfolio, including a process for reviewing 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, as of June 30, 2008 and 2007:

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	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
June 30, 2008
Fixed income securities:
U.S. Municipal bonds	$	971,093	$	(21,820	)	$	75,059	$	(6,403	)	$	1,046,152	$	(28,223	)
Foreign governments		170,387		(7,292	)		477,352		(22,344	)		647,739		(29,636	)
Corporate bonds		192,681		(7,494	)		701,350		(52,147	)		894,031		(59,641	)
Total fixed income securities		1,334,161		(36,606	)		1,253,761		(80,894	)		2,587,922		(117,500	)
Equity securities:
Common stocks		12,095		(1,184	)		—		—			12,095		(1,184	)
Preferred stocks		209,270		(46,386	)		3,667		(1,942	)		212,937		(48,328	)
Total equity securities		221,365		(47,570	)		3,667		(1,942	)		225,032		(49,512	)
Total	$	1,555,526	$	(84,176	)	$	1,257,428	$	(82,836	)	$	2,812,954	$	(167,012	)
June 30, 2007
Fixed income securities:
U.S. Municipal bonds	$	324,595	$	(6,374	)	$	—	$	—		$	324,595	$	(6,374	)
Foreign governments		244,477		(8,256	)		254,824		(8,681	)		499,301		(16,937	)
Corporate bonds		480,395		(9,427	)		286,428		(10,082	)		766,823		(19,509	)
U.S. government and agencies		944		(4	)		247		(6	)		1,191		(10	)
Total fixed income securities		1,050,411		(24,061	)		541,499		(18,769	)		1,591,910		(42,830	)
Equity securities:
Common stocks		8,723		(280	)		—		—			8,723		(280	)
Preferred stocks		58,672		(952	)		—		—			58,672		(952	)
Total equity securities		67,395		(1,232	)		—		—			67,395		(1,232	)
Total	$	1,117,806	$	(25,293	)	$	541,499	$	(18,769	)	$	1,659,305	$	(44,062	)

Unrealized losses in 2008 on fixed income securities were primarily due to an increase in interest rates and widening of credit spreads. Unrealized losses on preferred securities were primarily due to the widening of credit and sector spreads. We determined that the decline in the fair value of certain investments met the definition of other-than-temporary impairment and recognized realized losses of $19.0 million and $1.3 million for the first half of 2008 and 2007, respectively.

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 as 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

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expiration of risk. Single premiums written accounted for 15.6% and 19.3% of gross premiums written in the first half of 2008 and 2007, 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 we provide contract underwriting services on loans that do not require mortgage insurance, associated 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 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. For the year ended December 31, 2007, we performed a recoverability analysis of deferred costs relating to new mortgage insurance policies acquired in 2007. As a result of this analysis, we impaired PMI’s deferred policy acquisition cost asset by $33.6 million relating to the 2007 book year. This impairment of all remaining costs associated with the 2007 book year as of December 31, 2007 was driven by our expected loss development under various scenarios and our determination that the remaining costs were not recoverable. For the quarter ended June 30, 2008, due to the novation of principally all of PMI Guaranty’s risk in force, we impaired the remaining deferred policy acquisition cost assets related to PMI Guaranty’s operations by $3.6 million reducing its value to zero.

Impairment Analysis of Investments in Unconsolidated Subsidiaries

Periodically, or as events dictate, we evaluate potential impairment of our investments in unconsolidated subsidiaries. Accounting Principles Board (APB) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, 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 loss would be recognized in our 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 gains or losses resulting from the sale of our ownership interests of unconsolidated subsidiaries are recognized in net realized investment gains or losses in the consolidated statement of operations.

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In connection with the preparation of our consolidated financial statements for the quarter ended March 31, 2008, we determined that our investment in FGIC was other-than-temporarily impaired and reduced the carrying value of our investment in FGIC from $103.6 million at December 31, 2007 to zero. To the extent that our carrying value remains zero, we will not recognize in future periods our proportionate share of FGIC’s losses, if any. Equity in earnings from FGIC could be recognized in the future to the extent those earnings are deemed recoverable.

Premium Deficiency Analysis

We perform an analysis for premium deficiency using assumptions based on our best estimate when the analysis is performed. The calculation for premium deficiency requires significant judgment and includes estimates of future expected premiums, expected claims, loss adjustment expenses and maintenance costs as of the date of the test. The calculation of future expected premiums uses assumptions for persistency and termination levels on policies currently in force. Assumptions for future expected losses include future expected average claim sizes and claim rates which are based on the current default rate and expected future defaults. Investment income is also considered in the premium deficiency calculation. For the calculation of investment income we use our pre-tax investment yield.

We perform premium deficiency analyses quarterly on a single book basis for the U.S. Mortgage Insurance Operations. A premium deficiency analysis was performed as of June 30, 2008. We determined there was no premium deficiency in our U.S. Mortgage Insurance Operations segment despite significant losses in the second quarter and first half of 2008. To the extent premium levels and actual loss experience differ from our assumptions, our results could be negatively affected in future periods.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 30, 2008, our consolidated investment portfolio was $4.1 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 June 30, 2008, 93.3% of our investments were long-term fixed income securities, primarily 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 hypothetical changes in interest rates as of June 30, 2008:

	Estimated Increase (Decrease) in Fair Value
	(Dollars in thousands)
300 basis point decline	$	541,972
200 basis point decline	$	382,780
100 basis point decline	$	219,490
100 basis point rise	$	(205,455	)
200 basis point rise	$	(428,616	)
300 basis point rise	$	(629,779	)

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 5.3 as of June 30, 2008.

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We analyze the sensitivity of fluctuations in foreign currency exchange rates on investments in our foreign subsidiaries denominated in currencies other than the U.S. dollar. This estimate is calculated using the spot exchange rates as of June 30, 2008 and respective current period end investment balances in our foreign subsidiaries in the applicable foreign currencies. The following table summarizes the estimated changes in the investments in our foreign subsidiaries based upon specified hypothetical percentage changes in foreign currency exchange rates as of June 30, 2008, with all other factors remaining constant:

	Estimated Increase (Decrease ) Foreign Currency Translation
Change in foreign currency exchange rates	Australia			Europe			Asia*			Canada			Consolidated
	(USD In thousands)
15% decline	$	(142,092	)	$	(25,997	)	$	(8,368	)	$	(10,462	)	$	(186,919	)
10% decline	$	(94,728	)	$	(17,331	)	$	(5,579	)	$	(6,975	)	$	(124,613	)
5% decline	$	(47,364	)	$	(8,667	)	$	(2,789	)	$	(3,487	)	$	(62,307	)
5% rise	$	47,364		$	8,667		$	2,789		$	3,487		$	62,307
10% rise	$	94,728		$	17,331		$	5,579		$	6,975		$	124,613
15% rise	$	142,092		$	25,997		$	8,368		$	10,462		$	186,919
Foreign currency translation recorded as of June 30, 2008	$	298,726		$	72,200		$	16		$	7,001		$	377,943

	U.S. Dollar Relative to
As of June 30,	Australian Dollar	Euro	Hong Kong Dollar*	Canadian Dollar
2008	0.9586	1.5755	0.1283	0.9790
2007	0.8493	1.3542	0.1279	0.9385

* Since the Hong Kong dollar is pegged to the U.S. dollar, there has not been a significant impact to the recorded translation adjustment from Hong Kong dollar fluctuations. To the extent the currency becomes de-pegged in whole or on a partial basis, fluctuations could occur in the future.

The changes in the foreign currency exchange rates from the second quarter of 2007 to the second quarter of 2008 positively affected our investments in our foreign subsidiaries by $135.4 million. This foreign currency translation impact is calculated by applying the period over period change in the period end spot exchange rates to the current period end investment balance of our foreign subsidiaries.

As of June 30, 2008, $1.4 billion, excluding cash and cash equivalents of our invested assets, was held by PMI Australia and was predominantly denominated in the Australian dollars. As of June 30, 2008, $ 0.2 billion, excluding cash and cash equivalents of our invested assets, was held by PMI Europe and was denominated primarily in Euros. The above table shows the exchange rate of the U.S. dollar relative to the Australian dollar, Euro, Hong Kong dollar and Canadian dollar as of June 30, 2008 and 2007. The value of the Australian dollar, Euro, and Canadian dollar strengthened relative to the U.S. dollar as of June 30, 2008 compared to June 30, 2007.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures — Based on their evaluation as of June 30, 2008, 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 1. LEGAL PROCEEDINGS

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007, in March 2008, we and certain of our executive officers were named in a securities class action complaint filed in the United States District Court for the Northern District of California (Lori Weinrib v. The PMI Group, Inc., L. Stephen Smith, David H. Katkov and Donald P. Lofe, Jr.). Also in March 2008, we and the same executive officers were named in a second securities fraud class action complaint also filed in the United States District Court for the Northern District of California (Kimberly D. Holt v. The PMI Group, Inc., L. Stephen Smith, David H. Katkov and Donald P. Lofe, Jr.). On April 17, 2008, the court issued an order consolidating the two actions for pretrial purposes. On June 20, 2008, the court appointed a lead plaintiff in the action. The plaintiffs’ consolidated complaint is scheduled to be filed on or before August 28, 2008. We continue to believe that we have meritorious defenses and intend to defend ourselves vigorously.

Additionally, in April 2008, two shareholder derivative complaints, The Port Authority of Allegheny County Retirement and Disability Allowance Plan v. L. Stephen Smith, et. al., and Jorge Torres, Derivatively on Behalf of The PMI Group, Inc. v. L. Stephen Smith, et. al., were filed in the United States District Court for the Northern District of California and the Superior Court of the State of California in the County of Contra Costa, respectively, naming as defendants certain present and former PMI Group executive officers and directors, and naming The PMI Group as a nominal defendant. Both actions have been stayed pending resolution of the defendants’ motions to dismiss the consolidated securities class actions. We continue to believe that we have meritorious defenses and intend to defend ourselves vigorously.

Various other legal actions and regulatory reviews are currently pending that involve us and specific aspects of our conduct of business. Although there can be no assurance as to the ultimate disposition of these matters, in the opinion of management, based upon the information available as of the date of these financial statements, the expected ultimate liability in one or more of these actions is not expected to have a material effect on our consolidated financial condition, results of operations or cash flows.

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ITEM 1A. RISK FACTORS

The discussion of our business and financial results should be read together with the risk factors contained below and in Item 1A of our 2007 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, which describe risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, or prospects in a material and adverse manner.

We have been negatively impacted by recent downgrades of the insurer financial strength ratings of some of our wholly-owned insurance subsidiaries. Additional adverse rating agency actions with respect to our insurance subsidiaries could further harm our financial condition and our business.

To date, the ability of our wholly-owned insurance subsidiaries to attract new business and to compete has been highly dependent on the insurer financial strength ratings assigned to them by the rating agencies. On April 8, 2008, Standard & Poor’s lowered its insurer financial strength ratings on PMI, PMI Europe and PMI Guaranty to “A+” (CreditWatch with Negative Implications) from “AA” (Negative Outlook). On April 9, 2008, Standard & Poor’s lowered its insurer financial strength ratings on PMI Australia to a rating of “AA-” (CreditWatch with Negative Implications) from “AA” (CreditWatch with Negative Implications). On June 5, 2008, Fitch lowered its insurer financial strength ratings on PMI, PMI Europe, and PMI Guaranty to “A+” (Rating Watch Negative) from “AA” (Rating Watch Negative), and its long-term issuer rating of The PMI Group to “BBB+” from “A”. Fitch also lowered its insurer financial strength rating on PMI Australia to a rating of “AA-” from “AA”, while improving its rating outlook of PMI Australia from “Rating Watch Negative” to “Negative Outlook”. On June 26, 2008, Standard & Poor’s affirmed PMI Australia’s insurer financial strength rating at “AA-”and improved its rating outlook to “Negative Outlook” from “CreditWatch with Negative Implications”. On July 9, 2008, Moody’s lowered its insurer financial strength rating on PMI to “A3” (Negative Outlook) from “Aa2” (On Review for Possible Downgrade) and The PMI Group’s senior debt rating to “Baa3” (Negative Outlook) from “A1” (On Review for Possible Downgrade). Moody’s also lowered the ratings of PMI Europe and PMI Guaranty to “A3” (Negative Outlook) from “Aa3” (On Review for Possible Downgrade), and the rating of PMI Australia to a rating of “Aa3” (On Review for Possible Downgrade) from “Aa2” (On Review for Possible Downgrade). The ratings of PMI Australia, PMI Europe, PMI Canada, and PMI Guaranty are dependent in part upon the capital support of PMI.

As a result of the rating agencies’ recent downgrades of PMI, the GSEs have each required us to submit a written remediation plan outlining, among other things, the steps we are taking or plan to take to increase our and PMI’s insurer financial strength and ultimately restore PMI’s insurer financial strength rating to the “AA” or equivalent categories. We have submitted remediation plans to the GSEs and have discussed the plans with them. Freddie Mac has stated that it will continue to treat PMI as a Type I mortgage insurer but that its forbearance from enforcing Type II insurer requirements is wholly discretionary and subject to change and is dependent upon its evaluation of monthly updates regarding PMI’s progress in implementing its remediation plan. Fannie Mae has reviewed PMI’s remediation plan and continues to consider PMI an eligible mortgage insurer. Either of the GSEs or both of them, may require PMI to limit certain activities and practices in order to remain an eligible mortgage insurer. Such limitations could include, among other things, the preclusion of obtaining captive reinsurance without the GSEs’ consent, maximum risk-to-capital ratios and limitations on our ability to pay dividends or

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make other payments, which could limit our operating flexibility and limit the areas in which we may write new business. If either or both of the GSEs cease accepting our mortgage insurance products because we are not able to successfully implement remediation plans or comply with GSE-mandated limitations, our consolidated financial condition and results of operations would be significantly harmed, and an event of default would exist under our credit facility. In addition, if PMI’s insurer financial strength ratings are downgraded further by Standard & Poor’s, Fitch or Moody’s, either or both of the GSEs may cease to accept PMI’s mortgage insurance products.

The recent downgrades and any further downgrades also may harm our ability to compete. Although some of our U.S. competitors have also been downgraded, other of our competitors maintain ratings at the “AA” category, which may make it more difficult for us to compete and which could harm our consolidated financial condition and results of operations.

The recent downgrades also have had an adverse impact on our non-U.S. insurance subsidiaries. PMI Asia’s primary customer has significantly reduced its reinsurance allocation to us as a result of the recent downgrades of PMI Europe. In addition, PMI Europe’s and The PMI Group’s recent downgrades may give rise to the right by certain derivative counterparties to terminate their agreements, resulting in a possible termination payment, or require PMI Europe to post collateral for the benefit of such counterparties. In addition, although PMI Australia’s ratings were not downgraded below a “AA-” or equivalent rating, Standard & Poor’s and Fitch’s rating outlooks remain on “Negative Outlook”. PMI Australia’s ratings are dependent in part upon the capital support of PMI, and there can be no assurance that PMI Australia will not be downgraded in the future. Any downgrades of PMI Australia, or the prospect of a downgrade, could significantly impact its ability to compete.

We do not expect to regain “AA” or equivalent category insurer financial strength ratings on PMI and PMI Europe in the near term, and we cannot be sure that we will be able to regain these ratings at all. If we experience further downgrades, our business prospects, revenues, ability to compete, holding company debt ratings and the performance of our insurance subsidiaries could be significantly harmed. In addition, we may be required to raise additional capital to regain or maintain our ratings. There can be no assurance that we will be able to raise any additional capital in the future, either on acceptable terms and in a timely manner, or at all. Any of these events would harm our consolidated financial condition, results of operations and cash flows.

Our loss reserve estimates are subject to uncertainties and our actual losses may substantially exceed our loss reserves. Further, due to higher losses we may be required to record a premium deficiency reserve in the future. Changes in loss reserves or establishment of premium deficiency reserves may result in further volatility of net income and earnings.

The establishment of loss reserves is subject to inherent uncertainty and requires significant judgment by management. Loss reserves established with respect to our mortgage insurance business are based upon management’s estimates and judgments, principally with respect to the rate and severity of claims. Our actual losses may be substantially higher than our loss reserve estimates. Continued adverse economic and other conditions and resulting uncertainty with respect to the rate and severity of claims may result in substantial increases in loss reserves in the future. Additional increases in loss reserves would negatively affect our consolidated financial condition and results of operations.

We perform premium deficiency analyses quarterly on a single book basis for the U.S. Mortgage Insurance Operations using assumptions based on our best estimates when the analyses are performed. The calculation for premium deficiency requires significant judgment and includes estimates of future expected premiums, expected claims, loss adjustment expenses and maintenance costs as of the date of the test. The calculation of future expected premiums uses

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assumptions for persistency and termination levels on policies currently in force. Assumptions for future expected losses include future expected average claim sizes and claim rates which are based on the current default rate and expected future defaults.

A premium deficiency analysis was performed as of June 30, 2008, and we determined there was no premium deficiency in our U.S. Mortgage Insurance Operations segment despite significant losses in the second quarter and first half of 2008. Because this premium deficiency calculation required significant judgment and estimation, to the extent losses are higher or expected premiums are lower than the assumptions we used in our analysis, we could be required to record a premium deficiency reserve in the third quarter of 2008 or at any time in future reporting periods, which would negatively affect our financial condition and results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At The PMI Group’s Annual Meeting of Stockholders on May 15, 2008, the following individuals were elected to the Board of Directors, pursuant to voting results certified by the independent inspector of elections.

	Votes For	Votes Withheld
Mariann Byerwalter	57,177,925	17,858,428
Carmine Guerro	56,929,309	18,107,044
Wayne E. Hedien	56,815,436	18,220,917
Louis G. Lower II	56,929,309	18,107,841
Raymond L. Ocampo Jr.	57,388,469	17,647,884
John D. Roach	57,096,359	17,939,994
Steven L. Scheid	56,930,412	18,105,941
L. Stephen Smith	57,063,685	17,972,668
José H. Villarreal	57,206,070	17,830,283
Mary Lee Widener	57,095,092	17,941,261
Ronald H. Zech	56,926,476	18,109,877

The following proposals were ratified or approved at the Company’s Annual Meeting, pursuant to voting results certified by the independent inspector of elections.

	Votes For	Votes Against	Abstain
Ratification of the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2008.	74,765,285	223,986	47,079
Approval of the PMI Amended and Restated Bonus Incentive Plan	57,220,496	3,478,817	53,375
Approval of an amendment to the PMI Employee Stock Purchase Plan to increase the authorized shares.	55,556,143	5,146,231	50,315

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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.
August 8, 2008	/s/ Donald P. Lofe, Jr.
	Donald P. Lofe, Jr.
	Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)
August 8, 2008	/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*	Form of Indemnification Agreement between The PMI Group, Inc. and certain of its officers and directors.
10.2	Agreement dated as of June 10, 2008 by and among PMI Guaranty Co., Financial Guaranty Insurance Company and Assured Guaranty Re LTD.
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.

* Management or director contract or compensatory plan or arrangement.

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EX-10.1

EXHIBIT 10.1

INDEMNIFICATION AGREEMENT

INDEMNIFICATION AGREEMENT (this “Agreement”), effective as of the          day of                         , 20    , by and between The PMI Group, Inc., a Delaware corporation (the “Company”), and                      (the “Indemnitee”), an officer and/or a director of the Company or of one or more of its subsidiaries;

WHEREAS, the Indemnitee is currently serving as an officer and/or a director of the Company or of one or more subsidiaries of the Company and in such capacity has rendered and will render valuable services to the Company; and

WHEREAS, the Company desires to provide its officers and directors and those of its subsidiaries with adequate protection against various legal risks and potential liabilities to which such individuals are subject due to their positions with the Company or such subsidiaries, and has concluded that available liability insurance and statutory protections may provide inadequate and unacceptable protection to certain individuals requested to serve as its officers and directors or as officers and directors of its subsidiaries; and

WHEREAS, in order to induce and encourage highly experienced and capable persons such as the Indemnitee to continue to serve as an officer and/or a director of the Company or of one or more of its subsidiaries, the Board of Directors have determined, after due consideration and investigation of the terms and provisions of this Agreement and the various other options available to the Company and the Indemnitee in lieu hereof, that this Agreement is not only reasonable and prudent, but necessary to promote the best interests of the Company and its stockholders;

NOW, THEREFORE, in consideration of the premises and mutual agreements hereinafter set forth, and other good and valuable consideration, the receipt of which hereby is acknowledged, and in order to induce the Indemnitee to continue to serve as an officer and/or a director of the Company or, at the Company’s request, of certain subsidiaries, the Company and the Indemnitee hereby agree as follows:

1. Definitions. As used in this Agreement:

1.1 The term “Change in Control” shall mean:

(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in

the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (a), the following shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Paragraph 1.1. Notwithstanding the foregoing, in its sole discretion, the Board may increase the 20% threshold set forth above in this subsection (a) prior to any acquisition of 20% or more beneficial ownership of the Outstanding Company Common Stock or the Outstanding Company Voting Securities; provided, that (i) such increased threshold shall apply only to the acquisition and maintenance of beneficial ownership by any Person eligible to report such beneficial ownership at the time of such acquisition on Schedule 13G under the Exchange Act, and (ii) in the event that any Person initially eligible to so report on Schedule 13G thereafter ceases to be eligible to so report on Schedule 13G, the occurrence of the event causing such Person no longer to be eligible to so report shall be deemed an acquisition by such Person of all of the Outstanding Company Common Stock and Outstanding Company Voting Securities beneficially owned by such Person immediately prior to such occurrence; or

(b) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

(c) Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another entity (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, as such, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s

assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

(d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because any Person acquires beneficial ownership of 20% or more of the Outstanding Company Voting Securities or Outstanding Company Common Stock as a result of the acquisition of such securities or stock by the Company, which acquisition reduces the number of the Outstanding Company Voting Securities or Outstanding Company Common Stock; provided, that if after such acquisition by the Company such Person (while such Person remains the beneficial owner of 20% or more of the Outstanding Company Voting Securities or Outstanding Company Common Stock) becomes the beneficial owner of additional shares of such Outstanding Company Voting Securities or Outstanding Company Common Stock (as the case may be) and as a result of acquiring such beneficial ownership such Person’s percentage beneficial ownership of the Outstanding Company Voting Securities or Outstanding Company Common Stock increases by any amount, a Change of Control shall then occur. Capitalized terms used in this Paragraph 1.1, not otherwise defined, shall have the meaning set forth in the form of change of control employment agreement as approved at the February 12, 1998 meeting of the Board of Directors and as subsequently amended.

1.2 The term “Board of Directors” shall mean the Board of Directors of the Company.

1.3 The term “Disinterested Director,” with respect to any request by the Indemnitee for indemnification hereunder, shall mean a director of the Company who neither is nor was a party to the Proceeding in respect of which indemnification is being sought by the Indemnitee.

1.4 The term “Expenses” shall mean, without limitation, expenses related to or in connection with Proceedings, including attorneys’ fees, disbursements and retainers, accounting and witness fees, expenses related to the preparation or service as a witness, travel and deposition costs, expenses of investigations, judicial or administrative proceedings and appeals, amounts paid in settlement of a Proceeding by or on behalf of the Indemnitee, costs of attachment or similar bonds, any expenses of attempting to establish or establishing a right to indemnification, pursuant to this Agreement, under applicable law or otherwise, and reasonable compensation for time spent by the Indemnitee in connection with the investigation, defense or appeal of a Proceeding or action for indemnification for which he or she is not otherwise compensated by the Company or any third party. The term “Expenses” shall not include the amount of judgments, fines or penalties, or excise taxes or other amounts assessed with respect to any employee benefit plan, which are actually levied against or sustained by the Indemnitee.

1.5 The term “Independent Legal Counsel” shall mean (subject to Section 8(b)) any firm of attorneys (a) selected by lot from a list consisting of firms which meet minimum size criteria and other reasonable criteria established by the Board of Directors of the Company, so long as such firm has not represented the Company, the Indemnitee, any entity controlled by the Indemnitee, or any party adverse to the Company, the Indemnitee or any entity controlled by the Indemnitee, within the preceding five (5) years, and (b) reasonably acceptable to the Indemnitee. Notwithstanding the foregoing, the term “Independent Legal Counsel” shall not include any person who, under applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or the Indemnitee in an action to determine the Indemnitee’s right to indemnification under this Agreement, applicable law or otherwise.

1.6 The term “Other Enterprises” shall mean a corporation (other than the Company, and including, without limitation, subsidiaries of the Company and any partnership, joint venture, trust, employee benefit plan or other enterprise for which the Indemnitee is or was serving as a director, officer, employee, trustee, fiduciary, advisor or agent at the request of the Company.

1.7 The term “Proceeding” shall mean any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, or any other proceeding (including, without limitation, an appeal therefrom), formal or informal, whether brought in the name of the Company or otherwise, whether of a civil, criminal, administrative or investigative nature, whether by, in or involving a public official, law enforcement organization, public or government-sponsored board or commission, self-regulatory body, court or an administrative, other governmental or private entity or body (including, without limitation, an investigation by the Company or its Board of Directors of a committee thereof), and as to which the Indemnitee was or is a party or threatened to be made a party or was or is otherwise involved in by reason of (i) the fact that the Indemnitee is or was an officer or a director of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee, fiduciary, advisor or agent of an Other Enterprise, or was a director, officer, employee, trustee, fiduciary,

advisor or agent of a corporation which was a predecessor corporation of the Company or of another enterprise at the request of such predecessor corporation, whether or not he or she is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement is to be provided under this Agreement, including, without limitation, any such Proceeding arising out of or related to any act or omission of the Indemnitee in connection with the business of the Company or any of the Other Enterprises prior to, at the time of or subsequent to the date hereof, or (ii) the Indemnitee attempting to establish or establishing a right to indemnification pursuant to this Agreement, applicable law or otherwise.

1.8 The phrase “serving at the request of the Company” shall include, without limitation, (i) any service as an officer, director, employee, or agent which imposes duties on, or involves services by, such officer or director with respect to the Company or any Other Enterprise, and (ii) any service as an officer, director, employee or agent of a corporation which was a predecessor corporation of the Company or of an Other Enterprise at the request of the Company or any such predecessor corporation.

2. Services by the Indemnitee. The Indemnitee agrees to continue to serve as an officer and/or a director of the Company under the terms of his or her agreement with the Company for so long as he or she is duly elected and qualified, appointed or until such time as he or she tenders his or her resignation in writing or is removed as an officer and/or a director; provided, however, that the Indemnitee may at any time and for any reason resign from such positions (subject to any other contractual obligation or other obligation imposed by operation of law).

3. Proceeding Other Than a Proceeding By or In the Right of the Company. The Company shall indemnify the Indemnitee if the Indemnitee was or is a party to or threatened to be made a party to or was or is otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Company to procure a judgment in its favor), by reason of the fact that the Indemnitee was or is an officer or a director of the Company, or was or is serving at the request of the Company as a director, officer, employee, trustee, fiduciary, advisor or agent of an Other Enterprise, or was a director, officer, employee, trustee, fiduciary, advisor or agent of a corporation which was a predecessor corporation of the Company or of another enterprise at the request of the Company or any such predecessor corporation, against all Expenses, judgments, fines, forfeitures, disgorgements and penalties, and excise taxes and any other amounts assessed with respect to any employee benefit plan, which are actually incurred by the Indemnitee in connection with such a Proceeding, to the fullest extent permitted by applicable law and not prohibited by the Company’s Certificate of Incorporation, as amended, or the Company’s By-Laws, as amended, and subject in each case to Paragraph 7 below; provided, that any settlement of a Proceeding be approved in advance in writing by the Company and the Indemnitee, except that the Indemnitee’s approval shall not be required for a settlement of a Proceeding that is limited to the payment of money and a full release of the Indemnitee and that does not impose any penalty, bar, disqualification or limitation on or otherwise adversely affect the Indemnitee (including, but without limitation, by involving any admission or other statement of liability, guilt or any illegal, improper or negligent act or omission on the part of or concerning the Indemnittee).

4. Proceedings By or In the Right of the Company. The Company shall indemnify the Indemnitee if the Indemnitee was or is a party to or threatened to be made a party to or was or is otherwise involved in any Proceeding by or in the right of the Company to procure a judgment in its favor by reason of the fact that the Indemnitee was or is an officer or a director of the Company, or was or is serving at the request of the Company as a director, officer, employee, trustee, fiduciary, advisor or agent of an Other Enterprise, or was a director, officer, employee, trustee, fiduciary, advisor or agent of a corporation which was a predecessor corporation of the Company or of another enterprise at the request of the Company or any such predecessor corporation, against all Expenses, judgments, fines, forfeitures, disgorgements and penalties, and excise taxes and any other amounts assessed with respect to any employee benefit plan, which are actually incurred by the Indemnitee in connection with such a Proceeding, to the fullest extent permitted by applicable law and not prohibited by the Company’s Certificate of Incorporation, as amended, or the Company’s By-Laws, as amended, and subject in each case to Paragraph 7 below. Notwithstanding the foregoing, indemnification shall not be made in respect of any claim, issue or matter in such a Proceeding as to which the Indemnitee shall have been adjudged to be liable to the Company if applicable law prohibits such indemnification; provided, however, indemnification shall be made by the Company in such event if, and to the extent that, the Court of Chancery of the State of Delaware, or the court or other official body in which such Proceeding shall have been brought or is pending, shall determine that indemnification is appropriate under the circumstances.

5. Indemnification for Costs, Charges and Expenses of Witness or Successful Party. Notwithstanding any other provision of this Agreement (except as set forth in subparagraph 9(a) hereof), and without a requirement for a determination as required by Paragraph 8 hereof, to the extent that the Indemnitee (a) has prepared to serve or has served as a witness in any Proceeding in any way relating to the Company or any of the Company’s subsidiaries, affiliates, employee benefit plans, such plan’s participants or beneficiaries or any other enterprise, or in any way relating to anything done or not done (whether actually or allegedly) by the Indemnitee as an officer or a director of the Company, as a director, officer, employee, trustee, fiduciary, advisor or agent of an Other Enterprise, or as a director, officer, employee, trustee, fiduciary, advisor or agent of a corporation which was a predecessor corporation of the Company or of another enterprise at the request of the Company or any such predecessor corporation, or (b) has been successful in the defense of any Proceeding or in the defense of any claim, issue or matter therein, on the merits or otherwise, including the dismissal of a Proceeding without prejudice or the settlement of a Proceeding without an admission of liability, the Indemnitee shall be indemnified against all Expenses actually incurred by the Indemnitee in connection therewith to the fullest extent permitted by applicable law and not prohibited by the Company’s Certificate of Incorporation, as amended, or the Company’s By-Laws, as amended, subject in each case to Paragraph 7 below.

6. Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for a portion of the Expenses, judgments, fines, forfeitures, disgorgements or penalties, or excise taxes or other amounts assessed with respect to any employee benefit plan, which are actually incurred by him or her in the investigation, defense, appeal or settlement of any Proceeding, but not, however, for the total amount of his or

her Expenses, judgments, fines, forfeitures, disgorgements or penalties, or excise taxes or other amounts assessed with respect to any employee benefit plan, then the Company shall nevertheless indemnify the Indemnitee for the portion of such Expenses, judgments, fines, forfeitures, disgorgements, penalties, or excise taxes or other amounts to which the Indemnitee is entitled.

7. Advances of Expenses. The Expenses incurred by the Indemnitee in any Proceeding shall be paid promptly by the Company at the time incurred in advance of the final disposition of the Proceeding at the written request of the Indemnitee to the fullest extent permitted by applicable law and not prohibited by the Company’s Certificate of Incorporation, as amended, or the Company’s By-Laws, as amended; provided, that the Indemnitee shall set forth in such request reasonable evidence that such Expenses have been incurred by the Indemnitee in connection with such Proceeding, a statement that such Expenses do not relate to any matter described in subparagraph 9(a) of this Agreement, and an undertaking in writing to repay any advances of Expenses (a) if it is ultimately determined as provided in subparagraph 8(b) of this Agreement that the Indemnitee is not entitled to indemnification for such Expenses under this Agreement, or (b) upon reimbursement or other payment to the Indemnitee under any applicable insurance policy of the Expenses so advanced. The undertaking required by this Paragraph 7 shall be an unlimited general obligation of the Indemnitee, but shall not be secured by or made with reference to the financial ability of the Indemnitee to make repayment.

8. Indemnification Procedure: Determination of Right to Indemnification.

(a) Promptly after receipt by the Indemnitee of notice of the commencement of any Proceeding (the receipt of which shall be conclusively presumed if the Indemnitee is served with or has actual knowledge of any citation, summons, complaint, indictment or any other similar documents relating to such Proceeding), the Indemnitee shall, if a claim for indemnification or advances in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof in writing (which notice shall be addressed to the General Counsel of the Company). The omission to so notify the Company will not relieve the Company from any liability which the Company may have to the Indemnitee under this Agreement except to the extent that the Company shall have lost substantive or procedural rights with respect to the defense of any Proceeding as a result of such omission to so notify.

(b) The Indemnitee shall be conclusively presumed to have met the relevant standards of conduct, if any, as defined by Delaware law, for indemnification pursuant to this Agreement and shall be absolutely entitled to such indemnification and advances, unless a good faith determination by clear and convincing evidence is made that the Indemnitee has not met such standards (i) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors, (ii) by the stockholders of the Company by a majority vote of a quorum thereof consisting of stockholders who are not parties to the Proceeding in respect of which indemnification is being sought by the Indemnitee under this Agreement, (iii) by Independent Legal Counsel as set forth in a written opinion, provided, that (A) a quorum of Disinterested Directors is not obtainable or (B) the Board of Directors of the Company by a majority vote of a

quorum thereof consisting of Disinterested Directors so directs, or (iv) by a court of competent jurisdiction; provided, however, that if a Change of Control shall have occurred and the Indemnitee so requests in writing, such determination shall be made by Independent Legal Counsel (which, for purposes of this proviso only, shall mean a law firm, a member of a law firm, or an independent practitioner, that is experienced in matters of corporation law and shall include any person who, under the applicable standards of professional conduct then prevailing, would not have a conflict of interest in representing either the Company or the Indemnitee in an action to determine the Indemnitee’s right to indemnification-under this Agreement, applicable law or otherwise) selected by the Indemnitee.

(c) If the Company fails to respond within sixty (60) days to a written request for indemnification or advances, the Company shall be deemed to have approved the request. If the Company denies a written request for indemnification or advances, in whole or in part, or if payment in full pursuant to such request is not made within thirty (30) days thereof, the rights provided by this Agreement shall be enforceable by the Indemnitee in any court of competent jurisdiction. Such judicial proceeding shall be made de novo. The burden of proving by clear and convincing evidence that indemnification or advances is not appropriate shall be on the Company. Neither the failure of the directors or stockholders of the Company or Independent Legal Counsel to have made a determination prior to the commencement of such action that indemnification or advances is proper in the circumstances because the Indemnitee has met the applicable standard of conduct, if any, nor an actual determination by the directors or stockholders of the Company or Independent Legal Counsel that the Indemnitee has not met the applicable standard of conduct, shall be a defense to an action by the Indemnitee, shift the burden of proof to the Indemnitee or create a presumption for the purpose of such an action that the Indemnitee has not met the applicable standard of conduct. The termination or settlement of any Proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, (i) create a presumption that the Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in the best interests of the Company and/or its stockholders, or, with respect to any criminal Proceeding, that the Indemnitee had reasonable cause to believe that his or her conduct was unlawful, or (ii) otherwise adversely affect the rights of the Indemnitee to indemnification or advances under this Agreement, except in each case as may be provided herein. The Company shall not oppose the Indemnitee’s right or entitlement to indemnification or advances in any such judicial proceeding or appeal therefrom. The Company further agrees to stipulate to such rights in any such judicial proceeding or appeal therefrom unless a determination is made pursuant to Section 8(b) that the Indemnitee is not entitled to indemnification or advances. The Company further agrees to stipulate in any such judicial proceeding that the Company is bound by all the provisions of this Agreement and is precluded from making any assertion to the contrary.

(d) If a court of competent jurisdiction shall determine that the Indemnitee is entitled to any indemnification or advances hereunder, the Company shall pay all Expenses actually incurred by the Indemnitee in connection with such adjudication (including, but not limited to, any appellate proceedings). The Indemnitee’s Expenses incurred in connection with any Proceeding concerning his or her right to indemnification or advances in whole or in part pursuant to this Agreement shall also be indemnified by the Company, regardless of the outcome of such a Proceeding, to the fullest extent permitted by applicable law and not prohibited by the Company’s Certificate of Incorporation, as amended, or the Company’s By-Laws, as amended; provided, however, that nothing in this clause (d) shall limit or diminish in any respect the Company’s obligations to advance Expenses pursuant to Paragraph 7 above.

(e) With respect to any Proceeding for which indemnification or advances are requested, the Company will be entitled to participate therein at its own expense and, except as otherwise provided below, to the extent that it may wish, the Company may assume the defense thereof, with counsel acceptable to the Indemnitee. After notice from the Company to the Indemnitee of its election to so assume the defense of a Proceeding, the Company will not be liable to the Indemnitee under this Agreement for any Expenses subsequently incurred by the Indemnitee in connection with the defense thereof, other than as provided below. The Company shall not settle any Proceeding in any manner which would impose any penalty, bar, disqualification or limitation on or otherwise adversely affect the Indemnitee without the Indemnitee’s written consent (including, without limitation, by involving any admission or other statement of liability, guilt or any illegal, improper or negligent act or omission on the part of or concerning the Indemnitee). The Indemnitee shall have the right to employ his or her own counsel in any Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense of the Proceeding shall be at the expense of the Indemnitee, unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of a Proceeding, or (iii) the Company shall not in fact have employed counsel acceptable to the Indemnitee to assume the defense of a Proceeding, in each of which cases the fees and expenses of the Indemnitee’s counsel shall be advanced by the Company pursuant to the terms of Paragraph 7 above. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which the Indemnitee reasonably has concluded that there may be a conflict of interest between the Company and the Indemnitee.

9. Limitations on Indemnification. No payments pursuant to this Agreement shall be made by the Company:

(a) To indemnify or advance funds to the Indemnitee for (i) Expenses with respect to Proceedings initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under applicable law, or (ii) Expenses incurred by the Indemnitee in connection with preparing to serve or serving, prior to a Change in Control, as a witness in cooperation with any party or entity who or which has threatened or commenced any action or proceeding against the Company, or any director, officer, employee, trustee, agent, representative, subsidiary, parent corporation or affiliate of the Company, but such indemnification or advancement of Expenses in each such case may be provided by the Company if the Board of Directors finds it to be appropriate;

(b) To indemnify the Indemnitee for any Expenses, judgments, fines, forfeitures, disgorgement or penalties, or excise taxes or other amounts assessed with respect to any employee benefit plan, which are actually levied against or sustained by the Indemnitee in any Proceeding for which payment has been actually made to the Indemnitee under a valid and

collectible insurance policy, except in respect of any excess beyond the amount of payment under such insurance policy; provided, however, that nothing in this clause (b) shall limit or diminish in any respect the Company’s obligations to advance Expenses pursuant to Paragraph 7 above;

(c) To indemnify the Indemnitee for any Expenses, judgments, fines, forfeitures, disgorgements or penalties, sustained in any Proceeding for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended from time to time, or provisions of any federal, state or local statute or regulation that prohibits indemnification.

(d) To indemnify the Indemnitee for any Expenses, judgments, fines, forfeitures, disgorgements or penalties, or excise taxes or other amounts assessed with respect to any employee benefit plan, for which the Indemnitee is indemnified by the Company otherwise than pursuant to this Agreement and as to which payment has been actually made to the Indemnitee under such other indemnification obligations, except in respect of any excess beyond the amount of payment under such other indemnification obligations; provided, however, that nothing in this clause (d) shall limit or diminish in any respect the Company’s obligations to advance Expenses pursuant to Paragraph 7 above;

(e) To indemnify the Indemnitee for any Expenses, judgments, fines, forfeitures, disgorgements or penalties, or excise taxes or other amounts assessed with respect to any employee benefit plan, for which the Indemnitee is indemnified, or the payment of which is guaranteed, by a Company affiliate or another third party and as to which payment has been actually made to the Indemnitee under such other indemnification or guaranty obligations, except in respect of any excess beyond the amount of payment under such other indemnification or guaranty obligations; provided, however, that nothing in this clause (d) shall limit or diminish in any respect the Company’s obligations to advance Expenses pursuant to Paragraph 7 above;

(f) To indemnify the Indemnitee for any Expenses, judgments, fines, forfeitures, disgorgements or penalties, or excise taxes or other amounts assessed with respect to any employee benefit plan, on account of the Indemnitee’s conduct if such conduct shall be adjudged to have been knowingly fraudulent or willful misconduct by a court of competent jurisdiction in a final determination from which there is no appeal or as to which the applicable period for appeal has expired; or

(g) If a court of competent jurisdiction reaches a final determination from which there is no appeal or as to which the applicable period for appeal has expired that any indemnification hereunder is unlawful.

10. Maintenance of Liability Insurance.

(a) The Company hereby covenants and agrees that, as long as the Indemnitee continues to serve as an officer or a director of the Company and thereafter as long as the Indemnitee may be subject to any possible Proceeding, the Company, subject to subparagraph 10(c) of this Agreement, shall promptly obtain and maintain in full force and effect directors’ and officers’ liability insurance (“D&O Insurance”) in reasonable amounts from established and reputable insurers.

(b) In all D&O Insurance polices, the Indemnitee shall be named as an insured in such a manner as to provide to the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company’s directors and officers.

(c) Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines, in its sole discretion, that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, or the coverage provided by such insurance is so limited by exclusions that it provides an insufficient benefit.

11. Duration. All agreements and obligations of the Company contained herein (a) shall be applicable to any period prior to the date hereof during which the Indemnitee has been an officer and/or a director of the Company (or (i) a director, officer, employee, trustee, fiduciary, advisor or agent of an Other Enterprise, or (ii) a director, officer, employee, trustee, fiduciary, advisor or agent of a corporation which was a predecessor corporation of the Company or of another enterprise at the request of the Company or any such predecessor corporation); (b) shall be applicable to and continue during any period that the Indemnitee is an officer and/or a director of the Company (or is serving at the request of the Company as a director, officer, employee, trustee, fiduciary, advisor or agent of an Other Enterprise) and (c) shall be applicable and continue thereafter so long as the Indemnitee shall be subject to any possible Proceeding by reason of the fact that the Indemnitee was an officer or a director of the Company or serving in any other capacity referred to in this Paragraph 11.

12. Indemnification Hereunder Not Exclusive.

(a) The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under the Certificate of Incorporation, as amended, of the Company, the By-Laws, as amended, of the Company, any agreement, vote of stockholders or Disinterested Directors, provisions of applicable law, or otherwise, both as to action in his or her official capacity and as to action in another capacity on behalf of the Company while holding such office.

(b) Except as otherwise expressly provided in Paragraphs 9(b), 9(d) and 9(e) above with respect to payments actually made and received by Indemnitee, the indemnification provided by this Agreement is provided independently of, and shall not be deemed superseded by, subordinated to, conditioned on the exercise of rights by the Indemnitee under, or limited or otherwise affected in any respect by, (i) any D&O Insurance or other insurance coverage maintained by the Company, any Company affiliate or any other third party with respect to the Indemnitee’s acts or omissions to act, (ii) any indemnification obligations of the Company other than pursuant to this Agreement, or (iii) any guaranty or indemnification obligations of any Company affiliate or other third party with respect to the Indemnitee’s acts or omissions to act or with respect to the Company’s performance hereunder.

13. Successors and Assigns.

(a) This Agreement shall be binding upon, and shall inure to the benefit of, the Indemnitee and his or her heirs, executors, administrators and assigns, whether or not the Indemnitee has ceased to be an officer or director, and the Company and its successors and assigns. Upon the sale of all or substantially all of the business, assets or capital stock of the Company to, or upon the merger of the Company into or with, any corporation, partnership, joint venture, trust or other person, this Agreement shall inure to the benefit of and be binding upon both the Indemnitee and such purchaser or successor person, and the Company (or any entity assuming the Company’s obligations hereunder) shall not sell, or permit or acquiesce in the sale of, all or substantially all of the business, assets or capital stock of the Company (or such entity) to, or permit the merger of the Company (or such entity) into or with, any corporation, partnership, joint venture, trust or other person, unless the purchaser or successor person agrees in writing to be bound by all terms and conditions of this Agreement applicable to the Company (or such entity). Subject to the foregoing, this Agreement may not be assigned by either party without the prior written consent of the other party hereto.

(b) If the Indemnitee is deceased and is entitled to indemnification under any provision of this Agreement, the Company shall indemnify the Indemnitee’s estate and his or her spouse, heirs, executors, administrators and assigns against, and the Company shall, and does hereby agree to, assume any and all Expenses, judgments, fines or penalties, or excise taxes or other amounts assessed with respect to any employee benefit plan, actually and reasonably incurred by or for the Indemnitee or his or her estate, in connection with the investigation, defense, appeal or settlement of any Proceeding. Further, upon the death of the Indemnitee, the Company (i) shall provide written notice to the parties listed in this clause (b), to such address(es) as the Indemnitee shall have previously provided to the Company, of the Company’s agreement hereunder to indemnify the Indemnitee and such parties against and to itself assume such Expenses, judgments, fines, penalties, excise taxes or other amounts, and (ii) when requested in writing by any of the parties listed in this clause (b), shall provide appropriate evidence of such agreement by the Company hereunder to so indemnify the Indemnitee and such parties.

14. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights.

15. Severability. Each and every paragraph, sentence, term and provision of this Agreement is separate and distinct so that if any paragraph, sentence, term or provision thereof shall be held to be invalid, unlawful or unenforceable for any reason, such invalidity, unlawfulness or unenforceability shall not affect the validity, lawfulness or enforceability of any other paragraph, sentence, term or provision hereof. To the extent required, any paragraph, sentence, term or provision of this Agreement may be modified by a court of competent jurisdiction to preserve its validity and to provide the Indemnitee with the broadest possible indemnification permitted under applicable law.

16. Savings Clause. If this Agreement or any paragraph, sentence, term or provision hereof is invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify the Indemnitee as to any Expenses, judgments, fines, forfeitures, disgorgements or penalties, or excise taxes or other amounts assessed with respect to any employee benefit plan, incurred with respect to any Proceeding to the fullest extent permitted by any (a) applicable paragraph, sentence, term or provision of this Agreement that has not been invalidated or (b) applicable provision of applicable law.

17. Interpretation; Governing Law. This Agreement shall be construed as a whole and in accordance with its fair meaning. Headings are for convenience only and shall not be used in construing meaning. This Agreement shall be governed and interpreted in accordance with the laws of the State of Delaware.

18. Amendments. No amendment, waiver, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by each party hereto. The indemnification rights afforded to the Indemnitee hereby are contract rights and may not be diminished, eliminated or otherwise affected by amendments to the Certificate of Incorporation, as amended, of the Company, the By-Laws, as amended, of the Company, or by other agreements, including D&O Insurance policies, of the Company.

19. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other.

20. Notices. Any notice required to be given under this Agreement shall be directed to the Company at 3003 Oak Road, Walnut Creek, California 94597, Attention: General Counsel, and to the Indemnitee at the address noted below or to such other address as either shall designate to the other in writing.

IN WITNESS WHEREOF, the parties have executed this Indemnification Agreement as of the date first written above.

THE PMI GROUP, INC.
By:
	Name:
	Title:
INDEMNITEE
By:
	Name:
	Title:
	Address:

EX-10.2

EXHIBIT 10.2

AGREEMENT

This AGREEMENT (this “Agreement”) dated June 10, 2008, is by and among PMI Guaranty Co., a New Jersey domiciled insurance company (“PGC”), Financial Guaranty Insurance Company, a New York domiciled insurance company (“FGIC”) and Assured Guaranty Re Ltd., a Bermuda insurance company (formerly known as Assured Guaranty Re International Ltd.) (“AG Re”).

WITNESSETH:

WHEREAS, FGIC and PGC have entered into a Facultative Reinsurance Agreement (the “PGC Reinsurance Agreement”) dated December 29, 2006, pursuant to which FGIC has ceded as reinsurance to PGC, and PGC has agreed to accept as reinsurance, the percentage or other applicable share of each of the policies (the “Policies”) identified on Schedule I hereto;

WHEREAS, FGIC and PGC desire to terminate the PGC Reinsurance Agreement with respect to the Policies;

WHEREAS, FGIC desires to cede as reinsurance to AG Re, and AG Re has agreed to accept as reinsurance, the Policies pursuant to the terms of the Facultative Reinsurance Agreement (the “AG Re Reinsurance Agreement”), dated as of December 23, 2004, between FGIC and AG Re;

WHEREAS, FGIC’s agreement to terminate the PGC Reinsurance Agreement with respect to the Policies is expressly conditioned on AG Re’s agreement to reinsure the Policies and PGC’s agreement to pay to FGIC the amount specified in Section 1(d) below;

WHEREAS, AG Re’s agreement to reinsure the Policies is based upon, and subject to performance of, FGIC’s and PGC’s agreement to pay to AG Re the amounts specified in Sections 1(d) and 2(b), respectively, below;

WHEREAS, PGC desires to indemnify AG Re against losses with respect to the Policies identified on Schedule II hereto (the “Indemnified Policies”).

NOW, THEREFORE, in consideration of the mutual premises and covenants contained herein and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

Section 1. Release and Discharge of PGC Reinsurance Agreement.

(a) FGIC and PGC acknowledge and agree that with effect from 12:01 a.m. Eastern Time on the date hereof, PGC’s obligations under the PGC Reinsurance Agreement with respect to the Policies shall be released and discharged in all respects and all of the respective rights and obligations of FGIC and PGC thereunder are irrevocably and unconditionally cancelled and terminated.

(b) Each of FGIC and PGC fully, finally, unconditionally and irrevocably releases and discharges the other party from any obligations, claims or liabilities (of any nature whatsoever, whether now existing, hereafter arising or contingent and whether known or unknown) of the other party arising out of or to be performed under the PGC Reinsurance Agreement with respect to the Policies.

(c) In consideration of FGIC’s agreement to terminate the PGC Reinsurance Agreement with respect to the Policies and FGIC’s release and waiver of rights set forth in (f) below, PGC shall pay to FGIC on the date hereof and as a condition to such termination, by wire transfer to an account identified by FGIC, cash in an amount equal to $4,643,178, representing the unearned statutory premium reserves with respect to the Policies of $5,854,721 less a ceding commission of $1,211,543.

(d) In consideration of AG Re’s agreement to reinsure the Policies and thereby facilitate the termination of the PGC Reinsurance Agreement with respect to the Policies, PGC shall pay to AG Re on the date hereof and as a condition to such termination, by wire transfer to an account identified by AG Re, cash in an amount equal to (x) $8,977,466 less (y) $89,774.66, such amount to be withheld by PGC in respect of Federal excise tax, for a net payment of $8,887,691.34

(e) Each of PGC and FGIC hereby represents and warrants to the other of them and to AG Re that no consent, approval, authorization, order, registration or qualification of or with any governmental body in the United States having jurisdiction over it, including without limitation, in the case of PGC, the New Jersey Department of Banking and Insurance (“NJDOBI”) and in the case of FGIC the New York State Insurance Department (“NYID”), is required to be made or obtained by it for the performance of its obligation under this Agreement, except for (i) in the case of FGIC, filing with and approval of NYID pursuant to Section 1505 of the New York Insurance Law, (ii) in the case of PGC, filing with and waiver or approval of NJDOBI pursuant to New Jersey Admin. Code 11:2-29.1 et seq. and (iii) such as have been obtained (copies of which have been furnished by the party making such filing or obtaining such approval to the other) and are in full force and effect. The effectiveness of this Agreement is subject to the filings and approvals referred to in the prior sentence having been made and obtained and being in full force and effect.

(f) FGIC hereby fully, finally, unconditionally and irrevocably releases and discharges (i) each of PGC and PMI Mortgage Insurance Company (“PMI”) from any obligations, claims or liabilities in favor of FGIC (of any nature whatsoever, whether now existing, hereafter arising or contingent and whether known or unknown) of either PGC or PMI arising out of or to be performed under the Agreement between PGC and PMI dated October 20, 2006 relating to capital support (the “Capital Support Agreement”) and (ii) The PMI Group, Inc. (“TPG”) from any obligations, claims or liabilities in favor of FGIC (of any nature whatsoever, whether now existing, hereafter arising or contingent and whether known or unknown) arising out of or to be performed under the Guarantee of TPG dated October 20, 2006 (the “Guarantee”).

FGIC hereby fully, finally, unconditionally and irrevocably relinquishes, waives and disclaims any and all rights, including rights as a third party beneficiary, it may have under or arising out of either of the Capital Support Agreement or the Guarantee and any and all rights to enforce either of them or any provision thereof.

(g) On the date hereof, AG Re shall, in accordance with Article XIV of the AG Re Reinsurance Agreement, increase any letter of credit or trust account required thereunder to an amount equal to the amount required for FGIC to receive full statutory financial credit for the reinsurance provided thereunder.

Section 2. Reinsurance of the Policies.

(a) FGIC and AG Re hereby agree that each of the Policies (including any and all incurred losses with respect thereto) shall be reinsured pursuant to the AG Re Reinsurance Agreement and shall become “Covered Policies” thereunder with effect from 12:01 a.m. Eastern Time on the date hereof. FGIC and AG Re shall simultaneously with the execution of this Agreement execute a reinsurance memorandum with respect to the Policies substantially in the form of Exhibit A to the AG Re Reinsurance Agreement.

(b) In consideration of AG Re’s agreement to reinsure the Policies, FGIC shall pay to AG Re on the date hereof and as a condition to such reinsurance, by wire transfer to an account identified by AG Re, cash in an amount equal to $4,584,631, representing the unearned statutory premium reserves with respect to the Policies of $5,854,721 less (x) a ceding commission of $1,211,543 withheld by PGC pursuant to Section 1(c) and (y) an amount of $58,547.21 to be withheld by FGIC in respect of Federal excise tax.

(c) As between FGIC and AG Re:

(i) AG Re represents that it has sufficient knowledge and experience in financial, business and other relevant matters to be capable of evaluating the risks and merits of undertaking the transactions contemplated by this Agreement. In entering into this Agreement, AG Re is not relying on any representation as to any past or present fact or circumstance, or on any representation, prediction or estimation as to any future fact or circumstance, whatsoever made by or on behalf of FGIC. Prior to AG Re’s execution and delivery of this Agreement and the AG Re Reinsurance Agreement, AG Re has (A) been given the opportunity to ask questions of, and receive answers from, FGIC concerning the terms and conditions of the cession contemplated by this Agreement and the subject matter hereof; (B) been given the opportunity to request and review such additional information necessary to evaluate the risks and merits of entering into and performing this Agreement and to verify the accuracy of or to supplement the information provided to AG Re to the extent that FGIC possesses such information; and (C) received all documents and information reasonably necessary to make the decision to enter into and perform this Agreement.

(ii) AG Re hereby knowingly and voluntarily waives any and all defenses to payment under this Agreement and the AG Re Reinsurance Agreement that are based on misrepresentation and/or non-disclosure as to the subject matter of this Agreement at or prior

to AG Re’s execution and delivery hereof, and agrees not to seek rescission of this Agreement or the AG Re Reinsurance Agreement because of any actual or alleged misrepresentation and/or non-disclosure as to the subject matter hereof at or prior to AG Re’s execution and delivery of this Agreement.

Section 3. Indemnified Policies.

(a) PGC hereby agrees, subject to the Aggregate Limit, to indemnify and hold harmless AG Re from and against any and all Losses (as defined in the AG Re Reinsurance Agreement) and/or other amounts paid from time to time by AG Re under the Indemnified Policies (such Losses and other amounts are collectively referred to herein as “Indemnified Losses”). PGC’s limit of liability under or related to this Agreement with respect to the Indemnified Policies shall, notwithstanding any other provisions of this Agreement to the contrary, be $22,900,000 in the aggregate (the “Aggregate Limit”).

(i) Except as otherwise provided in Section 3(f)(ii), PGC’s obligations to indemnify AG Re as provided in subsection (i) above shall be limited to the amounts deposited in the Trust Account (as defined below) from time to time and AG Re’s sole recourse with respect to its right to indemnity as provided in subsection (i) above shall be to the assets contained in the Trust Account from time to time. This limitation shall not apply to any right which AG Re may have with respect to PGC’s failure to deposit funds in the Trust Account as provided in Section 3(f)(ii) below. AG Re shall provide to PGC a true and complete copy of each claim made by FGIC upon AG Re in respect of the Indemnified Policies and evidence of the payment of any Indemnified Losses promptly after withdrawing amounts from the Trust Account in reimbursement therefor. FGIC hereby consents to AG Re providing PGC with such information.

(b) Subject to the following sentence, as between PGC and AG Re, AG Re shall have complete and sole control of and direction of all activities, efforts and decisions relating to Indemnified Policies, including but not limited to all activities, efforts and decisions to:

(i) mitigate, investigate, negotiate, settle or defend a Loss or potential Loss;

(ii) prevent, mitigate or investigate a probable Loss or potential Loss under Indemnified Policies as to which AG Re has posted a loss reserve;

(iii) investigate and work out a Loss or potential Loss; and

(iv) protect, perfect and exercise any Recovery (as defined in (c) below) or security interests or other rights relating to any Indemnified Policy and may take any action as it may deem advisable with respect thereto.

In handling any claim made by FGIC in respect of an Indemnified Policy, AG Re shall adhere in all material respects to the claims adjusting and claims paying practices used within AG Re’s business generally, subject in all respects to subsection (e) below.

(c) All Loss settlements by AG Re (or its cedent), all Recovery settlements and all settlements with an issuer or obligor (an “Issuer”) with respect to obligations insured under a Policy (including deficiencies resulting therefrom) shall be final, conclusive and unconditionally binding upon PGC. “Recovery” shall mean any amount actually received by AG Re in reimbursement of any Loss in respect of the Indemnified Policies, whether by subrogation, salvage, reimbursement or other recovery from the Issuer or otherwise. Any Recoveries received by AG Re shall be applied first to indemnify AG Re for any Losses paid by AG Re with respect to the Indemnified Policies in excess of the amount of the Initial Deposit (“Excess Losses”), until the entire amount of Excess Losses shall have been reimbursed, and any Recoveries received thereafter shall be deposited in the Trust Account and shall be available to indemnify AG Re against any Indemnified Losses subject to the provisions of this Section 3 and the Trust Agreement.

(d) As between PGC and AG Re, it shall be the sole responsibility of AG Re to investigate and manage claims and suits involving the Indemnified Policies to their final determination.

(e) Notwithstanding any provision of this Agreement, it is understood and agreed that this Agreement shall not amend or modify any terms of the AG Re Reinsurance Agreement or any of the rights or obligations of FGIC or AG Re thereunder.

(f) PGC’s obligations under this Section 3 shall be secured by a security interest in, and a pledge of, the assets in the Trust Account. At AG Re’s reasonable request, PGC shall make all filings and registrations that may be necessary to be made by it under law to establish or evidence such security interest. AG Re and PGC shall enter into a trust agreement substantially in the form of Exhibit A hereto (the “Trust Agreement”) with a bank acceptable to AG Re which is a member of the United States Federal Reserve System or is a New York State chartered bank (the “Trustee”) for the purpose of establishing a trust account (the “Trust Account”) for the exclusive benefit and use of AG Re.

(i) On the date hereof, PGC shall transfer to the Trustee, for deposit to the Trust Account, cash or instruments of the types specified in (iii) below in an amount equal to US$22,900,000 (the “Initial Deposit”). In the event that AG Re notifies PGC that, on the basis of data obtained by AG Re from the trustees’ “INFORM” system, or similar replacement system,(pursuant to Section 4.04(c) of the Trust Agreement), the value of assets on deposit in the Trust Account as of the end of the most recent business day is less than (x) the sum of (A) the Initial Deposit plus (B) Recoveries deposited in the Trust Account pursuant to (c) above prior to such time less (y) the sum of (A) all Loss Payments (as defined in (iv) below) made prior to such time plus (B) all amounts released from the Trust Account and paid over to PGC prior to such time pursuant to Section 2.03 of the Trust Agreement, (such total of (x) less (y), the “Required Level”), PGC shall deposit within two business days (the “Two Day Period”) of the receipt of such accounting Authorized Investments (as defined below) with a fair market value not less than the amount of such deficiency. Receipt of such notice by PGC after 4:00 PM Eastern Time on any Business Day shall be deemed to have occurred on the following Business Day. In the event PGC fails to pay any such amounts within three business days after the expiration of the Two Day Period, AG Re’s exclusive remedy shall be, as provided in the Trust Agreement, to terminate the Trust and withdraw amounts equal to the Required Level (or the entire Trust

Account balance, if less than the Required Level) and deposit such amounts in a separate account, in the name of AG Re in any United States bank or trust company in trust, to secure PGC’s obligations hereunder and any references herein to the “Trust Account” shall thereafter refer to the aforementioned separate account.

(ii) The Trust Account (or in the event AG Re has exercised its exclusive remedy under Section 3(f)(ii) hereof, the separate account) shall consist solely of cash (United States legal tender), certificates of deposit (issued by a United States bank and payable in United States legal tender), and investments of the types specified in subsections (1) and (2) of Section 1404(a) of the New York Insurance Law, as amended from time to time, or any successor provision of law, provided that such investments are issued by an institution that is not the parent, subsidiary, or affiliate of PGC or AG Re (“Authorized Investments”).

(iii) AG Re, and any of its successors in interest (including, without limitation, any liquidator, receiver, conservator or other statutory successor of AG Re), may withdraw assets from the Trust Account at any time and from time to time, notwithstanding any other provisions herein. AG Re shall be entitled to use the amounts in the Trust Account (including any investment earnings) (i) to pay any amounts due to AG Re hereunder from PGC, including, without limitation, payment or reimbursement of Losses in respect of any Indemnified Policy (“Loss Payments”), (ii) to return to PGC any amounts in excess of 102% (or in the event AG Re has exercised its exclusive remedy under Section 2.02(c) of the Trust Agreement, 105%) of the Required Level or (iii) at such time as AG Re determines that it shall have no further actual or contingent liability to FGIC in respect of the Indemnified Policies, any remaining amounts on deposit in the Trust Account shall be returned to PGC.

(iv) The designated bank shall have no responsibility whatsoever in connection with the propriety of withdrawals from the Trust Account, or the disposition of funds withdrawn, except to see that withdrawals are made only upon the order of authorized representatives of AG Re.

(v) PGC shall be solely responsible for all U.S. income tax filings associated with the assets in the Trust Account, and such assets, for so long as they are on deposit in the Trust Account, shall be considered PGC assets for all U.S. income tax purposes.

Section 4. Expenses. Each party will bear its own expenses in connection with the transactions contemplated hereby, including, but not limited to, the fees of attorneys and financial advisors.

Section 5. Representations and Warranties of the Parties. Each party hereby represents and warrants that it has the corporate power and authority to enter into this Agreement and to carry out its obligations hereunder and that the individual executing this Agreement on its behalf has the requisite authority to bind such party to this Agreement. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized. This Agreement is a valid and binding obligation enforceable against each party in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganizations or similar laws affecting creditors generally or by general equitable principles (whether applied in equity or at law).

Section 6. Arbitration.

(a) Any dispute, claim or other matter in question arising out of, or relating to, the formation, interpretation, performance or breach of this Agreement, whether such dispute arises before or after termination of this Agreement, shall be settled by arbitration. Arbitration shall be initiated by the delivery of a written notice of demand for arbitration by one party to the other within a reasonable time after the dispute has arisen.

(b) Each party shall appoint an individual as arbitrator and the two so appointed shall then appoint a third arbitrator. If either party refuses or neglects to appoint an arbitrator within sixty (60) days, the other party may appoint the second arbitrator. If the two arbitrators do not agree on a third arbitrator within sixty (60) days of their appointment, each of the arbitrators shall nominate three individuals. Each arbitrator shall then decline two of the nominations presented by the other arbitrator. The third arbitrator shall then be chosen from the remaining two nominations by drawing lots. The arbitrators shall be active or former officers of insurance or reinsurance companies or Lloyd’s Underwriters; the arbitrators shall not have a personal or financial interest in the result of the arbitration.

(c) The arbitration hearings shall be held in New York, New York, or such other place as may be mutually agreed. Each party shall submit its case to the arbitrators within sixty (60) days of the selection of the third arbitrator or within such longer period as may be agreed by the arbitrators. The arbitrators shall not be obliged to follow judicial formalities or the rules of evidence except to the extent required by governing law, that is, the state law of the situs of the arbitration as herein agreed; they shall make their decisions according to the practice of the reinsurance business. The decision rendered by a majority of the arbitrators shall be final and binding on both parties. Such decision shall be a condition precedent to any right of legal action arising out of the arbitrated dispute which either party may have against the other. Judgment upon the award rendered may be entered in any court having jurisdiction thereof.

(d) Each party shall pay the fee and expenses of its own arbitrator and one-half of the fee and expenses of the third arbitrator. All other expenses of the arbitration shall be equally divided between the parties.

(e) Except as provided above, arbitration shall be based, insofar as applicable, upon either the arbitration procedures of ARIAS US or the Procedures for the Resolution of U.S. Insurance and Reinsurance Disputes as the parties may agree or in the absence of any agreement, as the Company shall elect.

Section 7. Miscellaneous Provisions.

(a) The provisions of and validity and construction of this Agreement and any amendments hereto shall be governed by, and construed in accordance with the laws of the State of New York without regard to conflict or choice of law principles that would require the application of the law of any jurisdiction other than such State.

(b) This Agreement may be modified or amended only upon the written amendment signed by all of the parties hereto and any provisions herein waived only upon the written waiver signed by the party or parties entitled to enforce the provision.

(c) In the event any provision of this Agreement shall be held invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the remaining parts of this Agreement.

(d) This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and the counterparts shall constitute but one and the same instrument.

(e) No party may assign this Agreement or any of its rights or obligations hereunder without the written consent of each other party.

(f) The headings have been inserted for convenience of reference only and shall not be deemed to constitute a part of this Agreement.

(g) This Agreement, together with the Trust Agreement (as between PGC and AG Re) and the AG Re Reinsurance Agreement (as between FGIC and AG Re), constitutes the sole agreement among the parties with respect to the subject matter hereof and supersedes all prior or contemporaneous understandings, agreements or negotiations.

[Signature page to follow]

PMI GUARANTY CO.
By:	/s/
	Name:
	Title:
FINANCIAL GUARANTY INSURANCE COMPANY
By:	/s/
	Name:
	Title:
ASSURED GUARANTY RE LTD.
By:	/s/
	Name:
	Title:

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: August 8, 2008

/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: August 8, 2008

/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 June 30, 2008 (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.

	/s/ L. Stephen Smith
Dated: August 8, 2008	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 June 30, 2008 (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.

	/s/ Donald P. Lofe, Jr.
Dated: August 8, 2008	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.