10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10 - Q

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

For the quarterly period ended September 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  x    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  x Accelerated filer  ¨ Non-accelerated filer  ¨ 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  x

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

Class of Stock	Par Value	Date	Number of Shares
Common Stock	$0.01	October 31, 2008	81,623,962

TABLE OF CONTENTS

			Page
Part I - Financial Information			3
	Item 1.	Interim Consolidated Financial Statements and Notes	3
		Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2008 and 2007 (Unaudited)	3
		Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007 (Unaudited)	4
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (Unaudited)	5
		Notes to Consolidated Financial Statements (Unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	94
	Item 4.	Controls and Procedures	96
Part II - Other Information			96
	Item 1.	Legal Proceedings	96
	Item 1A.	Risk Factors	97
	Item 6.	Exhibits	103
Signatures			104
Index to Exhibits			105
Exhibits

2

PART I – FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(Dollars in thousands, except per share data)
REVENUES
Premiums earned	$	183,581		$	209,201		$	602,037		$	605,472
Net investment income		36,098			33,587			105,119			98,093
Net realized investment (losses) gains		(52,807	)		712			(112,862	)		2,709
Change in fair value of certain debt instruments		66,283			—			111,948			—
Other (loss) income		(7,938	)		(3,550	)		8,858			6,228
Total revenues		225,217			239,950			715,100			712,502
LOSSES AND EXPENSES
Losses and loss adjustment expenses		382,689			351,033			1,494,807			580,176
Amortization of deferred policy acquisition costs		4,955			13,150			13,773			38,853
Other underwriting and operating expenses		59,412			40,555			159,977			145,903
Interest expense		11,179			7,627			27,992			22,815
Total losses and expenses		458,235			412,365			1,696,549			787,747
Loss before equity in earnings (losses) from unconsolidated subsidiaries and income taxes		(233,018	)		(172,415	)		(981,449	)		(75,245	)
Equity in earnings (losses) from unconsolidated subsidiaries		9,103			(22,602	)		(45,830	)		49,655
Loss from continuing operations before income taxes		(223,915	)		(195,017	)		(1,027,279	)		(25,590	)
Income tax benefit from continuing operations		(74,606	)		(84,382	)		(321,084	)		(51,211	)
(Loss) income from continuing operations		(149,309	)		(110,635	)		(706,195	)		25,621
(Loss) income from discontinued operations, net of taxes		(80,104	)		23,862			(43,468	)		73,472
NET (LOSS) INCOME	$	(229,413	)	$	(86,773	)	$	(749,663	)	$	99,093
PER SHARE DATA
Basic (loss) income from continuing operations	$	(1.83	)	$	(1.32	)	$	(8.68	)	$	0.30
Basic (loss) income from discontinued operations		(0.98	)		0.28			(0.54	)		0.85
Basic net (loss) income	$	(2.81	)	$	(1.04	)	$	(9.22	)	$	1.15
Diluted (loss) income from continuing operations	$	(1.83	)	$	(1.32	)	$	(8.68	)	$	0.29
Diluted (loss) income from discontinued operations		(0.98	)		0.28			(0.54	)		0.85
Diluted net (loss) income	$	(2.81	)	$	(1.04	)	$	(9.22	)	$	1.14

See accompanying notes to consolidated financial statements.

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THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2008			December 31, 2007
	(Unaudited)			(Unaudited)
	(Dollars in thousands, except per share data)
ASSETS
Investments
Fixed income securities	$	2,019,042		$	2,018,148
Equity securities:
Common		9,883			117,251
Preferred		212,703			299,630
Short-term investments		2,280			2,251
Total investments		2,243,908			2,437,280
Cash and cash equivalents		713,241			354,508
Investments in unconsolidated subsidiaries		154,397			309,800
Related party receivables		1,509			1,432
Accrued investment income		33,010			34,067
Premiums receivable		59,877			62,303
Reinsurance receivables and prepaid premiums		10,140			8,833
Reinsurance recoverables		393,654			36,917
Deferred policy acquisition costs		31,036			18,305
Property, equipment and software, net of accumulated depreciation and amortization		138,845			157,308
Prepaid and recoverable income taxes		12,773			87,102
Deferred income tax assets		130,116			48,875
Other assets		113,212			60,155
Assets - discontinued operations - held for sale		1,324,795			1,453,555
Total assets	$	5,360,513		$	5,070,440
LIABILITIES
Reserve for losses and loss adjustment expenses	$	2,463,407		$	1,177,309
Unearned premiums		117,324			136,921
Debt (includes $235,584 measured at fair value at September 30, 2008)		532,177			496,593
Reinsurance payables		43,446			41,379
Related party payables		781			1,852
Other liabilities and accrued expenses		206,670			135,044
Liabilities - discontinued operations - held for sale		543,830			568,380
Total liabilities		3,907,635			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; 81,623,962 and 81,120,144 shares outstanding		1,193			1,193
Additional paid-in capital		893,532			890,598
Treasury stock, at cost (37,689,805 and 38,193,623 shares)		(1,342,732	)		(1,354,601	)
Retained earnings		1,940,584			2,660,695
Accumulated other comprehensive (loss) income, net of deferred taxes		(39,699	)		315,077
Total shareholders’ equity		1,452,878			2,512,962
Total liabilities and shareholders’ equity	$	5,360,513		$	5,070,440

See accompanying notes to consolidated financial statements.

4

THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2008			2007
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
Net (loss) income	$	(749,663	)	$	99,093
Less loss (income) from discontinued operations, net of taxes		43,468			(73,472	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Equity in losses (earnings) from unconsolidated subsidiaries		45,830			(49,655	)
Net realized investment losses (gains)		113,255			(2,854	)
Change in fair value of certain debt instruments		(111,948	)		—
Depreciation and amortization		20,030			15,449
Deferred income taxes		(81,842	)		(7,319	)
Compensation expense related to share-based payments		8,402			13,507
Excess tax benefits on the exercise of employee stock options		—			(4,001	)
Deferred policy acquisition costs incurred and deferred		(26,558	)		(39,868	)
Amortization of deferred policy acquisition costs		9,861			38,206
Changes in:
Accrued investment income		(1,736	)		(174	)
Premiums receivable		2,263			(3,605	)
Reinsurance receivables, and prepaid premiums net of reinsurance payables		760			7,888
Reinsurance recoverables		(356,771	)		(934	)
Prepaid and recoverable income taxes		83,937			(37,070	)
Reserve for losses and loss adjustment expenses		1,271,318			333,269
Unearned premiums		(11,762	)		6,752
Related party receivables, net of payables		2,282			(804	)
Other		(29,002	)		(22,796	)
Net cash provided by operating activities from continuing operations		232,124			271,612
CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Proceeds from sales and maturities of fixed income securities		547,554			186,688
Proceeds from sales of equity securities		108,961			75,301
Proceeds from sale of unconsolidated subsidiary		3,375			3,989
Investment purchases: Fixed income securities		(746,168	)		(258,458	)
Equity securities		(6,867	)		(140,530	)
Net change in short-term investments		(29	)		(22	)
Distributions from unconsolidated subsidiaries, net of investments		(840	)		22,762
Capital expenditures and capitalized software, net of dispositions		(4,010	)		(13,494	)
Net cash used in investing activities from continuing operations		(98,024	)		(123,764	)
CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
Net proceeds from credit facility		200,000			—
Proceeds from issuance of common stock		—			7,879
Purchase of treasury stock		—			(214,996	)
Proceeds from issuance of treasury stock		2,526			30,953
Excess tax benefits on the exercise of employee stock options		—			4,001
Dividends paid to common shareholders		(2,246	)		(13,422	)
Net cash provided by (used in) financing activities from continuing operations		200,280			(185,585	)
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Net cash provided by operating activities from discontinued operations		55,076			109,602
Net cash provided by (used in) investing activities from discontinued operations		1,067,824			(333,552	)
Net cash provided by financing activities from discontinued operations		—			424
Net cash provided by (used in) from discontinued operations		1,122,900			(223,526	)
Effect of exchange rate changes on cash and cash equivalents from continuing operations		(9,044	)		6,185
Effect of exchange rate changes on cash and cash equivalents from discontinued operations—held for sale		(143,328	)		10,248
Net increase (decrease) in cash and cash equivalents		1,304,908			(244,830	)
Cash and cash equivalents at the beginning of the year (including $73,404 and $157,451 from discontinued operations—held for sale)		427,912			506,082
Less cash and cash equivalents of discontinued operations—held for sale, at the end of the period		(1,019,579	)		(49,011	)
Cash and cash equivalents of continuing operations at end of period	$	713,241		$	212,241

See accompanying notes to consolidated financial statements.

5

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 Company Limited and its holding company, PMI Europe Holdings Limited, the Irish insurance companies (collectively “PMI Europe”); PMI Mortgage Insurance Company Canada and its holding company, PMI Mortgage Insurance Holdings Canada Inc. (collectively “PMI Canada”); and other insurance, reinsurance and non-insurance subsidiaries. Also included in the accompanying financial statements and reported as discontinued operations for all periods presented are the accounts of PMI Mortgage Insurance Ltd and its holding company, PMI Mortgage Insurance Australia (Holdings) Pty Limited (collectively “PMI Australia”) and PMI Mortgage Insurance Asia Ltd. (“PMI Asia”) which were held for sale as of September 30, 2008; and the accounts of PMI Guaranty Co. (“PMI Guaranty”) which was considered disposed of other than by sale as of September 30, 2008. 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 reports the assets and liabilities of PMI Australia and PMI Asia, discontinued operations that are held for sale, in the consolidated balance sheets for all periods presented as “Assets/Liabilities—discontinued operations – held for sale”. The assets and liabilities of PMI Guaranty which were disposed of other than by sale, are classified in the consolidated balance sheet according to their nature. The results of discontinued operations, which include both held for sale and disposed of other than by sale, are reported as “Income (loss) from discontinued operations” in the consolidated statements of operations for all periods presented.

The Company 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 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 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.

At June 30, 2008, the carrying value of our investment in RAM Re had been reduced to zero due to equity in losses in RAM Re. During the third quarter of 2008, the Company recorded $9.4 million of equity in earnings from RAM Re and realized an other-than-temporary impairment charge of $2.9 million, which reduced the carrying value of its investment in RAM Re to its fair value of $6.5 million.

During the first quarter of 2008, the Company impaired its investment in FGIC and reduced the carrying value of its investment in FGIC from $103.6 million at December 31, 2007

6

to zero. To the extent that its carrying value remains zero, the Company will not recognize in future periods its 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.

The Company’s unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and disclosure requirements for interim financial information and the requirements of Form 10-Q and Articles 7 and 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation, have been included. Interim results for the three months and nine months ended September 30, 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.

7

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

Investments in Unconsolidated Subsidiaries — Investments in the Company’s unconsolidated subsidiaries include both equity investees and other unconsolidated subsidiaries. Investments in equity investees with ownership interests of 20-50% are generally accounted for using the equity method of accounting, and investments of less than 20% ownership interest are generally accounted for using the cost method of accounting if the Company does not have significant influence over the entity. Limited partnerships with ownership interests greater than 3% but less than 50% are primarily accounted for using the equity method of accounting. The 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 earnings (losses) from RAM Re are reported on a one-quarter lag 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 was recorded with respect to FGIC in the first nine months of 2008. To the extent that the carrying value remains zero, the Company will not recognize in future periods its 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.

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 September 30, 2008, related party receivables were $1.5 million and related party payables were $0.8 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.

8

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.

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 from continuing operations was $203.1 million and $180.5 million as of September 30, 2008 and December 31, 2007, respectively. In the third quarter of 2008, the Company recorded an impairment charge of $5.7 million related to capitalized software.

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 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.)

9

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. On September 4, 2008, in conjunction with the sale of PMI Australia, the put options were sold for $0.3 million which has been included in income from discontinued operations in the consolidated financial statements.

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 recoverables. 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 reserve levels as of the consolidated balance sheet date represent management’s best estimate of existing losses and LAE incurred. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known to the Company. Such adjustments, to the extent of increasing or decreasing loss reserves, are recognized in the current period’s consolidated results of operations.

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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 that can be provided by a single company 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 85.1% and 84.3% of gross premiums written from the Company’s mortgage insurance operations in the three and nine months ended September 30, 2008, respectively, compared to 78.4% and 79.5% in the corresponding periods in 2007. 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 for the majority of the single premium policies. 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 from continuing operations were 33.3% and 31.3% for the three and nine months ended September 30, 2008, respectively, compared to the federal statutory rate of 35.0%. The effective tax rates for the three and nine months ended September 30, 2008 reflect income from continuing operations combined with the Company’s municipal bond investment income which have lower effective tax rates. 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.

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As of September 30, 2008, a tax valuation allowance of approximately $229.6 million was recorded against a $277.0 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. In conjunction with the planned sale of PMI Australia and PMI Asia and their classifications as assets held for sale, as of September 30, 2008, the Company recognized approximately $124.1 million of accumulated currency translation gains for PMI Australia and $0.2 million for PMI Asia when determining their fair value, less costs to sell. Foreign currency translation gains in accumulated other comprehensive income were $57.9 million as of September 30, 2008 compared with $281.0 million as of December 31, 2007. Gains and losses from foreign currency re-measurement incurred by PMI Europe represent the revaluation of assets and liabilities denominated in non-functional currencies into the functional currency, the Euro.

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 from continuing operations of PMI Europe and PMI Canada, and the results from discontinued operations of PMI Australia and PMI Asia. Financial Guaranty includes the equity in earnings (losses) from FGIC and RAM Re, and the financial results of PMI Guaranty which are reported as discontinued operations. The Company’s Corporate and Other segment mainly consists of our holding company and contract underwriting operations.

Earnings (Loss) 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 nine months ended September 30, 2008 and the three months ended September 30, 2007, normally dilutive components of shares outstanding such as stock options were not included in fully diluted shares outstanding as their inclusion would have been anti-dilutive.

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The following table presents basic and diluted EPS from continuing operations and discontinued operations 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 September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(Dollars and shares in thousands)
(Loss) income from continuing operations	$	(149,309	)	$	(110,635	)	$	(706,195	)	$	25,621
(Loss) income from discontinued operations		(80,104	)		23,862			(43,468	)		73,472
Net (loss) income	$	(229,413	)	$	(86,773	)	$	(749,663	)	$	99,093
Weighted-average shares for basic EPS		81,597			83,747			81,343			85,833
Weighted-average stock options and other dilutive components		—			—			—			881
Weighted-average shares for diluted EPS		81,597			83,747			81,343			86,714
Basic EPS from continuing operations	$	(1.83	)	$	(1.32	)	$	(8.68	)	$	0.30
Basic EPS from discontinued operations		(0.98	)		0.28			(0.54	)		0.85
Basic EPS	$	(2.81	)	$	(1.04	)	$	(9.22	)	$	1.15
Dilutive EPS from continuing operations	$	(1.83	)	$	(1.32	)	$	(8.68	)	$	0.29
Dilutive EPS from discontinued operations		(0.98	)		0.28			(0.54	)		0.85
Dilutive EPS	$	(2.81	)	$	(1.04	)	$	(9.22	)	$	1.14
Dividends declared and accrued to common shareholders	$	0.0025		$	0.0525		$	0.0275		$	0.1575

Share-Based Compensation — The Company applies SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”) for share-based payments. 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 consolidated results of operations. Share-based compensation expense for the three and nine months ended September 30, 2008 was $1.9 million (pre-tax), and $8.4 million (pre-tax), respectively, compared to $2.9 million (pre-tax) and $13.5 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

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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 nine months ended September 30, 2008, the Company’s net loss included a $66.3 million and $111.9 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. The Company reclassified the results of operations, asset and liabilities of PMI Australia and PMI Asia and the results of operations of PMI Guaranty as discontinued operations for all periods presented. Certain items in the consolidated statements of cash flows for the nine months ended September 30, 2007 were reclassified to reflect the effect of foreign currency exchange rate changes on cash and cash equivalents and the results of discontinued operations held for sale. 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:

	Nine Months Ended September 30,
	2007 as reclassified			2007 as previously reported
	(Dollars in thousands)
Net cash provided by operating activities	$	271,612		$	431,392
Net cash used in investing activities	$	(123,764	)	$	(579,360	)
Net cash used in financing activities	$	(185,585	)	$	(193,464	)
Effect of exchange rate changes on cash and cash equivalents of continuing operations	$	6,185		$	—
Effect of exchange rate changes on cash and cash equivalents of discontinued operations	$	10,248		$	—
Foreign currency translation value increase	$	—		$	117,481

NOTE 3. NEW ACCOUNTING STANDARDS

In October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. This FSP clarifies the application of SFAS Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS No. 157-3 is effective upon issuance and has not impacted the Company’s consolidated financial statements.

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

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insurance contracts, including the recognition and measurement to be used to account for 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. SFAS No. 161 is not currently expected to significantly impact the Company’s 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. SFAS No. 160 is not currently expected to significantly impact the Company’s 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 September 30, 2008
Fixed income securities:
Municipal bonds	$	1,903,118	$	13,447	$	(102,452	)	$	1,814,113
Foreign governments		49,020		944		(2,398	)		47,566
Corporate bonds		152,145		1,877		(8,522	)		145,500
U.S. governments and agencies		8,130		454		(12	)		8,572
Mortgage-backed securities		3,144		147		—			3,291
Total fixed income securities		2,115,557		16,869		(113,384	)		2,019,042
Equity securities:
Common stocks		12,306		—		(2,423	)		9,883
Preferred stocks		252,960		—		(40,257	)		212,703
Total equity securities		265,266		—		(42,680	)		222,586
Short-term investments		2,280		—		—			2,280
Total investments	$	2,383,103	$	16,869	$	(156,064	)	$	2,243,908
	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		126,671		2,085		(2,057	)		126,699
Corporate bonds		179,527		671		(3,780	)		176,418
U.S. governments and agencies		7,002		1,485		—			8,487
Mortgage-backed securities		3,551		169		—			3,720
Total fixed income securities		1,945,827		81,588		(9,267	)		2,018,148
Equity securities:
Common stocks		86,920		30,670		(339	)		117,251
Preferred stocks		333,915		623		(34,908	)		299,630
Total equity securities		420,835		31,293		(35,247	)		416,881
Short-term investments		2,251		—		—			2,251
Total investments	$	2,368,913	$	112,881	$	(44,514	)	$	2,437,280

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(Dollars in thousands)
Fixed income securities	$	27,659		$	25,340		$	78,817		$	73,605
Equity securities		5,351			5,543			16,713			13,804
Short-term investments and cash and cash equivalents		3,582			3,050			11,066			11,843
Investment income before expenses		36,592			33,933			106,596			99,252
Investment expenses		(494	)		(346	)		(1,477	)		(1,159	)
Net investment income	$	36,098		$	33,587		$	105,119		$	98,093

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

	Three Months Ended September 30, 2008						Nine Months Ended September 30, 2008
	2008			2007			2008			2007
	(Dollars in thousands)
Fixed income securities
Net gains (losses)	$	9,839		$	(12	)	$	28,830		$	899
Equity securities
Net (losses) gains		(60,481	)		786			(51,420	)		1,951
Short-term investments and cash and cash equivalents
Net gains (losses)		722			(62	)		596			(141	)
Investments in unconsolidated subsidiaries:
Net (losses) gains		(2,887	)		—			(90,868	)		—
Net realized investment (losses) gains	$	(52,807	)	$	712		$	(112,862	)	$	2,709

Net realized investment (losses) gains for the third quarter and first nine months of 2008 include a $59.5 million and $72.7 million loss, respectively, related to the Company’s other-than-temporary impairment of certain preferred securities in its U.S. investment portfolio. Also included in net realized investment (losses) gains for the first nine months of 2008 is an $88.0 million loss related to the Company’s impairment of its investment in FGIC in the first quarter of 2008. The realized investment loss of $2.9 million in unconsolidated subsidiaries recognized in the third quarter of 2008 was related to the Company’s impairment to fair value of its investment in RAM Re.

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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 September 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)
September 30, 2008
Fixed income securities:
U.S. municipal bonds	$	1,396,429	$	(94,204	)	$	37,734	$	(8,248	)	$	1,434,163	$	(102,452	)
Foreign governments		22,509		(1,326	)		13,482		(1,072	)		35,991		(2,398	)
Corporate bonds		73,512		(3,113	)		47,803		(5,409	)		121,315		(8,522	)
U.S. government and agencies		3,996		(12	)		—		—			3,996		(12	)
Total fixed income securities		1,496,446		(98,655	)		99,019		(14,729	)		1,595,465		(113,384	)
Equity securities:
Common stocks		9,867		(2,423	)		—		—			9,867		(2,423	)
Preferred stocks		115,083		(28,946	)		47,012		(11,311	)		162,095		(40,257	)
Total equity securities		124,950		(31,369	)		47,012		(11,311	)		171,962		(42,680	)
Total	$	1,621,396	$	(130,024	)	$	146,031	$	(26,040	)	$	1,767,427	$	(156,064	)
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
December 31, 2007
Fixed income securities:
U.S. municipal bonds	$	135,690	$	(3,244	)	$	7,201	$	(186	)	$	142,891	$	(3,430	)
Foreign governments		28,217		(850	)		43,694		(1,207	)		71,911		(2,057	)
Corporate bonds		53,525		(1,190	)		62,147		(2,590	)		115,672		(3,780	)
U.S. government and agencies		100		—			145		—			245		—
Total fixed income securities		217,532		(5,284	)		113,187		(3,983	)		330,719		(9,267	)
Equity securities:
Common stocks		14,395		(339	)		—		—			14,395		(339	)
Preferred stocks		275,852		(34,908	)		—		—			275,852		(34,908	)
Total equity securities		290,247		(35,247	)		—		—			290,247		(35,247	)
Total	$	507,779	$	(40,531	)	$	113,187	$	(3,983	)	$	620,966	$	(44,514	)

Unrealized losses in 2008 on fixed income securities were primarily due to the widening of credit spreads which have also increased market interest rates on most fixed income securities. Unrealized losses in 2008 on preferred securities were primarily due to the widening of credit and sector spreads. The unrealized losses are not considered to be other-than-temporarily impaired as the Company has the intent and ability to hold such investments until they recover in value or mature. The Company determined that the decline in the fair value of certain investments in the first nine months of 2008 met the definition of other-than-temporary impairment and recognized realized losses of $75.2 million.

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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 September 30, 2008 and December 31, 2007:

	September 30, 2008		Ownership Percentage		December 31, 2007		Ownership Percentage
	(Dollars in thousands)
FGIC	$	—	42.0	%	$	103,644	42.0	%
CMG MI		132,584	50.0	%		131,225	50.0	%
RAM Re		6,453	23.7	%		60,017	23.7	%
Other*		15,360	various			14,914	various
Total	$	154,397			$	309,800

* Other represents principally various limited partnership investments.

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 nine months ended September 30, 2008. During the third quarter of 2008, the Company recognized equity in earnings from RAM Re of $9.4 million which increased the value of the Company’s investment in RAM Re to $9.4 million. The Company realized an other-than-temporary impairment charge of $2.9 million, which reduced the carrying value of its investment in RAM Re to its fair value of $6.5 million.

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

	Three Months Ended September 30,										Nine Months Ended September 30,
	2008			Ownership Percentage		2007			Ownership Percentage		2008			Ownership Percentage		2007		Ownership Percentage
	(Dollars in thousands)										(Dollars in thousands)
FGIC	$	—		42.0	%	$	(28,902	)	42.0	%	$	—		42.0	%	$	27,872	42.0	%
CMG MI		(85	)	50.0	%		4,167		50.0	%		5,781		50.0	%		13,645	50.0	%
RAM Re		9,340		23.7	%		2,161		23.7	%		(51,217	)	23.7	%		7,932	23.7	%
Other		(152	)	various			(28	)	various			(394	)	various			206	various
Total	$	9,103				$	(22,602	)			$	(45,830	)			$	49,655

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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 nine months ended:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(Dollars in thousands)
Beginning Balance	$	27,497		$	51,584		$	18,305		$	47,611
Policy acquisition costs incurred and deferred		8,494			14,158			26,504			43,834
Amortization of deferred policy acquisition costs		(4,955	)		(13,150	)		(13,773	)		(38,853	)
Balance at September 30,	$	31,036		$	52,592		$	31,036		$	52,592

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 September 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 September 30, 2008 includes only costs associated with the nine months of the 2008 book of business and book years prior to 2007. In the second quarter of 2008, PMI Guaranty impaired its remaining deferred policy acquisition cost assets by $3.6 million reducing its value to zero. PMI Guaranty did not incur any deferred acquisition costs during the third quarter of 2008 as runoff activities were effectively completed. The Company also impaired $1.2 million of deferred policy acquisition cost assets relating to PMI Europe during the third quarter of 2008.

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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 September 30:

	2008			2007
	(Dollars in thousands)
Balance at January 1,	$	1,177,309		$	384,089
Less: reinsurance recoverables		(36,917	)		(3,741	)
Net balance at January 1,		1,140,392			380,348
Losses and LAE incurred, principally with respect to defaults occurring in:
Current year		1,246,866			423,212
Prior years (1)		247,941			156,964
Total incurred		1,494,807			580,176
Losses and LAE payments, principally with respect to defaults occurring in:
Current year		(28,196	)		(12,264	)
Prior years		(553,498	)		(235,525	)
Total payments		(581,694	)		(247,789	)
Foreign currency translation effects		(4,002	)		1,390
Net change in PMI Guaranty’s loss reserves (2)		20,250			—
Net ending balance at September 30,		2,069,753			714,125
Reinsurance recoverables		393,654			4,747
Balance at September 30,	$	2,463,407		$	718,872

(1) The $247.9 million and $157.0 million increases in 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.

(2) Includes losses and LAE incurred of $29.9 million and payments of $9.6 million for the nine months ended September 30, 2008 from PMI Guaranty which are reported as discontinued operations in the consolidated statement of operations for the corresponding periods.

The increase in total consolidated loss reserves at September 30, 2008 compared to September 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

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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.

The following table presents the difference between fair values as of September 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 nine months ended September 30, 2008 would have been $3.34 per share and $10.11 per share, respectively.

	Fair Value (including accrued interest) as of September 30, 2008		Principal amount and accrued interest		Difference
Long-term debt
6.000% Senior Notes	$	155,355	$	250,625	$	95,270
6.625% Senior Notes	$	80,229	$	150,414	$	70,185

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. 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 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.

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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:

	September 30, 2008						Assets/Liabilities at Fair Value
	Fair Value Measurements Using
	Level 1		Level 2		Level 3
	(Dollars in thousand)
Assets
Fixed income securities	$	—	$	2,015,542	$	3,500	$	2,019,042
Equity securities		9,867		208,255		4,464		222,586
Short-term investments		2,280		—		—		2,280
Cash and cash equivalents		713,241		—		—		713,241
Accrued investment income		33,010		—		—		33,010
Total assets	$	758,398	$	2,223,797	$	7,964	$	2,990,159
Liabilities
Credit default swaps	$	—	$	—	$	38,370	$	38,370
6.000% Senior Notes		—		155,355		—		155,355
6.625% Senior Notes		—		80,229		—		80,229
Total liabilities	$	—	$	235,584	$	38,370	$	273,954

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.

The tables 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 three and nine months ended September 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.

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	Total Fair Value Measurements
	Three Months Ended September 30, 2008
	(Dollars in thousands)
Level 3 Instruments Only	Fixed Income Securities			Equity Securities			Credit Default Swaps (liabilities)
Balance, July 1, 2008	$	3,561		$	5,451		$	(27,128	)
Total gains or losses
Included in earnings (1)		(61	)		(987	)		(9,911	)
Included in other comprehensive income								3,197
Purchase, issuance and settlements(2)		—			—			(4,528	)
Balance, September 30, 2008	$	3,500		$	4,464		$	(38,370	)
	Total Fair Value Measurements
	Nine Months Ended September 30, 2008
	(Dollars in thousands)
Level 3 Instruments Only	Fixed Income Securities			Equity Securities			Credit Default Swaps (liabilities)
Balance, January 1, 2008	$	3,704		$	5,706		$	(26,921	)
Total gains or losses
Included in earnings (1)		(204	)		(1,242	)		439
Included in other comprehensive income		—			—			1,049
Purchase, issuance and settlements(2)		—			—			(12,937	)
Balance, September 30, 2008	$	3,500		$	4,464		$	(38,370	)

(1) The combined losses on equity and fixed income securities of $1.0 million and $1.4 million for the three months and nine months ended September 30, 2008, respectively, are included in net investment income in the Company’s consolidated statement of operations. The loss on credit default swaps of $9.9 million for the three months ended September 30, 2008 and the gain on credit default swaps of $0.4 million for the nine months ended September 30, 2008 is included in other income in the Company’s consolidated statement of operations.

(2) The purchase, issuance and settlements of $4.5 million and $12.9 million for the three months and nine months ended September 30, 2008, respectively, represent net cash received on credit default swaps.

NOTE 9. COMMITMENTS AND CONTINGENCIES

Income Taxes — As of September 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.

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.

Funding Obligations — The Company has invested in certain limited partnerships with ownership interests greater than 3% but less than 50%. As of September 30, 2008, the Company

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had committed to fund, if called upon to do so, $5.9 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 AND CASH EQUIVALENTS

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 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 September 30, 2008.

PMI Europe is required to pledge collateral for the benefit of the counterparty under the terms of certain credit default swap and reinsurance transactions it has concluded. As of September 30, 2008, PMI Europe pledged collateral of $11.3 million on credit default swap transactions and $58.1 million related to U.S. sub-prime related reinsurance transactions. The collateral of $69.4 million is included in cash and cash equivalents on the Company’s consolidated balance sheet at September 30, 2008.

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NOTE 11. COMPREHENSIVE INCOME

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(Dollars in thousands)
Net (loss) income	$	(229,413	)	$	(86,773	)	$	(749,663	)	$	99,093
Other comprehensive (loss) income, net of deferred taxes:
Total change in unrealized gains/losses during the period		(43,785	)		15,472			(148,400	)		(37,659	)
Less: realized investment gains (losses), net of income taxes		(32,448	)		256			(14,297	)		1,551
Change in unrealized (losses)/gains arising during the period, net of deferred tax (benefits) expense of $(11,238), $(8,355), $(71,197), and $16,184, respectively		(11,337	)		15,216			(134,103	)		(39,210	)
Accretion of cash flow hedges, net of deferred tax expenses		100			98			298			296
Foreign currency translation adjustment		(320,010	)		53,064			(223,114	)		117,481
Other comprehensive (loss) income, net of deferred tax		(331,247	)		68,378			(356,919	)		78,567
Comprehensive (loss) income	$	(560,660	)	$	(18,395	)	$	(1,106,582	)	$	177,660

The changes in unrealized gains/losses in the third quarter and first half of 2008 and 2007 were primarily due to widening market spreads principally in the U.S. The changes in foreign currency translation adjustments for 2008 were due primarily to the recognition of approximately $124.1 million of accumulated currency translation gains in connection with the write down of PMI Australia and PMI Asia to fair value, less costs to sell.

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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 September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(Dollars in thousands)
Pension benefits
Service cost	$	2,753		$	1,345		$	7,314		$	6,401
Interest cost		1,950			908			5,241			3,993
Expected return on plan assets		(2,969	)		(1,364	)		(7,294	)		(5,205	)
Amortization of prior service cost		(618	)		(357	)		(1,452	)		(588	)
Recognized net actuarial loss		295			88			452			348
Cost of special termination benefits		1,491			—			1,491			—
Net periodic benefit cost	$	2,902		$	620		$	5,752		$	4,949
	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(Dollars in thousands)
Other post-retirement benefits
Service cost	$	101		$	125		$	350		$	375
Interest cost		232			155			574			465
Amortization of prior service cost		(298	)		(200	)		(652	)		(600	)
Recognized net actuarial loss		164			95			328			285
Net periodic post-retirement benefit cost	$	199		$	175		$	600		$	525

In January 2008, the Company contributed $10 million to its Retirement Plan. The benefit costs for the three and nine months ended September 30, 2008 increased from the corresponding periods in 2007 primarily due to costs of special termination benefits associated with the early retirement program. The majority of costs associated with this program will be recognized in the fourth quarter of 2008. (See Note 18, Subsequent Events, for further discussion). The Company is evaluating the need to make future contributions to the Retirement Plan. Based on current projections, the Company may contribute between $9 million and $20 million to the Retirement Plan in the fourth quarter of 2008 or first quarter of 2009.

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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:

	September 30, 2008			December 31, 2007
	(Dollars in thousands)
Deferred tax assets:
AMT and other credits	$	73,758		$	55,473
Discount on loss reserves		27,015			18,384
Unearned premium reserves		5,725			6,979
Unrealized net losses on investments		82,226			—
Basis difference on investments in unconsolidated subsidiaries		276,959			214,258
Basis difference on assets held for sale		17,483			—
Pension costs and deferred compensation		13,430			12,987
Other assets		9,842			10,506
Total deferred tax assets		506,438			318,587
Deferred tax liabilities:
Contingency reserve deduction, net of tax and loss bonds		9,807			2,339
Deferred policy acquisition costs		10,378			5,580
Unrealized net gains on investments		—			21,316
Unrealized net gains on debt		61,268			—
Software development costs		20,929			21,683
Equity in earnings from unconsolidated subsidiaries		39,835			40,126
Other liabilities		4,545			10,565
Total deferred tax liabilities		146,762			101,609
Net deferred tax asset		359,676			216,978
Valuation allowance		(229,560	)		(168,103	)
Net deferred tax asset	$	130,116		$	48,875

The Company established a valuation allowance of approximately $229.6 million against a $277.0 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 September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(Dollars in thousands)
Premiums written
Direct	$	222,691		$	263,735		$	724,613		$	738,607
Assumed		2,461			4,454			13,528			9,220
Ceded		(48,655	)		(49,358	)		(146,789	)		(136,979	)
Net premiums written	$	176,497		$	218,831		$	591,352		$	610,848
Premiums earned
Direct	$	229,738		$	251,035		$	740,038		$	729,663
Assumed		3,833			7,527			10,212			12,185
Ceded		(49,990	)		(49,361	)		(148,213	)		(136,376	)
Net premiums earned	$	183,581		$	209,201		$	602,037		$	605,472
Losses and loss adjustment expenses
Direct	$	466,441		$	352,776		$	1,858,347		$	582,157
Assumed		3,695			(73	)		7,670			(67	)
Ceded		(87,447	)		(1,670	)		(371,210	)		(1,914	)
Net losses and LAE	$	382,689		$	351,033		$	1,494,807		$	580,176

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 93.9% and 93.6% of total ceded premiums written in the three and nine months ended September 30, 2008, respectively, compared to 90.7% and 94.7% for the corresponding periods in 2007. The Company recorded $393.7 million in reinsurance recoverables primarily from captive arrangements related to PMI’s gross loss reserves as of September 30, 2008, compared to $36.9 million as of December 31, 2007. As of September 30, 2008, the total assets in captive trust accounts held for the benefit of PMI totaled approximately $824.5 million.

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NOTE 15. DEBT AND REVOLVING CREDIT FACILITY

	September 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	$	155,355	$	155,355	$	250,000
6.625% Senior Notes, due September 15, 2036 (1)		150,000		80,229		80,229		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	$	235,584	$	532,177	$	496,593

(1) The fair value and carrying value of the Company’s 6.000% Senior Notes and 6.625% Senior Notes at September 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. The facility was reduced to $300 million in the first quarter of 2008 and was further reduced to $250 million on or about October 22, 2008 upon the sale of PMI Australia. 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”) be pledged in favor of the lenders under the facility and noteholders under certain of the Company’s senior notes. The amended facility also contains additional restrictions on asset dispositions and investments. While the Company is generally permitted under the amended facility to make additional investments in MIC and its subsidiaries, the Company’s ability to invest in its reinsurance subsidiaries is subject to dollar limitations (other than with regard to four of TPG’s subsidiaries whose capital stock was pledged to the bank group on or about September 29, 2008). In the third quarter of 2008, the Company requested and received 100% of the lenders’ consent for the sale of PMI Australia and PMI Asia to a third party. In addition, on or about September 29, 2008 the Company invested $25 million in one of TPG’s reinsurance subsidiaries, PMI Reinsurance Co.

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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 September 30, 2008
	U.S. Mortgage Insurance Operations			International Operations			Financial Guaranty			Corporate and Other			Consolidated Total
	(Dollars in thousands)
Revenues
Premiums earned	$	179,795		$	3,776		$	—		$	10		$	183,581
Net loss from credit default swaps		—			(9,911	)		—			—			(9,911	)
Net investment income		29,331			3,875			—			2,892			36,098
Net realized investment (losses) gains		(50,800	)		1,868			—			(988	)		(49,920	)
Change in fair value of certain debt instruments		—			—			—			66,283			66,283
Impairment of unconsolidated subsidiary		—			—			(2,887	)		—			(2,887	)
Other (loss) income		(190	)		(23	)		—			2,186			1,973
Total revenues (expenses)		158,136			(415	)		(2,887	)		70,383			225,217
Losses and expenses
Losses and LAE		348,201			34,488			—			—			382,689
Amortization of deferred policy acquisition costs		3,387			1,568			—			—			4,955
Other underwriting and operating expenses		24,633			13,048			—			21,731			59,412
Interest expense		53			—			—			11,126			11,179
Total losses and expenses		376,274			49,104			—			32,857			458,235
(Loss) income before equity in (losses) earnings from unconsolidated subsidiaries and income taxes		(218,138	)		(49,519	)		(2,887	)		37,526			(233,018	)
Equity in (losses) earnings from unconsolidated subsidiaries		(85	)		—			9,340			(152	)		9,103
(Loss) income from continuing operations before income taxes		(218,223	)		(49,519	)		6,453			37,374			(223,915	)
Income tax (benefit) expense from continuing operations		(81,108	)		(3,510	)		—			10,012			(74,606	)
(Loss) income from continuing operations		(137,115	)		(46,009	)		6,453			27,362			(149,309	)
(Loss) income from discontinued operations, net of taxes		—			(80,541	)		437			—			(80,104	)
Net (loss) income	$	(137,115	)	$	(126,550	)	$	6,890		$	27,362		$	(229,413	)

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	Three Months Ended September 30, 2007
	U.S. Mortgage Insurance Operations			International Operations			Financial Guaranty			Corporate and Other			Consolidated Total
	(Dollars in thousands)
Revenues
Premiums earned	$	205,539		$	3,644		$	—		$	18		$	209,201
Net loss from credit default swap		—			(8,371	)		—			—			(8,371	)
Net investment income		28,786			2,866			—			1,935			33,587
Net realized investment gains (losses)		2,865			(267	)		—			(1,886	)		712
Other income		167			91			—			4,563			4,821
Total revenues (expenses)		237,357			(2,037	)		—			4,630			239,950
Losses and expenses
Losses and LAE		348,314			2,719			—			—			351,033
Amortization of deferred policy acquisition costs		12,809			341			—			—			13,150
Other underwriting and operating expenses		18,420			5,217			—			16,918			40,555
Interest expense		36			—			—			7,591			7,627
Total losses and expenses		379,579			8,277			—			24,509			412,365
Loss before equity in earnings (losses) from unconsolidated subsidiaries and income taxes		(142,222	)		(10,314	)		—			(19,879	)		(172,415	)
Equity in earnings (losses) from unconsolidated subsidiaries		4,167			—			(26,741	)		(28	)		(22,602	)
Loss from continuing operations before income taxes		(138,055	)		(10,314	)		(26,741	)		(19,907	)		(195,017	)
Income tax benefit from continuing operations		(72,833	)		(1,567	)		(1,113	)		(8,869	)		(84,382	)
Loss from continuing operations		(65,222	)		(8,747	)		(25,628	)		(11,038	)		(110,635	)
Income from discontinued operations, net of taxes		—			22,626			1,236			—			23,862
Net (loss) income	$	(65,222	)	$	13,879		$	(24,392	)	$	(11,038	)	$	(86,773	)

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	Nine Months Ended September 30, 2008
	U.S. Mortgage Insurance Operations			International Operations			Financial Guaranty			Corporate and Other			Consolidated Total
	(Dollars in thousands)
Revenues
Premiums earned	$	591,254		$	10,750		$	—		$	33		$	602,037
Net gain from credit default swaps		—			439			—			—			439
Net investment income		86,586			12,404			—			6,129			105,119
Net realized investment (losses) gains		(22,149	)		1,157			—			(1,002	)		(21,994	)
Change in fair value of certain debt instruments		—			—			—			111,948			111,948
Impairment of unconsolidated subsidiary		—			—			(90,868	)		—			(90,868	)
Other (loss) income		(357	)		28			—			8,748			8,419
Total revenues		655,334			24,778			(90,868	)		125,856			715,100
Losses and expenses
Losses and LAE		1,437,710			57,097			—			—			1,494,807
Amortization of deferred policy acquisition costs		11,457			2,316			—			—			13,773
Other underwriting and operating expenses		71,131			27,687			—			61,159			159,977
Interest expense		114			—			—			27,878			27,992
Total losses and expenses		1,520,412			87,100			—			89,037			1,696,549
(Loss) income before equity in earnings (losses) from unconsolidated subsidiaries		(865,078	)		(62,322	)		(90,868	)		36,819			(981,449	)
Equity in earnings (losses) from unconsolidated subsidiaries		5,781			—			(51,217	)		(394	)		(45,830	)
(Loss) income from continuing operations before income taxes		(859,297	)		(62,322	)		(142,085	)		36,425			(1,027,279	)
Income tax (benefit) expense from continuing operations		(323,846	)		(5,506	)		(1,244	)		9,512			(321,084	)
(Loss) income from continuing operations		(535,451	)		(56,816	)		(140,841	)		26,913			(706,195	)
Loss from discontinued operations, net of taxes		—			(20,855	)		(22,613	)		—			(43,468	)
Net (loss) income	$	(535,451	)	$	(77,671	)	$	(163,454	)	$	26,913		$	(749,663	)

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	Nine Months Ended September 30, 2007
	U.S. Mortgage Insurance Operations			International Operations			Financial Guaranty		Corporate and Other			Consolidated Total
	(Dollars in thousands)
Revenues
Premiums earned	$	594,683		$	10,742		$	—	$	47		$	605,472
Net loss from credit default swaps		—			(4,964	)		—		—			(4,964	)
Net investment income		83,074			7,994			—		7,025			98,093
Net realized investment gains (losses)		6,113			(172	)		—		(3,232	)		2,709
Other income (loss)		171			(17	)		—		11,038			11,192
Total revenues		684,041			13,583			—		14,878			712,502
Losses and expenses
Losses and loss adjustment expenses		575,482			4,694			—		—			580,176
Amortization of deferred policy acquisition costs		38,001			852			—		—			38,853
Other underwriting and operating expenses		72,840			12,207			—		60,856			145,903
Interest expense		75			—			—		22,740			22,815
Total losses and expenses		686,398			17,753			—		83,596			787,747
Loss before equity in earnings from unconsolidated subsidiaries and income taxes		(2,357	)		(4,170	)		—		(68,718	)		(75,245	)
Equity in earnings from unconsolidated subsidiaries		13,645			—			35,804		206			49,655
Income (loss) from continuing operations before income taxes		11,288			(4,170	)		35,804		(68,512	)		(25,590	)
Income tax (benefit) expense from continuing operations		(33,913	)		327			5,191		(22,816	)		(51,211	)
Income (loss) from continuing operations		45,201			(4,497	)		30,613		(45,696	)		25,621
Income from discontinued operations, net of taxes		—			69,599			3,873		—			73,472
Net income (loss)	$	45,201		$	65,102		$	34,486	$	(45,696	)	$	99,093

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	September 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	$	2,349,684	$	322,447	$	30,837		$	254,181		$	2,957,149
Investments in unconsolidated subsidiaries		132,584		—		6,453			15,360			154,397
Reinsurance recoverable		392,701		953		—			—			393,654
Deferred policy acquisition costs		28,091		2,945		—			—			31,036
Property, equipment and software, net of accumulated depreciation and amortization		60,000		1,709		—			77,136			138,845
Other assets (liabilities)		298,908		18,596		60,414			(17,281	)		360,637
Assets - discontinued operations - held for sale		—		1,324,795		—			—			1,324,795
Total assets	$	3,261,968	$	1,671,445	$	97,704		$	329,396		$	5,360,513
Liabilities
Reserve for losses and LAE	$	2,349,651	$	90,856	$	22,900		$	—		$	2,463,407
Unearned premiums		90,007		27,296		—			21			117,324
Debt		—		—		—			532,177			532,177
Other liabilities (assets)		200,593		63,124		(2,000	)		(10,820	)		250,897
Liabilities - discontinued operations - held for sale		—		543,830		—			—			543,830
Total liabilities		2,640,251		725,106		20,900			521,378			3,907,635
Shareholders’ equity (deficit)		621,717		946,339		76,804			(191,982	)		1,452,878
Total liabilities and shareholders’ equity	$	3,261,968	$	1,671,445	$	97,704		$	329,396		$	5,360,513

	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	$	327,955	$	201,632	$	107,028		$	2,791,788
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		3,921		3,910		—			18,305
Property, equipment and software, net of accumulated depreciation and amortization		75,884		2,095		187		79,142			157,308
Other assets		188,018		12,174		52,918		49,657			302,767
Assets - discontinued operations - held for sale		—		1,453,555		—		—			1,453,555
Total assets	$	2,596,704	$	1,800,687	$	422,308	$	250,741		$	5,070,440
Liabilities
Reserve for losses and LAE	$	1,133,080	$	41,579	$	2,650	$	—		$	1,177,309
Unearned premiums		107,200		22,983		6,709		29			136,921
Debt		—		—		50,000		446,593			496,593
Other liabilities (assets)		129,246		46,652		2,892		(515	)		178,275
Liabilities - discontinued operations - held for sale		—		568,380		—		—			568,380
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. DISCONTINUED OPERATIONS

Sale of PMI Australia — In August 2008, the Company entered into a definitive agreement to sell PMI Australia to a third party. As a result of the agreement, the Company classified the operations, and assets and liabilities of PMI Australia as discontinued operations for all periods presented. On October 22, 2008, the Company completed the sale of PMI Australia, and received approximately $746 million in cash (including certain adjustments for pre-completion interest and changes in the value of PMI Australia’s investment portfolio) and $187 million in contingent consideration paid in the form of a note. The Company recorded a loss on the impairment primarily due to the contingent consideration of the note, selling and other costs, including a $46.5 million reinsurance premium associated with the transaction, partially offset by a net gain on realization of accumulated other comprehensive income.

The following table represents PMI Australia’s results of operations which were recorded as discontinued operations, and loss on the impairment of PMI Australia:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2008			2007		2008			2007
	(Dollars in thousands)
Premiums earned	$	45,159		$	44,224	$	141,234		$	120,693
Net investment (expense) income		(13,820	)		18,815		38,863			52,205
Other income		333			487		(359	)		376
Total revenues		31,672			63,526		179,738			173,274
Losses and LAE		23,765			21,849		66,728			48,150
Other underwriting and operating expenses		14,234			13,659		41,427			36,355
(Loss) income before income taxes from discontinued operations		(6,327	)		28,018		71,583			88,769
Income tax (benefit) expense		(1,877	)		8,304		21,555			26,579
Income (loss) from discontinued operations	$	(4,450	)	$	19,714	$	50,028		$	62,190
Loss on impairment of discontinued operations before income tax		(22,819	)		—		(22,819	)		—
Income tax expense		40,415			—		40,415			—
Loss from impairment of PMI Australia	$	(63,234	)	$	—	$	(63,234	)	$	—

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The following is a summary as of September 30, 2008 and December 31, 2007 of the assets and liabilities of PMI Australia held for sale and included under the captions “Assets – discontinued operations” and “Liabilities – discontinued operations” on the Company’s consolidated balance sheet:

	September 30, 2008		December 31, 2007
	(Dollars in thousands)
Assets
Cash and investments, at fair value	$	1,232,951	$	1,294,688
Premiums receivable and other assets		11,675		84,070
Total assets	$	1,244,626	$	1,378,758
Liabilities
Reserve for losses and LAE	$	77,988	$	65,060
Unearned premiums		384,416		452,743
Other liabilities		45,829		27,159
Total liabilities	$	508,233	$	544,962

Sale of PMI Asia — In August 2008, the Company entered into a definitive agreement to sell PMI Asia to a third party. As a result of the agreement, the Company classified the operations, assets and liabilities of PMI Asia as discontinued operations for all periods presented. The Company recorded a loss on the impairment primarily due to the contingent consideration to be paid in the form of a note issued by the purchaser, selling and other costs, partially offset by a net gain on realization of accumulated other comprehensive income.

The following table represents PMI Asia’s results of operations which were recorded as discontinued operations, and the loss from the impairment of PMI Asia:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(Dollars in thousands)
Total revenues	$	5,669		$	3,691		$	13,320		$	10,106
Losses and LAE		11			(38	)		(38	)		(2	)
Other underwriting and operating expenses		861			462			2,540			1,393
Income before income taxes from discontinued operations		4,797			3,267			10,818			8,715
Income tax expense		398			355			1,211			1,306
Income from discontinued operations	$	4,399		$	2,912		$	9,607		$	7,409
Loss on impairment of discontinued operations before income tax		(15,376	)		—			(15,376	)		—
Income tax expense		1,880			—			1,880			—
Loss from impairment of PMI Asia	$	(17,256	)	$	—		$	(17,256	)	$	—

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The following is a summary as of September 30, 2008 and December 31, 2007 of the assets and liabilities of PMI Asia held for sale and included under the captions “Assets – discontinued operations” and “Liabilities – discontinued operations” on the Company’s consolidated balance sheet:

	September 30, 2008		December 31, 2007
	(Dollars in thousands)
Assets
Cash and investments, at fair value	$	77,030	$	70,587
Premiums receivable and other assets		3,139		4,210
Total assets	$	80,169	$	74,797
Liabilities
Reserve for losses and LAE	$	193	$	230
Unearned premiums		21,122		21,583
Other liabilities		14,282		1,605
Total liabilities	$	35,597	$	23,418

Discontinued Operations of PMI Guaranty — PMI Guaranty has completed its runoff activities, and is reported as discontinued operations in the Financial Guaranty segment and in the consolidated statement of operations for all periods presented. The Company expects to merge PMI Guaranty into its U.S. Mortgage Insurance Operations during the fourth quarter of 2008, subject to regulatory approval.

The results of operations of PMI Guaranty for the periods ended:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2008		2007			2008			2007
	(Dollars in thousands)
Total revenues	$	1,424	$	2,406		$	2,320		$	7,799
Losses and LAE		90		—			29,856			—
Other underwriting and operating expenses		590		1,513			9,014			4,232
Income (loss) before income taxes from discontinued operations		744		893			(36,550	)		3,567
Income tax expense (benefit)		307		(343	)		(13,937	)		(306	)
Total income (loss) from discontinued operations	$	437	$	1,236		$	(22,613	)	$	3,873

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NOTE 18. SUBSEQUENT EVENTS

In April 2002, PMI commenced litigation in the United States District Court for the Northern District of California (PMI Mortgage Insurance Co. v. American International Specialty Lines Insurance Company, et al., Case No. 3:02-CV-01774) to obtain reimbursement from its former primary and excess insurance carriers for costs incurred by PMI, in connection with its defense and settlement of the class action litigation captioned Baynham et al. v. PMI Mortgage Insurance Co. In October 2006, PMI settled with the excess carriers, and on December 5, 2006, the court entered judgment in PMI’s favor in the amount of approximately $7.6 million, plus approximately $2.4 million in prejudgment interest. The insurers appealed the judgment in PMI’s favor, and on October 11, 2008, The PMI Group received payment of the settlement proceeds of approximately $10.9 million, including interest, from the primary carrier related to the remaining claims in the litigation.

On October 21, 2008 the Company completed a Voluntary Early Retirement Program (the “Program”). The Program was made available to employees (other than the CEO) who were at least 52 years of age and had seven or more years of service. We estimate that PMI will incur net expenses of between $20 million and $30 million in the fourth quarter of 2008 as a result of this Program. In addition, the Company is currently evaluating the need to make future contributions to the Retirement Plan.

On October 22, 2008, the Company completed the sale of PMI Australia, and received approximately $746 million in cash (including certain adjustments for pre-completion interest and changes in the value of PMI Australia’s investment portfolio) and a note in the principal amount of approximately $187 million. The amount owed under the Note could be reduced under certain conditions related to warranty claims and the post-sale performance of PMI Australia and PMI Asia. Pursuant to the sale agreement, PMI funded premiums of approximately $46.5 million for a reinsurance cover for PMI Australia. The proceeds from the sale of PMI Australia will be reflected as contributed capital to the Company’s U.S. Mortgage Insurance Operations segment. The terms as described above related to the sale of Australia was estimated in our loss on discontinued operations as of September 30, 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 captive reinsurance agreements. 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.

Unless otherwise indicated, discussion under items captioned as “revenues” and “expenses” and other matters in this Management’s Discussion and Analysis as well as in our consolidated financial statements relates only to continuing operations.

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Financial Results for the Quarter and Nine Months Ended September 30, 2008

For the third quarter and nine months ended September 30, 2008, we recorded consolidated net losses of $229.4 million and $749.7 million, respectively, compared to a consolidated net loss of $86.8 million and consolidated net income of $99.1 million for the corresponding periods in 2007. Our consolidated net losses for the quarter and nine months ended September 30, 2008 include the financial results of our discontinued operations related to PMI Australia, PMI Asia and PMI Guaranty. Our losses in the third quarter and nine months ended September 30, 2008 were primarily driven by losses in our U.S. Mortgage Insurance Operations and International Operations segments. U.S. Mortgage Insurance Operations’ net loss for the third quarter of 2008 was primarily driven by losses and loss adjustment expenses (“LAE”), impairment losses in our U.S. investment portfolio and a decrease in earned premiums from the corresponding period in 2007. U.S. Mortgage Insurance Operations’ net loss for the first nine months of 2008 was primarily driven by increases in losses and LAE as compared to the corresponding period in 2007. Our International Operations segment’s net losses for the third quarter and first nine months of 2008 were primarily driven by increases in losses and LAE in PMI Europe as compared to the corresponding periods in 2007. Our loss for the nine months ended September 30, 2008 was also a result of our impairment of our investment in FGIC in the first quarter of 2008, equity in losses from RAM Re and losses associated with a novation agreement executed by PMI Guaranty in the second quarter of 2008. Our financial results for the third quarter and first nine months of 2008 were positively impacted by gains related to the change in fair value of certain of our senior debt instruments in our Corporate and Other segment.

Overview of Our Business

We provide mortgage insurance and credit enhancement products that expand homeownership and strengthen communities. 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 $137.1 million and $535.5 million for the third quarter and first nine months of 2008, respectively, compared to a net loss of $65.2 million and net income of $45.2 million for the corresponding periods in 2007.

• International Operations. In August of 2008, we entered into agreements with a third party to sell our Australian mortgage insurance subsidiary and related Australian holding company (collectively “PMI Australia”) and our Hong Kong subsidiary, PMI Mortgage Insurance Asia Limited (“PMI Asia”). We completed the sale of PMI Australia on October 22, 2008. The results from PMI Australia and PMI Asia have been reported as discontinued operations in our International Operations segment and in the consolidated statement of operations for all periods presented. Losses from the continuing operations of PMI Europe and PMI Canada in our International Operations segment were $46.0 million and $56.8 million for the third quarter and first nine months of 2008, respectively, compared to losses of $8.7 million and $4.5 million for the corresponding periods in 2007.

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• Financial Guaranty. Our Financial Guaranty segment includes our investment in RAM Holdings Ltd., whose wholly-owned subsidiary, RAM Reinsurance Company, Ltd., or RAM Re, provides financial guaranty reinsurance, our investment in FGIC Corporation, whose wholly-owned subsidiary, Financial Guaranty Insurance Company (collectively, “FGIC”), is a financial guarantor, and our wholly-owned surety company, PMI Guaranty Co. (“PMI Guaranty”). We expect to merge PMI Guaranty into PMI in the fourth quarter of 2008, subject to regulatory approval. As of September 30, 2008, the results of PMI Guaranty have been reported as discontinued operations in our Financial Guaranty segment and in the consolidated statement of operations for all periods presented. Continuing operations in our Financial Guaranty segment generated net income of $6.5 million and a net loss of $140.8 million for the third quarter and first nine months of 2008, respectively, compared to a net loss of $25.6 million and net income of $30.6 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 income of $27.4 million and $26.9 million for the third quarter and first nine months of 2008, respectively, compared to net losses of $11.0 million and $45.7 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:

• Market Conditions and Capital Constraints. The significant weakening of employment in the United States and the U.S. credit, capital, residential mortgage, and housing markets continues to negatively affect our U.S. Mortgage Insurance Operations segment. As discussed below under Losses and LAE, PMI is experiencing higher losses. These losses, which we expect to continue in 2009, have reduced, and will continue to reduce, PMI’s net assets. Partially in response to PMI’s higher losses and reduced capital, on August 26, 2008, Standard & Poor’s lowered its insurer financial strength rating on PMI from “A+” to “A-” and placed it under CreditWatch with Negative Implications. On October 7, 2008, Standard & Poor’s removed its CreditWatch designation and affirmed PMI’s “A-” rating with Negative Outlook. On October 10, 2008, Moody’s placed PMI under review for possible downgrade. On October 17, 2008, Fitch lowered its insurer financial strength rating on PMI to “BBB+” from “A+” and revised the Outlook to Negative. Because of rating agency actions, we submitted written remediation plans to Fannie Mae and Freddie Mac (collectively, the “GSEs”) outlining, among other things, the steps we are taking or plan to take to bolster PMI’s financial strength. Each of the GSEs has stated that it will continue to treat PMI as an eligible mortgage insurer. Freddie Mac has stated that its forbearance from enforcing additional 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 also requires periodic updates from PMI, and we engage in ongoing discussions with the GSEs regarding our remediation plans. 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

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wholly-owned insurance subsidiaries. Additional adverse rating agency actions with respect to our insurance subsidiaries could further harm our financial condition and our business.

Based on current and expected future trends, we believe that we will continue to incur and pay material losses. The ultimate amount of losses will depend in part on general economic conditions and other factors, including the health of credit markets, home price fluctuations and unemployment rates, all of which are difficult to predict. Unless we raise new capital and/or reduce PMI’s NIW and risk-in-force, PMI’s policyholders position will likely decline and its risk-to-capital ratio could increase beyond the levels necessary to meet certain regulatory capital adequacy requirements and/or certain credit facility financial covenants. As a result, we are considering options to reduce our risk in force through reinsurance, limiting new insurance written or other means and to obtain additional capital, which could occur through the sale of equity, debt securities or the sale or contribution of additional assets to our U.S. Mortgage Insurance Operations. Especially given current and expected future market conditions, there can be no assurance that we will be able to raise any additional capital or procure capital relief in the future, either on acceptable terms and in a timely manner, or at all. Other measures that we may take to address these issues, including, but not limited to the reduction of NIW, may be inadequate to maintain PMI’s policyholder position and risk-to-capital levels within required limits. See also Part II, Item 1A. Risk Factors – Our policyholders position could decline and our risk-to-capital ratio could increase beyond the levels necessary to meet various capital adequacy requirements and There is no assurance that we will be able to raise needed capital on a timely basis and on favorable terms, or at all. In addition, any reduction in new insurance written would have an adverse effect on premiums earned.

• Losses and LAE. PMI’s losses and LAE were $348.2 million and $1.4 billion for the third quarter and first nine months of 2008, respectively, compared to $348.3 million and $575.5 million for the corresponding periods in 2007. We increased PMI’s net loss reserves in the third quarter and first nine months of 2008 by $137.9 million and $859.8 million, respectively. We increased net loss reserves in the first nine months of 2008 as a result of increases in PMI’s default inventory (discussed under Defaults below), higher claim rates (the rate at which delinquent insured loans result in claims), and higher average claim sizes. The increase in claim rates was 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 (cure rate). The increases in PMI’s average claim size have been driven by, among other things, higher loan sizes and coverage levels and declining home prices which limit PMI’s loss mitigation opportunities. During the third quarter of 2008, the increase in loss reserves was partially offset by a decrease in our estimated claim rate due to our projected impact of loss mitigation efforts and, to a lesser extent, by increased rescissions of insurance written in prior periods. PMI’s losses and LAE will be negatively affected if future estimated claim rates and/or claim sizes increase. Changes in economic conditions, or a failure of economic conditions to improve, including the U.S. credit and capital markets, mortgage interest rates, job creation, unemployment rates, and home prices, could significantly impact our reserve estimates and, therefore, PMI’s losses and LAE. Claims paid including LAE in the third quarter and first nine months of 2008 increased to $210.3 million and $577.9 million, respectively, compared to $95.9 million and $244.4 million in the corresponding periods in 2007.

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• Defaults. PMI’s primary default inventory increased to 93,670 as of September 30, 2008 from 80,895 as of June 30, 2008 and 63,197 as of December 31, 2007. PMI’s primary default rate increased to 12.06% as of September 30, 2008 from 10.35% as of June 30, 2008 and 7.9% as of December 31, 2007. The increases in the default rates are due to the combined effect of the higher default inventory and fewer policies in force. We expect PMI’s primary default inventory and default rate to continue to increase in the fourth quarter of 2008. The increases in PMI’s primary default inventory and default rate in the first nine months of 2008 were driven by a number of factors including:

Declining Home Prices – Declining home prices have made it significantly more difficult for many 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 percentage of defaults that cure has declined due to diminished refinancing opportunities as a result of declining home prices and diminished availability of loan products. This decline in the percentage of defaults that cure has negatively affected PMI’s default inventory and default rate. The decline in PMI’s cure rate has been partially offset by successful loss mitigation efforts and, to a lesser extent, by increased rescissions of insurance written in prior periods.

Above-97s – PMI has experienced higher than expected levels of delinquent mortgages with loan-to-value ratios (“LTVs”) exceeding 97%, which we refer to as “Above 97s”, in its flow and structured channels. As of September 30, 2008, risk in force from Above-97s in all book years represented 22.6% of PMI’s primary risk in force compared to 24.0% as of June 30, 2008 and 24.6% as of December 31, 2007. The default rate for Above-97s in PMI’s primary portfolio as of September 30, 2008 was 15.2% compared to 12.4% as of June 30, 2008 and 9.1% as of December 31, 2007. As of September 30, 2008, of the 22.6% of PMI’s primary risk in force from Above-97s, approximately half was from our 2007 book year. We no longer insure Above-97s.

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 20.0% of PMI’s primary risk in force as of September 30, 2008 compared to 21.9% as of June 30, 2008 and 22.8% as of December 31, 2007. The default rate for Alt-A loans was 25.8% as of September 30, 2008 compared to 21.7% as of June 30, 2008 and 13.9% as of December 31, 2007. Beginning in 2007, we began progressively tightening our underwriting guidelines related to Alt-A loans, and effective June 1, 2008, we eliminated all Alt-A loan eligibility. However, due primarily to commitments issued in 2007, approximately 0.5% and 7.0% of new insurance written in the third quarter and first nine months ended September 30, 2008, respectively, was for Alt-A loans. We expect the percentage of Alt-A loans in our portfolio to continue to decline.

Interest Only Loans – Interest only loans, also known as deferred amortization loans, have more exposure to declining home prices than traditional loans, in part because principal is not reduced during an initial deferral period. Risk in

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force from interest only loans represented 12.5% of PMI’s primary risk in force as of September 30, 2008 compared to 13.8% as of June 30, 2008 and 14.2% as of December 31, 2007. The default rate for interest only loans was 23.5% as of September 30, 2008 compared to 19.3% as of June 30, 2008 and 11.0% as of December 31, 2007. In the third quarter and first nine months of 2008, PMI primarily insured interest only loans through our flow channel and most of such loans were sold by the originating lenders to the GSEs. Due to the tightening of underwriting guidelines in late 2007 and early 2008, approximately 5% of new insurance written for the quarter ended September 30, 2008 was in connection with interest only loans, compared to 6% and 12% for the quarters ended June 30, 2008 and December 31, 2007, respectively. None of the above categories (or risk characteristics) are mutually exclusive, and PMI’s portfolio may contain loans with 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 continued to increase above PMI’s average default rate as of September 30, 2008. The default rate from California as of September 30, 2008 was 21.0% compared to 18.0% as of June 30, 2008 and 10.9% as of December 31, 2007. The default rate from Florida as of September 30, 2008 was 22.6% compared to 18.2% as of June 30, 2008 and 10.6% as of December 31, 2007. As of September 30, 2008, risk in force from California and Florida insured loans represented 8.2% and 10.5% of PMI’s primary risk in force, respectively. The default rate of the Auto States as of September 30, 2008 was 13.6% compared to 12.1% as of June 30, 2008 and 10.6% as of December 31, 2007. As of September 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.

• Voluntary Early Retirement Program. We initiated in the third quarter of 2008 a Voluntary Early Retirement Program (the “Program”). The Program was made available to employees (other than the CEO) who were at least 52 years of age and had seven or more years of service. We estimate that PMI will incur net expenses between $20 million and $30 million in the fourth quarter of 2008 as a result of this Program. In addition, we are currently evaluating the need to make future contributions to the Retirement Plan. Based on current projections, we may contribute between $9 million and $20 million to the Retirement Plan in the fourth quarter of 2008 or first quarter of 2009.

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• Other-than-temporary Impairment of Investments. During the third quarter and nine months ended September 30, 2008, we recorded realized losses of $59.5 million and $72.7 million, respectively related to preferred securities held in our U.S. investment portfolio. We may have additional impairment for preferred securities if they meet the criteria for other-than-temporary impairment due to continuing stress of the capital markets.

• New Insurance Written (NIW). PMI’s primary NIW decreased by 57.1% in the third quarter and by 54.4% in the first nine months of 2008 compared to the corresponding periods in 2007. These decreases were principally due to changes to PMI’s pricing and underwriting guidelines implemented during the second half of 2007 and early 2008 that reduce the types of loans that PMI will insure. 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 have contributed to PMI’s declining NIW. Capital constraints may likely cause PMI to limit NIW in 2009.

• 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 customers. In return, PMI cedes a share of its gross premiums written to these captive reinsurance companies. As of September 30, 2008, 50.0% of PMI’s primary insurance in force was subject to captive reinsurance agreements. As of September 30, 2008, we recorded $393.7 million in reinsurance recoverables primarily 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 $0.8 million and $1.7 million in claim payments from captive trusts in the third quarter and first nine months of 2008, respectively. As of September 30, 2008, assets in captive trust accounts held for the benefit of PMI totaled approximately $824.5 million. We expect that reinsurance payments to PMI from captive trusts assets will increase in the remainder of 2008 and substantially increase in 2009.

During the third quarter of 2008, two of PMI’s lender-customers did not meet their capital deposit obligations, as required under their respective captive reinsurance agreements. As a result, PMI terminated the agreements and recovered approximately $25.8 million remaining in the captive trust accounts. We recorded the $25.8 million cash payment as a reduction of the total claims paid, which principally offset previously recorded reinsurance recoverables. Accordingly, there was no significant impact to our results of operations for the current period. To the extent that other lender-customers do not meet their capital deposit obligations now or in the future, the agreements will either be placed into runoff or terminated according to the express terms of their respective contracts or by mutual agreement of the parties, in which event PMI would reassume the ceded risk and recover all trust assets.

On September 29, 2008, PMI announced that, effective January 1, 2009, it would no longer seek reinsurance under excess-of-loss (“XOL”) captive reinsurance agreements. On January 1, 2009, in-force XOL contracts will be placed into runoff and will mature pursuant to their existing terms and conditions, and PMI will cease obtaining XOL captive reinsurance on loans incepted on or after such date. We expect that captive trust balances will continue to increase through the remainder of 2008; however, due to termination and runoff of certain captive reinsurance agreements as described above, as well as expected claim payments, we do not expect the aggregate trust assets to continue to increase in 2009.

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• 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 81.0% as of September 30, 2008, 75.5% as of December 31, 2007 and 73.3% as of September 30, 2007. The increase in PMI’s persistency rate reflects home price declines and lower levels of residential mortgage refinance activity. To the extent that home prices continue to decline and residential mortgage refinance activity remains relatively low, we expect that PMI’s persistency rate will remain high.

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

• PMI Australia. On October 22, 2008, we sold PMI Australia for an aggregate purchase price of approximately $920 million (approximately 100% of the net tangible asset value of PMI Australia under GAAP as of June 30, 2008), plus certain adjustments for pre-completion interest and changes in the value of PMI Australia’s investment portfolio. With these adjustments, PMI received approximately $746 million in cash and $187 million in contingent consideration paid in the form of a note (the “Note”), with interest accruing through September 2011 when it matures and is payable. The actual amount owed under the Note is subject to reductions to the extent (i) performance of PMI Australia’s existing insurance portfolio as of June 30, 2008 does not achieve specified targets, (ii) PMI is required to satisfy any claims for any breach of warranties under the Sale Agreement and (iii) subject to our completion of the sale of PMI Asia, performance of PMI Asia’s existing insurance portfolio as of June 30, 2008 does not achieve specified targets and the amount of the note to be issued by the third party purchaser in connection with the sale of PMI Asia has been reduced to zero. In connection with the transaction, PMI funded premiums of approximately $46.5 million to procure an excess-of-loss reinsurance cover for PMI Australia. The agreement provides for reinsurance profit-sharing for one-half of the reinsurance premiums (equivalent to $25 million) at the end of the three-year policy life. PMI Australia was recorded as discontinued operations in the consolidated financial statements for all periods presented and in connection with recording PMI Australia as discontinued operations, in the third quarter of 2008, we recognized an after tax loss with respect to the writedown of the carrying amount of PMI Australia to its fair value less cost to sell.

• PMI Asia. On August 29, 2008, we announced our agreement to sell PMI Asia for an aggregate purchase price of $56 million, subject to certain adjustments, of which 80% of the purchase price will be paid in cash on the date of closing, and the remaining 20% of the purchase price will be paid in the form of a note (the “Hong Kong Note”) issued upon closing. The Hong Kong note, once issued, matures and is payable in September 2011, and the actual amount payable on the Hong Kong Note will be reduced to the extent (i) the performance of PMI Asia’s existing insurance portfolio as of June 30, 2008 does not achieve specified targets, (ii) we are required to satisfy any claims for any breach of warranties under the sale agreement and (iii) performance of PMI Australia’s existing insurance portfolio as of June 30, 2008 does not achieve specified targets and the amount of the Australia note has been reduced to zero. We are currently discussing post-closing issues with the buyer. While we expect the sale of PMI Asia to close in the fourth quarter of 2008, there can be no assurance that the transaction will be completed upon the agreed upon terms or at all. PMI Asia was recorded as discontinued operations in the consolidated financial statements for all periods presented and in connection with recording PMI Asia as discontinued operations, in the third quarter of 2008, we recognized an after tax loss with respect to the writedown of the carrying amount of PMI Asia to its fair value less cost to sell.

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• PMI Europe. We are reconfiguring PMI Europe to conserve capital and reduce expenses. PMI Europe is not presently assuming any new risk other than in respect of existing arrangements and has reduced staff accordingly. The aggregate costs associated with PMI Europe’s reconfiguration are estimated to be approximately $7.6 million (pretax) of which $6.3 million was recognized in the third quarter of 2008. PMI Europe had net losses of $44.5 million and $52.6 million in the third quarter and first nine months of 2008, respectively, compared to net losses of $8.4 million and $3.8 million in the corresponding periods in 2007. The increases in net losses in the third quarter and first nine months of 2008 compared to the corresponding periods in 2007 were primarily due to increases in loss reserves of $33.7 million and $53.2 million in the third quarter and first nine months of 2008, respectively. The increases in loss reserves were due primarily to the deteriorating performance of certain U.S. subprime exposures on which PMI Europe provided reinsurance coverage in 2005 and, to a lesser extent, increased defaults on the Italian primary flow business. As of September 30, 2008, PMI Europe’s total exposure to U.S. subprime risk is approximately $207 million. Total reserves associated with this portfolio were $70.2 million as of September 30, 2008 and PMI Europe has pledged collateral of $58.1 million related to these reinsurance transactions. PMI Europe’s losses in 2008 were also due to changes in the fair value of PMI Europe’s credit default swap (“CDS”) derivative contracts resulting from the widening of European residential mortgage-backed securities (“RMBS”) credit spreads during the period. As a result of these factors, PMI Europe recorded $9.9 million in unrealized mark-to-market losses in the third quarter and $0.4 million in unrealized mark-to-market gains in the first nine months of 2008 related to the credit derivative liabilities.

As discussed under Liquidity and Capital Resources below, PMI Europe recently has been downgraded by, and currently has insurer financial strength ratings of “A-” (Negative), “BBB+” (Negative) and “A3” (Negative), from Standard & Poor’s, Fitch and Moody’s, respectively. On October 10, 2008, Moody’s announced that it is placing on review for possible downgrade the insurer financial strength rating of PMI Europe. As a result of loss development and rating agency actions, counterparties have required PMI Europe to pledge collateral of $22.5 million on credit default swap transactions. As a result of future loss developments or rating agency actions, PMI Europe may be required to post additional collateral. In particular, in November 2008, we received a demand from one counterparty to a credit default swap to post collateral in an amount that exceeds the contractual limits of the swap. We have disputed this demand and believe that the amount requested was calculated erroneously and that the actual amount of collateral, if any, required to be posted is substantially lower than the amount requested. We have not recorded any effects with respect to this collateral request in our financial statements as of September 30, 2008. (See also Part II, Item 1A. Risk Factors – We are exposed to risk in our European operations.) In addition, PMI Europe’s downgrades have given rise to the right by certain counterparties to terminate their agreements, resulting in potential significant termination payments.

• PMI Canada. We are in the process of closing our operations in Canada, and estimate that the total costs to exit Canada will be between $8.2 million and $9.6 million, pre-tax, of which $2.7 million was recognized in the third quarter of 2008. We expect to repatriate to PMI between $40 and $50 million of capital in the fourth quarter of 2008, subject to final regulatory approval. To close our operations in Canada, we must facilitate the removal of PMI Canada’s risk in force and obtain regulatory approvals.

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As a result of the changes in our International Operations described above, our International Operations will generate a substantially smaller portion of our revenues in the fourth quarter of 2008 and thereafter.

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

• RAM Re. Equity in earnings from RAM Re in the third quarter of 2008 was $9.4 million and equity in losses in the first nine months of 2008 was $51.2 million, respectively, compared to equity in earnings of $2.2 million and $7.9 million in the corresponding periods in 2007. At June 30, 2008, the carrying value of our investment in RAM Re had been reduced to zero due to equity in losses in RAM Re. During the third quarter of 2008, we recognized equity in earnings from RAM Re of $9.4 million which increased our investment in RAM Re to $9.4 million. In addition, however, we realized an other-than-temporary impairment charge of $2.9 million, which reduced the carrying value of our investment in RAM Re to $6.5 million.

• PMI Guaranty. During the third quarter of 2008, PMI Guaranty paid approximately $152 million of its excess capital to The PMI Group, of which $144 million was reinvested in U.S. Mortgage Insurance Operations. Having substantially completed its runoff activities, we are now reporting the results of PMI Guaranty as discontinued operations in the Financial Guaranty segment and in the consolidated statement of operations for all periods presented. We expect to merge PMI Guaranty into our U.S. Mortgage Insurance Operations during the fourth quarter of 2008, subject to regulatory approval.

• FGIC. We impaired our investment in FGIC in the first quarter of 2008, and reduced the carrying value of the investment from $103.6 million at December 31, 2007 to zero. To the extent that our carrying value remains zero, 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 do we intend, to provide additional capital to FGIC.

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, which 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 third quarter and first nine months of 2008, the decreases in fair value (representing increase in revenue) of $66.3 million and $111.9 million, respectively, were 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.)

• Share-Based Compensation. During the third quarter and first nine months of 2008, we incurred pre-tax share-based compensation expense of $1.9 million and $8.4 million, respectively, compared to $2.9 million and $13.5 million in the corresponding periods in 2007. 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.

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• 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 $0.7 million and $3.7 million for the third quarter and first nine months of 2008, respectively, compared to $1.4 million and $5.0 million in the corresponding periods in 2007.

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

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RESULTS OF OPERATIONS

Consolidated Results

The following table presents our consolidated financial results:

	Three Months Ended September 30,								Nine Months Ended September 30,
	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	$	183.6		$	209.2		(12.2	)%	$	602.0		$	605.5		(0.6	)%
Net investment income		36.1			33.6		7.4	%		105.1			98.1		7.1	%
Net realized investment (losses) gains		(52.8	)		0.7		—			(112.9	)		2.7		—
Change in fair value of certain debt instruments		66.3			—		100.0	%		111.9			—		100.0	%
Other income		(8.0	)		(3.5	)	128.6	%		9.0			6.2		45.2	%
Total revenues		225.2			240.0		(6.2	)%		715.1			712.5		0.4	%
LOSSES AND EXPENSES:
Losses and loss adjustment expenses		382.7			351.0		9.0	%		1,494.8			580.2		157.6	%
Amortization of deferred policy acquisition costs		4.9			13.2		(62.9	)%		13.7			38.9		(64.8	)%
Other underwriting and operating expenses		59.4			40.6		46.3	%		160.0			145.9		9.7	%
Interest expense		11.2			7.6		47.4	%		28.0			22.8		22.8	%
Total losses and expenses		458.2			412.4		11.1	%		1,696.5			787.8		115.3	%
(Loss) income before equity in (losses) earnings from unconsolidated subsidiaries and income taxes		(233.0	)		(172.4	)	35.2	%		(981.4	)		(75.3	)	—
Equity in (losses) earnings from unconsolidated subsidiaries		9.1			(22.6	)	(140.3	)%		(45.8	)		49.7		(192.2	)%
(Loss) income from continuing operations before taxes		(223.9	)		(195.0	)	14.8	%		(1,027.2	)		(25.6	)	—
Income tax (benefit) expense from continuing operations		(74.6	)		(84.4	)	(11.6	)%		(321.0	)		(51.2	)	—
(Loss) income from continuing operations	$	(149.3	)		(110.6	)	35.0	%	$	(706.2	)	$	25.6		—
(Loss) income from discontinued operations, net of tax		(80.1	)		23.8		—			(43.5	)		73.5		(159.2	)%
Net (loss) income	$	(229.4	)	$	(86.8	)	164.3	%	$	(749.7	)	$	99.1		—
Diluted (loss) income from continuing operations per share	$	(1.83	)	$	(1.32	)	38.6	%	$	(8.68	)	$	0.29		—
Diluted (loss) income from discontinued operations per share		(0.98	)		0.28		—			(0.54	)		0.85		(163.5	)%
Diluted net (loss) income per share	$	(2.81	)	$	(1.04	)	170.2	%	$	(9.22	)	$	1.14		—

For the third quarter and nine months ended September 30, 2008, we recorded consolidated net losses of $229.4 million and $749.7 million, respectively, compared to a consolidated net loss of $86.8 million and consolidated net income of $99.1 million for the corresponding periods in 2007. Our consolidated net losses for the quarter and nine months ended September 30, 2008 include the financial results of our discontinued operations related to PMI Australia, PMI Asia and PMI Guaranty. Our losses in the third quarter and nine months ended September 30, 2008 were primarily driven by losses in our U.S. Mortgage Insurance Operations and International segments. U.S. Mortgage Insurance Operations’ net loss for the third quarter of 2008 was primarily driven by losses and loss adjustment expenses (“LAE”), impairment losses in our U.S.

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investment portfolio and a decrease in earned premiums from the corresponding period in 2007. U.S. Mortgage Insurance Operations’ net loss for the first nine months of 2008 was primarily driven by increases in losses and LAE as compared to the corresponding period in 2007. Our International Operations segment’s net losses for the third quarter and first nine months of 2008 were primarily driven by increases in losses and LAE in PMI Europe as compared to the corresponding periods in 2007. Our loss for the nine months ended September 30, 2008 was also a result of our impairment of our investment in FGIC in the first quarter of 2008, equity in losses from RAM Re and losses associated with a novation agreement executed by PMI Guaranty in the second quarter of 2008. Our financial results for the third quarter and first nine months of 2008 were positively impacted by gains related to the change in fair value of certain of our senior debt instruments in our Corporate and Other segment.

The decreases in premiums earned in the third quarter and first nine months of 2008 compared to the corresponding periods in 2007 were driven by lower premiums earned in the United States. The decreases in premiums earned in the United States were primarily due to lower NIW and higher levels of rescissions of insurance previously written, partially offset by higher persistency in 2008 compared to 2007.

The increases in net investment income in the third quarter and first nine months of 2008 compared to the same periods in 2007 were primarily due to the growth of PMI’s investment portfolio. 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 4.16% and 5.10% as of September 30, 2008, and 2007, respectively.

The net realized investment loss in the third quarter of 2008 was primarily due to an other-than-temporary impairment of $59.5 million of certain preferred securities in our U.S. investment portfolio. The net realized investment loss in the first nine months of 2008 was primarily the result of the impairments of our investment in FGIC in the first quarter of 2008 and preferred securities in the third quarter of 2008, partially offset by gains on the sale of common stock in PMI’s investment portfolios in the first half of 2008.

The change in fair value of certain debt instruments in the third quarter and first nine months of 2008 resulted from our adoption of SFAS No. 159 effective January 1, 2008. The changes in fair value of $66.3 million and $111.9 million in the third quarter and first nine months of 2008, respectively, were primarily due to changes in interest rates and credit spreads.

The increase in our losses and LAE in the third quarter of 2008 compared to the corresponding period in 2007 was primarily due to higher claims paid in the U.S and loss reserve increases by PMI Europe. The increase in losses and LAE in the first nine months of 2008 was primarily driven by U.S. Mortgage Insurance Operations’ increased loss reserves and claim payments during the period. These increases reflect the significant weakening of the U.S. credit, capital, residential mortgage, and housing markets which drove higher default inventories, claim rates and average claim sizes.

The decreases in amortization of deferred policy acquisition costs in the third quarter and first nine months 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 nine months of 2008. PMI’s deferred policy acquisition cost asset increased to $28.1 million at September 30, 2008 from $10.5 million at December 31, 2007. PMI’s deferred policy acquisition cost asset was $43.3 million as of September 30, 2007.

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The increases in other underwriting and operating expenses in the third quarter and first nine months of 2008 compared to the corresponding periods in 2007 were primarily due to severance and disposal costs in our International Operations segment, certain software impairment charges in the Corporate and Other Segment and to a lesser extent, higher compensation expenses.

The equity in earnings in the third quarter of 2008 was due primarily to RAM Re’s unrealized mark-to-market gains on its credit derivative portfolio partially offset by increased losses and loss adjustment expenses. The equity in losses in the first nine months of 2008 was due primarily to RAM Re’s increases in loss reserves primarily related to continuing deterioration in the performance of residential RMBS.

We recorded income tax benefits from continuing operations of $74.6 million and $321.0 million in the quarter and nine months ended September 30, 2008, respectively, compared to income tax benefits of $84.4 million and $51.2 million in the corresponding periods in 2007.The effective tax rates for the continuing operations were 33.3% and 31.2% for the third quarter and first nine months of 2008, respectively, compared to 43.3% and 200.0% for the corresponding periods in 2007. The changes in our effective tax rates were primarily due to losses in our U.S. Mortgage Insurance Operations and Financial Guaranty segments and the effects of tax exempt income as a proportion of net losses.

(Loss) income from discontinued operations includes the financial results of PMI Australia, PMI Asia and PMI Guaranty. Losses from discontinued operations for the quarter and first nine months of 2008 also include impairment recorded related to our sale of PMI Australia and potential sale of PMI Asia.

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Segment Results

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

	Three Months Ended September 30,						Percentage Change		Nine Months Ended September 30,						Percentage Change
	2008			2007					2008			2007
	(Dollars in millions)								(Dollars in millions)
U.S. Mortgage Insurance Operations	$	(137.1	)	$	(65.2	)	110.3	%	$	(535.5	)	$	45.2		—
International Operations		(46.0	)		(8.7	)	—			(56.8	)		(4.5	)	—
Financial Guaranty		6.5			(25.6	)	125.4	%		(140.8	)		30.6		—
Corporate and Other		27.4			(11.0	)	—			26.9			(45.7	)	158.9	%
(Loss) income from continuing operations*	$	(149.3	)	$	(110.6	)	35.0	%	$	(706.2	)	$	25.6		—
International Operations		(80.5	)		22.6		—			(20.9	)		69.6		(130.0	)%
Financial Guaranty		0.4			1.2		(66.7	)%		(22.6	)		3.9		—
(Loss) income from discontinued operations*	$	(80.1	)	$	23.9		—		$	(43.5	)	$	73.5		(159.2	)%
Net (loss) income*	$	(229.4	)	$	(86.8	)	164.3	%	$	(749.7	)	$	99.1		—

* May not total due to rounding

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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.

	Three Months Ended September 30,						Percentage		Nine Months Ended September 30,						Percentage
	2008			2007			Change		2008			2007			Change
	(Dollars in millions)								(Dollars in millions)
Net premiums written	$	173.9		$	214.4		(18.9	)%	$	575.0		$	599.5		(4.1	)%
Premiums earned	$	179.8		$	205.5		(12.5	)%	$	591.2		$	594.7		(0.6	)%
Net investment income		29.3			28.8		1.7	%		86.6			83.1		4.2	%
Net realized investment (losses) gains		(50.8	)		2.9		—			(22.1	)		6.1		—
Other loss		(0.2	)		0.1		—			(0.4	)		0.2		—
Total revenues		158.1			237.3		(33.4	)%		655.3			684.1		(4.2	)%
Losses and LAE		348.2			348.3		—			1,437.7			575.5		149.8	%
Underwriting and operating expenses		28.0			31.3		(10.5	)%		82.7			110.9		(25.3	)%
Total losses and expenses		376.2			379.6		(0.9	)%		1,520.4			686.4		121.5	%
(Loss) income before equity in earnings from unconsolidated subsidiaries and income taxes		(218.1	)		(142.3	)	53.3	%		(865.1	)		(2.3	)	—
Equity in earnings from unconsolidated subsidiaries		(0.1	)		4.2		(102.4	)%		5.8			13.6		(57.4	)%
(Loss) income before income taxes		(218.2	)		(138.1	)	58.0	%		(859.3	)		11.3		—
Income tax benefit		(81.1	)		(72.9	)	11.2	%		(323.8	)		(33.9	)	—
Net (loss) income	$	(137.1	)	$	(65.2	)	110.3	%	$	(535.5	)	$	45.2		—

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

PMI’s premiums earned refers to the amount of premiums recognized as earned, net of changes in unearned premiums. The components of PMI’s net premiums written and premiums earned are as follows:

	Three Months Ended September 30,						Percentage		Nine Months Ended September 30,						Percentage
	2008			2007			Change		2008			2007			Change
	(Dollars in millions)								(Dollars in millions)
Gross premiums written	$	249.4		$	266.5		(6.4	)%	$	764.0		$	743.4		2.8	%
Ceded and refunded premiums, net of assumed		(75.5	)		(52.1	)	44.9	%		(189.0	)		(143.9	)	31.3	%
Net premiums written	$	173.9		$	214.4		(18.9	)%	$	575.0		$	599.5		(4.1	)%
Premiums earned	$	179.8		$	205.5		(12.5	)%	$	591.2		$	594.7		(0.6	)%

The decrease in gross premiums written in the third quarter of 2008 compared to the third quarter of 2007 was due to a large structured transaction in the third quarter of 2007. The increase in gross premiums written in the first nine months of 2008 was primarily due to higher insurance in force in our monthly product category compared to the corresponding period in 2007. The decreases in premiums earned in the third quarter and first nine months of 2008 compared to the corresponding periods in 2007 were primarily due to lower NIW and higher levels of rescissions of insurance previously written, both of which will negatively impact our premiums earned in future periods.

As of September 30, 2008, 50.0% of PMI’s primary insurance in force and 50.4% of its risk in force were subject to captive reinsurance agreements compared to 50.2% and 50.2%, respectively, as of September 30, 2007. Effective January 1, 2009, PMI will no longer seek reinsurance under excess-of-loss (“XOL”) reinsurance arrangements with lender affiliated captive reinsurers. On that date, in-force XOL contracts will be placed into runoff and will mature pursuant to their terms and conditions.

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Net investment income — Net investment income increased in the third quarter and first nine months of 2008 primarily due to increased holdings of fixed income securities in PMI’s investment portfolio at September 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 4.37% at September 30, 2008 compared to 5.31% at September 30, 2007. Fixed income securities in PMI’s portfolio increased to $1.7 billion as of September 30, 2008 from $1.6 billion as of September 30, 2007.

Net realized investment (losses) gains — The net realized investment loss in the third quarter and first nine months of 2008 was due to an other-than-temporary impairment of PMI’s preferred securities as a result of declines in the market values of the securities. The effect of the impairment in the first nine months of 2008 was partially offset by realized gains on the sale of certain equity investment in PMI’s portfolio in the first half 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 September 30,				Percentage Change		Nine Months Ended September 30,				Percentage Change
	2008		2007				2008		2007
	(Dollars in millions, except claim size)						(Dollars in millions, except claim size)
Claims paid including LAE	$	210.3	$	95.9	119.3	%	$	577.9	$	244.4	136.5	%
Change in net loss reserves		137.9		252.4	(45.4	)%		859.8		331.1	159.7	%
Losses and LAE	$	348.2	$	348.3	—		$	1,437.7	$	575.5	149.8	%
Number of primary claims paid		4,371		2,675	63.4	%		12,422		7,373	68.5	%
Average primary claim size (in thousands) (1)	$	47.6	$	32.8	45.1	%	$	44.5	$	29.9	48.8	%

(1) The calculation of the average primary claim size for the three and nine months ended September 30, 2008 excluded $25.8 million recovered from certain terminated captive trust accounts during the quarter ended September 30, 2008.

The increases in claims paid including LAE in the third quarter and first nine months of 2008 compared to the corresponding periods in 2007 were driven by higher average primary claim sizes and an 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 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. We expect PMI’s claims paid to continue to be higher in the remainder of 2008 and 2009 than in 2007. Primary claims paid were $182.4 million and $527.0 million in the third quarter and first nine months of 2008, respectively, compared to $87.7 million and $220.4 million in the corresponding periods in 2007. Pool insurance claims paid were $22.6 million and $35.9 million in the third quarter and first nine months of 2008, respectively, compared to $5.4 million and

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$15.1 million in the corresponding periods in 2007. For a discussion of the changes in net loss reserves for the third quarter and first nine months of 2008 and 2007, see Conditions and Trends Affecting our Business – U.S. Mortgage Insurance Operations – Losses and LAE, above.

As of September 30, 2008, we ceded $393.7 million in loss reserves primarily to captive reinsurers, which we record as reinsurance recoverables. Reinsurance recoverables normally do not exceed assets in captive trust accounts on an individual captive reinsurer basis. Due to the delay between establishing a reserve and the payment of claims, we have only received $0.8 million and $1.7 million in claim payments from captive trusts in the third quarter and first nine months of 2008, respectively. As of September 30, 2008, assets in captive trust accounts held for the benefit of PMI totaled approximately $824.5 million. See Conditions and Trends Affecting our Business – U.S. Mortgage Insurance Operations – Captive Reinsurance, above.

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.

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

	As of September 30,				Percentage Change/ Variance
	2008		2007
Flow Channel
Loans in default	72,020		35,026		105.6	%
Policies in force	658,954		651,354		1.2	%
Default rate	10.93	%	5.38	%	5.55 pps
Structured channel
Loans in default	21,650		15,716		37.8	%
Policies in force	117,590		134,947		(12.9	)%
Default rate	18.41	%	11.65	%	6.76 pps
Total primary
Loans in default	93,670		50,742		84.6	%
Policies in force	776,544		786,301		(1.2	)%
Default rate	12.06	%	6.45	%	5.61 pps

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

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

	As of September 30,				Percentage change/ variance
	2008		2007
Modified pool with deductible
Loans in default	29,362		13,272		121.2	%
Policies in force	215,375		236,025		(8.7	)%
Default rate	13.63	%	5.62	%	8.01pps
Modified pool without deductible
Loans in default	9,611		6,298		52.6	%
Policies in force	56,937		71,334		(20.2	)%
Default rate	16.88	%	8.83	%	8.05pps
Total modified pool
Loans in default	38,973		19,570		99.1	%
Policies in force	272,312		307,359		(11.4	)%
Default rate	14.31	%	6.37	%	7.94pps

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 expect the numbers of modified pool loans in default to increase as PMI’s insured modified pool portfolio seasons. The increases in loans in default for modified pool without deductible were primarily 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. Principally due to higher rates of delinquency on modified pool loans, losses could begin to exceed deductibles which may result in PMI recording significant losses in the future.

Total pool loans in default (which includes modified and other pool products) as of September 30, 2008 and 2007 were 42,741 and 23,789, respectively. The default rates for total pool loans as of September 30, 2008 and 2007 were 12.74% and 6.18%, respectively.

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

	Three Months Ended September 30,				Percentage Change		Nine Months Ended September 30,				Percentage Change
	2008		2007				2008		2007
	(Dollars in millions)						(Dollars in millions)
Amortization of deferred policy acquisition costs	$	3.4	$	12.8	(73.4	)%	$	11.5	$	38.0	(69.7	)%
Other underwriting and operating expenses		24.6		18.5	33.0	%		71.2		72.9	(2.3	)%
Total underwriting and operating expenses	$	28.0	$	31.3	(10.5	)%	$	82.7	$	110.9	(25.4	)%
Policy acquisition costs incurred and deferred	$	9.0	$	12.2	(26.2	)%	$	29.1	$	37.8	(23.0	)%

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

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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 third quarter and first nine months 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 nine months of 2008. PMI’s deferred policy acquisition cost asset increased to $28.1 million at September 30, 2008 from $10.5 million at December 31, 2007. PMI’s deferred policy acquisition cost asset was $43.3 million as of September 30, 2007.

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 increased in the third quarter compared to the corresponding period in 2007 primarily as a result of increased employee compensation costs and purchased services.

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 $2.0 million and $8.1 million in the third quarter and first nine months of 2008, respectively, compared to $3.8 million and $9.9 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 losses from CMG MI in the third quarter of 2008 were $0.1 million and equity in earnings in the first nine months of 2008 were $5.8 million compared to equity in earnings of $4.2 million and $13.6 million in the corresponding periods in 2007 primarily as a result of higher losses.

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 changes in the compositions of earnings, the effect of tax exempt income as a proportion of net income and favorable interim period adjustments, resulting in an effective tax rate of 37.2% and 37.7% for the third quarter and first nine months of 2008, respectively.

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2008		2007		Variance	2008		2007		Variance
Loss ratio	193.7	%	169.5	%	24.2 pps	243.2	%	96.8	%	146.4 pps
Expense ratio	16.1	%	14.6	%	1.5 pps	14.4	%	18.5	%	(4.1) pps
Combined ratio	209.8	%	184.1	%	25.7 pps	257.6	%	115.3	%	142.3 pps

PMI’s loss ratio is the ratio of losses and LAE to premiums earned. The loss ratio increased in the third quarter of 2008 compared to the corresponding period in 2007 as a result of lower premiums earned. The loss ratio increased in the first nine months of 2008 compared to the corresponding period in 2007 as a result of higher losses and LAE and lower premiums earned.

PMI’s expense ratio is the ratio of total underwriting and operating expenses to net premiums written. The increase in PMI’s expense ratio in the third quarter of 2008 compared to the corresponding period in 2007 was primarily due to lower premiums written. The decrease in the first nine months of 2008 compared to the corresponding period in 2007 was primarily due to decreases in amortization of deferred acquisition costs and employee compensation expenses.

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

	Three Months Ended September 30,				Percentage		Nine Months Ended September 30,				Percentage
	2008		2007		Change		2008		2007		Change
	(Dollars in millions )						(Dollars in millions )
Primary NIW:
Flow channel	$	6,156	$	11,091	(44.5	)%	$	16,472	$	28,883	(43.0	)%
Structured finance channel		67		3,404	(98.0	)%		418		8,180	(94.9	)%
Total primary NIW	$	6,223	$	14,495	(57.1	)%	$	16,890	$	37,063	(54.4	)%

The decreases in PMI’s primary NIW for the third quarter and first nine months of 2008 compared to the corresponding periods in 2007 were principally due to changes to PMI’s pricing and underwriting guidelines that were implemented during the second half of 2007 and early 2008 and 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.

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Modified pool insurance — PMI wrote $0 and $4.1 million of modified pool risk in the third quarter and first nine months of 2008, respectively, compared to $41.5 million and $308.0 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 and capital conservation. We do not expect to write material amounts of modified pool risk, if any, in the forseeable future. Modified pool risk in force was $1.9 billion as of September 30, 2008, $2.9 billion as of December 31, 2007 and $2.8 billion as of September 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 September 30,				Percentage Change/ Variance
	2008		2007
	(Dollars in millions)
Primary insurance in force	123,142		119,969		2.6	%
Primary risk in force	30,439		30,078		1.2	%
Pool risk in force*	2,762		3,476		(20.5	)%
Policy cancellations—primary (year-to-date)	17,732		19,729		(11.9	)%
Persistency—primary	81.0	%	73.3	%	7.7pps

* Includes modified pool and other pool risk in force. As of September 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 September 30, 2008 increased from September 30, 2007 primarily as a result of new insurance written, combined with 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 September 30, 2008 and December 31, 2007 in the ten states with the highest risk in force in PMI’s primary portfolio:

	Percent of Primary Risk in Force as of September 30, 2008		Percent of Primary Risk in Force as of December 31, 2007
Florida	10.5	%	10.8	%
California	8.2	%	8.1	%
Texas	7.2	%	7.2	%
Illinois	5.1	%	5.0	%
Georgia	4.7	%	4.7	%
New York	3.8	%	3.6	%
Ohio	3.8	%	3.8	%
Pennsylvania	3.3	%	3.3	%
Washington	3.1	%	3.1	%
New Jersey	3.1	%	3.0	%

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Credit and portfolio characteristics — Less-than-A quality loans generally include loans with credit scores less than 620. In the third quarter and first nine months 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 September 30,								Nine Months Ended September 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	$	8	0.1	%	$	1,166	10.5	%	$	289	1.8	%	$	2,534	8.8	%
Primary NIW- structured finance channel		1	1.5	%		638	18.7	%		26	6.2	%		1,506	18.4	%
Total primary NIW	$	9	0.1	%	$	1,804	12.4	%	$	315	1.9	%	$	4,040	10.9	%
Alt-A loan amounts and as a percentage of:
Primary NIW- flow channel	$	4	0.1	%	$	3,161	28.5	%	$	1,176	7.1	%	$	9,877	34.2	%
Primary NIW- structured finance channel		4	6.0	%		51	1.5	%		12	2.9	%		1,367	16.7	%
Total primary NIW	$	8	0.5	%	$	3,212	22.2	%	$	1,188	7.0	%	$	11,244	30.3	%

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 September 30,								Nine Months Ended September 30,
	2008				2007				2008				2007
	(Dollars in millions)								(Dollars in millions)
ARM amounts and as a percentage of :
Primary NIW- flow channel	$	55	0.9	%	$	477	4.3	%	$	224	1.4	%	$	1,687	5.8	%
Primary NIW- structured finance channel		2	3.0	%		640	18.8	%		33	7.9	%		2,175	26.6	%
Total primary NIW	$	57	0.9	%	$	1,117	7.7	%	$	257	1.5	%	$	3,862	10.4	%
Above-97 loan amounts and as a percentage of:
Primary NIW- flow channel	$	4	0.1	%	$	3,776	34.0	%	$	974	5.9	%	$	9,917	34.3	%
Primary NIW- structured finance channel		3	4.5	%		709	20.8	%		113	27.0	%		2,537	31.0	%
Total primary NIW	$	7	0.1	%	$	4,485	30.9	%	$	1,087	6.4	%	$	12,454	33.6	%

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.

In the third quarter and first nine months 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 third quarter and first nine months of 2008 have ten year terms and are subject to additional underwriting criteria to limit the potential for layered risk.

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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 September 30,								Nine Months Ended September 30,
	2008				2007				2008				2007
	(Dollars in millions)								(Dollars in millions)
Interest only loan amounts and as a percentage of :
Primary NIW- flow channel	$	287	4.7	%	$	2,565	23.1	%	$	1,064	6.5	%	$	7,203	24.9	%
Primary NIW- structured finance channel		2	3.0	%		31	90.0	%		11	2.6	%		1,014	12.4	%
Total primary NIW	$	289	4.6	%	$	2,596	17.9	%	$	1,075	6.4	%	$	8,217	22.2	%
Payment option ARMs amounts and as a percentage of:
Primary NIW- flow channel	$	5	0.1	%	$	321	2.9	%	$	47	0.3	%	$	1,014	3.5	%
Total primary NIW	$	5	0.1	%	$	321	2.2	%	$	47	0.3	%	$	1,014	2.7	%

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:

	September 30, 2008		December 31, 2007		September 30, 2007
As a percentage of primary risk in force:
Less-than-A Quality loans (FICO scores below 620)	7.4	%	8.1	%	8.1	%
Less-than-A Quality loans with FICO scores below 575 *	1.9	%	2.2	%	2.2	%
Alt-A loans	20.0	%	22.8	%	23.4	%
ARMs (excluding  2/28 Hybrid ARMs)	8.4	%	9.5	%	10.2	%
2/28 Hybrid ARMs **	2.5	%	3.3	%	3.8	%
Above-97s (above 97% LTV’s)	22.6	%	24.6	%	23.9	%
Interest Only	12.5	%	14.2	%	14.2	%
Payment Option ARMs	3.6	%	3.8	%	3.9	%

* 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.

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International Operations

International Operations’ results include continuing operations of PMI Europe and PMI Canada, and discontinued operations and losses on the sales of PMI Australia and PMI Asia:

	Three Months Ended September 30,						Percentage Change	Nine Months Ended September 30,						Percentage Change
	2008			2007				2008			2007
	(Dollars in millions)							(Dollars in millions)
PMI Europe	$	(44.5	)	$	(8.4	)	—	$	(52.6	)	$	(3.8	)	—
PMI Canada		(1.5	)		(0.3	)	—		(4.2	)		(0.7	)	—
Loss from continuing operations*		(46.0	)		(8.7	)	—		(56.8	)		(4.5	)	—
Loss from discontinued operations		(80.5	)		22.6		—		(20.9	)		69.6		(130.0	)%
Net (loss) income*	$	(126.6	)	$	13.9		—	$	(77.7	)	$	65.1		—

* May not total due to rounding

PMI Europe

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

	Three Months Ended September 30,						Percentage change		Nine Months Ended September 30,						Percentage change
	2008			2007					2008			2007
	(USD in millions)								(USD in millions)
Net premiums written	$	2.6		$	4.4		(40.9	)%	$	14.0		$	11.3		23.9	%
Premiums earned	$	3.6		$	3.6		—		$	10.4		$	10.8		(3.7	)%
Net (losses) gains from credit default swaps		(9.9	)		(8.4	)	17.9	%		0.4			(5.0	)	108.0	%
Net investment income		3.2			2.1		52.4	%		10.2			6.7		52.2	%
Net realized gains (losses)		0.9			(0.2	)	—			0.2			(0.2	)	200.0	%
Other loss		—			—		—			—			(0.1	)	(100.0	)%
Total revenues		(2.2	)		(2.9	)	(24.1	)%		21.2			12.2		73.8	%
Losses and LAE		34.4			2.7		—			57.0			4.7		—
Other underwriting and operating expenses		11.4			4.2		171.4	%		22.3			10.6		110.4	%
Total losses and expenses		45.8			6.9		—			79.3			15.3		—
Loss before taxes		(48.0	)		(9.8	)	—			(58.1	)		(3.1	)	—
Income tax expense (benefit)		(3.5	)		(1.4	)	150.0	%		(5.5	)		0.7		—
Net loss	$	(44.5	)	$	(8.4	)	—		$	(52.6	)	$	(3.8	)	—

The average USD/Euro currency exchange rate was 1.5040 and 1.5221 in the third quarter and first nine months of 2008, respectively, compared to 1.3746 and 1.3447 in the corresponding periods in 2007. The changes in the average USD/Euro currency exchange rates negatively impacted PMI Europe’s financial results by $3.8 million and $6.1 million in the third quarter and first nine months of 2008, respectively.

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Premiums written and earned — Net premiums written decreased in the third quarter of 2008 compared to the corresponding period in 2007 primarily due to the reconfiguration of our European operations in the quarter to conserve capital and reduce expenses. Net premiums written increased in the first nine months of 2008 compared to the corresponding period in 2007 primarily due to growth in new reinsurance written in the U.K. The decrease in premiums earned in the first nine months 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.

Net (losses) gains from credit default swaps — PMI Europe is currently a party to fourteen credit default swap (“CDS”) contracts that are classified as derivatives. Net losses from its credit default swaps were primarily a result of changes in the fair value of the derivative contracts in the third quarter of 2008 due to the significant widening of CDS spreads during the period. Net losses were partially offset by gains 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 losses of $9.9 million and $8.4 million for the third quarter of 2008 and 2007, respectively, related to the credit derivative liabilities. (See also Part II, Item 1A. Risk Factors – We are exposed to risk in our European operations.)

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 4.08% and 4.40% for September 30, 2008 and 2007, respectively. The increase in net investment income in the third quarter and first nine months of 2008 compared to the corresponding periods in 2007 was primarily due to foreign currency re-measurement. The increase in net investment income in the first nine months of 2008 was also attributable to the strengthening of the Euro relative to the dollar.

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 $0.7 million and $3.8 million in the third quarter and first nine months of 2008, respectively, compared to $1.2 million and $3.4 million in the corresponding periods in 2007. We increased PMI Europe’s loss reserves by $33.7 million and $53.2 million in the third quarter and first nine months of 2008, respectively, primarily due to the deteriorating performance of certain U.S. subprime exposures on which PMI Europe provided reinsurance coverage in 2005 (see also Part I, Item 2, Conditions and Trends Affecting our Business- PMI Europe) and, to a lesser extent, increased defaults on the Italian primary flow business.

Underwriting and operating expenses — The increases in underwriting and operating expenses in the third quarter and first nine months of 2008 compared to the corresponding periods in 2007 were primarily due to severance costs related to the reconfiguration of PMI Europe and the strengthening of the Euro relative to the U.S. dollar.

Risk in force — PMI Europe’s risk in force as of September 30, 2008 decreased from $9.4 billion at December 31, 2007 to $8.0 billion. The decrease was primarily due to a number of credit default swap contracts being called as scheduled and no significant new business writings.

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Income taxes — The effective tax rate for PMI Europe for the nine months ended September 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.

PMI Canada

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

	Three Months Ended September 30,						Percentage Change		Nine Months Ended September 30,						Percentage Change
	2008			2007					2008			2007
	(USD in millions)								(USD in millions)
Total revenues	$	1.8		$	0.9		100.0	%	$	3.6		$	1.4		157.1	%
Losses and LAE		0.1			—		—			0.1			—		—
Underwriting and operating expenses		3.2			1.4		128.6	%		7.7			2.5		—
Total losses and expenses		3.3			1.4		135.7	%		7.8			2.5		—
Loss before taxes		(1.5	)		(0.5	)	200.0	%		(4.2	)		(1.1	)	—
Income tax (benefit) expense		—			(0.2	)	(100.0	)%		—			(0.4	)	(100.0	)%
Net Loss	$	(1.5	)	$	(0.3	)	—		$	(4.2	)	$	(0.7	)	—

We are in the process of closing our operations in Canada, and estimate that the total costs to exit Canada will be between $8.2 million and $9.6 million, pre-tax. We expect to repatriate to PMI between $40 and $50 million of capital in the fourth quarter of 2008, subject to final regulatory approval. To close our operations in Canada, we must facilitate the removal of PMI Canada’s risk in force and obtain regulatory approvals.

Discontinued Operations

In August 2008, we entered into definitive agreements to sell our wholly-owned subsidiaries, PMI Australia and PMI Asia, to a third party. In connection with these agreements, we classified the operations, and assets and liabilities of PMI Australia and PMI Asia as discontinued operations for all periods presented. During the third quarter of 2008 we recorded a loss on impairment of discontinued operations of $80.5 million after taxes ($63.2 from the impairment of PMI Australia and $17.3 million from PMI Asia).

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The following table represents PMI Australia’s results of operations which were recorded as discontinued operations, and loss on impairment of PMI Australia:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2008			2007		2008			2007
	(Dollars in thousands)
Premiums earned	$	45,159		$	44,224	$	141,234		$	120,693
Net investment (loss) income		(13,820	)		18,815		38,863			52,205
Other income		333			487		(359	)		376
Total revenues		31,672			63,526		179,738			173,274
Losses and loss adjustment expenses		23,765			21,849		66,728			48,150
Other underwriting and operating expenses		14,234			13,659		41,427			36,355
(Loss) income before income taxes from discontinued operations		(6,327	)		28,018		71,583			88,769
Income tax (benefit) expense		(1,877	)		8,304		21,555			26,579
(Loss) income from discontinued operations	$	(4,450	)	$	19,714	$	50,028		$	62,190
Loss on impairment of discontinued operations before income tax		(22,819	)		—		(22,819	)		—
Income tax expense		40,415			—		40,415			—
Loss on impairment PMI Australia	$	(63,234	)	$	—	$	(63,234	)	$	—

Net investment loss during the quarter ended September 30, 2008 was primarily due to the disposal of the majority of PMI Australia’s investment portfolio. Loss on impairment of PMI Australia was principally due to receiving a portion of the purchase price in the form of a note issued by the purchaser, the payment of which is contingent on certain performance criteria, and selling and other costs, including a $46.5 million reinsurance premium associated with the transaction, partially offset by gains on realization of accumulated other comprehensive income relating to foreign currency translation adjustment. The income tax expense related to the sale reflects the recognition of a U.S. taxable gain, reduced by the benefits of certain foreign tax credits generated by the sale.

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The following table represents PMI Asia’s results of operations which were recorded as discontinued operations, and loss on impairment of PMI Asia:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(Dollars in thousands)
Total Revenues	$	5,669		$	3,691		$	13,320		$	10,106
Losses and loss adjustment expenses		11			(38	)		(38	)		(2	)
Other underwriting and operating expenses		861			462			2,540			1,393
Income before income taxes from discontinued operations		4,797			3,267			10,818			8,715
Income taxes		398			355			1,211			1,306
Income from discontinued operations	$	4,399		$	2,912		$	9,607		$	7,409
Loss on impairment of discontinued operations before income tax		(15,376	)		—			(15,376	)		—
Income tax expense		1,880			—			1,880			—
Loss on impairment of PMI Asia		(17,256	)		—			(17,256	)		—

Financial Guaranty

Financial Guaranty includes the equity in earnings (losses) from FGIC and RAM Re. The financial results of PMI Guaranty are reported as discontinued operations.

Equity in earnings (losses) from unconsolidated subsidiaries

Equity in earnings from RAM Re in the third quarter of 2008 was $9.4 million and equity in losses in the first nine months of 2008 was $51.2 million, compared to equity in earnings of $2.2 million and $7.9 million in the corresponding periods in 2007. The equity in earnings from RAM Re in the third quarter of 2008 was due primarily to RAM Re’s unrealized mark-to-market gains on its credit derivative portfolio partially offset by increased losses and loss adjustment expenses. We realized an other-than-temporary impairment charge of $2.9 million to reduce the carrying value of our investment in RAM Re to its fair value of $6.5 million. The equity in losses in the first nine months of 2008 was due primarily to RAM Re’s increases in loss reserves related to continuing deterioration in the performance of RMBS.

In the first quarter of 2008, we impaired our investment in FGIC, and reduced the carrying value of the investment from $103.6 million as of 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.

Discontinued Operations

During the third quarter of 2008, PMI Guaranty paid approximately $152 million of its excess capital to The PMI Group, of which $144 million was reinvested in U.S. Mortgage Insurance Operations. Having substantially completed its runoff activities, we are now reporting the results of PMI Guaranty as discontinued operations in the Financial Guaranty segment and in the consolidated statement of operations for all periods presented. We expect to merge PMI Guaranty into our U.S. Mortgage Insurance Operations during the fourth quarter of 2008 subject to regulatory approval.

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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 September 30,						Percentage Change		Nine Months Ended September 30,						Percentage Change
	2008			2007					2008			2007
	(Dollars in millions)								(Dollars in millions)
Net investment income	$	2.9		$	1.9		52.6	%	$	6.1		$	7.0		(12.9	)%
Net realized investment losses		(1.0	)		(1.9	)	47.4	%		(1.0	)		(3.2	)	68.8	%
Change in fair value of certain debt instruments		66.3			—		—			111.9			—		—
Other income		2.2			4.6		(52.2	)%		8.8			11.0		(20.0	)%
Total revenues		70.4			4.6		—			125.8			14.8		—
Share-based compensation expense		1.9			2.9		(34.5	)%		8.4			13.5		(37.8	)%
Other operating expenses		19.8			14.0		41.4	%		52.7			47.4		11.2	%
Total other operating expenses		21.7			16.9		28.4	%		61.1			60.9		0.3	%
Interest expense		11.1			7.6		46.1	%		27.9			22.7		22.9	%
Total expenses		32.8			24.5		33.9	%		89.0			83.6		6.5	%
Loss before equity in (losses) earnings from unconsolidated subsidiaries and income taxes		37.6			(19.9	)	—			36.8			(68.8	)	153.5	%
Equity in (losses) earnings from unconsolidated subsidiaries		(0.2	)		—		—			(0.4	)		0.3		—
Net (loss) income before income taxes		37.4			(19.9	)	—			36.4			(68.5	)	153.1	%
Income tax expense (benefit)		10.0			(8.9	)	—			9.5			(22.8	)	141.7	%
Net income (loss)	$	27.4		$	(11.0	)	—		$	26.9		$	(45.7	)	158.9	%

Change in fair value of certain debt instruments — The change in fair value of certain debt instruments in the third quarter and first nine months 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 $66.3 million and $111.9 million in the third quarter and first nine months of 2008, respectively, are the result of fluctuations of fair value in the first nine months of 2008 primarily due to widening credit spreads and changes in interest rates.

Share-based compensation expenses — The decreases in share-based compensation in the third quarter and first nine months of 2008 from the corresponding periods in 2007 were primarily due to a decrease in fair value of share-based compensation and number of stock units granted in 2008.

Other operating expenses — The changes in other operating expenses in the third quarter and first nine months of 2008 compared to the corresponding periods in 2007 were due to increased legal fees and impairments of capitalized software projects and to a lesser extent, increased employee compensation costs.

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Income taxes —The tax rates of 26.7% for the third quarter and 26.1% for the first nine months of 2008 were lower than the 2007 tax rates of 44.7% and 33.3% for the corresponding periods in 2007 due primarily to due to allocation 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 is limited and 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. Our 5.568% Senior Notes of $45 million are due and will be paid on November 15, 2008.

The PMI Group’s available funds, consisting of cash and cash equivalents and investments, were $232.3 million at September 30, 2008 compared to $78.6 million at September 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.

On October 22, 2008, we completed the sale of PMI Australia to a third party. In connection with the sale, we received a cash payment of approximately $746 million as well as a note (the “Australia Note”) in the principal amount of $187 million, which is payable in September 2011 and is subject to reductions to the extent (i) performance of PMI Australia’s existing insurance portfolio as of June 30, 2008 does not achieve specified targets, (ii) PMI is required to satisfy any claims for any breach of warranties under the sale agreement and (iii) subject to our completion of the sale of PMI Asia to the third party purchaser, performance of PMI Asia’s existing insurance portfolio as of June 30, 2008 does not achieve specified targets and the amount of the note to be issued in connection with the sale of PMI Asia has been reduced to zero. Net loss on impairment of PMI Australia was principally due to receiving a portion of the purchase price in the form of a note issued by the purchaser, the payment of which is contingent on certain performance criteria, and selling and other costs which includes a $46.5 million reinsurance premium associated with the transaction, partially offset by gains on realization of accumulated other comprehensive income relating to foreign currency translation adjustment.

On August 29, 2008, we announced our agreement to sell PMI Asia for an aggregate purchase price of $56 million, subject to certain adjustments, of which 80% of the purchase price will be paid in cash on the date of closing, and the remaining 20% of the purchase price will be paid in the form of a note (the “Hong Kong Note”) issued upon closing. The Hong Kong note, once issued, matures and is payable in September 2011, and the actual amount payable on the Hong Kong Note will be reduced to the extent (i) the performance of PMI Asia’s existing insurance portfolio as of June 30, 2008 does not achieve specified targets, (ii) we are required to satisfy any claims for any breach of warranties under the sale agreement and (iii) performance of PMI Australia’s existing insurance portfolio as of June 30, 2008 does not achieve specified targets and the amount of the Australia note has been reduced to zero. We are currently discussing post-closing issues with the buyer. While we expect the sale of PMI Asia to close in the fourth quarter of 2008, there can be no assurance that the transaction will be completed upon the agreed upon terms or at all.

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We may transfer or assign the interests under the Australia Note or the Hong Kong Note without restriction. Due to the contingent nature of the notes, we will not record the notes as assets in our consolidated financial statements.

As a result primarily of higher losses and LAE in 2007 and 2008, we require additional capital and/or capital relief (in addition to the amounts received in connection with the sale of PMI Australia and the amounts we expect to receive from the sale of PMI Asia), as described further under Part II, Item 1A. Risk Factors—Our policyholders position could decline and our risk-to-capital ratio could increase beyond the levels necessary to meet various capital adequacy requirements and We may face liquidity issues at our holding company. The amount of capital and/or capital relief required are affected by a variety of factors, many of which are difficult to predict and may be outside of our control. These factors include, among others:

• the performance of our U.S. mortgage insurance operations, which is affected by, among other things, the economy, default and cure rates and losses and LAE;

• PMI Mortgage Insurance Co.’s (“MIC”) ability to comply with policyholder position requirements and risk-to-capital requirements imposed by regulators as well as under our credit facility;

• determinations and views, many of which are subjective rather than quantitative in nature, of the GSEs and rating agencies;

• financial and other covenants and event of default triggers in our credit facility;

• the performance of PMI Europe, which is affected by, among other things, the U.S. mortgage market and changes in the fair value of CDS derivative contracts resulting from the widening of RMBS credit spreads; and

• any requirements to provide capital under the PMI Europe or CMG capital support agreements.

On an ongoing basis, we are exploring available alternatives to enhance our liquidity and capital at PMI and The PMI Group, including 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, as well as the possibility that we may need to raise additional capital with little notice, there can be no assurance that we will be able to consummate any capital raising transactions on favorable terms, in a timely manner or at all. Other measures that we may take to address these issues, including, but not limited to, the reduction of NIW, may be inadequate to maintain PMI’s policyholder position and risk-to-capital levels within required limits. (See also Part II, Item 1A. Risk Factors – There is no assurance that we will be able to raise needed capital on a timely basis and 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. As described below under Part II, Item 1A. Risk Factors – Our policyholders position could decline and our risk-to-capital ratio could increase beyond the levels necessary to meet various capital adequacy requirements and We may face liquidity issues at our holding company, unless we raise new capital and/or reduce PMI’s NIW and risk-in-force, PMI’s policyholder position will likely decline and its risk-to-capital ratio could increase beyond the levels necessary to meet certain capital adequacy requirements and to be in compliance with our credit facility.

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International Operations and Financial Guaranty Liquidity —Negative rating agency actions with respect to PMI and PMI Europe 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. Upon completion of the sale of PMI Australia, the amount available under the facility was reduced to $250 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 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 related to the facility totaling approximately $0.3 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 and the loss realized in connection with the sale of PMI Australia (as determined in accordance with GAAP) in an amount equal to no more than 20% of the entity’s pre-sale book value are excluded from the calculation of Adjusted Consolidated Net Worth. 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 amendment also added additional conditions to our being able to borrow additional amounts under the facility. Among other things, we will not be able to borrow additional amounts if either (1) MIC fails to meet GSE eligibility requirements for mortgage insurers or (2) there exist any limitations that were not in effect on the date of the credit facility amendment with respect to the eligibility of mortgages insured by MIC for purchase by the GSEs that would adversely affect (other than in a manner that is insubstantial) the ability of MIC to conduct its business as it was conducted on the date of the credit facility amendment. There can be no assurance that we will be able to meet the conditions required to borrow additional amounts under the facility.

The amended facility also contains additional covenants and restrictions. Among these are restrictions on asset dispositions and investments. While we are generally permitted under the amended facility to make additional investments in MIC and its subsidiaries, our ability to invest in our

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reinsurance subsidiaries is subject to dollar limitations (other than with regard to four of TPG’s subsidiaries whose capital stock was pledged to the bank group on or about September 29, 2008). The amended facility does not permit us to make additional investments in PMI Guaranty (other than pursuant to existing support arrangements), FGIC or RAM Re. In the third quarter of 2008, we requested and received 100% of the lenders’ consent for the sale of PMI Australia and PMI Asia to a third party. In addition, on September 29, 2008 we completed the pledge of stocks of four reinsurance subsidiaries to the bank group and invested $25 million in one of the subsidiaries, PMI Reinsurance Co. 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 while also 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 would likely be required 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. See also Part II, Item 1A. Risk Factors—Our credit facility contains restrictive and financial covenants and, if we are unable to comply with these covenants, we may trigger an event of default under the facility.

Dividends to The PMI Group

PMI’s ability to pay dividends to The PMI Group is affected by state insurance laws, credit agreements, rating agencies, and the discretion of insurance regulatory authorities. The laws of Arizona, PMI’s state of domicile for insurance regulatory purposes, provide that PMI may pay dividends out of any available surplus account, without prior approval of the Director of the Arizona Department of Insurance, during any 12-month period in an amount not to exceed the lesser of 10% of policyholders’ surplus as of the preceding year end or the prior calendar year’s net investment income. A dividend that exceeds the foregoing threshold is deemed an “extraordinary dividend” and requires the prior approval of the Director of the Arizona Department of Insurance. In December 2006, the Director of the Arizona Department of Insurance approved an extraordinary dividend request of $250 million and a $100 million installment was paid to The PMI Group in the form of a return of capital. In April 2007, an additional $200 million extraordinary dividend was approved by the Director of the Arizona Department of Insurance. In 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 September 30, 2008, PMI’s risk-to-capital ratio was 15.7 to 1 compared to 9.6 to 1 at September 30, 2007.

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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, $5.9 million of additional equity in certain limited partnership investments.

Consolidated Investments

Net Investment Income

Net investment income consists of:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(Dollars in thousands)
Fixed income securities	$	27,659		$	25,340		$	78,817		$	73,605
Equity securities		5,351			5,543			16,713			13,804
Short-term investments and cash and cash equivalents		3,582			3,050			11,066			11,843
Investment income before expenses		36,592			33,933			106,596			99,252
Investment expenses		(494	)		(346	)		(1,477	)		(1,159	)
Net investment income	$	36,098		$	33,587		$	105,119		$	98,093

The increases in net investment income in the third quarter and first nine months of 2008 compared to the same periods in 2007 were primarily due to the growth of PMI’s fixed income portfolio, partially offset by a decrease in pre-tax book yield. Our consolidated pre-tax book yield was 4.16% and 5.10% as of September 30, 2008, and 2007, respectively.

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Investment Portfolio by Operating Segment

The following table summarizes the estimated fair value of the consolidated investment portfolio as of September 30, 2008 and December 31, 2007. Amounts shown under “International Operations” consist of the investment portfolios of PMI Europe and PMI Canada. 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)
September 30, 2008
Fixed income securities:
U.S. Municipal bonds	$	1,715,169	$	—	$	617	$	98,327	$	1,814,113
Foreign governments		—		47,566		—		—		47,566
Corporate bonds		675		110,605		—		34,220		145,500
U.S. government and agencies		8,429		—		—		143		8,572
Mortgage-backed securities		1,759		—		—		1,532		3,291
Total fixed income securities		1,726,032		158,171		617		134,222		2,019,042
Equity securities:
Common stocks		9,883		—		—		—		9,883
Preferred stocks		212,703		—		—		—		212,703
Total equity securities		222,586		—		—		—		222,586
Short-term investments		980		—		—		1,300		2,280
Total investments	$	1,949,598	$	158,171	$	617	$	135,522	$	2,243,908
	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		—		265,653		—		—		265,653
Corporate bonds		675		—		—		36,789		37,464
U.S. government and agencies		7,511		—		—		976		8,487
Mortgage-backed securities		2,053		—		—		1,667		3,720
Total fixed income securities		1,531,606		265,653		167,915		52,974		2,018,148
Equity securities:
Common stocks		116,005		4		—		1,242		117,251
Preferred stocks		277,165		—		22,465		—		299,630
Total equity securities		393,170		4		22,465		1,242		416,881
Short-term investments		951		—		—		1,300		2,251
Total investments	$	1,925,727	$	265,657	$	190,380	$	55,516	$	2,437,280

Our consolidated investment portfolio holds primarily investment grade securities comprised of readily marketable fixed income and equity securities. At September 30, 2008, the fair value of these securities in our consolidated investment portfolio decreased to $2.2 billion as of September 30, 2008 from $2.4 billion as of December 31, 2007.

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.

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

	U.S. Mortgage Insurance Operations		International Operations		Financial Guaranty		Corporate and Other		Consolidated Total
AAA or equivalent	48	%	72	%	92	%	59	%	52	%
AA	31	%	8	%	8	%	31	%	28	%
A	18	%	13	%	0	%	9	%	16	%
BBB	3	%	5	%	0	%	1	%	4	%
Below investment grade	—		2	%	—		—		—
Total	100	%	100	%	100	%	100	%	100	%

As of September 30, 2008, approximately $854.9 million, or 29.0% 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 September 30, 2008.

	Fair Value (in thousands)		% of Consolidated Investments
MBIA	$	238,030	8.1	%
FGIC		190,843	6.4	%
FSA		159,291	5.4	%
AMBAC		175,536	6.0	%
Other		91,201	3.1	%
Total	$	854,901	29.0	%

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 the underlying rating distributions of our consolidated investment portfolio (including cash and cash equivalents, excluding common stocks) as of September 30, 2008, 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.

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	U.S. Mortgage Insurance Operations		International Operations		Financial Guaranty		Corporate and Other		Consolidated Total
AAA or equivalent	41	%	72	%	92	%	53	%	47	%
AA	24	%	8	%	8	%	22	%	22	%
A	29	%	13	%	0	%	24	%	26	%
BBB	6	%	5	%	0	%	1	%	5	%
Below investment grade	—		2	%	—		—		—
Not rated	—		—		—		—		—
Total	100	%	100	%	100	%	100	%	100	%

Capital Support Obligations

PMI has a capital support agreement with PMI Europe, with a corresponding guarantee from The PMI Group, PMI may be required to make additional capital contributions from time-to-time as necessary to maintain PMI Europe’s minimum capital requirements. 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 CMG MI capital support agreement is limited to an aggregate of $37.7 million. As of September 30, 2008, CMG MI’s risk-to-capital ratio is at 15.5 to 1.

PMI also has capital support agreements with PMI Guaranty and PMI Canada, with a corresponding guarantee from The PMI Group for PMI’s capital support agreement with PMI Guaranty. Because PMI Guaranty has substantially completed its runoff activities and we terminated our Canadian operations in PMI Canada, we believe there are no remaining material support obligations under the PMI Guaranty or PMI Canada capital support agreements. PMI also had a capital support agreement with PMI Australia and corresponding guarantee from the PMI Group. As a result of our sale of PMI Australia, there are no remaining obligations under PMI’s capital support agreement with PMI Australia nor under the corresponding guarantee from the PMI Group.

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, in the event we are called upon to immediately satisfy amounts under our credit facility and/or senior notes in 2009, there may not be funds at our holding company to repay the debt. (See also Part II, Item 1A. Risk Factors—We may face liquidity issues at our holding company.)

Consolidated cash flows generated by operating activities, including premiums, investment income, underwriting and operating expenses and losses, were $232.1 million in the first nine months of 2008 compared to $271.6 million in the first nine 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.

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Consolidated cash flows used in investing activities in the first nine months of 2008, including purchases and sales of investments and capital expenditures, were $98.0 million compared to consolidated cash flows used in investing activities of $123.8 million in the first nine months of 2007. The decrease in cash flows used in investing activities in the first nine months of 2008 compared to the corresponding period in 2007 was due primarily to increased proceeds from sales of fixed income and equity securities without a corresponding increase in security purchases.

Consolidated cash flows provided by financing activities were $200.3 million in the first nine months of 2008 compared to cash flows used in financing activities of $185.6 million of cash used in the first nine 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 nine months of 2008.

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Ratings

The rating agencies have assigned the following ratings to The PMI Group and certain of its affiliates and its equity investee subsidiaries as of October 31, 2008:

	Standard & Poor’s	Fitch	Moody’s	DBRS
Insurer Financial Strength Ratings
PMI Mortgage Insurance Co.	A-	BBB+	A3	AA
PMI Insurance Co.	A-	BBB+	A3	—
PMI Canada	—	—	—	AA
PMI Europe	A-	BBB+	A3	—
CMG MI	AA-	AA	—	—
FGIC	BB	CCC	B1	—
RAM Re	A+	—	A3	—
Senior Unsecured Debt
The PMI Group	BBB-	BB	Baa3	—
Capital Securities
PMI Capital I	BB	BB-	Ba1	—

Recent Developments Relating to Mortgage Insurance Companies 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 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 rating on PMI and PMI Europe from “AA” (Rating Watch Negative) to “A+” (Rating Watch Negative) and its long-term issuer rating of The PMI Group from “A” (Rating Watch Negative) to “BBB+” (Rating Watch Negative).

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

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On August 26, 2008, Standard & Poor’s downgraded its counterparty credit and insurer financial strength ratings on PMI Mortgage Insurance Co., PMI Insurance Co. and PMI Europe from “A+” (Negative Outlook) to “A-” (CreditWatch with Negative Implications). Standard & Poor’s also downgraded its counterparty credit rating on The PMI Group from “BBB+” (Negative Outlook) to “BBB-” (CreditWatch with Negative Implications).

On October 7, 2008, Standard & Poor’s removed The PMI Group and its mortgage insurance subsidiaries, PMI Mortgage Insurance Co., PMI Insurance Co. and PMI Europe from CreditWatch with Negative Implications. At the same time, Standard & Poor’s affirmed the ratings on all of these companies, and revised the Outlook to Negative.

On October 10, 2008, Moody’s announced that it placed on review for possible downgrade the “A3” insurance financial strength rating of PMI Mortgage Insurance Co., PMI Insurance Co. and PMI Europe. Moody’s also placed the “Baa3” senior unsecured debt rating of the holding company, The PMI Group, under review for possible downgrade. Moody’s noted that “these rating actions primarily reflect the rating agency’s expectation of further stress on the company’s risk-adjusted capital position in light of continued deterioration in housing fundamentals, as reflected in the upward revisions to Moody’s loss expectations for certain residential mortgage-backed securities announced in September.”

On October 17, 2008, Fitch lowered its insurer financial strength ratings on PMI Mortgage Insurance Co., PMI Insurance Co. and PMI Europe from “A+” (Rating Watch Negative) to “BBB+” (Negative). Fitch also lowered its long-term issuer debt rating of The PMI Group from “BBB+” (Negative) to “BB” (Rating Watch Negative). These ratings have been removed from Rating Watch Negative, and the Outlook has been revised to Negative. In taking these actions, Fitch stated among other things, that these actions “incorporate[d] expectations of continued losses in 2005 through early 2008 vintages, which, when compared to the rest of the MI industry, include higher concentration levels to geographic regions and mortgage products are under the greatest stress.” Fitch also noted that “the ratings differential between the operating company and the holding company reflect concerns that PMI’s holding company liquidity position is at increased risk arising from certain financial and ratings-based covenants within the company’s bank credit facility, particularly with regard to a maximum risk-to-capital ratio of 20:1.”

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 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.) In addition, if MIC fails to

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maintain both a financial strength rating of at least “Baa” from Moody’s and a financial strength rating of at least “BBB” from Standard & Poor’s, an event of default will occur under our credit facility. (See Part II, Item 1.A Risk Factors—Our credit facility contains restrictive and financial covenants and, if we are unable to comply with these covenants, we may trigger an event of default under the facility.)

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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 September 30, 2008 and December 31, 2007 on a segment and consolidated basis:

	As of September 30, 2008						As of December 31, 2007
	Low		High		Recorded		Low		High		Recorded
	(Dollars in millions)						(Dollars in millions)
U.S. Mortgage Insurance Operations	$	1,975.0	$	2,675.0	$	2,349.7	$	933.8	$	1,348.7	$	1,133.1
International Operations		78.3		99.0		90.8		18.1		76.2		41.6
PMI Guaranty (1)		22.9		22.9		22.9		2.6		2.6		2.6
Consolidated loss and LAE reserves	$	2,076.2	$	2,796.9	$	2,463.4	$	954.5	$	1,427.5	$	1,177.3

⁽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 September 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 September 30, 2008 was approximately the mid-point of the actuarial range.

Our increases to the reserve balance in the first nine months of 2008 were primarily due to PMI’s higher default inventory and higher expected claim rates and claim sizes on reported delinquencies driven by increases in the average loan size and coverage level within PMI’s default inventory. 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 nine months of 2008. 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 (cure rate). The increases in PMI’s average claim size have been driven by, among other things, an increase in delinquencies from loans with higher loan sizes and coverage levels, and declining home prices which limit PMI’s loss mitigation opportunities. During the third quarter of 2008, the increase in loss reserves was partially offset by a decrease in our estimated future claim rate due to our projected impact of future loss mitigation efforts and, to a lesser extent, by increased rescissions of insurance written in prior periods. Despite the third quarter improvement to our estimated claim rates, we have had significant increases in the number of notices of default and the estimated claim rate during the first nine months of 2008 as compared to the first nine months of 2007. These increases have been the primary driver of the large increases in loss reserves in 2008. The table below provides a reconciliation of our U.S. Mortgage Insurance segment’s beginning and ending reserves for losses and LAE for the nine months ended September 30, 2008 and 2007:

	Nine Months Ended September 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		1,237.1			419.6
Prior years		200.6			155.9
Total incurred		1,437.7			575.5
Losses and LAE payments (principally with respect to defaults occuring in):
Current year		(28.2	)		(12.3	)
Prior years		(549.7	)		(232.1	)
Total payments		(577.9	)		(244.4	)
Net balance at September 30		1,957.0			694.4
Reinsurance recoverables		392.7			3.9
Balance at September 30	$	2,349.7		$	698.2

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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 $577.9 million and $244.4 million for the periods ended September 30, 2008 and 2007, respectively, reflect amounts paid during the periods presented and are not subject to estimation. Total losses and LAE incurred of $1.4 billion and $575.5 million for the nine months ended September 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 $200.6 million and $155.9 million for the nine months ended September 30, 2008 and 2007, respectively. The table below breaks down the nine months ended September 30, 2008 and 2007 changes in reserves related to prior years by particular accident years:

	Losses and LAE Incurred								Change in Incurred
Accident Year (year in which default occurred)	September 30, 2008		December 31, 2007		September 30, 2007		December 31, 2006		September 30, 2008 vs. December 31, 2007			September 30, 2007 vs. December 31, 2006
2001 and Prior	$	—	$	—	$	—	$	—	$	(0.6	)	$	0.4
2002		224.1		225.1		224.3		221.7		(1.0	)		2.6
2003		224.5		226.8		225.0		220.2		(2.3	)		4.8
2004		239.4		241.3		238.0		229.1		(1.9	)		8.9
2005		269.7		270.8		263.0		240.4		(1.1	)		22.6
2006		405.5		410.3		377.4		260.8		(4.8	)		116.6
2007		1,105.4		893.1		419.6		—		212.3			—
Total									$	200.6		$	155.9

The $200.6 million and $155.9 million increases related to prior years in the first nine months 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

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$200.6 million increase in prior years’ reserves during the first nine months 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. 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:

	September 30, 2008		December 31, 2007
	(Dollars in thousands)
Primary insurance	$	2,195,289	$	1,054,326
Pool insurance		154,362		78,754
Total reserves for losses and LAE	$	2,349,651	$	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:

	September 30, 2008		December 31, 2007
	(Dollars in thousands)
Loans in default	$	2,243,432	$	1,062,150
IBNR		71,177		45,453
Cost to settle claims (LAE)		35,042		25,477
Total reserves for losses and LAE	$	2,349,651	$	1,133,080

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 September 30, 2008 reserves for losses and LAE, the effect on pre-tax income would be an increase or decrease of approximately $112.2 million; (ii) for every 5% change in our estimate of incurred but not reported loans in default as of September 30, 2008, the effect on pre-tax income would be approximately $3.6 million; and (iii) for every 5% change in our estimate of the future cost of claims settlement expenses as of September 30, 2008, the effect on pre-tax income would be approximately $1.8 million.

If either the claim rate or claim size, or a combination of the claim rate and claim size, were to increase approximately 14% 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 16% 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

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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 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 components: case reserves and IBNR reserves. Case and IBNR reserves are based upon factors which include, but are not limited to, our analysis of arrears and loss payment reports, loss assumptions derived from pricing analyses, our view of current and future economic conditions and industry information. Our actuaries calculated a range for PMI Europe’s loss reserves at September 30, 2008 of $ 78.3 million to $98.7 million. PMI Europe’s recorded loss reserves at September 30, 2008 were $90.7 million, which represented our best estimate and an increase of $49.1 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. subprime exposures on which PMI Europe provided reinsurance coverage.

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

	September 30, 2008		December 31, 2007
	(Dollars in thousands)
Loans in default	$	69,566	$	33,044
IBNR		20,949		8,250
Cost to settle claims (LAE)		341		285
Total loss and LAE reserves	$	90,856	$	41,579

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

	2008			2007
	(Dollars in millions)
Balance at January 1	$	41.6		$	17.9
Reinsurance recoverables		(1.0	)		(0.9	)
Net balance at January 1		40.6			17.0
Losses and LAE incurred (principally with respect to defaults occurring in)
Current year		9.7			3.7
Prior years		47.4			1.0
Total incurred		57.1			4.7
Losses and LAE payments (principally with respect to defaults occurring in)
Current year		—			—
Prior years		(3.8	)		(3.4	)
Total payments		(3.8	)		(3.4	)
Foreign currency translation		(4.0	)		1.3
Net balance at September 30		89.9			19.6
Reinsurance recoverables		0.9			1.0
Balance at September 30	$	90.8		$	20.6

The increase in losses and LAE incurred relating to prior years of $47.4 million in the first nine months of 2008 was primarily due to a loss provision related to deteriorating performance of several U.S. exposures on which PMI Europe provided reinsurance coverage.

PMI Guaranty — PMI Guaranty’s loss reserves of $22.9 million are related to the agreement between PMI Guaranty, FGIC, and AG Re under which PMI Guaranty commuted certain risks with FGIC.

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Investment Securities

Other-Than-Temporary Impairment—We have a committee review process for all securities in our investment portfolio, including a 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.

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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 September 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)
September 30, 2008
Fixed income securities:
U.S. municipal bonds	$	1,396,429	$	(94,204	)	$	37,734	$	(8,248	)	$	1,434,163	$	(102,452	)
Foreign governments		22,509		(1,326	)		13,482		(1,072	)		35,991		(2,398	)
Corporate bonds		73,512		(3,113	)		47,803		(5,409	)		121,315		(8,522	)
U.S. government and agencies		3,996		(12	)		—		—			3,996		(12	)
Total fixed income securities		1,496,446		(98,655	)		99,019		(14,729	)		1,595,465		(113,384	)
Equity securities:
Common stocks		9,867		(2,423	)		—		—			9,867		(2,423	)
Preferred stocks		115,083		(28,946	)		47,012		(11,311	)		162,095		(40,257	)
Total equity securities		124,950		(31,369	)		47,012		(11,311	)		171,962		(42,680	)
Total	$	1,621,396	$	(130,024	)	$	146,031	$	(26,040	)	$	1,767,427	$	(156,064	)
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
December 31, 2007
Fixed income securities:
U.S. municipal bonds	$	135,690	$	(3,244	)	$	7,201	$	(186	)	$	142,891	$	(3,430	)
Foreign governments		28,217		(850	)		43,694		(1,207	)		71,911		(2,057	)
Corporate bonds		53,525		(1,190	)		62,147		(2,590	)		115,672		(3,780	)
U.S. government and agencies		100		—			145		—			245		—
Total fixed income securities		217,532		(5,284	)		113,187		(3,983	)		330,719		(9,267	)
Equity securities:
Common stocks		14,395		(339	)		—		—			14,395		(339	)
Preferred stocks		275,852		(34,908	)		—		—			275,852		(34,908	)
Total equity securities		290,247		(35,247	)		—		—			290,247		(35,247	)
Total	$	507,779	$	(40,531	)	$	113,187	$	(3,983	)	$	620,966	$	(44,514	)

Unrealized losses in 2008 on fixed income securities were primarily due to the widening of credit spreads which have also increased market interest rates on most fixed income securities. Unrealized losses on preferred securities were primarily due to the widening of credit and sector spreads. These unrealized losses are not considered to be other-than-temporarily impaired as the Company has the intent and ability to hold such investments until they recover in value or mature. 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 $62.0 million and $75.2 million for the third quarter and first nine months of 2008, 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

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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 expiration of risk. 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 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 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. We also impaired $1.2 million of deferred policy acquisition cost assets relating to PMI Europe during the third quarter of 2008.

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.

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.

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At June 30, 2008, the carrying value of our investment in RAM Re had been reduced to zero due to equity in losses in RAM Re. During the third quarter of 2008, we recognized equity in earnings from RAM Re of $9.4 million which increased our investment in RAM Re to $9.4 million. In addition, however, we realized an other-than-temporary impairment charge of $2.9 million, which reduced the carrying value of our investment in RAM Re to $6.5 million.

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 September 30, 2008. We determined there was no premium deficiency in our U.S. Mortgage Insurance Operations segment despite significant losses in the third quarter and first nine months 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 September 30, 2008, our consolidated investment portfolio was $2.2 billion. The fair value of investments in our portfolio is calculated from independent market quotations, and is interest rate sensitive and subject to change based on interest rate movements. As of September 30, 2008, 90.0% 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 September 30, 2008:

	Estimated Increase (Decrease) in Fair Value
	(Dollars in thousands)
300 basis point decline	$	364,920
200 basis point decline	$	259,732
100 basis point decline	$	155,870
100 basis point rise	$	(169,334	)
200 basis point rise	$	(318,296	)
300 basis point rise	$	(450,069	)

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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 6.5 as of September 30, 2008.

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 September 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 September 30, 2008, with all other factors remaining constant:

	Estimated Increase (Decrease) Foreign Currency Translation
Change in foreign currency exchange rates	Europe			Canada			Consolidated
	(USD in thousands)
15% decline	$	(17,120	)	$	(9,691	)	$	(26,811	)
10% decline	$	(11,413	)	$	(6,461	)	$	(17,874	)
5% decline	$	(5,707	)	$	(3,230	)	$	(8,937	)
5% rise	$	5,707		$	3,230		$	8,937
10% rise	$	11,413		$	6,461		$	17,874
15% rise	$	17,120		$	9,691		$	26,811
Foreign currency translation recorded as of September 30, 2008	$	53,698		$	4,235		$	57,933

	U.S. Dollar relative to
As of September 30,	Euro	Canadian Dollar
2008	1.4093	0.9394
2007	1.4261	1.0075

The changes in the foreign currency exchange rates from the third quarter of 2007 to the third quarter of 2008 negatively affected our investments in our foreign subsidiaries by $6.0 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 September 30, 2008, $ 0.2 billion, including cash and cash equivalents of our invested assets, was held by PMI Europe and was denominated primarily in Euros. As of September 30, 2008, $37.3 million, including cash and cash equivalents of our invested assets, was held by PMI Canada and was denominated in the Canadian dollar. The above table shows the exchange rate of the U.S. dollar relative to the Euro and Canadian dollar as of September 30, 2008 and 2007. The value of the Euro, and Canadian dollar weakened relative to the U.S. dollar as of September 30, 2008 compared to September 30, 2007.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures—Based on their evaluation as of September 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 filed a consolidated complaint on September 4, 2008, naming as defendants The PMI Group, Inc., L. Stephen Smith, David H. Katkov, Donald P. Lofe, Jr. and Bradley M. Shuster. On October 14, 2008, we filed a motion to dismiss the consolidated complaint. The hearing on our motion to dismiss is scheduled for December 12, 2008. We continue to believe that we have meritorious defenses and intend to defend ourselves vigorously.

On August 28, 2008, PMI Mortgage Insurance Co. (“PMI”) rescinded coverage on 5,565 loans that IndyMac Bank delivered to PMI for coverage in 2007 under a lender paid mortgage insurance program. On September 12, 2008, Indymac Federal Bank, FSB (“IndyMac”), by the Federal Deposit Insurance Corporation as Conservator, filed a complaint against PMI in the United States District Court for the Northern District of California alleging that PMI improperly rescinded mortgage insurance coverage on the 5,565 loans. The complaint seeks declaratory and injunctive relief and requests damages against PMI in an unspecified amount for breach of contract, tortuous breach of the implied covenant of good faith and fair dealing, and reformation. On November 4, 2008, IndyMac filed a supplemental complaint. PMI’s response to the supplemental complaint is due on November 24, 2008. We believe that we have meritorious defenses to the complaint and intend to defend against the complaint vigorously.

In April 2002, PMI commenced litigation in the United States District Court for the Northern District of California (PMI Mortgage Insurance Co. v. American International Specialty Lines Insurance Company, et al., Case No. 3:02-CV-01774) to obtain reimbursement from its former primary and excess insurance carriers for costs incurred by PMI, in connection with its defense and settlement of the class action litigation captioned Baynham et al. v. PMI Mortgage Insurance Co. In October 2006, PMI settled with the excess carriers, and on December 5, 2006, the court entered judgment in PMI’s favor in the amount of approximately $7.6 million, plus approximately $2.4 million

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in prejudgment interest. The insurers appealed the judgment in PMI’s favor, and on October 11, 2008, the Company received payment of the settlement proceeds of approximately $10.9 million, including interest, from the primary carrier related to the remaining claims in the litigation.

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.

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 quarters ended March 31 and June 30, 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.

Current market volatility combined with falling home prices and rising unemployment have materially and adversely affected our business and results of operations, and we do not expect these conditions to improve in the near future.

The recent deterioration and volatility of credit and capital markets cast significant uncertainty in the domestic residential mortgage markets. Falling home prices and increasing foreclosures and unemployment have resulted in significant write-downs of mortgage-backed securities, credit default swaps and other derivative securities by financial institutions, including the GSEs and major commercial and investment banks. As a result of this market turmoil and significant tightening of credit and underwriting standards, many mortgage lenders have reduced, and in some cases, ceased to provide funding to borrowers.

Deterioration in economic conditions has generally increased the likelihood of borrowers defaulting on their mortgage loans. In addition, home prices continue to decline or have stopped appreciating in many regions of the United States, making it possible that borrowers with sufficient resources to make their mortgage payments may instead abandon their properties when their mortgage balances exceed the value of their homes. We do not anticipate that market conditions will improve in the near term. We have incurred increased losses as a result of the deterioration in economic conditions and the amount of new insurance written has declined, and we expect that these trends will continue to materially affect our results of operations and financial condition.

Our policyholders position could decline and our risk-to-capital ratio could increase beyond the levels necessary to meet various capital adequacy requirements.

PMI’s principal regulator is the Arizona Department of Insurance (the “Department”), whose regulations require PMI to maintain “policyholders position” of not less than a minimum computed under a formula set by statute. Other states in which PMI is licensed also use a “policyholders position” formula to determine a mortgage insurer’s capital adequacy. If a mortgage insurer does not meet the minimum required by the formula, it cannot write new business until its policyholders position meets the minimum. Other states require mortgage

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insurers to maintain certain risk-to-capital ratios, generally at 25 to 1. If a mortgage insurer’s risk-to-capital ratio exceeds the limit applicable in a state, it may be prohibited from writing new business in that state until its risk-to-capital ratio falls below the limit. Our revolving credit 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%. If PMI’s capital adequacy metrics exceed the limits discussed above, we would be in default under the credit facility, and 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. See also Part II, Item 1.A Risk Factors – Our credit facility contains restrictive and financial covenants and, if we are unable to comply with these covenants, we may trigger an event of default under the facility.

Based on current and expected future trends, we believe that we will continue to incur and pay material losses. The ultimate amount of losses will depend in part on general economic conditions and other factors, including the health of credit markets, home price fluctuations and unemployment rates, all of which are difficult to predict. Unless we raise new capital and/or reduce PMI’s NIW and risk-in-force, PMI’s policyholder position will likely decline and its risk-to-capital ratio could increase beyond the levels necessary to meet capital adequacy requirements imposed by regulators as well as under our credit facility. The amount of capital and/or capital relief we require will depend on a number of factors, such as economic conditions, compliance with regulatory policyholder position and risk-to-capital requirements and rating agencies and GSE requirements and determinations, many of which may be outside of our control and difficult to predict. In addition, some of these factors, such as the views and requirements of the rating agencies and GSEs, are subjective and not subject to specific quantitative standards. See also Part I, Item 2. Liquidity and Capital Resources.

We are considering options to reduce our risk in force through reinsurance, limiting new insurance written or other means and to obtain additional capital, which could occur through the sale of equity or debt securities. There can be no assurance that we will be able to raise any additional capital or procure capital relief in the future, either on acceptable terms and in a timely manner, or at all. Other measures that we may take to address these issues, including, but not limited to, the reduction of NIW, may be inadequate to maintain PMI’s policyholder position and risk-to-capital levels within required limits. See also Part II, Item 1A. There is no assurance that we will be able to raise needed capital on a timely basis and on favorable terms, or at all.

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.

On August 26, 2008, Standard & Poor’s lowered its insurer financial strength rating on PMI to “A-” from “A+” and placed it under CreditWatch with Negative Implications. On October 7, 2008, Standard & Poor’s removed its CreditWatch designation and affirmed its “A-” rating on PMI with Negative Outlook. On October 10, 2008, Moody’s placed PMI under review for possible downgrades. On October 17, 2008, Fitch lowered its insurer financial strength rating on PMI to “BBB+” from “A+.” As a result of the recent downgrades of PMI, PMI Europe has been downgraded by and has received insurer financial strength ratings of “A-”, “BBB+” and “A3” from Standard & Poor’s, Fitch and Moody’s, respectively. PMI Europe’s rating is dependent in part upon the capital support of PMI.

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Because of the recent downgrades, we submitted written remediation plans to each of the GSEs 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. Both of the GSEs indicated that they will continue to treat PMI as an eligible mortgage insurer. Freddie Mac has stated that its forbearance from enforcing additional insurer requirements is wholly discretionary and subject to change as well as its review of monthly updates regarding PMI’s progress in implementing its remediation plan. Fannie Mae also requires periodic updates from PMI. 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 with either of them. Such limitations could include, among other things, maximum risk-to-capital ratios and limitations on our ability to pay dividends or make other payments, which could limit our operating flexibility and limit the areas in which we may write new business. In addition, such limitations could prevent us from drawing under our credit facility. See Part II, Item 1A. We are dependent on our revolving credit facility as a significant source of liquidity.

In September 2008, the GSEs were placed into conservatorship by the U.S. Department of the Treasury (“Treasury”). In conservatorship, the GSEs could change their business practices with respect to the mortgage insurance industry or individual mortgage insurers, which could materially impact the quantity and level of mortgage insurance coverage required by the GSEs on residential mortgage loans or PMI’s status as an eligible mortgage insurer.

If either or both of the GSEs were to 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 also have had an adverse impact on PMI Europe. PMI Europe’s and The PMI Group’s recent downgrades have given rise to the right by certain counterparties to terminate their agreements, resulting in possible termination payments, and requiring PMI Europe to post collateral for the benefit of such counterparties. (See also Part II, Item 1A. We are exposed to risk in our European operations.) If the counterparties choose to exercise their rights to terminate the agreements, the termination payments could be significant and could materially impair our financial condition. The downgrade by Fitch of PMI Europe’s insurer financial strength rating has also had an adverse impact on PMI Asia, whose primary customer, in response to the downgrade, has ceased ceding business to PMI Asia.

We do not expect to regain PMI’s and PMI Europe’s “AA” or equivalent category insurer financial strength ratings from the rating agencies in the near term, and we cannot be sure that we will be able to regain this level of 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, an event of default would occur under our credit facility if MIC fails to maintain a financial strength rating of at least “Baa” from Moody’s and fails to maintain a financial strength rating of at least “BBB” from Standard & Poor’s (see Part II, Item 1A. Our credit facility contains restrictive and financial covenants and, if we are unable to comply with these covenants, we may trigger an event of default under the facility.). We will need to raise additional capital to regain 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. See also Part II, Item 1A. We may face liquidity issues at our holding company. Any of these events would harm our consolidated financial condition, results of operations and cash flows.

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We are exposed to risk in our European operations.

Despite the reconfiguration of our European operations in PMI Europe, substantial risk remains in those operations and has increased in 2008 as a result of deteriorating economic conditions in the United States and the European Union. As a result of PMI Europe’s exposure to U.S. subprime risk under reinsurance agreements and the deterioration of such risk, PMI Europe has increased its loss reserves by $53.2 million in the first nine months of 2008. If the performance of these exposures continues to deteriorate, PMI Europe would continue to experience increased losses and increases to its loss reserves, which could have a material adverse effect on our results and financial condition.

In addition, the recent downgrades of PMI Europe’s insurer financial strength ratings have had an adverse impact on PMI Europe. PMI Europe’s downgrades have given rise to the right by certain counterparties to terminate their agreements, resulting in possible significant termination payments, or may require PMI Europe to post additional collateral amounts for the benefit of such counterparties. As of October 31, 2008, PMI Europe has pledged collateral of $22.5 million on credit default swap transactions and $58.1 million related to its exposure to U.S. subprime risk. Additional collateral may be required due to continued loss development and rating agency actions. In November 2008, we received a demand from one counterparty to a credit default swap to post collateral in an amount of approximately $66.9 million. We have disputed this demand, which is for an amount that exceeds the contractual limits of the swap, and believe that the amount requested was calculated erroneously and that the actual amount of collateral, if any, required to be posted is substantially lower than the amount requested. We have not recorded any effects with respect to this collateral request in our financial statements as of September 30, 2008. If PMI Europe is required to pledge additional collateral or pay termination payments, our financial condition could be materially impaired.

Further, PMI Europe’s financial results have been volatile as a result of changes in the fair value of its credit default swap derivative contracts. Credit derivative transactions are recorded at fair value, and are subject to mark-to-market treatment under SFAS No. 133. Since quoted market prices for these derivative contracts are generally not available, PMI Europe estimates fair value by using modeling methodologies, which are less objective than using quoted market prices. Changes in estimated fair values can be caused by general market conditions, perception of credit risk generally and events affecting particular credit derivative transactions (e.g. impairment or improvement of specific reference entities or reference obligations).

Decreases in estimated fair value relative to credit derivatives have caused decreases in the value of such credit derivative transactions. Those changes in value are reflected in our financial statements and have adversely affected our reported earnings. 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. Further decreases in estimated fair value in the future will continue to affect our reported earnings. The underlying collateral of these credit derivatives are residential mortgage loans. Accordingly, continued adverse conditions in the residential mortgage credit market may continue to result in mark-to-market losses and we expect this trend to continue in the remainder of 2008.

All of the above risks could result in material losses to PMI Europe and, if significant enough in the aggregate, could require PMI to make additional capital contributions to PMI Europe pursuant to its capital support agreements, which could harm the financial condition of PMI.

We may face liquidity issues at our holding company.

We currently have sufficient liquidity at our holding company to pay holding company expenses (including interest expenses on our outstanding debt) and to repay the amounts owed under our revolving credit facility. If we are not able to raise additional capital or otherwise able to provide

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our holding company with additional capital in the fourth quarter of 2008 or thereafter, we may not continue to have sufficient liquidity at our holding company to repay amounts owed under our revolving credit facility, in the event we are required to repay it prior to maturity due to debt covenant violations. An event of default under our credit facility also could trigger an event of default under our outstanding senior notes. In the event we are called upon to immediately satisfy amounts owing under our credit facility and/or our senior notes, there may not be funds at our holding company to repay the debt. See also Part II, Item 1A. There is no assurance that we will be able to raise needed capital on a timely basis and on favorable terms, or at all.

There is no assurance that we will be able to raise needed capital on a timely basis and on favorable terms, or at all.

On an ongoing basis, we are exploring available alternatives to enhance our liquidity and capital at PMI and The PMI Group, including debt or equity offerings, obtaining reinsurance for PMI’s existing or future book of business and/or limiting the new insurance written by PMI. 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. In addition, a rapid escalation of losses or sudden ratings downgrades could make it more difficult for us to raise the necessary capital. Moreover, to the extent a capital raising transaction is undertaken in an effort to avoid a ratings downgrade or adverse GSE action, there can be no assurance that the transaction could be completed in a timely manner to avoid an adverse ratings agency or GSE action. The terms of a capital raising transaction could require us to agree to stringent financial and operating covenants and to grant security interests on our assets to lenders or holders of our debt securities that could limit our flexibility in operating our business or our ability to pay dividends on our common stock and could make it more difficult for us to obtain capital in the future. We may not be able to access additional debt financing on acceptable terms or at all. Any future equity offerings could be significantly dilutive to our existing shareholders or could result in the issuance of securities that have rights, preferences and privileges that are senior to those of our common stock. Further, any capital initiatives in the form of reinsurance, or other risk transfer transactions of our existing portfolios, would have a dilutive effect on our future earnings.

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.

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 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.

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A premium deficiency analysis was performed as of September 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 fourth quarter of 2008 or at any time in future reporting periods, which could trigger an event of default under our credit facility and would negatively affect our financial condition and results of operations.

Our credit facility contains restrictive and financial covenants and, if we are unable to comply with these covenants, we may trigger an event of default under the facility.

As discussed under Part I, Item 2. Liquidity and Capital Resources, our credit facility contains a number of covenants and events of default, including covenants relating to compliance with financial covenants such as the requirement not to exceed a risk-to-capital ratio of 20 to 1, as well as events of default relating to maintenance of ratings, GSE eligibility, compliance with regulatory capital requirements and compliance with the covenants in the credit facility. These covenants and event of default provisions also reduce our operating flexibility. In addition, if an event of default under the facility were to occur, we could have to repay all outstanding indebtedness and would be unable to draw on the facility, the lenders would have the right to terminate their loan commitments under the facility and we may trigger cross default provisions under our senior notes. Some of the event of default triggers, such as those relating to ratings downgrades and GSE eligibility, are subject to subjective determinations by the rating agencies and GSEs and, therefore, are impossible to predict and are outside of our control. If we were to trigger an event of default under the facility, there is no assurance that we would be able to raise the capital required, in a timely manner, on favorable terms, or at all, to repay amounts owing under the credit facility and, if applicable, our senior notes.

We are dependent on our revolving credit facility as a significant source of liquidity.

We currently have $200 million outstanding under our $250 million credit facility. There are a number of conditions we are required to meet in the event that we wish to borrow additional amounts under the facility. Among other things, we would be unable to borrow additional amounts under the facility if (1) MIC fails to meet GSE eligibility requirements for mortgage insurers or (2) there exist any limitations that were not in effect on the date of the credit facility amendment with respect to the eligibility of mortgages insured by MIC for purchase by the GSEs that would adversely affect (other than in a manner that is insubstantial) the ability of MIC to conduct its business as it was conducted on the date of the amendment. In addition, any of the lenders under our credit facility could fail to satisfy their obligations to extend credit under the facility, due to adverse effects of market conditions or otherwise, and in that instance, the other lenders under our facility may refuse or be unable to assume that lender’s obligations. If we are unable to borrow needed funds under the facility, we may be unable to locate an alternative source of funds, on satisfactory terms or at all. If this were to occur, our financial condition would be negatively impacted.

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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.
November 5, 2008	/s/ Donald P. Lofe, Jr.
	Donald P. Lofe, Jr.
	Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)
November 5, 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
2.1	Share Sale Agreement by and among PMI Mortgage Insurance Co., QBE Holdings (AAP) Pty Limited and QBE Insurance Group Limited, dated as of August 14, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed August 15, 2008 (file number 001-13664)).
2.2	Amendment Agreement by and among PMI Mortgage Insurance Co., QBE Holdings (AAP) Pty Limited and QBE Insurance Group Limited, dated as of August 29, 2008 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed September 2, 2008 (File No. 001-13664)).
2.3	Second Amendment Agreement by and among PMI Mortgage Insurance Co., QBE Holdings (AAP) Pty Limited and QBE Insurance Group Limited, dated as of October 22, 2008 (incorporated by reference to Exhibit 2.3 to the Company’s Current Report on Form 8-K, filed October 28, 2008 (File No. 001-13664)).
3(ii)	The PMI Group, Inc. Amended and Restated Bylaws effective July 16, 2008 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on form 8-K, filed July 22, 2008 (File No. 001-13664)).
10.1*	Amendment No. 2 to The PMI Group, Inc. Retirement Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 27, 2008 (File No. 001-13664)).
10.2	Share Sale Deed by and among The PMI Group, Inc., QBE Holdings (AAP) Pty Limited and QBE Insurance Group Limited, dated as of August 29, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed September 2, 2008 (File No. 001-13664)).
10.3	Note Deed, dated as of October 22, 2008, between PMI Mortgage Insurance Co. and QBE Insurance Group Limited (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed October 28, 2008 (File No. 001-13664)).
10.4	2008 Form of Change of Control Employment Agreement
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-10.4

Exhibit 10.4

2008 FORM

CHANGE OF CONTROL

EMPLOYMENT AGREEMENT

AGREEMENT by and between The PMI Group, Inc., a Delaware corporation (the “Company”), and                                          (“Executive”), dated as of the fifteenth day of July 2008.

The Board of Directors of the Company (the “Board”), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive’s full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.

NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

SECTION 1 CERTAIN DEFINITIONS.

1.1 The “Effective Date” shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive’s employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the “Effective Date” shall mean the date immediately prior to the date of such termination of employment.

1.2 The “Change of Control Period” shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the “Renewal Date”), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended.

SECTION 2 CHANGE OF CONTROL. FOR THE PURPOSE OF THIS AGREEMENT, A “CHANGE OF CONTROL” SHALL MEAN:

2.1 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 Section 2. 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

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2.2 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

2.3 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, 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

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2.4 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), a Change of Control shall then occur.

SECTION 3 EMPLOYMENT PERIOD. THE COMPANY HEREBY AGREES TO CONTINUE THE EXECUTIVE IN ITS EMPLOY, AND THE EXECUTIVE HEREBY AGREES TO REMAIN IN THE EMPLOY OF THE COMPANY SUBJECT TO THE TERMS AND CONDITIONS OF THIS AGREEMENT, FOR THE PERIOD COMMENCING ON THE EFFECTIVE DATE AND ENDING ON THE THIRD ANNIVERSARY OF SUCH DATE (THE “EMPLOYMENT PERIOD”).

SECTION 4 TERMS OF EMPLOYMENT.

4.1 Position and Duties.

4.1.1 During the Employment Period, (A) the Executive’s position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned to the Executive at any time during the 90-day period immediately preceding the Effective Date and (B) the Executive’s services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 50 miles from such location.

4.1.2 During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote

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reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive’s reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive’s responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive’s responsibilities to the Company.

4.2 Compensation.

4.2.1 Base Salary. During the Employment Period, the Executive shall receive an annual base salary (“Annual Base Salary”), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term “affiliated companies” shall include any company controlled by, controlling or under common control with the Company.

4.2.2 Annual Bonus. In addition to the Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the “Annual Bonus”) in cash at least equal to the Executive’s highest

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bonus earned under the Company’s annual incentive plans, or any comparable bonus under any predecessor or successor plan, for the last three full fiscal years prior to the Effective Date (or for such lesser number of full fiscal years prior to the Effective Date for which the Executive was eligible to earn such a bonus, and annualized in the case of any bonus earned for a partial fiscal year) (the “Recent Annual Bonus”). If the Executive has not been eligible to earn such a bonus for any period prior to the Effective Date, the Recent Annual Bonus shall mean the Executive’s target Annual Bonus for the year in which the Effective Date occurs. Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus.

4.2.3 Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs (other than equity-based incentives) provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.

4.2.4 Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive’s family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most

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favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.

4.2.5 Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

4.2.6 Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

4.2.7 Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

4.2.8 Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

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SECTION 5 TERMINATION OF EMPLOYMENT.

5.1 Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disability” shall mean the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.

5.2 Cause. The Company may terminate the Executive’s employment during the Employment Period for Cause. For purposes of this Agreement, “Cause” shall mean:

(i) the willful and continued failure of the Executive to perform substantially the Executive’s duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive’s duties, or

(ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.

For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or

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without reasonable belief that the Executive’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail.

5.3 Good Reason. The Executive’s employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, “Good Reason” shall mean:

(i) the assignment to the Executive of any duties inconsistent in any substantial respect with the Executive’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a substantial diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;

(ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;

(iii) the Company’s requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company’s requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date;

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(iv) any purported termination by the Company of the Executive’s employment otherwise than as expressly permitted by this Agreement; or

(v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement.

For purposes of this Section 5(c), any good faith determination of “Good Reason” made by the Executive shall be conclusive.

5.4 Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.

5.5 Date of Termination. “Date of Termination” means (i) if the Executive’s employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive’s employment is terminated by the Company other than for Cause or Disability, the date on which the Company notifies the Executive of such termination and (iii) if the Executive’s employment is terminated by reason of death or Disability, the date of death of the Executive or the Disability Effective Date, as the case may be.

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SECTION 6 OBLIGATIONS OF THE COMPANY UPON TERMINATION.

6.1 Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive’s employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason:

(i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts:

(a) the sum of (1) the Executive’s Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (i) the Recent Annual Bonus and (ii) the Annual Bonus paid or payable, including any bonus or portion thereof that has been earned but deferred (and annualized for any fiscal year consisting of less than 12 full months or during which the Executive was employed for less than 12 full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount, the “Highest Annual Bonus”) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the “Accrued Obligations”); and

(b) the amount equal to the product of (1) two and a half (2.5) and (2) the sum of (x) the Executive’s Annual Base Salary and (y) the Highest Annual Bonus; and

(c) an amount equal to the difference between (a) the aggregate benefit under the Company’s qualified defined benefit retirement plan (currently entitled The PMI Group, Inc. Retirement Plan) (the “Retirement Plan”) and the Company’s excess or supplemental defined benefit retirement plan(s) in which the Executive participates (currently entitled The PMI Group, Inc. Supplemental Employee Retirement Plan) (the “SERP”) which the Executive would have accrued (whether or not vested) if the Executive’s employment had continued for two and a half (2.5) years after the Date of Termination (for

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purposes of this clause (a) of Section 6(a)(i)(C), the Executive shall be treated as vested in, and eligible to receive, his accrued benefits under the Retirement Plan and SERP, based upon the Executive’s credited service under such plans, plus the additional years of credited service under this Section) and (b) the actual vested benefit, if any, of the Executive under the Retirement Plan and the SERP, determined as of the Date of Termination (with the foregoing amounts to be computed on an actuarial present value basis, based on the assumption that the Executive’s compensation in each of the two and a half (2.5) years following such termination would have been that required by Section 4(b)(i) and Section 4(b)(ii), and using actuarial assumptions no less favorable to the Executive than the most favorable of those in effect for purposes of computing benefit entitlements under the Retirement Plan and the SERP at any time from the day before the Effective Date) through the Date of Termination (no amendment to or termination of the Retirement plan or SERP on or after the Effective Date shall adversely effect the Executive’s right to receive the benefits under this Section 6(a)(i)(C), based upon the Executive’s credited service through the date of such amendment or termination, plus the additional years of service credited under this Section);

(ii) for two and a half (2.5) years after the Executive’s Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive’s family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive’s employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility, and for purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until two and a half (2.5) years after the Date of Termination and to have retired on the last day of such period; provided

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however, that notwithstanding anything else contained in this Section 6(a)(ii), if the Executive has reached the age of 50 on or prior to his Date of Termination, he shall be deemed fully eligible for retiree health benefits;

(iii) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in the Executive’s sole discretion; and provided, however, that the cost of such outplacement shall not exceed 15% of Annual Base Salary as of the Date of Termination;

(iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”).

(b) Death. If the Executive’s employment is terminated by reason of the Executive’s death during the Employment Period, this Agreement shall terminate without further obligations to the Executive’s legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive’s estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive’s estate and/or the Executive’s beneficiaries, as in effect on the date of the Executive’s death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries.

(c) Disability. If the Executive’s employment is terminated by reason of the Executive’s Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the

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provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive’s family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families.

(d) Cause; Other than for Good Reason. If the Executive’s employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) the Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination.

SECTION 7 NON-EXCLUSIVITY OF RIGHTS. NOTHING IN THIS AGREEMENT SHALL PREVENT OR LIMIT THE EXECUTIVE’S CONTINUING OR FUTURE PARTICIPATION IN ANY PLAN, PROGRAM, POLICY OR PRACTICE PROVIDED BY THE COMPANY OR ANY OF ITS AFFILIATED COMPANIES AND FOR WHICH THE EXECUTIVE MAY QUALIFY, NOR, SUBJECT TO SECTION 12(F), SHALL ANYTHING HEREIN LIMIT OR OTHERWISE AFFECT SUCH RIGHTS AS THE EXECUTIVE MAY HAVE UNDER ANY CONTRACT OR AGREEMENT WITH THE COMPANY OR ANY OF ITS AFFILIATED COMPANIES. AMOUNTS WHICH ARE VESTED BENEFITS OR WHICH THE EXECUTIVE IS OTHERWISE ENTITLED TO RECEIVE UNDER ANY PLAN, POLICY, PRACTICE OR PROGRAM OF OR ANY CONTRACT OR AGREEMENT WITH THE COMPANY OR ANY OF ITS AFFILIATED COMPANIES AT OR SUBSEQUENT TO THE DATE OF TERMINATION SHALL BE PAYABLE IN ACCORDANCE WITH SUCH PLAN, POLICY, PRACTICE OR PROGRAM OR CONTRACT OR AGREEMENT EXCEPT AS EXPLICITLY MODIFIED BY THIS AGREEMENT.

SECTION 8 FULL SETTLEMENT; LEGAL FEES. THE COMPANY’S OBLIGATION TO MAKE THE PAYMENTS PROVIDED FOR IN THIS AGREEMENT AND OTHERWISE TO PERFORM ITS OBLIGATIONS HEREUNDER SHALL NOT BE AFFECTED BY ANY SET-OFF, COUNTERCLAIM, RECOUPMENT, DEFENSE OR OTHER CLAIM, RIGHT OR ACTION WHICH THE COMPANY MAY HAVE AGAINST THE EXECUTIVE OR OTHERS.

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IN NO EVENT SHALL THE EXECUTIVE BE OBLIGATED TO SEEK OTHER EMPLOYMENT OR TAKE ANY OTHER ACTION BY WAY OF MITIGATION OF THE AMOUNTS PAYABLE TO THE EXECUTIVE UNDER ANY OF THE PROVISIONS OF THIS AGREEMENT AND EXCEPT AS SPECIFICALLY PROVIDED IN SECTION 6(A)(II), SUCH AMOUNTS SHALL NOT BE REDUCED WHETHER OR NOT THE EXECUTIVE OBTAINS OTHER EMPLOYMENT. THE COMPANY AGREES TO PAY AS INCURRED, TO THE FULL EXTENT PERMITTED BY LAW, ALL LEGAL FEES AND EXPENSES WHICH THE EXECUTIVE MAY REASONABLY INCUR AS A RESULT OF ANY CONTEST (REGARDLESS OF THE OUTCOME THEREOF) BY THE COMPANY, THE EXECUTIVE OR OTHERS OF THE VALIDITY OR ENFORCEABILITY OF, OR LIABILITY OR ENTITLEMENT UNDER, ANY PROVISION OF THIS AGREEMENT OR ANY GUARANTEE OF PERFORMANCE THEREOF (WHETHER SUCH CONTEST IS BETWEEN THE COMPANY AND THE EXECUTIVE OR BETWEEN EITHER OF THEM AND ANY THIRD PARTY, AND INCLUDING AS A RESULT OF ANY CONTEST BY THE EXECUTIVE ABOUT THE AMOUNT OF ANY PAYMENT PURSUANT TO THIS AGREEMENT), PLUS IN EACH CASE INTEREST ON ANY DELAYED PAYMENT AT THE APPLICABLE FEDERAL RATE PROVIDED FOR IN SECTION 7872(F)(2)(A) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”).

SECTION 9 CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.

9.1 Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, award, benefit or distribution by the Company (or any of its affiliated entities) or by any entity which effectuates a Change of Control (or any of its affiliated entities) to or for the benefit of the Executive (whether pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code or any corresponding provisions of state or local tax laws, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax

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imposed upon the Payments. The payment of a Gross-Up Payment under this Section 9(a) shall not be conditioned upon the Executive’s termination of employment. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the portion of the Payments that would be treated as “parachute payments” under Section 280G of the Code does not exceed 110% of the greatest amount (the “Safe Harbor Amount”) that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the amounts payable under this Agreement shall be reduced so that the Payments, in the aggregate, are reduced to the Safe Harbor Amount. The reduction of the amounts payable hereunder, if applicable, shall be made by first reducing the payments under Section 6(a)(i)(B), unless an alternative method of reduction is elected by the Executive. For purposes of reducing the Payments to the Safe Harbor Amount, only amounts payable under this Agreement (and no other Payments) shall be reduced. If the reduction of the amounts payable under this Agreement would not result in a reduction of the Payments to the Safe Harbor Amount, no amounts payable under this Agreement shall be reduced pursuant to this Section 9(a).

9.2 Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Deloitte & Touche LLP or such other certified public accounting firm as may be designated by the Executive (the “Accounting Firm”), which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent

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with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

9.3 The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

(i) give the Company any information reasonably requested by the Company relating to such claim,

(ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

(iii) cooperate with the Company in good faith in order effectively to contest such claim, and

(iv) permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing

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provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

9.4 If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

SECTION 10 CONFIDENTIAL INFORMATION. THE EXECUTIVE SHALL HOLD IN A FIDUCIARY CAPACITY FOR THE BENEFIT OF THE COMPANY ALL SECRET OR CONFIDENTIAL INFORMATION, KNOWLEDGE OR DATA RELATING TO THE COMPANY OR ANY OF ITS AFFILIATED COMPANIES, AND THEIR RESPECTIVE

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BUSINESSES, WHICH SHALL HAVE BEEN OBTAINED BY THE EXECUTIVE DURING THE EXECUTIVE’S EMPLOYMENT BY THE COMPANY OR ANY OF ITS AFFILIATED COMPANIES AND WHICH SHALL NOT BE OR BECOME PUBLIC KNOWLEDGE (OTHER THAN BY ACTS BY THE EXECUTIVE OR REPRESENTATIVES OF THE EXECUTIVE IN VIOLATION OF THIS AGREEMENT). AFTER TERMINATION OF THE EXECUTIVE’S EMPLOYMENT WITH THE COMPANY, THE EXECUTIVE SHALL NOT, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY OR AS MAY OTHERWISE BE REQUIRED BY LAW OR LEGAL PROCESS, COMMUNICATE OR DIVULGE ANY SUCH INFORMATION, KNOWLEDGE OR DATA TO ANYONE OTHER THAN THE COMPANY AND THOSE DESIGNATED BY IT. IN NO EVENT SHALL AN ASSERTED VIOLATION OF THE PROVISIONS OF THIS SECTION 10 CONSTITUTE A BASIS FOR DEFERRING OR WITHHOLDING ANY AMOUNTS OTHERWISE PAYABLE TO THE EXECUTIVE UNDER THIS AGREEMENT.

SECTION 11 SUCCESSORS.

11.1 This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives.

11.2 This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.

11.3 The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

SECTION 12 MISCELLANEOUS.

12.1 This Agreement shall be governed by and construed in accordance with the laws of the State of California, without reference to principles of conflict of laws. The

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captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

12.2 All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:
If to the Company:
	The PMI Group, Inc.
	3003 Oak Road
	Walnut Creek, California 94597
	Attention: Chief Executive Officer

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

12.3 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

12.4 The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.

12.5 The Executive’s or the Company’s failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.

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12.6 The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is “at will” and, prior to the Effective Date, the Executive’s employment may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof, including, without limitation, the right of the Executive to participate in any severance plan of the Company or otherwise receive severance benefits from the Company.

IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorization from its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written.

EXECUTIVE

THE PMI GROUP, INC.
By:
	Compensation Committee Chair

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, L. Stephen Smith, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of The PMI Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 5, 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: November 5, 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 September 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: November 5, 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 September 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: November 5, 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.