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 March 31, 2011

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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	¨	Accelerated filer	x
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	May 5, 2011	161,556,520

TABLE OF CONTENTS

		Page
Part I- Financial Information
Item 1.	Interim Consolidated Financial Statements and Notes		3
	Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 (Unaudited)		3
	Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010		4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (Unaudited)		5
	Notes to Consolidated Financial Statements (Unaudited)		6
Item 2.	Management’s Discussions and Analysis of Financial Condition and Results of Operations		39
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		84
Item 4.	Controls and Procedures		86
Part II- Other Information
Item 1.	Legal Proceedings		87
Item 1A.	Risk Factors		88
Item 6.	Exhibits		94
Signatures			95
Index to Exhibits
Exhibits

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PART I – FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands, except per share data)
REVENUES
Premiums earned	$	120,306		$	153,030
Net investment income		16,722			26,688
Equity in losses from unconsolidated subsidiaries		(1,299	)		(4,410	)
Net realized investment (losses) gains		(81	)		7,433
Change in fair value of certain debt instruments		21,656			(40,813	)
Other income		2,704			1,723
Total revenues		160,008			143,651
LOSSES AND EXPENSES
Losses and loss adjustment expenses		241,110			342,289
Amortization of deferred policy acquisition costs		4,156			3,876
Other underwriting and operating expenses		27,679			33,960
Interest expense		13,511			9,523
Total losses and expenses		286,456			389,648
Loss before income taxes		(126,448	)		(245,997	)
Income tax expense (benefit)		376			(89,010	)
NET LOSS	$	(126,824	)	$	(156,987	)
PER SHARE DATA
Basic net loss	$	(0.79	)	$	(1.90	)
Diluted net loss	$	(0.79	)	$	(1.90	)

See accompanying notes to consolidated financial statements.

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THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31, 2011			December 31, 2010
	(Unaudited)			(Audited)
	(Dollars in thousands, except per share data)
ASSETS
Investments - available-for-sale, at fair value:
Fixed income securities	$	2,673,019		$	2,651,206
Equity securities:
Common		27,235			30,664
Preferred		113,492			120,421
Short-term investments		17,559			17,867
Total investments		2,831,305			2,820,158
Cash and cash equivalents		211,497			267,705
Investments in unconsolidated subsidiaries		119,230			121,040
Related party receivables		6,461			6,355
Accrued investment income		23,840			19,783
Premiums receivable		44,554			46,336
Reinsurance receivables and prepaid premiums		44,500			65,357
Reinsurance recoverables, net		439,324			459,671
Deferred policy acquisition costs		48,115			46,372
Property, equipment and software, net of accumulated depreciation and amortization		83,234			85,186
Prepaid and recoverable income taxes		2,135			48,042
Deferred income tax assets		143,847			142,899
Other receivables		71,257			66,335
Other assets		21,857			23,748
Total assets	$	4,091,156		$	4,218,987
LIABILITIES
Reserve for losses and loss adjustment expenses	$	2,886,440		$	2,869,765
Reserve for premium refunds		106,535			88,696
Unearned premiums		69,012			64,298
Debt (includes $299,291 and $327,181 measured at fair value)		589,859			616,158
Reinsurance payables		26,050			28,206
Related party payables		716			1,786
Other liabilities and accrued expenses		124,698			134,808
Total liabilities		3,803,310			3,803,717
Commitments and contingencies (Notes 6 and 8)
SHAREHOLDERS’ EQUITY
Preferred stock - $0.01 par value; 5,000,000 shares authorized; none issued or outstanding		—			—
Common stock - $0.01 par value; 350,000,000 shares authorized; 197,078,767 and 197,078,767 shares issued; 161,540,957 and 161,167,542 shares outstanding		1,971			1,971
Additional paid-in capital		1,361,752			1,370,757
Treasury stock, at cost (35,537,810 and 35,911,225 shares)		(1,285,826	)		(1,295,644	)
Retained earnings		204,877			331,700
Accumulated other comprehensive income, net of deferred taxes		5,072			6,486
Total shareholders’ equity		287,846			415,270
Total liabilities and shareholders’ equity	$	4,091,156		$	4,218,987

See accompanying notes to consolidated financial statements.

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THE PMI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	March 31,
	2011			2010
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(126,824	)	$	(156,987	)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in losses from unconsolidated subsidiaries		1,299			4,410
Net realized investment (gains) losses		60			(7,628	)
Change in fair value of certain debt instruments		(21,656	)		40,813
Depreciation and amortization		14,230			7,746
Deferred income taxes		(1,105	)		(49,845	)
Compensation expense related to share-based payments		491			685
Deferred policy acquisition costs incurred and deferred		(5,899	)		(5,229	)
Amortization of deferred policy acquisition costs		4,156			3,876
Amortization of debt discount and debt issuance cost		2,226			482
Changes in:
Accrued investment income		(3,965	)		6,763
Premiums receivable		1,890			545
Reinsurance receivables, and prepaid premiums net of reinsurance payables		18,701			(9,334	)
Reinsurance recoverables		20,347			37,252
Prepaid and recoverable income taxes		45,907			1,526
Reserve for losses and loss adjustment expenses		15,368			33,491
Reserve for premium refunds		17,839			8,536
Unearned premiums		4,503			(1,752	)
Related party receivables, net of payables		(1,197	)		(1,323	)
Liability for pension benefit		1,452			1,738
Other receivables		(4,922	)		(745	)
Other		(16,339	)		(23,300	)
Net cash used in operating activities		(33,438	)		(108,280	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed income securities		16,691			269,761
Proceeds from maturities of fixed income securities		1,588			200
Proceeds from sales of equity securities		12,683			24,585
Investment purchases:     Fixed income securities		(54,130	)		(12,028	)
Equity securities		(27	)		(242	)
Net change in short-term investments		100			599
Distributions from unconsolidated subsidiaries, net of investments		825			(23	)
Capital expenditures and capitalized software, net of dispositions		(2,505	)		(439	)
Net cash (used in) provided by investing activities		(24,775	)		282,413
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of treasury stock		323			306
Net cash provided by financing activities		323			306
Effect of foreign exchange rate changes on cash and cash equivalents		1,682			(2,199	)
Net (decrease) increase in cash and cash equivalents		(56,208	)		172,240
Cash and cash equivalents at the beginning of the period		267,705			686,891
Cash and cash equivalents of continuing operations at end of period	$	211,497		$	859,131
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year:
Interest paid, net of capitalization	$	15,216		$	15,998
Income taxes refunds, net of payments	$	45,924		$	1

See accompanying notes to consolidated financial statements.

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THE PMI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of The PMI Group, Inc. (“The PMI Group” or “TPG”), a Delaware corporation and its direct and indirect wholly-owned subsidiaries, including: PMI Mortgage Insurance Co. (“MIC”), an Arizona corporation, its direct wholly-owned subsidiary, PMI Mortgage Assurance Company (“PMAC”), and its other 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. The PMI Group and its subsidiaries are collectively referred to as the “Company.” All material inter-company transactions and balances have been eliminated in the consolidated financial statements.

The Company has equity ownership interests in CMG Mortgage Insurance Company and CMG Mortgage Assurance Company (collectively “CMG MI”), which conduct residential mortgage insurance business for credit unions. In addition, the Company owns 100% of PMI Capital I (“Issuer Trust”), an unconsolidated wholly-owned trust that privately issued debt in 1997. The Company also has ownership interests in several limited partnerships.

In the third quarter of 2010, the Company sold its equity ownership interest in FGIC Corporation, the holding company of Financial Guaranty Insurance Company (collectively “FGIC”), a New York-domiciled financial guaranty insurance company. In the fourth quarter of 2009, the Company sold its equity ownership interest in RAM Holdings Ltd., the holding company of RAM Reinsurance Company, Ltd. (collectively “RAM Re”), a financial guaranty reinsurance company based in Bermuda.

Impact of Current Economic Environment

The Company has undergone significant changes in the past few years, and the protracted weak housing, credit and economic environment has continued to negatively affect the Company’s financial condition and results of operations. The Company’s consolidated net loss was $126.8 million and $157.0 million for the three months ended March 31, 2011 and 2010, respectively.

The Company continues to focus on its core U.S. Mortgage Insurance Operations. In 2010 and the first quarter of 2011, the private mortgage insurance industry continued to be significantly challenged by the slow pace of economic recovery and instability in the housing and mortgage markets. PMI’s new business writings in 2010 were limited as a result of continued competition with the Federal Housing Administration (“FHA”), which has become a significant competitor. PMI’s new business writings were negatively impacted in the first quarter of 2011 as a result of lower than expected residential mortgage originations and continued high demand for mortgage insurance from FHA.

As a result of continuing losses, the Company expects that, in the second quarter of 2011, MIC’s policyholders’ position will decline below the minimum, and its risk-to-capital ratio will increase above the maximum, levels necessary to meet state regulatory capital adequacy requirements, described below. As of March 31, 2011, MIC’s excess minimum policyholders’ position was $39.2 million and its risk-to-capital ratio was 24.4 to 1.

In sixteen states, if a mortgage insurer does not meet a required minimum policyholders’ position (calculated in accordance with statutory formulae) or exceeds a maximum permitted risk-to-capital ratio of 25 to 1, it may be prohibited from writing new business. In two of those states, a mortgage insurer is required to cease writing new business immediately if and so long as it fails to meet capital requirements. In the remaining fourteen states, the Company believes that regulators exercise discretion as to whether the mortgage insurer may continue writing new business. As applicable, the Company has requested from insurance departments either waivers of regulatory capital requirements or clarification that MIC’s inability to comply with capital requirements would not, by itself, require it to cease writing business in that state.

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MIC’s principal regulator is the Arizona Department of Insurance (the “Department”). On March 30, 2011, the Department advised the Company that under the express requirements of Arizona law, MIC is not required to obtain a waiver from the Department in order to continue to write new business in the event that it does not maintain the minimum level of policyholders’ position (“MPP”). The Department further advised that it will continue to evaluate MIC’s minimum policyholders’ position along with all other measures of PMI’s business operations and financial position in assessing its liquidity and financial resources. The Department expects to obtain additional information regarding MIC’s financial position and business operations through its current financial statutory examination and actuarial analysis of MIC and from additional information required to be provided by MIC to the Department. If the Department were to determine that MIC’s liquidity or financial resources warranted regulatory action, it could, among other actions, order MIC to suspend writing new business in all states.

In the event that MIC is unable to continue to write new mortgage insurance in a limited number of states, the Company plans to write new mortgage insurance in those states through PMAC. PMAC is currently licensed to write insurance in all states. The GSEs approved the use of PMAC as a limited, direct issuer of mortgage guaranty insurance in certain states in which MIC is unable to continue to write new business. These approvals are subject to certain restrictions and currently expire on December 31, 2011.

The Company believes that it currently has sufficient liquidity at the holding company to pay holding company expenses (including interest expense on its outstanding debt) and has sufficient assets at the insurance company level to meet its obligations through 2011.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“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 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 predominantly 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 (“AOCI”) in shareholders’ equity. 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.

The Company evaluates its portfolio of equity securities regularly to determine whether there are declines in value and whether such declines meet the definition of other-than-temporary impairment (“OTTI”) in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 320 Investments-Debt and Equity Securities (“Topic 320”) and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 59, Accounting for Noncurrent Marketable Equity Securities. When the Company determines that an equity security has suffered an OTTI, the impairment loss is recognized as a realized investment loss in the consolidated statement of operations. See Note 3, Investments, for further discussion regarding criteria for evaluating equity security impairments.

In accordance with Topic 320, the Company assesses whether it intends to sell or it is more likely than not that it will be required to sell a debt security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of its amortized cost basis, the Company separates the amount of the impairment into the amount that is credit-related (referred to as the credit loss component) and the amount due to all other factors. The credit loss component is recognized in net income and is

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the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit-related and is recognized in AOCI. For debt securities that are intended to be sold, or that management believes are more likely than not to be required to be sold prior to recovery, the full impairment is recognized immediately in earnings.

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 is recognized on an accrual basis. Dividend income on common and preferred stock investments is recognized on the date of declaration. Net investment income represents interest and dividend income, net of investment expenses.

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

Investments in Unconsolidated Subsidiaries — Investments in the Company’s unconsolidated subsidiaries include both equity investees and other unconsolidated subsidiaries. Investments in equity investees with ownership interests of 20-50% are generally accounted for using the equity method of accounting, and investments of less than 20% ownership interest are generally accounted for using the cost method of accounting if the Company does not have significant influence over the entity. Limited partnerships with ownership interests greater than 3% but less than 50% are primarily accounted for using the equity method of accounting. The 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, which is included in AOCI.

Periodically, or as events dictate, the Company evaluates potential impairment of its investments in unconsolidated subsidiaries. FASB ASC Topic 323 Investments-Equity Method and Joint Ventures (“Topic 323”) provides criteria for determining potential impairment. In the event a loss in value of an investment is determined to be an other-than-temporary decline, an impairment charge would be recognized in the consolidated statement of operations. Evidence of a loss in value that could indicate impairment might include, but would not necessarily be limited to, the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. Realized capital gains or losses resulting from the sale of the Company’s ownership interests of unconsolidated subsidiaries are recognized as net realized investment gains or losses in the consolidated statement of operations.

The Company reports the equity in earnings (losses) from CMG MI on a current month basis and the Company’s interest in limited partnerships are reported on a one-quarter lag basis.

Related Party Receivables and Payables — As of March 31, 2011, related party receivables, which were comprised of non-trade receivables and payables from unconsolidated subsidiaries, were $6.5 million and related party payables were $0.7 million compared to $6.4 million and $1.8 million as of December 31, 2010, respectively.

Deferred Policy Acquisition Costs — The Company defers certain costs of its mortgage insurance operations relating to the acquisition of new insurance and consistent with industry accounting practice, amortizes these costs for each underwriting year book of business against revenue in proportion to estimated gross profits in order to match costs and revenues. To the extent the Company provided contract underwriting services on loans that did not require mortgage insurance, associated underwriting costs were not deferred. Estimated gross profits are comprised of earned premiums, interest income, losses and loss adjustment expenses. For each underwriting year, the Company estimates the rate of amortization 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 was $207.1 million and $202.6 million as of March 31, 2011 and December 31, 2010, respectively.

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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 in accordance with FASB ASC Topic 350 Intangibles-Goodwill and Other. Capitalized costs are amortized beginning at such time as the software is ready for its intended use on a straight-line basis over the estimated useful life of the asset, which is generally three to seven years. The Company did not incur any capitalized costs related to software developed for internal use in the first quarters of 2011 and 2010.

Other Receivables — In 2010, the Company restructured various modified pool policies whereby the Company paid a fee to be relieved of all of its remaining obligations to provide insurance coverage under those policies. In certain of these transactions, we retained the right to continue to receive monthly premium payments as though the insurance had not been cancelled. The Company has determined that this stream of payments, which is supported by an underlying pool of mortgage loans, is no longer part of an insurance contract and instead must be accounted for separately as a discounted receivable. Management determined that this stream of cash flows most resembles a beneficial interest from a residential mortgage securitization (interest-only strips), which is also a stream of cash flows based on an underlying pool of mortgages.

To initially value this asset, management used observable market inputs from an active market with respect to interest-only strips for mortgage securitizations with similar characteristics to those of the former modified pool policies (e.g., origination year, loan-to-value ratios, etc.) and applied these fair value inputs to the expected cash flows. Consistent with FASB ASC Topic 835 Interest, a market discount of $26.0 million was calculated based on the excess of all cash flows attributable to the beneficial interest estimated at the acquisition date over the initial investment. The fair value of the asset upon initial recognition was $82.3 million. On a monthly basis, the Company applies the cash received from this asset to the accretion with the excess cash reducing the value of the asset. The carrying value of the asset was $61.6 million as of March 31, 2011 (net of a market discount of $17.3 million) compared to $66.3 million as of December 31, 2010 (net of a market discount of $19.2 million). The income recognition from the accretion of the discount is recognized as other income and was $1.9 million for the three months ended March 31, 2011.

Derivatives — Certain credit default swap contracts entered into by PMI Europe are considered credit derivative contracts under FASB ASC Topic 815 Derivatives and Hedging (“Topic 815”). 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 or loss. The Company determines the fair values of its credit default swaps on a quarterly basis and uses internally developed models since observable market quotes are not regularly 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.

Convertible Notes — In the second quarter of 2010, the Company issued 4.50% Convertible Senior Notes (“Convertible Notes”) due April 15, 2020, in a public offering for an aggregate principal amount of $285 million. The Convertible Notes bear interest at a rate of 4.50% per year. Interest is payable semi-annually in arrears on April 15 and October 15 of each year, beginning October 15, 2010. The Convertible Notes are senior unsecured obligations and rank senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated. Prior to January 15, 2020, the Convertible Notes are convertible only under certain circumstances. The initial conversion rate is 127.5307 shares of common stock per $1,000 principal amount of Convertible Notes, which represents an initial conversion price of approximately $7.84 per share. Upon conversion, the Company may deliver cash, shares of common stock or a combination thereof, at its option. The Company evaluated the accounting treatment for the Convertible Notes in accordance with FASB ASC Topic 470-20 Debt with Conversion and Other Options to determine if the instruments should be accounted for as debt, equity, or a combination of both. As the Convertible Notes are debt with a conversion option, the Company

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bifurcated the net proceeds between liability and equity components. A fair value was calculated for the debt component and the equity component is recorded net of that value. At March 31, 2011, Additional Paid-in- Capital included $66.0 million related to the fair value of the conversion option.

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.

Premium Deficiency Reserve — The Company performs an analysis for premium deficiency using assumptions based on management’s best estimate when the assessment 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 analysis. 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. The Company performs premium deficiency analyses quarterly. The Company determined that there were premium deficiencies for PMI Europe and PMI Canada and recorded premium deficiency reserves in 2009. As of March 31, 2011, a premium deficiency reserve for PMI Europe was not required. As of March 31, 2011, management determined that the premium deficiency reserve for PMI Canada was $1.3 million. Premium deficiency reserves are included in reserves for losses and loss adjustment expenses on the consolidated balance sheets and losses and loss adjustment expenses in the consolidated statements of operations. The Company determined there was no premium deficiency in its U.S. Mortgage Insurance Operations segment. To the extent premium levels and actual loss experience differ from the assumptions used, results could be negatively affected in future periods.

Reserve for Losses and Loss Adjustment Expenses — The consolidated reserves for losses and loss adjustment expenses (“LAE”) for the Company’s U.S. Mortgage Insurance and International Operations are the estimated claim settlement costs on notices of default that have been received by the Company, as well as loan defaults that have been incurred but have not been reported by the lenders. For reporting and internal tracking purposes, the Company does not consider a loan to be in default until the borrower has missed two payments. Depending upon its scheduled payment date, a loan in default 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 periodic 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. 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 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 loss reserves on a gross basis for losses and LAE for its deductible pool policies, which contain aggregate deductible and stop-loss limits, on a pool by pool basis. The gross reserves for each pool are based on reported delinquencies, claim rate and claim size assumptions which are determined based on the loan characteristics of the pool, delinquency trends and historical performance as well as expected economic conditions. After determining the gross loss reserve, deductible and stop-loss limits are applied to determine the net loss reserve.

PMI Europe currently reinsures certain financial guaranty contracts. 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. Financial guaranty contracts are recorded in accordance with the accounting guidance provided in FASB ASC Topic 944 Financial Services – Insurance. These reserves

10

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.

Changes in loss reserves can materially affect the Company’s consolidated net income or loss. The process of estimating loss reserves requires the Company to forecast, among other things, 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 accounting estimates are reasonably likely to occur from period to period based on economic conditions. The Company reviews the judgments made in its prior period estimation process and adjusts the current assumptions as appropriate. While the 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 the Company’s estimates.

Reinsurance — The Company uses reinsurance to reduce net risk-in-force and enhance capital allocation. This is done primarily with captive reinsurance companies via both excess-of-loss (“XOL”) and quota share arrangements. Under a captive reinsurance agreement, the Company reinsures a portion of its risk written on loans originated by a certain lender with the captive reinsurance company affiliated with such lender. PMI’s captive reinsurance agreements primarily provide for XOL reinsurance, in which PMI retains a first loss position on a defined set of mortgage insurance risk, reinsures a second loss layer of this risk with the captive reinsurance company and retains the remaining risk above the second loss layer. The Company cedes premiums pursuant to its captive reinsurance arrangements in exchange for the reinsurance of a portion of the Company’s risk less, in some instances, a ceding commission paid to us for underwriting and administering the business. Ceded premiums reduce premiums earned and ceded loss reserves reduce losses and loss adjustment expenses in the consolidated statements of operations. Total loss reserves gross of reinsurance contracts are determined in accordance with the Company’s loss reserving practices. After gross reserves are established, reserves are allocated to reinsurance contracts consistent with the terms of the coverage provided and based on an actuarial analysis of the loans reinsured under each reinsurance agreement. The total ceded loss reserves subject to reinsurance arrangements represent reinsurance recoverables in the consolidated balance sheets. Under the Company’s XOL captive reinsurance arrangements, PMI generally cedes 100% of the losses within the reinsured loss layer to the captive insurance company. PMI limits its recorded recoverable to the amount currently available in the trust account maintained by the captive insurance company for PMI’s benefit, if that amount is less than PMI’s ceded loss reserves. Effective January 1, 2009, the Company ceased seeking reinsurance under XOL captive reinsurance agreements. On that date, in-force XOL contracts were placed into run-off and will mature pursuant to the existing terms and conditions. A small percentage of the Company’s existing captive reinsurance arrangements are under quota share agreements under which the Company continues to reinsure new insurance business.

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. Consistent with industry accounting practices, premiums written on a monthly basis are earned as coverage is provided. Monthly premiums accounted for 88.3% and 87.7% of gross premiums written from the Company’s mortgage insurance operations in the first quarters of 2011 and 2010, respectively. Premiums written on an annual basis are amortized on a monthly pro rata basis over the year of coverage. Primary mortgage insurance premiums written on policies covering more than one year are referred to as single premiums. A portion of the revenue from single premiums is recognized in premiums earned in the current period, and the remaining portion is deferred as unearned premiums and earned over the expected life of the policy, a range of seven to fifteen years 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, 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. A portion of premium payments may be refundable if the insured cancels coverage, which generally occurs when the loan is repaid, the loan amortizes to a sufficiently low amount to trigger a lender permitted or legally required

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cancellation, or the value of the property has increased sufficiently in accordance with the terms of the contract. In addition, when the Company pays a claim on a delinquent loan, all premiums received on the delinquent loan covering any period after the default date will be refunded, in accordance with the terms of the contract. In the event the Company rescinds insurance coverage of a loan as a result of an issue that occurred during the origination of the loan and/or prior to the effective date of coverage, it refunds all premiums associated with the rescinded loan to the insured, whether or not the loan was delinquent. Premium refunds reduce premiums earned in the consolidated statements of operations. Premium refunds (including the changes in reserve for premium refunds) were $33.1 million and $26.2 million for the three months ended March 31, 2011 and March 31, 2010, respectively.

Income Taxes — The Company accounts for income taxes using the liability method in accordance with FASB ASC Topic 740 Income Taxes (“Topic 740”). 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 evaluates the need for a valuation allowance against its deferred tax assets on a quarterly basis. In the course of its review, the Company assesses all available evidence, both positive and negative, including future sources of income, tax planning strategies, future contractual cash flows and reversing temporary differences. In 2010 and first quarter of 2011, the Company experienced loss development in excess of its expectations. Based, in part, on the higher than expected loss development, the Company does not currently expect its U.S. Mortgage Insurance Operations segment to report an operating profit in 2011. Primarily as a result of these factors, under Topic 740, the Company does not use forecasted taxable income from its mortgage insurance activities in determining whether or not the deferred tax assets will be utilized. In 2011, the Company evaluated its deferred tax assets in light of these issues and determined that it was necessary to increase its valuation allowance by $51.7 million to $578.9 million with respect to its deferred tax assets of $859.2 million. The Company expects that the remaining net deferred tax assets of $143.8 million will be utilized based on contractual cash flow streams and tax strategies that are not dependent on generating taxable income from the Company’s mortgage insurance activities. Additional valuation allowance benefits or charges could be recognized in the future due to changes in management’s expectations regarding the realization of tax benefits. (See Note 12, Income Taxes, for further discussion.)

On August 12, 2010, the Board of Directors of The PMI Group adopted a Tax Benefits Preservation Plan (the “Plan”). In connection with its adoption of the Plan, the Board declared a dividend of one preferred stock purchase right for each outstanding share of The PMI Group’s common stock payable to holders of record of the common stock on August 23, 2010. On February 17, 2011, the Board adopted the Amended and Restated Tax Benefits Preservation Plan (as amended, the “Amended Plan”), which amends and restates the Plan in its entirety. The purpose of the Amended Plan is to help protect the Company’s ability to recognize certain tax benefits in future periods from net unrealized built in losses and tax credits, as well as any net operating losses that may be expected in future periods (the “Tax Benefits”). The Company’s use of the Tax Benefits in the future would be significantly limited if it experiences an “ownership change” for U.S. federal income tax purposes. In general, an “ownership change” will occur if there is a cumulative change in the Company’s ownership by “5-percent shareholders” (as defined under U.S. income tax laws) that exceeds 50 percentage points over a rolling three-year period. The Amended Plan is designed to reduce the likelihood that the Company will experience an ownership change by (i) discouraging any person or group from becoming a “5-percent shareholder” and (ii) discouraging any existing “5-percent shareholder” from acquiring more than a minimal number of additional shares of the Company stock. There can be no assurance, however, that the Plan will prevent the Company from experiencing an ownership change. If the Amended Plan is not approved by stockholders at the 2011 annual meeting, the Plan will expire on August 11, 2011 (unless such date is advanced).

Benefit Plans — The Company provides pension benefits through noncontributory defined benefit plans 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

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Company provides certain health care and life insurance benefits for retired employees under another post-employment benefit plan. The Company applies FASB ASC Topic 715 Compensation-Retirement Benefits (“Topic 715”) for its treatment of U.S. employees’ pension benefits. This topic 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 AOCI. The net periodic benefit costs associated with the Retirement Plan are included in the operating expenses of the Company’s consolidated statements of operations.

Foreign Currency Translation — The financial statements of the Company’s foreign subsidiaries have been translated into U.S. dollars in accordance with FASB ASC Topic 830, Foreign Currency Matters. 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 financial results with a functional currency other than the reporting currency are reported as a component of AOCI included in total shareholders’ equity. Foreign currency translation gains in AOCI net of taxes were $58.2 million as of March 31, 2011 compared with $51.1 million as of December 31, 2010. Gains and losses from foreign currency re-measurement for PMI Europe and PMI Canada are reflected in income and represent the revaluation of monetary assets and liabilities denominated in non-functional currencies into the functional currency, the Euro and Canadian dollar, respectively.

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

Business Segments — The Company’s reportable operating segments are U.S. Mortgage Insurance Operations, International Operations and Corporate and Other. U.S. Mortgage Insurance Operations includes the results of operations of MIC, PMI Mortgage Assurance Co. (“PMAC”), formerly Commercial Loan Insurance Co., PMI Insurance Co., affiliated U.S. insurance and reinsurance companies and the equity in earnings from CMG MI. International Operations includes the results of PMI Europe and PMI Canada. The Corporate and Other segment includes other income and related operating expenses of PMI Mortgage Services Co., change in fair value of certain debt instruments, interest expense, intercompany eliminations and corporate expenses of the Company; equity in earnings (losses) from certain limited partnerships and its former investment in FGIC.

Earnings (Loss) Per Share — Basic earnings (loss) 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. As a result of the Company’s net loss for the quarters ended March 31, 2011 and 2010, 9.5 million and 8.7 million share equivalents issued under the Company’s share-based compensation plans in the respective periods were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive. In addition, additional shares are considered for dilutive EPS purposes related to the Convertible Notes issued in 2010. The method of determining which method to use for calculating dilutive EPS for the Convertible Notes depends on the facts and circumstances of the Company’s liquidity position. At March 31, 2011, 36.3 million share equivalents were excluded from the calculation of diluted earnings per share under the If Converted method as their inclusion would have been anti-dilutive. No share equivalents were excluded under the Treasury Stock method.

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The following table presents for the periods indicated 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 March 31,
	2011			2010
	(Dollars and shares in thousands)
Net loss	$	(126,824	)	$	(156,987	)
Weighted-average shares for basic EPS		161,313			82,776
Weighted-average stock options and other dilutive components		—			—
Weighted-average shares for diluted EPS		161,313			82,776
Dividends declared and accrued to common shareholders	$	—		$	—

Share-Based Compensation — The Company applies FASB ASC Topic 718 Compensation-Stock Compensation (“Topic 718”) in accounting for share-based payments. This topic requires share based payments such as stock options, restricted stock units and employee stock purchase plan shares to be accounted for using a fair value-based method and recognized as compensation expense in the consolidated results of operations. Share-based compensation expense was $0.9 million (pre-tax) and $1.1 million (pre-tax) for the three months ended March 31, 2011 and 2010, respectively.

Debt Instruments — The Company has elected the fair value option for certain corporate debt as permitted by FASB ASC Topic 825 Financial Instruments (“Topic 825”). The Company elected the fair value option for its 10 year and 30 year senior debt instruments 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 were expected to generally offset changes in the value of credit default swap contracts that are also accounted for at fair value. The 6.000% Senior Notes and the 6.625% Senior Notes bear interest at a rate of 6.000% and 6.625% per annum, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on March 15, 2007. In connection with the issuance of these Senior Notes, the Company entered into two interest rate lock agreements which were designated as cash flow hedges. The fair value of the cash flow hedges was settled for $9.0 million and is amortized into interest expense over the terms of the senior debt that was issued. As of March 31, 2011, the unamortized balance in the other comprehensive income related to these fair value hedges was approximately $6.2 million (pre-tax).

In considering the initial adoption of the fair value option presented by ASC Topic 825, the Company determined that the change in fair value of the 8.309% Junior Subordinated Debentures would not have a 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. As the fair value option is not available for financial instruments that are, in whole or in part, classified as a component of shareholders equity, the Convertible Notes are not remeasured at fair value.

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

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NOTE 3. 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 as of March 31, 2011 and December 31, 2010 are shown in the tables below:

	Cost or		Gross Unrealized					Fair
	Amortized Cost		Gains		(Losses)			Value
			(Dollars in thousands)
As of March 31, 2011
Fixed income securities:
Municipal bonds	$	228,816	$	1,187	$	(13,597	)	$	216,406
Foreign governments		152,587		580		—			153,167
Corporate bonds		1,255,761		5,075		(22,973	)		1,237,863
FDIC corporate bonds		189,057		851		(882	)		189,026
U.S. governments and agencies		326,415		1,177		(6,017	)		321,575
Mortgage-backed securities		340,223		606		(6,195	)		334,634
Asset-backed securities		220,452		563		(667	)		220,348
Total fixed income securities		2,713,311		10,039		(50,331	)		2,673,019
Equity securities:
Common stocks		31,288		369		(4,422	)		27,235
Preferred stocks		96,096		18,228		(832	)		113,492
Total equity securities		127,384		18,597		(5,254	)		140,727
Short-term investments		17,576		3		(20	)		17,559
Total investments	$	2,858,271	$	28,639	$	(55,605	)	$	2,831,305

	Cost or		Gross Unrealized					Fair
	Amortized Cost		Gains		(Losses)			Value
			(Dollars in thousands)
As of December 31, 2010
Fixed income securities:
Municipal bonds	$	232,108	$	668	$	(12,665	)	$	220,111
Foreign governments		151,393		946		—			152,339
Corporate bonds		1,241,265		8,278		(17,726	)		1,231,817
FDIC corporate bonds		180,698		703		(631	)		180,770
U.S. governments and agencies		326,082		1,955		(4,914	)		323,123
Mortgage-backed securities		326,832		462		(5,120	)		322,174
Asset-backed securities		221,016		567		(711	)		220,872
Total fixed income securities		2,679,394		13,579		(41,767	)		2,651,206
Equity securities:
Common stocks		34,773		294		(4,403	)		30,664
Preferred stocks		105,410		16,766		(1,755	)		120,421
Total equity securities		140,183		17,060		(6,158	)		151,085
Short-term investments		17,886		3		(22	)		17,867
Total investments	$	2,837,463	$	30,642	$	(47,947	)	$	2,820,158

As of March 31, 2011 and December 31, 2010, the total fair value of the mortgage-backed securities portfolio was $334.6 million and $322.2 million, with $327.3 million and $314.9 million invested in residential mortgage-backed securities and $7.3 million and $7.3 million invested in commercial mortgage-backed securities, respectively. There were no other-than-temporary impairments on debt securities in the first quarters of 2011 or 2010.

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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 March 31, 2011 and December 31, 2010:

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
March 31, 2011
Fixed income securities:
Municipal bonds	$	129,219	$	(5,645	)	$	60,434	$	(7,952	)	$	189,653	$	(13,597	)
Corporate bonds		774,445		(22,972	)		495		(1	)		774,940		(22,973	)
FDIC corporate bonds		16,342		(882	)		—		—			16,342		(882	)
U.S. government and agencies		194,095		(6,017	)		—		—			194,095		(6,017	)
Mortgage-backed securities		287,815		(5,290	)		278		(905	)		288,093		(6,195	)
Asset-backed securities		85,773		(667	)		—		—			85,773		(667	)
Total fixed income securities		1,487,689		(41,473	)		61,207		(8,858	)		1,548,896		(50,331	)
Equity securities:
Common stocks		25,340		(4,422	)		—		—			25,340		(4,422	)
Preferred stocks		—		—			41,755		(832	)		41,755		(832	)
Total equity securities		25,340		(4,422	)		41,755		(832	)		67,095		(5,254	)
Short-term investments		6,873		(20	)		—		—			6,873		(20	)
Total	$	1,519,902	$	(45,915	)	$	102,962	$	(9,690	)	$	1,622,864	$	(55,605	)
	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, 2010
Fixed income securities:
Municipal bonds	$	131,919	$	(5,631	)	$	61,391	$	(7,034	)	$	193,310	$	(12,665	)
Corporate bonds		714,901		(17,721	)		758		(5	)		715,659		(17,726	)
FDIC corporate bonds		11,622		(430	)		2,057		(201	)		13,679		(631	)
U.S. government and agencies		186,635		(4,914	)		—		—			186,635		(4,914	)
Mortgage-backed securities		293,266		(5,120	)		—		—			293,266		(5,120	)
Asset-backed securities		118,117		(711	)		—		—			118,117		(711	)
Total fixed income securities		1,456,460		(34,527	)		64,206		(7,240	)		1,520,666		(41,767	)
Equity securities:
Common stocks		25,359		(4,403	)		—		—			25,359		(4,403	)
Preferred stocks		7,331		(150	)		40,981		(1,605	)		48,312		(1,755	)
Total equity securities		32,690		(4,553	)		40,981		(1,605	)		73,671		(6,158	)
Short-term investments		17,405		(22	)		—		—			17,405		(22	)
Total	$	1,506,555	$	(39,102	)	$	105,187	$	(8,845	)	$	1,611,742	$	(47,947	)

As of March 31, 2011, the Company’s investment portfolio included 634 securities in an unrealized loss position compared to 629 securities as of December 31, 2010. At March 31, 2011, the Company had gross unrealized losses of $55.6 million on investment securities, including fixed maturity and equity securities that had a fair value of $1.6 billion. The deterioration in unrealized losses on the fixed income portfolio from December 31, 2010 to March 31, 2011 was primarily due to the rising yields across the fixed income investment categories and the effect of the strengthening of the Euro and the Canadian dollar with respect to the U.S. dollar denominated corporate bond investments in the Company’s European and Canadian subsidiaries. Unrealized losses on the Company’s corporate bond portfolio at March 31, 2011 were primarily related to an increase in interest rates.

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Gross unrealized losses in the equity security portfolio were $0.9 million lower at March 31, 2011 compared with December 31, 2010 due to the improvement in the valuation of the preferred stock portfolio and the sale of certain preferred stocks in the first quarter of 2011. At March 31, 2011, the total preferred stock portfolio had a fair value of $113.5 million, with $37.6 million invested in public utility companies and the remaining $75.9 million invested in the financial services sector.

Evaluating Investments for Other-than-Temporary-Impairment

The Company reviews all of its fixed income and equity security investments on a periodic basis for impairment. The Company specifically assesses all investments with declines in fair value and, in general, monitors all security investments as to ongoing risk.

The Company reviews on a quarterly basis, or as needed in the event of specific credit events, unrealized losses on all investments with declines in fair value. These investments are then tracked to establish whether they meet the Company’s established other than temporary impairment criteria. This process involves monitoring market events and other items that could impact issuers. The Company considers relevant facts and circumstances in evaluating whether the impairment of a security is other-than-temporary.

Relevant facts and circumstances considered include, but are not limited to:

• 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 it is more likely than not the Company will hold the security for a sufficient period of time to allow for anticipated recoveries in fair value.

Once a security is determined to have met certain of the criteria for consideration as being other-than-temporarily impaired, further information is gathered and evaluated pertaining to the particular security. If the security is an unsecured obligation, the additional evaluation is a security specific approach with particular emphasis on the likelihood that the issuer will meet the contractual terms of the obligation.

The Company assesses equity securities using the criteria outlined above and also considers whether, in addition to these factors, it has the ability and intent to hold the equity securities for a period of time sufficient for recovery of cost. Where the Company lacks that ability or intent, the equity security’s decline in fair value is deemed to be other than temporary, and the Company records the full difference between fair value and cost or amortized cost in earnings.

Once the determination is made that a debt security is other-than-temporarily impaired, an estimate is developed of the portion of such impairment that is credit-related. The estimate of the credit-related portion of impairment is based upon a comparison of ratings at the time of purchase and the current ratings of the security, to establish whether there have been any specific credit events during the time the Company has owned the security, as well as the outlook through the expected maturity horizon for the security. The Company obtains ratings from nationally recognized rating agencies for each security being assessed. The Company also incorporates information on the specific securities from its management and, as appropriate, from its external investment advisors on their views on the probability of it receiving the interest and principal cash flows for the remaining life of the securities.

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This information is used to determine the Company’s best estimate of what the credit related portion of the impairment is, based on a probability-weighted estimate of future cash flows. The probability weighted cash flows for the individual securities are modeled using internal models, which calculate the discounted cash flows at the implicit rate at purchase through maturity. If the cash flow projections indicate that the Company does not expect to recover its amortized cost basis, the Company recognizes the estimated credit loss in earnings. For debt securities that are intended to be sold, or that management believes are more likely than not to be required to be sold prior to recovery, the full impairment is recognized immediately in earnings. For debt securities that management has no intention to sell and believes it is more likely than not that they will not be required to be sold prior to recovery, only the credit component of the impairment is recognized in earnings, with the remaining impairment loss recognized in AOCI.

The total impairment for any debt security that is deemed to have an other-than-temporary impairment is recorded in the statement of operations as a net realized loss from investments. The portion of such impairment that is determined to be non-credit-related is deducted from net realized losses in the statement of operations and reflected in other comprehensive income (loss) and AOCI, the latter of which is a component of stockholders’ equity.

Other-than-temporary Impairment – During the three months ended March 31, 2011 and March 31, 2010, the Company did not record other-than-temporary impairment losses in net realized investment gains (losses) in the consolidated statements of operations.

Activity related to the credit component recognized in net realized investment gains on debt securities held by the Company for which a portion of other-than-temporary impairment was recognized in AOCI for the three months ended March 31, 2011 and March 31, 2010 is as follows:

	Cumulative Other-Than-Temporary Impairment Credit Losses Recognized in Net Realized Investment Gains for Debt Securities
	January 1, 2011 Cumulative OTTI credit losses recognized for securities still held		Reductions due to sales of credit impaired securities			Adjustments to book value of credit impaired securities due to changes in cash flows		March 31, 2011 Cumulative OTTI credit losses recognized for securities still held
	(Dollars in thousands)
OTTI credit losses recognized for debt securities
Municipal Bonds	$	1,717	$	—		$	—	$	1,717
Corporate Bonds		142		—			—		142
Total OTTI credit losses recognized for debt securities	$	1,859	$	—		$	—	$	1,859
	Cumulative Other-Than-Temporary Impairment Credit Losses Recognized in Net Realized Investment Gains for Debt Securities
	January 1, 2010 Cumulative OTTI credit losses recognized for securities still held		Reductions due to sales of credit impaired securities			Adjustments to book value of credit impaired securities due to changes in cash flows		March 31, 2010 Cumulative OTTI credit losses recognized for securities still held
	(Dollars in thousands)
OTTI credit losses recognized for debt securities
Municipal Bonds	$	1,717	$	—		$	—	$	1,717
Corporate Bonds		789		(74	)		—		715
Total OTTI credit losses recognized for debt securities	$	2,506	$	(74	)	$	—	$	2,432

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Scheduled Maturities — The following table sets forth the amortized cost and fair value of fixed income securities by contractual maturity at March 31, 2011:

	Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	366,104		367,138
Due after one year through five years		1,103,054		1,100,454
Due after five years through ten years		663,440		640,888
Due after ten years		240,490		229,905
Mortgage-backed securities		340,223		334,634
Total fixed income securities	$	2,713,311		2,673,019

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

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

	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Fixed income securities	$	16,070		$	23,619
Equity securities		1,695			3,101
Short-term investments, cash and cash equivalents and other		(197	)		817
Investment income before expenses		17,568			27,537
Investment expenses		(846	)		(849	)
Net investment income	$	16,722		$	26,688

Net Realized Investment Gains (Losses) — Net realized investment gains (losses) consist of the following:

	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Fixed income securities:
Gross gains	$	99		$	5,758
Gross losses		(14	)		(1,381	)
Net gains		85			4,377
Equity securities:
Gross gains		248			3,492
Gross losses		(392	)		(148	)
Net (losses) gains		(144	)		3,344
Short-term investments:
Gross losses		(22	)		(288	)
Net losses		(22	)		(288	)
Net realized investment (losses) gains before income taxes		(81	)		7,433
Income tax expense		—			2,602
Total net realized investment (losses) gains after income taxes	$	(81	)	$	4,831

Net realized investment losses for the first quarter of 2011 resulted primarily from the sale of a common stock distribution from a limited partnership and certain preferred stock sales. Net realized investment gains for the first quarter of 2010 resulted primarily from the sales of certain municipal bonds and preferred stocks.

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Other Items — At March 31, 2011, fixed income securities and short-term investments with an aggregate fair value of $12.2 million were on deposit with regulatory authorities as required by law.

NOTE 4. 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 March 31, 2011 and December 31, 2010:

	March 31, 2011		Ownership Percentage			December 31, 2010		Ownership Percentage
	(Dollars in thousands)
CMG MI		105,331		50.0	%		106,470		50.0	%
Other*		13,899		various			14,570		various
Total	$	119,230				$	121,040

* Other represents principally various limited partnership investments.

In the third quarter of 2010, the Company sold its equity ownership interest in FGIC, the holding company of Financial Guaranty Insurance Company. In the third quarter of 2010, CMG Mortgage Reinsurance Company issued a $5.0 million Surplus Note to MIC and a $5.0 million Surplus Note to CUNA Mutual Insurance Society. The Surplus Notes are due September 30, 2020 and bear interest at a rate of 6.25% per year until October 15, 2015 and 9.00% per year thereafter. The interest is payable annually on September 30.

Equity in earnings (losses) from unconsolidated subsidiaries is shown for the periods presented:

	Three Months Ended March 31,
	2011			Ownership Percentage			2010			Ownership Percentage
	(Dollars in thousands)
CMG MI	$	(1,452	)		50.0	%	$	(4,289	)		50.0	%
Other		153			various			(121	)		various
Total	$	(1,299	)				$	(4,410	)

Due to the impairment of its FGIC investment in the first quarter of 2008 and the sale of FGIC during the third quarter of 2010, the Company did not recognize any equity in earnings (losses) from FGIC in 2010 or 2011.

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CMG MI’s condensed balance sheets as of March 31, 2011 and December 31, 2010, and condensed statements of operations for the three months ended March 31, 2011 and 2010 are as follows:

	March 31,		December 31,
	2011		2010
	(Dollars in thousands)
Condensed Balance Sheets
Assets:
Cash and investments, at fair value	$	380,415	$	383,399
Deferred policy acquisition costs		12,263		12,029
Other assets		22,770		26,767
Total assets	$	415,448	$	422,195
Liabilities:
Reserve for losses and loss adjustment expenses	$	180,179	$	184,343
Unearned premiums		11,992		12,998
Debt		10,000		10,000
Other liabilities		9,322		8,622
Total liabilities		211,493		215,963
Shareholders’ equity		203,955		206,232
Total liabilities and shareholders’ equity	$	415,448	$	422,195

	Three Months Ended March 31,
	2011			2010
Condensed Statements of Operations	(Dollars in thousands)
Gross revenues	$	25,678		$	26,819
Total expenses		31,251			40,524
Loss before income taxes		(5,573	)		(13,705	)
Income tax benefit		(2,669	)		(5,127	)
Net loss		(2,904	)		(8,578	)
PMI’s ownership interest in common equity		50.0	%		50.0	%
Total equity in losses from CMG MI	$	(1,452	)	$	(4,289	)

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NOTE 5. DEFERRED POLICY ACQUISITION COSTS

The following table summarizes deferred policy acquisition cost activity as of and for the periods set forth below:

	2011			2010
	(Dollars in thousands)
Beginning balance	$	46,372		$	41,289
Policy acquisition costs incurred and deferred		5,899			5,229
Amortization of deferred policy acquisition costs		(4,156	)		(3,876	)
Balance at March 31,	$	48,115		$	42,642

NOTE 6. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE)

The Company establishes reserves for losses and LAE to recognize the estimated liability for potential losses and LAE related to insured mortgages that are in default. The establishment of loss reserves is subject to inherent uncertainty and requires significant judgment by management. The following table provides a reconciliation of the beginning and ending consolidated reserves for losses and LAE between January 1 and March 31 for each of the two quarters:

	2011			2010
	(Dollars in thousands)
Balance at January 1,	$	2,869,765		$	3,178,359
Less: reinsurance recoverables		(459,671	)		(703,550	)
Net balance at January 1,		2,410,094			2,474,809
Losses and LAE incurred, principally with respect to defaults occurring in:
Current year		177,939			289,620
Prior years (1)		63,171			52,669
Total incurred		241,110			342,289
Losses and LAE payments, principally with respect to defaults occurring in:
Current year		—			(3,267	)
Prior years		(205,167	)		(268,466	)
Total payments		(205,167	)		(271,733	)
Foreign currency translation effects		1,079			(1,917	)
Net ending balance at March 31,		2,447,116			2,543,448
Reinsurance recoverables		439,324			666,298
Balance at March 31,	$	2,886,440		$	3,209,746

(1) The $63.2 million net increase in prior years’ reserves in the first quarter of 2011 was driven primarily by increases in the Company’s U.S. Mortgage Insurance Operations’ primary reserves related to increases in claim rates and an increase to the IBNR reserve. The increases in claim rates were due to fewer than expected cures. The increase to the IBNR reserve was related to changes in estimates of future reinstatements of claim denials.

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The $52.7 million net increase in prior years’ reserves in the first quarter of 2010 was driven primarily by increases in the Company’s U.S. Mortgage Insurance Operations’ pool reserves. In the first quarter of 2010, the increase in the prior years’ reserves related to the pool portfolio was due to increases in claim rates partially offset by decreases in pool claim sizes and restructurings related to negotiated early discounted claim payments for modified pool contracts completed in the first quarter of 2010. The increases in pool claim rates were driven by fewer delinquencies curing than expected due to the significant weakening of the housing and mortgage markets, combined with an elevated percentage of Alt-A or limited documentation loans insured under the pool contracts.

The decrease in total consolidated loss reserves at March 31, 2011 compared to March 31, 2010 was primarily due to decreases in the reserve balances for U.S. Mortgage Insurance Operations primarily due to payments of claims on the Company’s primary and pool insurance portfolios combined with fewer new notices of default. Upon receipt of notices of default, future claim payments are estimated relating to those loans in default and a reserve is recorded. Generally, it takes approximately 12 to 36 months from the receipt of a notice of default to result in a primary claim payment. Accordingly, almost all losses paid relate to notices of default received in prior years.

NOTE 7. FAIR VALUE DISCLOSURES

The following tables present the difference between fair values as of March 31, 2011 and December 31, 2010 and the aggregate contractual principal amounts of the long-term debt for which the fair value option has been elected. Fluctuations in credit spreads and market yields drive changes in fair values of the long-term debt. Had the Company not adopted the fair value option, the Company’s diluted loss per share for the three months ended March 31, 2011 would have been $0.92 per share compared to $0.79 per share as reported in the first quarter of 2011.

	Fair Value (including accrued interest) as of March 31, 2011		Principal amount and accrued interest		Difference
	(Dollars in thousands)
Long-term debt
6.000% Senior Notes	$	197,345	$	250,625	$	53,280
6.625% Senior Notes	$	101,946	$	150,414	$	48,468
	Fair Value (including accrued interest) as of December 31, 2010		Principal amount and accrued interest		Difference
	(Dollars in thousands)
Long-term debt
6.000% Senior Notes	$	215,158	$	254,375	$	39,217
6.625% Senior Notes	$	112,023	$	152,898	$	40,875

Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (referred to as 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. Topic 820 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 Observable inputs with 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.

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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.

When determining the fair value of its debt, the Company has considered the guidance presented in Topic 820 related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly.

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:

	March 31, 2011
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Assets/Liabilities at Fair Value
	(Dollars in thousands)
Assets
Fixed income securities:
Municipal bonds	$	—	$	216,406	$	—	$	216,406
Foreign governments		—		153,167		—		153,167
Corporate bonds		—		1,237,863		—		1,237,863
FDIC corporate bonds		—		189,026		—		189,026
U.S. governments and agencies		—		321,575		—		321,575
Mortgage-backed securities		—		332,620		2,014		334,634
Asset-backed securities		—		220,348		—		220,348
Total fixed income securities		—		2,671,005		2,014		2,673,019
Equity securities:
Common stocks		26,723		—		512		27,235
Preferred stocks		—		109,805		3,687		113,492
Total equity securities		26,723		109,805		4,199		140,727
Short-term investments		362		17,197		—		17,559
Cash and cash equivalents		211,497		—		—		211,497
Total assets	$	238,582	$	2,798,007	$	6,213	$	3,042,802
Liabilities
Credit default swaps	$	—	$	—	$	4,644	$	4,644
6.000% Senior Notes		—		197,345		—		197,345
6.625% Senior Notes		—		101,946		—		101,946
Total liabilities	$	—	$	299,291	$	4,644	$	303,935

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	December 31, 2010
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Assets/Liabilities at Fair Value
	(Dollars in thousands)
Assets
Fixed income securities:
Municipal bonds	$	—	$	220,111	$	—	$	220,111
Foreign governments		—		152,339		—		152,339
Corporate bonds		—		1,231,817		—		1,231,817
FDIC corporate bonds		—		180,770		—		180,770
U.S. governments and agencies		—		323,123		—		323,123
Mortgage-backed securities		—		320,192		1,982		322,174
Asset-backed securities		—		220,872		—		220,872
Total fixed income securities		—		2,649,224		1,982		2,651,206
Equity securities:
Common stocks		30,192		—		472		30,664
Preferred stocks		—		116,734		3,687		120,421
Total equity securities		30,192		116,734		4,159		151,085
Short-term investments		462		17,405		—		17,867
Cash and cash equivalents		267,705		—		—		267,705
Total assets	$	298,359	$	2,783,363	$	6,141	$	3,087,863
Liabilities
Credit default swaps	$	—	$	—	$	5,366	$	5,366
6.000% Senior Notes		—		215,158		—		215,158
6.625% Senior Notes		—		112,023		—		112,023
Total liabilities	$	—	$	327,181	$	5,366	$	332,547

Fair Value of Credit Default Swap Contracts

PMI Europe’s risk-in-force related to its credit default swap (“CDS”) contracts was $12.4 million, which is the maximum potential amount of loss, as of March 31, 2011 and as of December 31, 2010. Certain PMI Europe CDS contracts contain collateral support provisions which, in certain circumstances, such as deterioration of underlying mortgage loan performance, require PMI Europe to post collateral for the benefit of the counterparty. The methodology for determining the amount of the required posted collateral varies and can include mark-to-market valuations, contractual formulae (principally related to expected loss performance) and/or negotiated amounts. The aggregate fair value of all derivative instruments with collateral support provisions that are in a liability position as of March 31, 2011 is $4.6 million, for which the Company has posted collateral of $4.8 million in the normal course of business. The actual level of collateral posted in 2011 will be dependent upon deal performance, claim payments, and the extent to which PMI Europe is successful in commuting certain contracts. To the extent PMI Europe is successful in commuting certain contracts the amount of collateral postings could be significantly reduced. The fair value of derivative liabilities was $4.6 million and $5.4 million as of March 31, 2011 and December 31, 2010, respectively, and is included in other liabilities on the balance sheet.

PMI Europe’s CDS contracts are valued using internal proprietary models because these instruments are unique, complex, and private and are often customized transactions, for which observable market quotes are not regularly available. Due to the lack of observable inputs required to value CDS contracts, they are considered to be Level 3 under the Topic 820 fair value hierarchy. Valuation models and the related assumptions are continuously re-evaluated by management and refined, as appropriate.

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Key inputs used in the Company’s valuation of CDS contracts include the transaction notional amount, expected term, premium rates on risk layers, changes in market spreads and cost of capital, estimated loss rates and loss timing, and risk free interest rates. As none of the instruments that the Company is holding are traded, the Company develops internal exit price estimates. Its internal exit price estimates are based on a number of factors, including its own expectations of loss payments and timing.

Third party information is not available for non-investment grade contracts, and, accordingly, for those contracts, fair value is estimated using the present value of expected future contractual payments and incorporating a market-based estimated cost of capital that would be required by a third party with similar credit standing as PMI to assume an identical contract. Expected future contractual payments are determined through the analysis of recent performance of the relevant transaction and similar transactions. Cash flows are discounted using a risk-free rate. The market-based cost of capital is based on an estimate of PMI’s cost of capital as of the period in which the value is being determined.

The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2011 and March 31, 2010.

	Total Fair Value Measurements
	Three Months Ended March 31, 2011
	(Dollars in thousands)
Level 3 Instruments Only	Fixed  Income Securities			Equity Securities			Credit Default Swaps  (Liabilities)
Balance, January 1, 2011		1,982			4,159			(5,366	)
Total gains or (losses)
Included in earnings (1)		—			40			784
Included in other comprehensive income (2)		32			—			(295	)
Settlements (3)		—			—			233
Balance, March 31, 2011	$	2,014		$	4,199		$	(4,644	)
	Three Months Ended March 31, 2010
	(Dollars in thousands)
Balance, January 1, 2010		3,147			3,970			(17,331	)
Total gains or (losses)
Included in earnings (1)		—			(61	)		1,718
Included in other comprehensive income (2)		(938	)		—			1,010
Settlements (3)		—			—			(931	)
Balance, March 31, 2010	$	2,209		$	3,909		$	(15,534	)

(1) The gain on equity securities of $40 thousand for the three months ended March 31, 2011 and the loss on equity securities of $61 thousand for the three months ended March 31, 2010 are included in net investment income in the Company’s consolidated statement of operations. The gains on credit default swaps of $0.8 million and $1.7 million for the three months ended March 31, 2011 and 2010, respectively, are included in other income in the Company’s consolidated statement of operations.

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(2) The gain on fixed income securities of $32 thousand for the three months ended March 31, 2011 is included in other comprehensive income. The loss on fixed income securities of $0.9 million for the three months ended March 31, 2010 is a result of the adjustment of certain corporate bonds to market price and is included in other comprehensive income. The loss on credit default swaps of $0.3 million for the three months ended March 31, 2011 and the gain on credit default swaps of $1.0 million for the three months ended March 31, 2010 are a result of the translation from the Euro to the U.S. dollar and are included in other comprehensive income.

(3) The settlements of $0.2 million for the three months ended March 31, 2011 represent net cash paid on credit default swaps. The settlements of $0.9 million for the three months ended March 31, 2010 represent net cash received on credit default swaps.

NOTE 8. COMMITMENTS AND CONTINGENCIES

Income Taxes — As of March 31, 2011, no tax issues from the most recently closed or current 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, an unconsolidated subsidiary of the Company. 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. The principal amount of the Junior Subordinated Debentures is $51.6 million.

Funding Obligations — As of March 31, 2011, the Company had committed to fund, if called upon to do so, $2.7 million of additional equity in certain limited partnership investments.

Legal Proceedings — The Company is engaged in litigation and alternative dispute resolution with respect to its rescission activity. These proceedings, discussed below, are complex and their outcomes are subject to substantial uncertainty.

• As previously disclosed, on January 26, 2009, the Company was served with a complaint filed by Bayview Loan Servicing, LLC in California Superior Court. The complaint alleges that the Company improperly rescinded mortgage insurance coverage, or terminated coverage for non-payment of premium, on 94 loans and seeks unspecified contractual and extra-contractual damages. The parties have reached a settlement of this action. The estimated costs associated with the settlement of this action were not material and were accrued by the Company in the first quarter of 2011.

• The Company and a customer have agreed to participate in arbitration proceedings regarding contested rescissions on approximately 190 loans. In its demand for arbitration, the customer seeks unspecified contractual and extra-contractual damages. The arbitration is currently scheduled to take place in July 2011. The disputed risk on the loans subject to arbitration is approximately $13 million. The Company believes that a significant majority of the disputed risk is delinquent.

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• In March 2011, the Company and a customer participated in a voluntary mediation with respect to contested rescissions on a group of what the Company believes to be approximately 1,200 loans, with disputed risk of approximately $100 million. The Company believes that the significant majority of the disputed risk is delinquent. The mediation did not result in a resolution of the matter.

• In February 2011, the Company was advised by a customer that it desired to engage in arbitration with respect to or otherwise resolve approximately 190 rescinded loans with disputed risk of approximately $14.6 million. The Company and the customer are discussing the timing and structure of any such arbitration.

In addition to the above matters, other customers have challenged the legal and factual bases of the Company’s rescission decisions. The Company is in discussions with such customers and, to date, such matters have not resulted in litigation or other formal dispute resolution proceedings initiated against the Company.

The above matters are generally in the early stages and the Company intends to defend against these claims vigorously. The Company’s contractual rescission rights have not been subject to judicial or arbitral decisions. As a result, and as the above matters represent aggregations of multiple rescission decisions based upon review of individual loan files, the ultimate resolution of these matters is inherently uncertain and impossible to ascertain. While the Company considers potential future reinstatements of rescinded policies as a result of its rescission reconsideration process when it establishes the IBNR portion of its reserve for losses and loss adjustment expenses, these reserves are not intended to include the possibility that the Company may be unsuccessful in defending its rescissions in the above litigation or other dispute resolution processes.

If the Company were wholly unsuccessful in defending its rescission decisions in one or more of the above matters, it would likely be required to reinstate coverage on the disputed, rescinded loans, pay claims (including accrued interest) on those rescinded loans that were delinquent, and pay additional contractual or extra-contractual damages, if any, awarded by the court or arbiter. An adverse judgment or the settlement of such matters could have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows.

In addition to the matters described above, the Company is engaged in other legal proceedings in the ordinary course of business. In its opinion, based upon the facts known at this time, the ultimate resolution of these legal proceedings will not have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows.

The Minnesota Department of Commerce (“MNDOC”) has been conducting an examination since 2006 of the mortgage insurance industry, focusing on the use of captive reinsurers. The Company continues to respond to requests from MNDOC and the Office of the Inspector General of the United States Department of Housing and Urban Development (“HUD OIG”) for information regarding its captive reinsurance arrangements among other matters. To date, there has been no allegation of wrongdoing by MNDOC or HUD OIG, and no written report or letters of findings have been issued.

NOTE 9. RESTRICTED INVESTMENTS, 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 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 the Company. As of March 31, 2011, $20.5 million remains on deposit in the trust account and is included in cash and cash equivalents with a corresponding liability in losses and LAE reserves in the Company’s U.S. Mortgage Insurance Operations segment.

Certain of PMI Europe’s CDS and reinsurance transactions contain collateral support provisions which, in certain circumstances, require PMI Europe to post collateral for the benefit of the counterparty. As of March 31, 2011 and 2010, PMI Europe posted collateral of $4.8 million on credit default swap transactions accounted for as derivatives and $6.1 million related to insurance and certain U.S. sub-prime related reinsurance transactions. The collateral of $10.9 million is included in investments and cash and cash equivalents in the Company’s International Operations segment at March 31, 2011.

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NOTE 10. COMPREHENSIVE LOSS

The following table shows the components of comprehensive loss for the three months ended March 31, 2011 and 2010:

	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Net loss	$	(126,824	)	$	(156,987	)
Unrealized (losses) gains on investments
Total change in unrealized (losses) gains arising during the period, net of tax expense		(8,762	)		13,823
Less: realized investment (losses) gains, net of tax expense		(59	)		5,019
Change in unrealized gains arising during the period, net of tax (benefit) expense of $(473) and $2,574, respectively		(8,703	)		8,804
Accretion of cash flow hedges, net of tax expense of $0 and $54, respectively		153			99
Change in unrealized gains on foreign currency translation, net of tax expense (benefit) of $0 and $(3,527), respectively		7,136			(2,567	)
Other comprehensive (loss) income		(1,414	)		6,336
Comprehensive loss	$	(128,238	)	$	(150,651	)

The change in unrealized gains/losses in the first quarter of 2011 was primarily due to the rise in yields across the yield curve and the effect of the strengthening of the Euro and Canadian dollar with respect to the U.S. dollar denominated investments in the Company’s European and Canadian subsidiaries. The change in unrealized gains/losses in the first quarter of 2010 was primarily due to the improved valuation of the preferred and common stock securities offset by the deterioration in the valuation of the municipal bond portfolio. The improvement in foreign currency translation adjustment in the first quarter of 2011 was primarily due to the strengthening of the Euro and Canadian dollar relative to the U.S. dollar. Conversely, the deterioration in foreign currency translation adjustment in the first quarter of 2010 was driven by the weakening of the Euro relative to the U.S. dollar, offset in part by the strengthening of the Canadian dollar.

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The following table shows the accumulated balances for each component of AOCI net of tax for the three months ended March 31, 2011 and 2010:

	Unrealized gains (losses) on investments			Defined benefit plans			Accretion of cash flow hedges			Foreign currency translation gains			Total
	(Dollars in thousands)
Balance, December 31, 2009		28,444			(8,557	)		(4,554	)		50,075			65,408
Current period change		8,804			—			99			(2,567	)		6,336
Balance, March 31, 2010	$	37,248		$	(8,557	)	$	(4,455	)	$	47,508		$	71,744
Balance, December 31, 2010		(28,852	)		(11,668	)		(4,103	)		51,109			6,486
Current period change		(8,703	)		—			153			7,136			(1,414	)
Balance, March 31, 2011	$	(37,555	)	$	(11,668	)	$	(3,950	)	$	58,245		$	5,072

NOTE 11. BENEFIT PLANS

The following table provides the components of net periodic benefit cost for the pension and other post-retirement benefit plans for the three months ended March 31, 2011 and 2010:

	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Pension benefits
Service cost	$	1,229		$	1,501
Interest cost		1,012			1,154
Expected return on plan assets		(813	)		(904	)
Amortization of prior service cost		(261	)		(296	)
Recognized net actuarial loss		333			339
Net periodic benefit cost	$	1,500		$	1,794
	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Other post-retirement benefits
Service cost	$	122		$	107
Interest cost		242			261
Amortization of prior service cost		(196	)		(155	)
Recognized net actuarial loss		132			117
Net periodic post-retirement benefit cost	$	300		$	330

The Company contributed $6.2 million to the Retirement Plan in 2010. The Company generally makes contributions that are sufficient to fully fund its actuarially determined costs.

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NOTE 12. INCOME TAXES

The components of the deferred income tax assets and liabilities as of March 31, 2011 and December 31, 2010 are as follows:

	March 31, 2011			December 31, 2010
	(Dollars in thousands)
Deferred tax assets:
AMT and other credits	$	195,125		$	194,974
Discount on loss reserves		33,511			34,342
Unearned premium reserves		4,447			4,090
Abnormal capital loss		245,511			245,511
Pension costs and deferred compensation		21,235			21,766
Net operating losses		312,317			244,269
Basis difference in foreign subsidiaries		28,272			28,272
Other assets		18,748			18,880
Total deferred tax assets		859,166			792,104
Deferred tax liabilities:
Deferred policy acquisition costs		16,840			16,230
Unrealized net gains on investments		9,870			9,952
Convertible debt discount		33,515			34,072
Unrealized net gains on debt		50,247			35,113
Software development costs		1,627			2,638
Equity in earnings from unconsolidated subsidiaries		20,586			21,094
Other liabilities		3,694			2,819
Total deferred tax liabilities		136,379			121,918
Net deferred tax asset		722,787			670,186
Valuation allowance		(578,940	)		(527,287	)
Net deferred tax asset	$	143,847		$	142,899

The Company evaluates the need for a valuation allowance quarterly taking into consideration all available evidence, both positive and negative, including future sources of income, tax planning strategies, future contractual cash flows and reversing temporary differences. The Company previously realized benefits from the use of tax and loss bonds which, when redeemed, resulted in taxable income that offset the Company’s operating losses. The Company redeemed its remaining tax and loss bonds in the first quarter of 2010 and there were no remaining benefits that the Company could consider when it evaluated its deferred tax valuation allowance. As of March 31, 2011, the tax valuation allowance was $578.9 million against a $722.8 million net deferred tax asset. (See Note 2, Summary of Significant Accounting Policies, for further discussion.)

The deferred tax asset of $245.5 million labeled “abnormal capital loss” above represents the sale of capital assets which include FGIC and preferred stocks during a time where they would qualify as an “abnormal loss” under Internal Revenue Code § 832(c)(5) previously recorded as unrealized losses. Capital losses qualifying under this section of the Internal Revenue Code are allowed to offset ordinary income to the extent they exceed capital gains and can be carried back three years and forward five years. Accordingly, when the tax returns are filed for 2010, the abnormal losses will be carried back to 2008 where significant taxable income was generated due to the sale of our Australia and Asia subsidiaries, as well as the redemption of tax and loss bonds. While the carryback of abnormal losses will not generate any tax refund on a consolidated level, certain credits that were used to offset the 2008 taxes will be released and available to offset future taxable income. Most of these credits are foreign tax credits which will expire in 2018 if not utilized before that time.

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In accordance with Topic 740, the Company has recorded a contingent liability of $3.6 million and $2.3 million as of March 31, 2011 and December 31, 2010, respectively, which, if recognized, would affect the Company’s future effective tax rate. When incurred, the Company recognizes interest and penalties related to unrecognized tax benefits in tax expense. The Company accrued net interest and penalties of $0.3 million in the first quarter of 2011. As of March 31, 2011, there were no additional positions for which management believes it is reasonably possible that the total amounts of tax contingencies will significantly increase or decrease within 12 months of the reporting date.

The Company remains subject to examination in the following major tax jurisdictions:

Jurisdiction	Years Affected
United States	From 2007 to present
California	From 2006 to present
Ireland	From 2007 to present
Canada	From 2007 to present

In 2007, the IRS closed its audit for taxable years 2001 through 2003 and the statute of limitations lapsed for 2006 in 2010. The Company is currently under an IRS audit for the 2008 tax year.

PMI has historically provided for U.S. federal income tax on the undistributed earnings from its foreign subsidiaries, except to the extent such earnings are reinvested indefinitely. During 2009, the Company determined that earnings from foreign subsidiaries, principally PMI Europe, were no longer deemed “permanently reinvested”. As such, related income tax amounts have subsequently been recorded as components in the consolidated statement of operations and AOCI.

The Company has domestic net operating loss carryforwards of approximately $806.9 million that will expire in 2030, if not utilized. The Company has foreign net operating loss carryforwards of approximately $54.6 million primarily related to the PMI Europe and Canada operations that will expire in 2012-2027.

The Company has tax credit carryforwards of approximately $195.1 million, primarily related to the payment of alternative minimum tax of $106.3 million, foreign taxes of $80.0 million, and general business credits of $8.8 million. The alternative minimum tax credits do not expire and the foreign tax credits will expire if not utilized by 2018.

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NOTE 13. 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 presented:

	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Premiums written
Direct, net of refunds	$	151,889		$	185,481
Assumed		2			3
Ceded		(26,918	)		(33,943	)
Net premiums written	$	124,973		$	151,541
Premiums earned
Direct, net of refunds	$	147,389		$	187,217
Assumed		(19	)		(49	)
Ceded		(27,064	)		(34,138	)
Net premiums earned	$	120,306		$	153,030
Losses and loss adjustment expenses
Direct	$	277,248		$	368,634
Assumed		41			8
Ceded		(36,179	)		(26,353	)
Net losses and LAE	$	241,110		$	342,289

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 100.0% of total ceded premiums written in the first quarters of 2011 and 2010. The Company recorded $439.3 million in reinsurance recoverables primarily from captive arrangements related to PMI’s gross loss reserves as of March 31, 2011, compared to $459.7 million as of December 31, 2010. These amounts have been reduced by a valuation allowance on reinsurance recoverables of $68.0 million and $75.1 million, to the extent applicable, if they are in excess of captive trust account balances as of March 31, 2011 and December 31, 2010, respectively. The decrease in reinsurance recoverables from year end 2010 is due primarily to receipt of cash from captive trust accounts related to the captives’ share of claims paid. As of March 31, 2011 and December 31, 2010, the total assets in captive trust accounts, including those for which a valuation allowance was established as the recoverables exceed trust account balances, held for the benefit of PMI totaled approximately $679.0 million and $724.3 million, before quarterly net settlements, respectively.

NOTE 14. DEBT AND REVOLVING CREDIT FACILITY

	March 31, 2011						December 31, 2010
	Principal Amount		Fair Value		Carrying Value		Carrying Value
	(Dollars in thousands)
6.000% Senior Notes, due September 15, 2016 (1)	$	250,000	$	197,345	$	197,345	$	215,158
6.625% Senior Notes, due September 15, 2036 (1)		150,000		101,946		101,946		112,023
Revolving Credit Facility, due October 24, 2011		49,750		49,750		49,750		49,750
8.309% Junior Subordinated Debentures, due February 1, 2027		51,593		35,702		51,593		51,593
4.50% Convertible Notes due April 15, 2020		285,000		225,609		189,225		187,634
Total debt	$	786,343	$	610,352	$	589,859	$	616,158

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

The Company amended its revolving credit facility (the “credit facility” or “facility”) effective May 29, 2009 following the satisfaction of certain conditions precedent agreed upon between the Company and the lenders under the facility on May 8, 2009. In connection with the Amended Agreement, MIC and The PMI Group entered

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into a Note Purchase Agreement pursuant to which The PMI Group purchased the contingent note from MIC which MIC received in connection with the sale of PMI Australia (the “QBE Note”). Upon the completion of the sale of the QBE Note to The PMI Group from MIC, The PMI Group granted a security interest in the QBE Note in favor of the Administrative Agent, for the benefit of the lenders under the Amended Agreement.

In the second quarter of 2010, The PMI Group used $75 million of the net proceeds from the concurrent common stock and Convertible Notes offerings to pay down the credit facility from $124.8 million to $49.8 million; the total maximum amount of the lenders’ commitments is $50 million. In April 2010, in connection with the offerings, the Company amended its credit facility. As part of the amendment, the net worth requirement was removed as a financial covenant. The credit facility places certain limitations on the Company’s ability to pay dividends on its common stock, including a per year cap of $0.01 per share, subject to an annual aggregate limit of $5 million, and a prohibition from declaring any dividend at any time MIC is prohibited from writing new mortgage insurance by any state in the U.S.

The Company received proceeds of $279.0 million after the deduction of offering expenses of $6.1 million upon issuance of the 4.50% Convertible Notes due 2020. As the Convertible Notes are debt with a conversion option, the Company bifurcated the net proceeds between liability and equity components. A fair value was calculated for the debt component and the equity component is recorded net of that value. At March 31, 2011, the following summarizes the liability and equity components of the Convertible Notes:

	March 31, 2011
	(Dollars in thousands)
Liability components:
4.50% Convertible Notes due 2020	$	285,000
Convertible Notes discount		(101,478	)
Convertible Notes amortized discount		5,703
Convertible Notes, net of discount	$	189,225
Equity components:
Additional Paid in Capital:
Embedded conversion option	$	101,478
Less: Embedded conversion option tax effect		(35,517	)
Less: Issuance Costs		(3,121	)
	$	62,840

The Company has allocated the Convertible Notes offering costs to liability and equity components in proportion to the allocation of proceeds and accounted for them as debt issuance costs and equity issuance costs, respectively. At March 31, 2011, remaining unamortized debt issuance costs included in other assets were $5.5 million and are being amortized to interest expense over the term of the Convertible Notes. Amortization expense for the three months ended March 31, 2011 was $0.2 million. At March 31, 2011 the remaining amortization period for the unamortized Convertible Notes discount and debt issuance costs was 9.08 years.

The components of interest expense resulting from the Convertible Notes for the three months ended March 31, 2011 are as follows:

	Three months ended March 31, 2011
	(Dollars in thousands)
Contractual coupon interest	$	3,206
Amortization of Convertible Notes debt discount		1,591
Amortization of debt issuance costs		153
Interest expense on Convertible Notes	$	4,950

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For the period ended March 31, 2011, the amortization of the Convertible Notes debt discount and debt issuance costs are based on an effective interest rate of 10.3%.

Holders may convert their Convertible Notes prior to January 15, 2020, only in specified circumstances, and holders may convert their Notes at any time thereafter until the second business day preceding maturity. The Convertible Notes will be convertible at an initial conversion rate of 127.5307 shares of common stock per $1,000 principal amount of Convertible Notes, which represents an initial conversion price of approximately $7.84 per share. Upon conversion, the Company may deliver cash, shares of common stock or a combination thereof, at its option. The Convertible Notes’ If-Converted value did not exceed the principal amount of $285 million at March 31, 2011.

On or after January 15, 2020 until the close of business on the second business day immediately preceding the maturity date, holders may convert their Convertible Notes, in multiples of $1,000 principal amount, at the option of the holder.

The Company may redeem the Notes in whole or in part on or after April 15, 2015, if the last reported sale price of common stock exceeds 130% of the conversion price then in effect for 20 or more trading days in a

period of 30 consecutive trading days ending on the trading day immediately prior to the date of redemption notice. The redemption price will be equal to the principal amount of the Convertible Notes to be redeemed plus accrued but unpaid interest plus a specified “make whole” premium.

NOTE 15. 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 management to evaluate segment performance, the availability of separate financial information and overall materiality considerations.

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

	Three Months Ended March 31, 2011
	U.S. Mortgage Insurance Operations			International Operations			Corporate and Other			Consolidated Total
	(Dollars in thousands)
Revenues
Premiums earned	$	119,044		$	1,262		$	—		$	120,306
Net investment income		16,060			530			132			16,722
Equity in (losses) earnings from unconsolidated subsidiaries		(1,452	)		—			153			(1,299	)
Net realized investment losses		(74	)		(7	)		—			(81	)
Change in fair value of certain debt instruments		—			—			21,656			21,656
Other income		1,917			787			—			2,704
Total revenues		135,495			2,572			21,941			160,008
Losses and expenses
Losses and loss adjustment expenses		238,994			2,116			—			241,110
Amortization of deferred policy acquisition costs		4,156			—			—			4,156
Other underwriting and operating expenses		25,032			1,430			1,217			27,679
Interest expense		3,223			—			10,288			13,511
Total losses and expenses		271,405			3,546			11,505			286,456
(Loss) income before income taxes		(135,910	)		(974	)		10,436			(126,448	)
Income tax expense		376			—			—			376
Net (loss) income	$	(136,286	)	$	(974	)	$	10,436		$	(126,824	)
	Three Months Ended March 31, 2010
	U.S. Mortgage Insurance Operations			International Operations			Corporate and Other			Consolidated Total
	(Dollars in thousands)
Revenues
Premiums earned	$	151,628		$	1,402		$	—		$	153,030
Net investment income		25,033			1,525			130			26,688
Equity in losses from unconsolidated subsidiaries		(4,289	)		—			(121	)		(4,410	)
Net realized investment gains		7,170			263			—			7,433
Change in fair value of certain debt instruments		—			—			(40,813	)		(40,813	)
Other (loss) income		(1	)		1,724			—			1,723
Total revenues (expenses)		179,541			4,914			(40,804	)		143,651
Losses and expenses
Losses and loss adjustment expenses		341,537			752			—			342,289
Amortization of deferred policy acquisition costs		3,876			—			—			3,876
Other underwriting and operating expenses		30,090			1,800			2,070			33,960
Interest expense		74			—			9,449			9,523
Total losses and expenses		375,577			2,552			11,519			389,648
(Loss) income before income taxes		(196,036	)		2,362			(52,323	)		(245,997	)
Income tax (benefit) expense		(74,253	)		2,345			(17,102	)		(89,010	)
Net (loss) income	$	(121,783	)	$	17		$	(35,221	)	$	(156,987	)

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	March 31, 2011
	U.S. Mortgage Insurance Operations		International Operations		Corporate and Other			Consolidated Total
	(Dollars in thousands)
Assets
Cash and investments, at fair value	$	2,793,591	$	175,932	$	73,279		$	3,042,802
Investments in unconsolidated subsidiaries		105,331		—		13,899			119,230
Reinsurance recoverables		439,324		—		—			439,324
Deferred policy acquisition costs		48,115		—		—			48,115
Property, equipment and software, net of accumulated depreciation and amortization		21,749		—		61,485			83,234
Deferred tax assets		62,297		81,550		—			143,847
Other assets (liabilities)		208,476		7,159		(1,031	)		214,604
Total assets	$	3,678,883	$	264,641	$	147,632		$	4,091,156
Liabilities
Reserve for losses and loss adjustment expenses	$	2,860,635	$	25,805	$	—		$	2,886,440
Reserve for premium refunds		106,535		—		—			106,535
Unearned premiums		65,155		3,857		—			69,012
Debt		285,000		—		304,859			589,859
Other liabilities		143,238		6,258		1,968			151,464
Total liabilities		3,460,563		35,920		306,827			3,803,310
Shareholders’ equity (deficit)		218,320		228,721		(159,195	)		287,846
Total liabilities and shareholders’ equity	$	3,678,883	$	264,641	$	147,632		$	4,091,156
	December 31, 2010
	U.S. Mortgage Insurance Operations		International Operations		Corporate and Other			Consolidated Total
	(Dollars in thousands)
Assets
Cash and investments, at fair value	$	2,830,680	$	174,231	$	82,952		$	3,087,863
Investments in unconsolidated subsidiaries		106,470		—		14,570			121,040
Reinsurance recoverables		459,671		—		—			459,671
Deferred policy acquisition costs		46,372		—		—			46,372
Property, equipment and software, net of accumulated depreciation and amortization		22,769		—		62,417			85,186
Deferred tax assets		61,349		81,550		—			142,899
Other assets		263,019		6,895		6,042			275,956
Total assets	$	3,790,330	$	262,676	$	165,981		$	4,218,987
Liabilities
Reserve for losses and loss adjustment expenses	$	2,846,580	$	23,185	$	—		$	2,869,765
Reserve for premium refunds		88,696		—		—			88,696
Unearned premiums		60,227		4,071		—			64,298
Debt		285,000		—		331,158			616,158
Other liabilities		154,099		6,920		3,781			164,800
Total liabilities		3,434,602		34,176		334,939			3,803,717
Shareholders’ equity (deficit)		355,728		228,500		(168,958	)		415,270
Total liabilities and shareholders’ equity	$	3,790,330	$	262,676	$	165,981		$	4,218,987

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NOTE 16. EXIT AND DISPOSAL ACTIVITIES

In 2008 and 2009, the Company undertook initiatives to reduce and manage its expenses and to focus on its core U.S. mortgage insurance business. The following table provides a reconciliation of exit and disposal costs included in other liabilities and accrued expenses by operating segment in the first quarter of 2010:

	U.S. Mortgage Insurance Operations			International Operations			Consolidated Total
				(Dollars in thousands)
Balance at January 1, 2010	$	2,072		$	243		$	2,315
Exit costs payments
Severance		(1,551	)		—			(1,551	)
Other		(77	)		(61	)		(138	)
Total payments		(1,628	)		(61	)		(1,689	)
Balance at March 31, 2010	$	444		$	182		$	626

The expenses in the U.S. Mortgage Insurance Operations segment are primarily payroll and related expenses from involuntary terminations in 2009. The expenses in the International Operations segment are primarily due to reductions in force from the closure of PMI Canada’s office in Toronto and reconfiguration of PMI Europe. Exit costs incurred since December 2008 were $21.8 million which consisted primarily of severance and related costs. All accrued exit and disposal costs have been paid as of March 31, 2011.

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

CAUTIONARY STATEMENT

Statements we make or incorporate by reference in this and other documents filed with the Securities and Exchange Commission that are not historical facts, that are preceded by, followed by or include the words “believes,” “expects,” “anticipates,” “estimates” or similar expressions, or 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, default inventories, claim rates, rescission and claim denial activity and the challenges thereto, persistency, premiums, new insurance written, refinance activity, the make-up of our various insurance portfolios, utilization of our deferred tax assets, the impact of market and competitive conditions, unemployment, liquidity, capital requirements and initiatives, captive reinsurance agreements, fair value of debt instruments, the performance of our derivative contracts as well as certain securities held in our investment portfolios, and potential litigation. When a forward-looking statement includes an underlying assumption, we caution that, while we believe the assumption to be reasonable and make it in good faith, assumed facts almost always vary from actual results, and the difference between assumed facts and actual results can be material. Where, in any forward-looking statement, we express an expectation or belief as to future results, there can be no assurance that the expectation or belief will result. Our actual results may differ materially from those expressed in our forward-looking 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, 2010 and in Part II, Item 1A. herein. Except as may be required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Financial Results for the Quarters Ended March 31, 2011 and 2010

For the quarters ended March 31, 2011 and 2010, we recorded consolidated net losses of $126.8 million and $157.0 million, respectively. These losses were driven by losses and loss adjustment expenses (“LAE”) in our U.S. Mortgage Insurance Operations and, to lesser degrees, decreases in premiums earned and investment income. Losses and LAE decreased from $342.3 million in the first quarter of 2010 to $241.1 million in the first quarter of 2011. Premiums earned decreased from $153.0 million in the first quarter of 2010 to $120.3 million in the first quarter of 2011. Our consolidated net loss in the first quarter of 2011 included a $21.7 million increase to revenues as a result of decreases in the fair value of our corporate debt. Our consolidated net loss in the first quarter of 2010 included a $40.8 million decrease to revenues as a result of increases in the fair value of our debt.

Overview of Our Business

We provide residential mortgage insurance that protects mortgage lenders and investors from credit losses in the event of borrower default. We divide our business into the following segments:

• U.S. Mortgage Insurance Operations. The results of U.S. Mortgage Insurance Operations include PMI Mortgage Insurance Co. (“MIC”) and its affiliated U.S. mortgage insurance and reinsurance companies (collectively, “PMI”), and equity in earnings (losses) from PMI’s joint venture, CMG Mortgage Insurance Company and its affiliated companies (collectively, “CMG MI”). Effective January 1, 2010, we include PMI Mortgage Assurance Co. (“PMAC”) in U.S. Mortgage Insurance Operations. U.S. Mortgage Insurance Operations recorded a net loss of $136.3 million for the quarter ended March 31, 2011 and $121.8 million for the quarter ended March 31, 2010. U.S. Mortgage Insurance Operations recorded a loss before income taxes of $135.9 million for the quarter ended March 31, 2011 and $196.0 million for the quarter ended March 31, 2010.

• International Operations. Our International Operations segment includes the results of our European and Canadian subsidiaries, “PMI Europe” and “PMI Canada,” neither of which is writing new business. International Operations generated a net loss of $1.0 million for the quarter ended March 31, 2011 and an insignificant amount of net income for the quarter ended March 31, 2010.

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• Corporate and Other. Our Corporate and Other segment consists of corporate debt and expenses of our holding company, contract underwriting operations (which were discontinued in April 2009), our former investments in RAM Re and FGIC Corporation, and equity in earnings or losses from investments in certain limited partnerships. Our Corporate and Other segment generated net income of $10.4 million for the quarter ended March 31, 2011 and a net loss of $35.2 million for the quarter ended March 31, 2010.

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:

• MIC’s Capital Position. As a result of continuing losses, we expect that, in the second quarter of 2011, MIC’s policyholders’ position will decline below the minimum, and its risk-to-capital ratio will increase above the maximum, levels necessary to meet state regulatory capital adequacy requirements, described below. As of March 31, 2011, MIC’s excess minimum policyholders’ position was $39.2 million and its risk-to-capital ratio was 24.4 to 1.

• State Regulatory Capital Requirements/PMAC. In sixteen states, if a mortgage insurer does not meet a required minimum policyholders’ position (calculated in accordance with statutory formulae) or exceeds a maximum permitted risk-to-capital ratio of 25 to 1, it may be prohibited from writing new business. In two of those states, mortgage insurers are required to cease writing new business immediately if and so long as they fail to meet capital requirements. In the remaining fourteen states, we believe that regulators exercise discretion as to whether the mortgage insurer may continue writing new business. As applicable, we have requested from insurance departments either waivers of regulatory capital requirements or clarification that MIC’s inability to comply with capital requirements would not, by itself, require it to cease writing business in that state.

MIC’s principal regulator is the Arizona Department of Insurance (the “Department”). On March 30, 2011, in response to our waiver request, the Department advised us that:

• Under the express requirements of Arizona law, MIC is not required to obtain a waiver from the Department in order to continue to write new business in the event that it does not maintain the minimum level of policyholders’ position (“MPP”).

• The Department considers MPP one of many measures of the financial condition of a mortgage insurer. The Department will continue to evaluate MIC’s MPP along with all other measures of PMI’s business operations and financial position in assessing its liquidity and financial resources to fulfill its obligations under existing and prospectively issued mortgage guaranty insurance contracts. The Department expects that its financial statutory examination and actuarial analysis of MIC, initiated in January 2011, will provide the Department with additional information regarding MIC’s financial position, operations and exposure to prospective risks.

• The Department requested that MIC provide it with additional periodic information regarding its operations and financial condition but did not impose restrictions upon its operations.

If the Department were to determine that MIC’s liquidity or financial resources warranted regulatory action, it could, among other actions, order MIC to suspend writing new business in all states.

In addition to the Department’s notice described above, MIC has received written waivers from three state departments of insurance. One of these waivers remains in effect only until MIC exceeds a 27 to 1 risk-to-capital ratio. Each of these waivers may be withdrawn at any time. We believe that our pending waiver requests in other states are under review by the applicable state insurance departments. We cannot predict whether or under what circumstances these insurance regulators might exercise

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discretion to permit MIC to continue to write new business. It is not clear what actions the insurance regulators in states that do not have capital adequacy requirements would take if MIC were to fail to meet capital adequacy requirements established by one or more states.

In the event that MIC is unable to continue to write new mortgage insurance in a limited number of states, we plan to write new mortgage insurance in those states through PMAC, a subsidiary of MIC. Fannie Mae and Freddie Mac (collectively, the “GSEs”) approved the use of PMAC as a limited, direct issuer of mortgage guaranty insurance in certain states in which MIC is unable to continue to write new business. These approvals are subject to restrictions and currently expire on December 31, 2011. Some of our customers may choose not to purchase mortgage insurance from us in any state unless we offer mortgage insurance through the combined companies in all fifty states or if MIC were to exceed regulatory capital requirements. See Item 1A. Risk Factors – We expect that our primary insurance subsidiary, MIC, will not meet regulatory capital requirements in the second quarter of 2011. MIC could be required to cease writing new business and could be subject to restrictions under the terms of its runoff support agreement with Allstate and - Our plan to write certain new mortgage insurance in a subsidiary of MIC may not be successful and, even if it is implemented in some states, it may not allow us to continue to write mortgage insurance in other states.

In 2008, we were required to submit remediation plans to each of the GSEs. To date, each of the GSEs continues to treat MIC as an eligible mortgage insurer. There can be no assurance that the GSEs will continue to treat MIC as an eligible mortgage insurer.

• Losses and LAE. PMI’s losses and LAE includes net changes to loss reserves and expenses related to default, loss mitigation and claim processing in the applicable period. Losses and LAE in a particular period reflects reserves with respect to new delinquencies received in the period and additional amounts from any re-estimate of loss reserves associated with PMI’s existing delinquent loan inventory. Elevated levels of new delinquencies drove PMI’s losses and LAE of $341.5 million in the first quarter of 2010. Of PMI’s $239.0 million of losses and LAE in the first quarter of 2011, approximately $177.4 million was due to reserves on new (but, compared to the first quarter of 2010, fewer) delinquencies. The remaining $61.6 million of losses and LAE in the first quarter of 2011 was driven by increases in our incurred but not reported (“IBNR”) reserves and re-estimations of claim rates on PMI’s reserves established at year end 2010. For a discussion of our re-estimation of claim rates, see Claim Rates, below. We increased our IBNR reserves in the first quarter of 2011 primarily due to an increase in our estimate of the frequency of future reinstatements of past claim denials. See Rescission Activity and Claim Denials, below.

The process of estimating loss reserves is inherently uncertain and requires the forecast of complex factors, including future claim rates, future loan modification, rescission and claim denial activity, and macroeconomic conditions. The losses and LAE PMI incurs in a period are subject to change in later periods as we review the estimations made in the prior period and determine that adjustments to our assumptions are appropriate. PMI’s losses and LAE will be negatively affected if notices of default, claim rates and/or claim sizes develop unfavorably compared to our current estimates. Changes, or lack of improvement, in job creation, unemployment rates and home prices could significantly impact our reserve estimates and, therefore, PMI’s losses and LAE. For additional discussion of our loss reserving process, see Critical Accounting Estimates – Reserves for Losses and LAE.

• Claim Rates. A significant assumption within our loss reserving process is our estimate of the percentage of loans in PMI’s delinquent loan inventory that will result in a paid claim. Delinquent loans that do not result in a claim payment by PMI “cure.” Delinquent loans may cure as a result of, among other things, the borrower bringing the loan current, selling the home, or refinancing or modifying the loan, or PMI’s rescission of coverage with respect to the delinquent loan. In 2010, we increased PMI’s claim rates primarily due to high levels of unemployment and declining home prices, diminished refinancing opportunities, and the protracted implementation of modification programs such as the U.S. Treasury Home Affordable Modification Program (“HAMP”). In the first quarter of 2011, these factors caused us to further increase claim rates associated with delinquencies we received in 2010. Any future claim rate increases will negatively affect our results of operations and financial condition. See Critical Accounting Estimates – Reserves for Losses and LAE.

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• Loss Mitigation Activities. We pursue retention and liquidation workout opportunities to mitigate loss on delinquent loans. Retention workouts are often preceded by loans entering forbearance periods. Forbearance plans temporarily suspend all or part of a borrower’s regularly scheduled payments for a specified time period. Forbearance plans include risk-in-force subject to HAMP and non-HAMP trial modification periods. The following table shows risk-in-force that has been reported to us as being newly enrolled in forbearance plans as of each quarter end:

	Q1 2011		Q4 2010		Q3 2010		Q2 2010		Q1 2010		Q4 2009		Q3 2009		Q2 2009
	(Dollars in millions)
Risk-in-force subject to forbearance reported in the quarter	$	135.0	$	148.1	$	114.8	$	177.7	$	513.4	$	656.1	$	646.0	$	198.7

As a result of a decreasing population of HAMP eligible borrowers, the amount of new risk-in-force entering forbearance plans is generally declining. As of March 31, 2011, approximately $2.6 billion of our risk-in-force was in a forbearance plan. Because a significant number of loans subject to forbearance plans are in trial modification periods, we believe that they are an indicator of risk-in-force that could ultimately cure as a result of retention workouts. Consequently, a portion of the loans subject to forbearance plans in a quarter may be re-characterized in a later period as risk related to a retention workout.

Retention workouts are designed to result in borrowers curing, or satisfying in full, their delinquent loans. Retention workouts include refinances, loan modifications and repayment plans. A liquidation workout is designed to mitigate PMI’s loss on a paid claim through options such as a pre-foreclosure sale or a deed-in-lieu of foreclosure. The following tables show mitigated risk resulting from retention and liquidation workouts completed in each of the quarters indicated:

	Q1 2011		Q4 2010		Q3 2010		Q2 2010		Q1 2010		2010
	(Dollars in thousands)
Retention workouts	$	257,626	$	345,048	$	462,727	$	542,405	$	543,035	$	1,893,215
Liquidation workouts	$	121,336	$	124,551	$	140,115	$	162,164	$	149,542	$	576,372

	Q4 2009		Q3 2009		Q2 2009		Q1 2009		2009
	(Dollars in thousands)
Retention workouts	$	285,000	$	204,388	$	187,390	$	212,604	$	889,382
Liquidation workouts	$	125,894	$	112,573	$	115,404	$	87,397	$	441,268

Note: Year-end aggregate numbers may not total due to rounding.

Risk-in-force subject to retention workouts is declining as a result of a decline in our delinquent loan inventory and servicers refining their HAMP modification programs to require verification of income and other qualifying information during the initial stage of the modification process. Liquidation workouts of our delinquent risk remain elevated primarily as a result of high incidences of short sales and deeds-in-lieu approved by servicers and PMI as a means of mitigating loss by reducing foreclosure and other costs.

• Defaults. As set out below in Segment Results - U.S. Mortgage Insurance Operations – Defaults, PMI’s primary and pool default inventories decreased in the first quarter of 2011. The decrease in PMI’s primary default inventory was due to lower levels of new notices of default, delinquency cures and primary claims paid. The decrease in PMI’s modified pool default inventory was primarily due to

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claims paid. We believe that new delinquencies from our 2005 through 2008 primary book years have peaked. Factors affecting the size of PMI’s default inventories in the first quarter of 2011 include:

Declining Home Prices and High Unemployment - Elevated levels of unemployment and home price depreciation negatively affect PMI’s default inventories and default rates.

Aging - A significant portion of loans in our delinquent loan inventory are those on which the borrowers are twelve or more payments in default. Historically, our claim rates have been higher as loans remain in our delinquency inventory and progress into later stages of the foreclosure and claim process. This trend has negatively impacted PMI's loss reserves and will continue if the resolution of these pending delinquencies requires more time or is less favorable than we expect.

Claims Paid – The number of primary claims paid (including claim denials) was 5,866 in the first quarter of 2011 compared to 6,892 in the first quarter of 2010. The decrease in the number of primary claims paid in the first quarter of 2011 compared to the first quarter of 2010 was driven by increases in the length of time required for claims processing and review, and to a lesser extent, foreclosure moratoriums instituted in the third quarter of 2010. Claims processing and review periods lengthened due to, among other factors, delays in servicers’ abilities to produce documents and perfect claims. We expect claims paid in 2011 (both in number and aggregate dollar amounts) to approximate or be slightly lower than 2010 levels and continue to contribute to the reduction in the number of loans in PMI’s default inventory.

Credit and Portfolio Characteristics and Geographic Factors – We have experienced higher than expected levels of delinquent mortgages with respect to certain types of loans and risk characteristics. See Segment Results - U.S. Mortgage Insurance Operations – Credit and portfolio characteristics. Declining home prices and weak economic conditions, particularly in California, Florida, Illinois, New Jersey and Georgia, have negatively affected the development of PMI’s portfolio. See Segment Results - U.S. Mortgage Insurance Operations – Insurance and risk-in-force. For certain geographic areas (principally metropolitan statistical areas (MSAs)) that are designated as distressed, PMI caps the maximum insured loan-to-value ratio and/or prescribes additional limiting criteria and underwriting guidelines. PMI assesses MSAs on a regular basis.

• Rescission Activity and Claim Denials. PMI routinely investigates early payment default loans (loans that default prior to the thirteenth payment), or EPDs, and also investigates certain other non-EPD loans, for misrepresentation, negligent underwriting and eligibility for coverage. Based upon PMI’s investigations, industry data and other data, we believe that there were significantly higher levels of mortgage origination fraud and decreases in the quality of mortgage origination underwriting in 2006 and 2007 when compared to historical levels. As a result, PMI continues to review and investigate a substantial volume of insured loans.

PMI’s mortgage insurance policies, certain endorsements, and certain of its lender-paid mortgage insurance commitment agreements contain provisions giving PMI the right to unilaterally rescind coverage of an insured loan for breach of representations and warranties, material misrepresentation, negligent underwriting and/or ineligibility. PMI may also have rescission rights under general principles of contract law. Generally, PMI exercises its contractual rights following an investigation and upon establishing a reasonable belief that, at loan origination, there was a material misrepresentation by the originator or an agent of the originator, that the loan was negligently underwritten, or that the loan was not eligible for coverage under an approved loan program or set of underwriting guidelines. When PMI rescinds coverage, we notify the insured in writing, identify the bases for the rescission, summarize the evidence supporting the rescission decision and refund all premiums associated with the rescinded loan to the insured, whether or not the loan was delinquent. The tables below show the aggregate risk of delinquent and non-delinquent loans rescinded by PMI in each of the quarters presented:

	Q1 2011		Q4 2010		Q3 2010		Q2 2010		Q1 2010		Q4 2009		Q3 2009		Q2 2009
	(Dollars in millions)
Delinquent risk-in-force rescinded per quarter	$	77.3	$	93.2	$	85.3	$	78.7	$	109.2	$	123.6	$	148.4	$	170.3

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	Q1 2011		Q4 2010		Q3 2010		Q2 2010		Q1 2010		Q4 2009		Q3 2009		Q2 2009
	(Dollars in millions)
Non-delinquent risk-in-force rescinded per quarter	$	0.6	$	2.4	$	0.8	$	0.3	$	1.3	$	4.8	$	9.5	$	66.3

When PMI rescinds coverage of a loan, we remove it from our calculation of PMI’s risk-in-force and insurance in force. In addition, if the rescinded loan was delinquent, we cease to include that loan in our default inventory and, therefore, do not incorporate that loan into our loss reserve estimates. Accordingly, past rescissions of delinquent loans have materially reduced our loss reserve estimates. In arriving at our loss reserve estimates, we also consider the effect of projected future rescission activity with respect to the existing inventory of delinquent insured loans. Projected future rescissions are materially reducing our current loss reserve estimates, although to a lesser extent than in past periods. To the extent future rescission activity is lower than projected, we would increase loss reserves in future periods. Our inventory of files under review peaked in 2010 and, as a result, rescission levels are generally declining.

Upon receiving PMI’s notice of rescission with respect to a loan, the insured, either directly or through its servicer, may seek additional information as to our rescission and/or request reconsideration by challenging the bases of our decision to rescind coverage on specific loans (“loan-level challenge”). Although PMI’s policies do not contain provisions addressing reconsideration requests, we review the loan-level challenges we receive. PMI’s policies contain a three-year contractual limitations period (subject to applicable state law), commencing from the earlier of the date a claim is filed or the rescission date, after which an insured may be barred from filing a lawsuit, or seeking arbitration or other redress, for recovery of policy benefits. In some cases, insureds’ loan-level challenges include new or additional information and/or considerations. If we decide to reverse a rescission after consideration of a loan-level challenge, we reinstate coverage of the loan after receipt of the applicable premium (“reinstatement”). If we reinstate coverage of a loan that is delinquent at the time of reinstatement, regardless of its status at the time of the rescission, we reassume the risk and include the loan in our delinquent loan inventory. If, as a result of our review, we affirm our initial rescission, we inform the customer of our decision. If levels of reinstatements exceed our expectations, our financial condition and results of operations will be negatively impacted. We believe that insureds typically do not notify PMI in the event that they consider their loan-level challenge to be resolved. In some cases, insureds are also challenging our general rights to rescind coverage of all or any loans under the terms of PMI’s master policies (“general challenges”). These general challenges do not identify the specific loans believed to be at issue and may refer to broad categories of rescissions.

If we are not able to informally resolve a disagreement with an insured regarding a rescission of coverage, the insured may seek resolution of the disagreement by filing a lawsuit or requesting that PMI agree to an arbitration. PMI’s mortgage insurance policies contain arbitration clauses providing for binding arbitration upon mutual consent of the parties. The table below shows, for each year in which the risk was written (“book year”), the aggregate delinquent and non-delinquent rescinded risk to date, net of reinstatements, and the aggregate risk amount of previously rescinded loans, net of reinstatements, which PMI believes may be subject to disagreement, either because PMI has received a loan-level challenge or because the loan is subject to pending litigation, arbitration or other dispute resolution process. As discussed above, because insureds generally do not notify PMI when they agree with our decisions to defend rescissions, an unknown portion of what we categorize as disputed rescinded risk may not actually be subject to disagreement.

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	Primary and Pool*
	(by book year**)
	2005 and Prior		2006		2007		2008		2009		Total
	(Dollars in millions)
Delinquent Risk:
Rescinded Risk (Net of Reinstatements)	$	212.3	$	356.4	$	899.8	$	109.3	$	1.4	$	1,579.2
Rescinded Risk Disputed and Subsequently Re-Affirmed by PMI	$	26.9	$	47.1	$	139.1	$	19.8	$	—	$	232.9
Rescinded Risk Disputed and Currently Pending Investigation		2.9		27.1		73.2		6.6		0.1		109.9
Total Rescinded Risk Disputed (Net of Reinstatements)	$	29.8	$	74.2	$	212.3	$	26.4	$	0.1	$	342.8
Non-Delinquent Risk:
Rescinded Risk (Net of Reinstatements)	$	58.7	$	67.6	$	364.7	$	6.3	$	0.5	$	497.8
Rescinded Risk Disputed and Subsequently Re-Affirmed by PMI	$	4.2	$	7.1	$	11.7	$	1.1	$	—	$	24.1
Rescinded Risk Disputed and Currently Pending Investigation		0.2		7.5		35.4		0.1		—		43.2
Total Rescinded Risk Disputed (Net of Reinstatements)	$	4.4	$	14.6	$	47.1	$	1.2	$	—	$	67.3

* Data excludes rescissions of modified pool risk subject to restructurings completed in 2009 and 2010.

** There were no rescissions for the 2010 book year as of March 31, 2011.

Because insureds’ general challenges to PMI’s rescission rights do not identify specific rescinded loans, the total population of rescinded loans that may be subject to general challenges is uncertain. Accordingly, we are unable to quantify the aggregate risk amount of rescinded loans that may be subject to general challenges. As we have received general challenges from several larger customers, the aggregate risk relating to general challenges would be material if we are unable to satisfactorily resolve such challenges. Moreover, because our or other mortgage insurers’ contractual rescission rights have been subject to few judicial decisions, it is unclear whether a court would adopt the same interpretation of our contractual rescission rights as we do. Accordingly, there is a risk that we will not be successful in defending our contractual bases of rescission against challenges. If this were to happen, we would be required to reassume rescinded risk and re-establish loss reserves on delinquent loans, which would negatively impact our financial condition and results of operations.

In some cases, our servicing customers do not produce documents necessary to perfect a claim. This is often the result of the servicer’s inability to provide the loan origination file or other servicing records for our review. If the requested documents are not produced after repeated requests by PMI, the claim will be denied (“documentation claim denials”). Beginning in 2010, claim denial activity also included claims denied or curtailed as a result of servicers’ failure to, among other things, adhere to customary servicing standards applicable to delinquent loans (“servicer-related claim denials”). PMI’s mortgage insurance policies require servicers to mitigate loss by adhering to customary servicing standards relating to the servicing of delinquent loans. PMI’s published Customary Servicing Standards Guide (the “Guide”) sets out customary delinquent loan servicing procedures, including default reporting, early delinquency intervention, and the pursuit of retention and liquidation workouts. The Guide is based on PMI’s mortgage insurance policies and industry standards, including the GSEs’ and Treasury’s servicing guidelines. A servicer-related claim denial may occur, for example, when a servicer fails to contact or makes insufficient contacts (as measured against customary standards) with a delinquent borrower to determine whether a loan modification or other workout options are feasible prior to foreclosure.

We consider our estimates of future claim denials in establishing our loss reserves. We increased our assumptions of future claim denials in 2010, which reduced our loss reserve estimates. See Critical Accounting Estimates – Reserves for Losses and LAE. If future claim denials are lower than expected, we would be required to increase our loss reserves. If our servicing customers ultimately produce documents we had previously requested or sufficiently demonstrate that they have satisfied

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their loss mitigation obligations, PMI will review the file for potential claim payment. Our loss reserve estimation process takes into consideration this possibility. In the first quarter of 2011, we increased our IBNR reserve estimates by approximately $91.9 million relating to the increase in our estimate of the frequency of servicers’ production of previously requested loan documents. There can be no assurance, however, that we will not significantly adjust our claim denial assumptions in the future. See Item 1A. Risk Factors - Claim denials may not materially reduce our loss reserve estimates at the same levels as we expect, and our loss reserves will increase if future claim denial activity is lower than projected or if we reverse claim denials beyond expected levels. The table below shows the risk-in-force of claim denials (including primary and pool) in each of the quarters presented:

	Q1 2011		Q4 2010		Q3 2010		Q2 2010		Q1 2010		Q4 2009		Q3 2009		Q2 2009
	(Dollars in millions)
Claims denials per quarter - delinquent risk-in-force	$	192.8	$	179.0	$	123.5	$	108.7	$	149.2	$	93.4	$	80.1	$	184.8

• New Insurance Written (NIW). The table below shows PMI’s primary NIW in each of the quarters presented:

	Q1 2011		Q4 2010		Q3 2010		Q2 2010		Q1 2010		Q4 2009		Q3 2009		Q2 2009
	(Dollars in millions)
Primary new insurance written	$	1,471	$	2,214	$	2,004	$	1,567	$	964	$	969	$	1,176	$	2,001

Lower than expected residential mortgage originations and the high demand for mortgage insurance from the Federal Housing Administration (“FHA”) are negatively impacting our NIW. The size of the U.S. mortgage origination market is influenced by many economic factors, including employment trends, interest rates, home prices and access to credit markets. We believe that the size of the U.S. residential mortgage origination market in 2011 will be smaller than in 2010. Within the total mortgage origination market, the distribution between purchase money and refinance originations also affects PMI’s new insurance writings. Historically, there has been greater demand for private mortgage insurance in connection with purchase loan originations than there has been with refinance transactions. In the first quarter of 2011, the purchase loan share of the origination market was significantly lower than expected, which negatively impacted PMI’s NIW in the quarter.

Although FHA adopted a number of changes to its eligibility criteria and increased its premium rates in 2010, FHA’s share of the insured loan market continues to be significantly higher than private mortgage insurers’ aggregate share. On April 18, 2011, FHA increased its annual mortgage insurance premium by a quarter of a percentage point on all 30- and 15-year loans. While there can be no assurance of the effect of such increase, this and any future premium increase by FHA could positively affect the demand for private mortgage insurance. Our ability to compete with FHA has also been negatively impacted by the GSEs’ risk-based pricing structures. These structures include additive loan level pricing adjustments (“LLPA”) that are based on the risk characteristics of the particular loan and paid up-front by the lender to the GSE at the time of the loan sale transaction. Effective April 2011, the GSEs increased LLPAs on all loans with loan-to-value ratios in excess of 70%. These and any future LLPA increases will negatively impact our ability to compete with FHA.

Ongoing legislative and regulatory scrutiny of the GSEs and the residential mortgage market could impact the private mortgage insurance market and PMI’s future insurance writings. In September 2008, the GSEs were placed into conservatorship with the newly created Federal Housing Finance Agency (“FHFA”) as their conservator. In conservatorship, the GSEs could change their business practices with

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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 MIC’s status as an eligible mortgage insurer. Moreover, the GSEs’ business practices may be impacted by legislative or regulatory changes governing their operations. As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd Frank Act”), on February 11, 2011, Treasury published recommendations to Congress outlining several future proposed changes to the GSEs and the domestic housing finance system, including a multi-year phase-out of the GSEs as participants in the mortgage finance industry. Federal legislation enacted in the future could reduce the level of private mortgage insurance coverage used by the GSEs as credit enhancement or eliminate the requirement altogether.

The Dodd-Frank Act will require mortgage lenders and securitizers to retain a portion of the risk on mortgage loans they sell or securitize, unless the mortgage loans are “qualified residential mortgages” or are insured by the FHA or another federal agency. On March 30, 2011, federal regulators released a proposed rule that details the regulatory definition of a qualified residential mortgage, including a requirement that such mortgages include a cash down-payment equal to at least the sum of (i) the closing costs payable by the borrower, (ii) 20% of the lesser of the applicable property’s estimated market value and its purchase price, and (iii) the difference, if a positive amount, between the applicable property’s purchase price and its estimated market value. Regulators are seeking public comment and data regarding the credit risk mitigation effects of private mortgage insurance and an alternative definition that would include a down-payment of 10% (as opposed to 20%) of the lesser of the applicable property’s estimated market value and its purchase price and take into account private mortgage insurance for higher loan-to-value (“LTV”) ratio maximum requirements. The proposed rule exempts the GSEs from the risk retention requirement as long as they remain in conservatorship. Comments to the proposed rule are due on June 10, 2011. See Item 1A. Risk Factors - Implementation of the Dodd-Frank Act could negatively impact private mortgage insurers and PMI.

• Captives. As of March 31, 2011, 40.3% of PMI’s primary risk-in-force was subject to excess of loss (“XOL”) captive reinsurance agreements. In 2009, we placed those agreements into run-off and we no longer cede premiums on new business written to such captives. PMI continues, however, to cede premiums to the captives with respect to risk-in-force written prior to run-off. Captive cessions, therefore, will decrease over time as the number of loans in PMI’s portfolio subject to captives decreases. As of March 31, 2011, PMI ceded approximately $439.3 million of loss reserves primarily to captive reinsurers compared to $459.7 million as of December 31, 2010. We record these ceded loss reserves as reinsurance recoverables. The decrease in reinsurance recoverables is due primarily to receipt of cash from captive trust accounts related to the captives’ share of claims paid. Reinsurance recoverables do not exceed assets in captive trust accounts which, as of March 31, 2011, totaled approximately $679.0 million, before quarterly net settlements. Because premium cessions are decreasing and paid claims ceded to captives are increasing, we expect that captive trust account balances will continue to decline through 2011.

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

• PMI Europe. PMI Europe’s risk-in-force was $0.7 billion at March 31, 2011 compared to $2.1 billion at March 31, 2010. The significant reduction in PMI Europe’s risk-in-force was primarily the result of contract commutations and terminations of credit default swap (“CDS”) transactions. PMI Europe is not writing new business and, as a result, we expect its revenues to decline. In April 2011, PMI Europe repatriated $14.5 million of capital to MIC. As of March 31, 2011, PMI Europe’s total exposure from its reinsurance of U.S. subprime risk was $103.5 million compared to $104.9 million as of December 31, 2010. Total reserves associated with this portfolio were $18.5 million as of March 31, 2011. If the performance of these exposures deteriorates, PMI Europe will experience increased losses and increases to loss reserves. PMI Europe has posted collateral of $10.9 million on certain transactions as of March 31, 2011. Depending upon the performance of the underlying risk referenced in such transactions, PMI Europe may be required to post additional collateral.

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• PMI Canada. We are in the process of closing our operations in Canada. To fully close our operations in Canada, we must remove PMI Canada’s risk-in-force and obtain regulatory approvals. PMI Canada’s risk-in-force was $18.7 million as of March 31, 2011.

As a result of the changes in our International Operations described above, other than the expected revenues from the consideration due on the QBE Note in 2011, our International Operations now generates a substantially smaller portion of our revenues. See Liquidity and Capital Resources – The QBE Note.

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

• Fair Value Measurement of Financial Instruments. In the first quarter of 2011, our total revenues were increased by $21.7 million as a result of the decrease in the fair value of our debt. This decrease in fair value was due largely to the widening of credit spreads in the first quarter of 2011. (See Item 1, Note 7. Fair Value Disclosures.)

• Holding Company Liquidity. Our holding company’s principal sources of liquidity include dividends from its insurance subsidiaries, expected tax receivables and interest payments from PMI, tax refunds and income from its investment portfolio. MIC did not pay dividends to The PMI Group in 2010, and we do not expect that MIC will be able to pay dividends in 2011. Our holding company’s available funds, consisting of cash and cash equivalents and investments, were $70.7 million at March 31, 2011. Our holding company has $49.8 million in principal amount of debt under its revolving credit facility, with a $50.0 million maximum amount allowed. The credit facility expires and the outstanding debt must be repaid no later than October 24, 2011. As a result of the upcoming maturity of the QBE Note in September 2011, we currently believe there will be sufficient liquidity at the holding company to pay holding company expenses (including interest expense on its outstanding debt) through 2011. See Liquidity and Capital Resources –Sources and Uses of Funds and Credit Facility.

Additional Conditions and Trends. Factors potentially affecting the financial results of all of our segments include:

• Deferred Tax Assets. As of March 31, 2011, we had $722.8 million of net deferred tax assets. Our valuation allowance on our deferred tax assets was $578.9 million. We expect to utilize the remaining net deferred tax assets of $143.8 million based on contractual cash flow streams and tax strategies that are not dependent on generating taxable income from our mortgage insurance activities. In September 2011, we expect to utilize a portion of our deferred tax assets when the QBE Note matures and is payable by QBE. If we return to a period of sustained profitability, we may be able to utilize a substantial additional portion of our $722.8 million net deferred tax assets. However, any future tax benefits may not be realized or, even if realized, may be significantly delayed. Additional valuation allowance benefits or charges could be recognized in the future due to changes in management’s expectations regarding the realization of tax benefits. In addition, in the event of an “ownership change” for federal income tax purposes under Internal Revenue Code § 382, we may be restricted annually in our ability to use our deferred tax assets. See Item 1A. Risk Factors – We may be required to record a full valuation allowance or increase the current partial valuation allowance against our net deferred tax assets and may not be able to realize all of our deferred tax assets in the future and - Our Amended and Restated Tax Benefits Preservation Plan may not be effective in preventing an “ownership change” as defined in Section 382 of the Internal Revenue Code and our deferred tax assets and other tax attributes could be significantly limited.

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RESULTS OF OPERATIONS

Consolidated Results

The following table presents our consolidated financial results:

	Three Months Ended March 31,
	2011			2010			Percentage Change
	(Dollars in millions, except per share data)
REVENUES:
Premiums earned	$	120.3		$	153.0			(21.4	)%
Net investment income		16.7			26.7			(37.5	)%
Equity in losses from unconsolidated subsidiaries		(1.3	)		(4.4	)		(70.5	)%
Net realized investment (losses) gains		(0.1	)		7.4			(101.4	)%
Change in fair value of certain debt instruments		21.7			(40.8	)		153.2	%
Other income		2.7			1.8			50.0	%
Total revenues		160.0			143.7			11.3	%
LOSSES AND EXPENSES:
Losses and loss adjustment expenses (LAE)		241.1			342.3			(29.6	)%
Amortization of deferred policy acquisition costs		4.1			3.9			5.1	%
Other underwriting and operating expenses		27.7			33.9			(18.3	)%
Interest expense		13.5			9.5			42.1	%
Total losses and expenses		286.4			389.6			(26.5	)%
Loss from continuing operations before taxes		(126.4	)		(245.9	)		(48.6	)%
Income tax expense (benefit) from continuing operations		0.4			(88.9	)		100.4	%
Net loss	$	(126.8	)	$	(157.0	)		(19.2	)%
Diluted net loss per share	$	(0.79	)	$	(1.90	)		(58.4	)%

The decrease in premiums earned in the first quarter of 2011 compared to the first quarter of 2010 was driven by lower policies in force in our U.S. Mortgage Insurance Operations due in part to low levels of NIW and higher premium refunds due to an increase in the premium refund reserve of $17.8 million from year end. The increase in the premium refund reserve was due primarily to an increase in estimated refunds related to rescissions and claim related payments.

The decrease in net investment income in the first quarter of 2011 compared to the first quarter of 2010 was primarily due to lower average pre-tax book yields. Our consolidated pre-tax book yield was 2.4% and 3.0% as of March 31, 2011 and 2010, respectively. This decrease in our consolidated pre-tax book yield was primarily due to our decision to liquidate certain tax-advantaged municipal bond and preferred stock securities which had higher average book yields. A significant majority of the proceeds were reinvested in taxable securities with shorter average maturity dates and lower average book yields.

Equity in losses from unconsolidated subsidiaries in the first quarters of 2011 and 2010 were driven by losses from CMG MI. CMG MI’s losses were primarily due to elevated levels of unemployment and the continued weakness of the housing and mortgage markets. Declines in new notices of default drove CMG MI’s reduced losses when compared to the first quarter of 2010.

Net realized investment losses in the first quarter of 2011 were driven by realized losses on the sale of certain common stock offset by realized gains on the sale of certain preferred equity securities. Net realized investment gains in the first quarter of 2010 were driven primarily by sales of municipal bonds and preferred equity securities.

In the first quarter of 2011, our revenues increased by $21.7 million as a result of the decrease in the fair value of our debt. The decrease in fair value was due largely to the widening of credit spreads during the quarter. In the first quarter of 2010, our revenues decreased by $40.8 million as a result of the increase in the fair value of our debt. The increase in fair value was due largely to the narrowing of credit spreads during the quarter.

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The increase in other income in the first quarter of 2011 compared to the first quarter of 2010 was due primarily to income recognized from our pool restructuring receivable made in connection with the restructuring of a significant number of modified pool contracts completed in the second quarter of 2010.

Elevated levels of unemployment and continued weakness in the housing and mortgage markets drove our losses and LAE in the quarters presented. In the first quarter of 2011, losses and LAE included additions to reserves on defaults reported in the period and, to a lesser extent, additions to reserves as a result of re-estimations of reserves established at year end for the U.S Mortgage Insurance Operations’ segment. The decrease in losses and LAE in the first quarter of 2011 compared to the first quarter of 2010 was primarily driven by lower levels of new notices of default and decreases in pool losses as a result of the significant reduction in pool risk-in-force.

The decrease in other underwriting and operating expenses in the first quarter of 2011 compared to the first quarter of 2010 was primarily due to the decrease in payroll and related expense for the period. Interest expense increased in the first quarter of 2011 as a result of the interest expense on our Convertible Notes issued in the second quarter of 2010.

The effective tax rates were (0.3)% for the first quarter of 2011 and 36.2% for the first quarter of 2010, compared to the federal statutory rate of 35.0%. The primary driver for the change in effective tax rates was an increase in our deferred tax valuation allowance in the third quarter of 2010. The income tax expense in the first quarter of 2011 was due to an increase in the reserve for uncertain tax positions currently under audit. The income tax benefit in the first quarter of 2010 was primarily due to municipal bond investment income and income from certain international operations, which have lower effective tax rates, and therefore increased our effective tax rate above the federal statutory rate.

Segment Results

The following table presents consolidated results for each of our segments:

	Three Months Ended March 31,
	2011			2010			Percentage Change
	(Dollars in millions)
U.S. Mortgage Insurance Operations	$	(136.3	)	$	(121.8	)		11.9	%
International Operations		(1.0	)		0.0			—
Corporate and Other		10.4			(35.2	)		129.5	%
Net loss *	$	(126.8	)	$	(157.0	)		(19.2	)%

* May not total due to rounding

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U.S. Mortgage Insurance Operations

The results of our 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 losses from unconsolidated subsidiaries. U.S. Mortgage Insurance Operations’ results are summarized in the table below.

	Three Months Ended March 31,
	2011			2010			Percentage Change
	(Dollars in millions)
Net premiums written	$	124.1		$	150.9			(17.8	)%
Premiums earned	$	119.0		$	151.6			(21.5	)%
Net investment income		16.1			25.0			(35.6	)%
Equity in losses from unconsolidated subsidiaries		(1.4	)		(4.3	)		67.4	%
Net realized investment (losses) gains		(0.1	)		7.2			(101.4	)%
Other income		1.9			—			—
Total revenues		135.5			179.5			(24.5	)%
Losses and LAE		239.0			341.5			(30.0	)%
Underwriting and operating expenses		29.2			34.0			(14.1	)%
Interest expense		3.2			—			—
Total losses and expenses		271.4			375.5			(27.7	)%
Loss before income taxes		(135.9	)		(196.0	)		(30.7	)%
Income tax expense (benefit)		0.4			(74.2	)		100.5	%
Net loss	$	(136.3	)	$	(121.8	)		11.9	%

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 net premiums written, net of changes in unearned premiums and the reserve for premium refunds. The components of PMI’s net premiums written and premiums earned are as follows:

	Three Months Ended March 31,						Percentage
	2011			2010			Change
	(Dollars in millions)
Direct premiums written, net of refunds	$	151.0		$	184.9			(18.3	)%
Ceded premiums, net of assumed		(26.9	)		(34.0	)		(20.9	)%
Net premiums written	$	124.1		$	150.9			(17.8	)%
Premiums earned	$	119.0		$	151.6			(21.5	)%

The decrease in direct premiums written and premiums earned in the first quarter of 2011 compared to the first quarter of 2010 was driven by lower policies in force due in part to low levels of NIW, higher premium refunds and a $17.8 million increase in the premium refund reserve from year end. The increase in the premium refund reserve was due primarily to an increase in estimated refunds related to rescissions and claim related payments. The decrease in ceded premiums in the first quarter of 2011 compared to the first quarter of 2010 was primarily due to commutations of certain XOL captive reinsurance agreements in 2010 and 2011 and XOL captives placed into runoff effective January 1, 2009. As of March 31, 2011, 40.3% of PMI’s primary risk-in-force was subject to captive reinsurance agreements compared to 46.6% as of March 31, 2010. See Conditions and Trends Affecting our Business – U.S. Mortgage Insurance Operations – Captives.

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Net investment income – Net investment income decreased in the first quarter of 2011 primarily due to lower average pre-tax book yields. The average pre-tax book yield in the first quarter of 2011 was lower than the first quarter of 2010 primarily due to our decision to liquidate certain tax-advantaged municipal bond and preferred stock securities which generally had higher average book yields. A significant majority of the proceeds were reinvested in taxable securities with lower average book yields.

Equity in earnings (losses) from unconsolidated subsidiaries — Equity in losses from unconsolidated subsidiaries (CMG MI) was $1.4 million in the first quarter of 2011 compared to $4.3 million in the first quarter of 2010. CMG MI’s losses were primarily due to elevated levels of unemployment and the continued weakness of the housing and mortgage markets. Declines in new notices of default drove CMG MI’s reduced losses when compared to the first quarter of 2010.

Net realized investment gains (losses) – Net realized investment losses in the first quarter of 2011 were driven by realized losses on the sale of certain common stock offset by realized gains on the sale of certain preferred stocks. Net realized investment gains in the first quarter of 2010 were driven primarily by sales of municipal bonds and sales of certain preferred stocks.

Losses and LAE — PMI’s total losses and LAE incurred includes net changes in the period to loss reserves on PMI’s delinquent loan inventories. Total losses and LAE also includes expenses related to default, loss mitigation and claim processing. Because losses and LAE includes changes to loss reserves, it incorporates our best estimate of PMI’s future claim payments and costs relating to PMI’s existing inventories of delinquent loans. PMI’s losses and LAE are shown in the following table.

	Three Months Ended March 31,				Percentage
	2011		2010		Change
	(Dollars in millions)
Losses incurred- primary	$	212.8	$	258.5		(17.7	)%
Losses incurred- pool		11.8		70.0		(83.1	)%
LAE and other		14.4		13.0		10.8	%
Total losses and LAE incurred	$	239.0	$	341.5		(30.0	)%
New primary notices of default		24,754		34,268		(27.8	)%

For a discussion of PMI’s losses and LAE, see Conditions and Trends Affecting our Business – U.S. Mortgage Insurance Operations – Losses and LAE, above. The decrease in primary losses incurred in the first quarter of 2011 was driven by lower new notices of default partially offset by additions to loss reserves as a result of re-estimations of reserves established at year end 2010. The decrease in pool losses incurred in the first quarter of 2011 was driven by the operation of contractual stop loss limits and modified pool contract restructurings in 2009 and 2010 which significantly reduced pool risk-in-force. As of March 31, 2011, we ceded $439.3 million in loss reserves primarily to captive reinsurers, which we record as reinsurance recoverables. Reinsurance recoverables do not exceed assets in captive trust accounts. As of March 31, 2011, assets in captive trust accounts held for the benefit of PMI totaled approximately $679.0 million, before quarterly net settlements. See Conditions and Trends Affecting our Business – U.S. Mortgage Insurance Operations – Captives.

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Claims paid – PMI’s claims paid including LAE is presented below:

	Three Months Ended March  31,				Percentage
	2011		2010		Change
	(Dollars in millions, except claim size)
Total primary claims paid	$	173.1	$	236.4		(26.8	)%
Total pool and other		16.6		21.4		(22.4	)%
Loss adjustment expenses		14.9		13.2		12.9	%
Total claims paid including LAE	$	204.6	$	271.0		(24.5	)%
Number of primary claims paid (1)		5,866		6,892		(14.9	)%
Average primary claim size (in thousands)	$	29.5	$	34.3		(14.0	)%

(1) Amount includes claims denials.

The decreases in the total and number of primary claims paid in the first quarter of 2011 compared to the first quarter of 2010 were driven by increases in the length of time required for claims processing and review and, to a lesser extent, foreclosure moratoriums instituted in the third quarter of 2010. Claims processing and review periods lengthened due to, among other factors, delays in servicers’ abilities to produce documents and perfect claims. The decrease in PMI’s average primary claim size in the first quarter of 2011 was driven by the increase in claim denials, which are counted in the total number of claims paid as zero dollar claim settlements.

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 installment 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 in default 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 delinquent roll forward is presented in the tables below.

	Three Months Ended March 31,
	2011			2010			Percentage Change
Number of policies
Beginning delinquent inventory, January 1		127,478			150,925			(15.5	)%
Plus: New notices		24,754			34,268			(27.8	)%
Less: Cures		(25,540	)		(29,565	)		(13.6	)%
Less: Paids (1)		(5,866	)		(6,892	)		(14.9	)%
Less: Rescissions		(1,078	)		(1,488	)		(27.6	)%
Ending delinquent inventory, March 31		119,748			147,248			(18.7	)%

(1) Claims paid are net of claim reversals and reinstatements.

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

	March 31,			December 31,			September 30,			June 30,			March 31,			December 31,
	2011			2010			2010			2010			2010			2009
Flow channel
Loans in default		98,408			104,303			107,978			113,438			120,665			122,365
Policies in force		535,026			547,505			562,164			577,040			591,079			606,240
Default rate		18.39	%		19.05	%		19.21	%		19.66	%		20.41	%		20.18	%
Structured channel
Loans in default		21,340			23,175			23,913			24,993			26,583			28,560
Policies in force		78,225			81,649			85,155			89,164			92,809			99,177
Default rate		27.28	%		28.38	%		28.08	%		28.03	%		28.64	%		28.80	%
Total primary
Loans in default		119,748			127,478			131,891			138,431			147,248			150,925
Policies in force		613,251			629,154			647,319			666,204			683,888			705,417
Default rate		19.53	%		20.26	%		20.37	%		20.78	%		21.53	%		21.40	%

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

	March 31,			December 31,			September 30,			June 30,			March 31,			December 31,
	2011			2010			2010			2010			2010			2009
Modified pool with deductible
Loans in default		3,572			3,981			4,023			4,186			10,573			35,661
Policies in force		31,406			32,938			34,375			36,974			59,699			129,472
Default rate		11.37	%		12.09	%		11.70	%		11.32	%		17.71	%		27.54	%
Modified pool without deductible
Loans in default		6,416			7,553			7,711			8,974			9,880			10,363
Policies in force		34,209			35,122			36,171			43,694			45,252			48,628
Default rate		18.76	%		21.51	%		21.32	%		20.54	%		21.83	%		21.31	%
Total modified pool
Loans in default		9,988			11,534			11,734			13,160			20,453			46,024
Policies in force		65,615			68,060			70,546			80,668			104,951			178,100
Default rate		15.22	%		16.95	%		16.63	%		16.31	%		19.49	%		25.84	%

The changes in PMI’s primary and modified pool default inventories in the first quarter of 2011 are discussed in Conditions and Trends Affecting our Business – U.S. Mortgage Insurance Operations – Defaults, above.

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

	Three Months Ended March 31,				Percentage Change
	2011		2010
	(Dollars in millions)
Amortization of deferred policy acquisition costs	$	4.2	$	3.9		7.7	%
Other underwriting and operating expenses		25.0		30.1		(16.9	)%
Total underwriting and operating expenses	$	29.2	$	34.0		(14.1	)%
Policy acquisition costs incurred and deferred	$	5.9	$	5.2		13.5	%

PMI’s policy acquisition costs are those costs that vary with, and are related to, our acquisition, underwriting and processing of new mortgage insurance policies. We defer policy acquisition costs when incurred and amortize these costs in proportion to estimated gross profits for each policy year. Policy acquisition costs incurred and deferred are variable and fluctuate with the volume of new insurance applications processed and NIW. PMI’s deferred policy acquisition cost asset was $48.1 million as of March 31, 2011 compared to $46.4 million as of December 31, 2010 and $42.6 million as of March 31, 2010.

Other underwriting and operating expenses generally consist of costs that are not attributable to the acquisition of new business and are recorded as expenses when incurred. Other underwriting and operating expenses decreased in the first quarter of 2011 compared to the first quarter of 2010 primarily due to the decrease in our payroll and related expense during the period.

Interest expense — The increase in interest expense in the first quarter of 2011 compared to the first quarter of 2010 was due to interest from the surplus notes issued by MIC to The PMI Group upon completion of the sale of convertible senior notes in the second quarter of 2010. The surplus notes have a principal balance of $285 million and pay interest at 4.50%.

Income taxes — U.S. Mortgage Insurance Operations’ statutory tax rate is 35%. U.S. Mortgage Insurance Operations had an effective tax rate of (0.3)% in the first quarter of 2011 due to an increase in our deferred tax valuation allowance in the third quarter of 2010. The income tax expense in the first quarter of 2011 was due to an increase in the reserve for uncertain tax positions currently under audit. The tax benefit recorded in the first quarter of 2010 in our U.S. Mortgage Insurance Operations segment primarily reflects tax benefits attributable to operating losses and tax exempt interest and dividends, resulting in an effective tax rate of 37.9%. Beginning in the third quarter of 2010, the Company has discontinued taking certain income tax benefits from current period losses and will continue to do so until such time management is able to demonstrate sufficient taxable income.

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

	As of March 31,						Variance
	2011			2010
Loss ratio		200.8	%		225.2	%		(24.4)	pps
Expense ratio		23.5	%		22.5	%		1.0	pps
Combined ratio		224.3	%		247.7	%		(23.4)	pps

PMI’s loss ratio is the ratio of losses and LAE to premiums earned. The loss ratio decreased in the first quarter of 2011 compared to the first quarter of 2010 as a result of lower losses and LAE, partially offset by a decrease in 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 first quarter of 2011 compared to the first quarter of 2010 was primarily due to decreases in net premiums written which were in excess of the reduction in total underwriting and operating expenses.

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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 March 31,						Percentage  Change/ Variance
	2011			2010
	(Dollars in millions)
Primary insurance in force	$	99,335		$	110,270			(9.9	)%
Primary risk in force		24,292			26,957			(9.9	)%
Pool risk in force*		591			884			(33.1	)%
Policy cancellations—primary (year-to-date)		3,846			4,388			(12.4	)%
Persistency—primary		83.5	%		84.9	%		(1.4	) pps

* Includes modified pool and other pool risk-in-force.

Primary insurance in force and risk-in-force decreased in the first quarter of 2011 compared to the first quarter of 2010 as a result of policy terminations exceeding NIW. See Conditions and Trends Affecting our Business—U.S. Mortgage Insurance Operations—NIW, above.

Modified pool risk-in-force as of March 31, 2011 was $0.3 billion compared to $0.3 billion as of December 31, 2010 and $0.6 billion as of March 31, 2010. The decrease in modified pool risk-in-force in the first quarter of 2011 from the first quarter of 2010 was primarily driven by the operation of contractual stop loss limits and modified pool contract restructurings. Pool risk-in-force is net of risk for which reserves have been established.

The table below sets forth the percentage of PMI’s primary risk-in-force as of March 31, 2011 and December 31, 2010 in the ten states with the highest risk-in-force as of March 31, 2011 in PMI’s primary portfolio and the reserve for losses and LAE associated with delinquent risk-in-force in those states. The geographic mix of our delinquent loan inventory is one of many factors we consider when estimating loss reserves. As we do not determine loss reserves based on a geographic location, the table below reflects an allocation of loss reserves based on such information. For a discussion of our loss reserve estimation process, see Critical Accounting Estimates – Reserves for Losses and LAE.

	As of March 31, 2011								As of December 31, 2010
	Percentage of Primary Risk in Force			Reserve for Losses and LAE		Reserves as a Percentage  of Total USMI Reserves			Percentage of Primary Risk in Force			Reserve for Losses and LAE		Reserves as a Percentage  of Total USMI Reserves
	(Dollars in thousands)								(Dollars in thousands)
Florida		9.5	%	$	542,278		19.0	%		9.6	%	$	558,437		19.6	%
Texas		8.1	%		100,611		3.5	%		8.0	%		98,945		3.5	%
California		7.4	%		306,494		10.7	%		7.4	%		305,147		10.7	%
Illinois		5.2	%		165,843		5.8	%		5.2	%		165,352		5.8	%
Georgia		4.6	%		112,690		4.0	%		4.6	%		111,082		3.9	%
New York		4.1	%		109,144		3.8	%		4.1	%		116,537		4.1	%
Ohio		4.0	%		66,929		2.3	%		4.0	%		68,714		2.4	%
Pennsylvania		3.5	%		55,422		1.9	%		3.5	%		56,359		2.0	%
New Jersey		3.4	%		105,501		3.7	%		3.3	%		106,886		3.8	%
Washington		3.3	%		76,962		2.7	%		3.3	%		72,048		2.5	%
Total				$	1,641,874		57.4	%				$	1,659,507		58.3	%

Credit and portfolio characteristics — In the first quarter of 2011, PMI did not write new insurance on less-than-A quality loans, Alt-A loans, Above-97s, interest only loans or payment option ARM loans. NIW consisting of ARMs (mortgage loans with interest rates that may adjust prior to their fifth anniversary) was insignificant in the first quarter of 2011.

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The table below presents PMI’s less-than-A quality, Alt-A, ARM, Above-97, interest only and payment option ARM loans as a percentage of primary risk-in-force and the associated reserve for losses and LAE associated with delinquent risk-in-force for each loan type. Loan and risk characteristics within PMI’s delinquent loan inventory are two of many factors we consider when estimating loss reserves. As we do not establish loss reserves based on these factors, the loss reserve amounts set out below have been allocated based on total delinquencies and also on the number of delinquencies associated with each risk characteristic.

	As of March 31, 2011								As of December 31, 2010
	Percentage of Primary Risk in Force			Reserve for Losses and  LAE		Reserves as a Percentage  of Total USMI Reserves			Percentage of Primary Risk in Force			Reserve for Losses and  LAE		Reserves as a Percentage  of Total USMI Reserves
Loan Type*:	(Dollars in thousands)								(Dollars in thousands)
Less-than-A Quality loans (FICO scores below 620)		6.5	%	$	272,180		9.5	%		6.5	%	$	281,806		9.9	%
Less-than-A Quality loans with FICO scores below 575**		1.7	%		81,135		2.8	%		1.7	%		84,816		3.0	%
Alt-A loans		15.0	%		846,373		29.6	%		15.3	%		872,683		30.7	%
ARMs (excluding 2/28 Hybrid ARMs)		6.5	%		377,127		13.2	%		6.7	%		388,197		13.6	%
2/28 Hybrid ARMs***		1.3	%		103,656		3.6	%		1.4	%		118,181		4.2	%
Above-97s (Above 97% LTV’s)		19.3	%		652,536		22.8	%		19.5	%		645,485		22.7	%
Interest Only		9.6	%		493,013		17.2	%		9.8	%		494,358		17.4	%
Payment Option ARMs		2.5	%		181,751		6.4	%		2.6	%		184,665		6.5	%

* Loan types are not mutually exclusive as certain loans may be included in one or more of the above loan categories. The total reserve for losses and LAE associated with all loan types listed above was $1.9 billion for the periods ended March 31, 2011 and December 31, 2010. Total reserves for losses and loss adjustment expenses for the U.S. Mortgage Insurance Operations’ segment were $2.9 billion and $2.8 billion for the periods ended March 31, 2011 and December 31, 2010, respectively.

** Less-than-A quality loans 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.

International Operations

International Operations’ results include continuing operations of PMI Europe and PMI Canada:

	Three Months Ended March 31,						Percentage Change
	2011			2010
	(USD in millions)
PMI Europe	$	0.2		$	0.5			(60.0	)%
PMI Canada		(1.1	)		(0.5	)		(120.0	)%
Net (loss) income*	$	(1.0	)	$	—			—

* May not total due to rounding.

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PMI Europe

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

	Three Months Ended March 31,				Percentage change
	2011		2010
	(USD in millions)
Net premiums written	$	0.8	$	0.6		33.3	%
Premiums earned	$	1.1	$	1.3		(15.4	)%
Net gains from credit default swaps		0.8		1.7		(52.9	)%
Net investment income		0.5		1.4		(64.3	)%
Net realized gains		—		0.4		(100.0	)%
Total revenues		2.4		4.8		(50.0	)%
Losses and LAE		1.0		0.4		150.0	%
Other underwriting and operating expenses		1.2		1.5		(20.0	)%
Total losses and expenses		2.2		1.9		15.8	%
Income before taxes		0.2		2.9		(93.1	)%
Income tax expense		—		2.4		(100.0	)%
Net income	$	0.2	$	0.5		(60.0	)%

The average USD/Euro currency exchange rate was 1.3696 for the first quarter of 2011 and 1.3837 for the first quarter of 2010. The changes in the average USD/Euro currency exchange rates from 2010 to 2011 did not significantly impact PMI Europe’s financial results in the first quarter of 2011.

Premiums written and earned — Net premiums written consist of quarterly and annual premiums due on insurance in force. Net premiums earned decreased in the first quarter of 2011 due to the decision in 2008 to cease writing new business in Europe and policy commutations. As PMI Europe’s insurance in force ages, premiums earned will continue to decline.

Net gains from credit default swaps — As of March 31, 2011, PMI Europe was a party to two CDS contracts classified as derivatives, compared to five transactions as of March 31, 2010. Net gains in the first quarters of 2011 and 2010 from CDS contracts were driven by changes in the fair value of derivative contracts during the period, resulting from income earned and the reversal of unrealized losses as the contracts age. Net gains from CDS contracts in the first quarter of 2010 were offset by $1.9 million as a result of an unrealized loss arising from the extension of the expected call dates on two of our risk remote CDS transactions.

Net investment income — PMI Europe’s net investment income consists primarily of interest income from cash and short-term investments and foreign exchange gains or losses arising from the revaluation of short-term monetary assets. The decrease in net investment income in the first quarter of 2011 compared to the first quarter of 2010 was primarily due to foreign currency remeasurement losses compared to foreign currency remeasurement gains in the first quarter of 2010. The pre-tax book yields were 3.1% and 2.8% as of March 31, 2011 and 2010, respectively.

Losses and LAE — Losses and LAE in the first quarter of 2011 were primarily driven by increased severity assumptions associated with the U.S. sub-prime reinsurance portfolio, partially offset by foreign exchange remeasurement gains on the portfolio. Losses and LAE in the first quarter of 2010 were primarily driven by reserve increases relating to new defaults in PMI Europe’s Italian mortgage insurance portfolio offset by reductions in loss estimates on our German transactions.

Underwriting and operating expenses — PMI Europe’s underwriting and operating expenses decreased in the first quarter of 2011 compared to the first quarter of 2010 due to the cessation of new business writings.

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Income taxes — There was no tax expense or benefit recorded for PMI Europe in the first quarter of 2011 as a valuation allowance of $5.6 million was established against deferred tax assets as it is “more likely than not” that such assets will not be utilized.

Risk-in-force — PMI Europe’s risk-in-force was $0.7 billion as of March 31, 2011 and December 31, 2010.

PMI Canada

PMI Canada’s net loss increased in the first quarter of 2011 compared to the first quarter of 2010 primarily as a result of higher losses and LAE on new defaults.

Corporate and Other

The results of our Corporate and Other segment include net investment income, interest expense, equity in earnings (losses) from certain limited partnership investments, and corporate overhead of The PMI Group, our holding company. Our Corporate and Other segment results are summarized as follows:

	Three Months Ended March 31,					Percentage Change
	2011		2010
	(Dollars in millions)
Net investment income	$	0.1	$	0.1			—
Equity in earnings (losses) from unconsolidated subsidiaries		0.1		(0.1	)		200.0	%
Change in fair value of certain debt instruments		21.7		(40.8	)		153.2	%
Total revenues (expenses)		21.9		(40.8	)		153.7	%
Share-based compensation expense		0.9		1.1			(18.2	)%
Other operating expenses		0.3		0.9			(66.7	)%
Total other operating expenses		1.2		2.0			(40.0	)%
Interest expense		10.3		9.5			8.4	%
Total expenses		11.5		11.5			—
Net income (loss) before income taxes		10.4		(52.3	)		119.9	%
Income tax benefit		—		(17.1	)		(100.0	)%
Net income (loss)	$	10.4	$	(35.2	)		129.5	%

Equity in earnings (losses) from unconsolidated subsidiaries — Equity in earnings from unconsolidated subsidiaries in the first quarter of 2011 was driven by limited partnership earnings. Equity in losses from unconsolidated subsidiaries in the first quarter of 2010 was driven by limited partnership losses.

Change in fair value of certain debt instruments – Fluctuations in our credit spreads drove the changes in fair value of our debt. In the first quarter of 2011 our total revenues were increased by $21.7 million as a result of the decreases in the fair value of our debt. These decreases in fair value were due largely to the widening of credit spreads in the period. In the first quarter of 2010 our total revenues were decreased by $40.8 million as a result of the increases in the fair value of our debt. These increases in fair value were due largely to the narrowing of credit spreads in the period.

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Share-based compensation expense — The decrease in share-based compensation expense in the first quarter of 2011 was primarily due to the completion of amortization of prior year grants offset by the amortization of the stock units and options granted in the first quarter of 2011 which were at a lower fair value than prior years.

Other operating expenses — Other operating expenses decreased in the first quarter of 2011 compared to the first quarter of 2010 primarily due to the decrease in deferred compensation expense.

Interest expense — Interest expense increased in the first quarter of 2011 as a result of the interest expense on our Convertible Notes issued in the second quarter of 2010.

Liquidity and Capital Resources

Sources and Uses of Funds

The PMI Group Liquidity — The PMI Group is a holding company and conducts its business operations through various subsidiaries. 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; (iii) maturing or refunded investments and investment income from The PMI Group’s investment portfolio; and (iv) receivables from MIC with respect to tax sharing agreements and regularly scheduled interest payments by MIC on the Surplus Notes, described below. The PMI Group’s ability to access dividend and financing 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. MIC did not pay dividends to The PMI Group in 2009 or 2010 and we do not expect that MIC will pay any dividends in 2011. We received a $45.7 million federal income tax refund in the first quarter of 2011. Of the $45.7 million, $7.3 million was allocated to The PMI Group and $38.4 million was allocated to the U.S. Mortgage Insurance Operations segment.

The PMI Group’s principal uses of liquidity are the payment of operating costs, principal and interest on its capital instruments, dividends to shareholders, repurchases of its common shares, purchases of investments, and capital investments in and for its subsidiaries. The PMI Group’s available funds, consisting of cash and cash equivalents and investments, were $70.7 million at March 31, 2011 compared to $79.1 million at December 31, 2010. We believe there is currently sufficient liquidity at the holding company to pay holding company expenses (including interest expense on its outstanding debt) through 2011. The PMI Group does not expect to pay any dividends in 2011.

Convertible Senior Notes due 2020 – In the second quarter of 2010, we completed a concurrent public offering of equity and debt, including the sale of $285 million aggregate principal amount of 4.50% Convertible Senior Notes due 2020 (“Convertible Notes”) and received aggregate net proceeds of approximately $732 million. Of these aggregate net proceeds, The PMI Group contributed approximately $610 million to MIC in the form of capital and two surplus notes with aggregate face amounts of $285 million (the “Surplus Notes”).

The terms of the Surplus Notes provide for interest, principal and redemption payments that are generally concurrent with and equivalent to the payment of interest, principal and redemptions with respect to the Convertible Notes or cash settlement of the Convertible Notes once such conversions exceed a specified level. All interest payments and principal repayments on the Surplus Notes and early redemption of the Surplus Notes are subject to the prior approval of the Department, which has issued a letter to PMI pre-approving regularly scheduled interest payments to The PMI Group on the Surplus Notes. The pre-approval may be rescinded by the Department at any time in its sole discretion.

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Credit Facility

In the second quarter of 2010, The PMI Group used $75 million of the net proceeds from its concurrent common stock and Convertible Notes offerings to pay down our credit facility from $124.8 million to $49.8 million. The maximum amount of the lenders’ commitments is $50.0 million. The credit facility matures on October 24, 2011 and will be reduced by the amount of any payment we receive in connection with the QBE Note (see below).

The QBE Note

In connection with the sale of PMI Australia, MIC received approximately $746 million in cash and a contingent note (the “QBE Note”) in the principal amount of approximately $187 million, with interest accruing through September 2011 when it matures and is payable. In May 2009, The PMI Group purchased the QBE Note from MIC. The actual amount owed under the QBE Note is subject to reduction to the extent that the sum of (i) claims paid between June 30, 2008 and June 30, 2011, with respect to PMI Australia’s policies in force at June 30, 2008, (ii) increases in reserves with respect to such policies at June 30, 2011 as compared to June 30, 2008 and (iii) projected ultimate unpaid losses in excess of such reserves as of June 30, 2011 (together, the “ultimate projected losses”) exceeds $237.6 million (50% of the unearned premium reserve of such policies at June 30, 2008). Based on the information made available to us on the performance of such PMI Australia policies through March 31, 2011, we do not currently expect that ultimate projected losses with respect to such policies will exceed $237.6 million. However, we have not yet received the report prepared by an independent actuary for the quarter ended March 31, 2011 (as described below). The last such report that we received was for the period ended December 31, 2010. The ultimate performance of the PMI Australia policies will depend, among other things, on the performance of the Australian housing market and economy and other factors that are beyond our control and difficult to predict.

We pledged the QBE Note to the lenders under the credit facility. Under the terms of the credit facility, the size of the credit facility will be reduced by the amount necessary to cause the aggregate commitment of the lenders to be equal to or less than 80% of the estimated value of the QBE Note determined from time to time pursuant to procedures set forth in the credit facility. Under these procedures, the value of the QBE Note is subject to reduction on account of losses that reduce the amount of the QBE Note pursuant to the agreement with QBE as described above. In addition, under the credit facility, we are required to provide the lenders with quarterly reports, prepared by an independent actuary, with respect to the estimated loss performance of PMI Australia’s insurance policies as of June 30, 2008, pending the ultimate determination of the amount, if any, by which the QBE Note will be reduced. The credit facility requires that for purposes of determining the commitment under the credit facility, the value of the QBE Note will be reduced to the extent that such a quarterly report forecasts that ultimate projected losses will exceed $237.6 million. In the exercise of its professional judgment, we expect that the independent actuary will consider a variety of factors, including its expectations as to the performance of the Australian housing market and economy and their effect on the loss performance of such insurance policies. To date, such reports (the latest one being issued for the quarter ended December 31, 2010) have not resulted in a decrease in the value accorded to the QBE Note for purposes of the credit facility.

Dividends to The PMI Group

MIC’s ability to pay dividends to The PMI Group is affected by state insurance laws, credit agreements, rating agencies, the discretion of insurance regulatory authorities and our agreements with Fannie Mae and Freddie Mac relating to PMAC. The laws of Arizona, MIC’s state of domicile for insurance regulatory purposes, provide that MIC may pay dividends out of any available surplus account, without prior approval of the Director of the Arizona Department of Insurance (“Arizona Director”), 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 Arizona Director. We do not anticipate that MIC will pay any dividends to The PMI Group in 2011.

Other states may also limit or restrict MIC’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. MIC’s ability to pay dividends is also subject to restriction under the terms of a runoff support agreement with Allstate Insurance Company (“Allstate”), described below under Capital Constraints.

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MIC’s ability to pay dividends is also limited by the terms of our agreements with the GSEs relating to PMAC. Under the agreements, MIC may not, without the GSEs’ prior written consent, pay dividends or make distributions or payments of indebtedness outside the ordinary course of business or in excess of specified levels. Notwithstanding these restrictions, our agreements with Fannie Mae and Freddie Mac permit MIC to make dividend, interest and principal payments in connection with the issuance of certain new debt or equity instruments up to specified levels.

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, interest payments on the Surplus Notes, dividends to The PMI Group and the growth of its investment portfolio. The principal sources of U.S. Mortgage Insurance Operations’ liquidity are the investment portfolio, including cash and cash equivalents, written premiums, net investment income and capital contributed from its parent (TPG).

International Operations Liquidity — The principal uses of this segment’s liquidity are the payment of operating expenses, claim payments, taxes and returns of capital. The principal sources of this segment’s liquidity are written premiums, investment maturities and net investment income.

Capital Constraints

There remains significant uncertainty as to the ultimate level and timing of PMI’s losses from its existing insurance portfolio. As a result of continuing losses, we expect that in the second quarter of 2011, MIC’s policyholders’ position will decline below the minimum, and its risk-to-capital will increase above the maximum, levels necessary to meet state regulatory capital adequacy requirements. As of March 31, 2011, MIC’s excess minimum policyholders’ position was $39.2 million and risk-to-capital ratio was 24.4 to 1. Our future losses and MIC’s ability to meet capital adequacy requirements 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 claim rates and losses and LAE;

• levels of new insurance written;

• GSEs’ and rating agencies’ requirements and determinations;

• performance of our investment portfolio and the extent to which issuers of fixed-income securities that we own default on principal and interest payments or the extent to which we are required to impair portions of the portfolio as a result of deteriorating capital markets;

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

• the performance of PMI Europe, which is affected by the U.S. and European mortgage markets; and

• any requirements to provide capital under the PMI Europe or CMG MI capital support agreements (discussed under Capital Support Obligations below).

If it were to be enforced by a court of final appeal or applicable regulator, the terms of a 1994 Allstate runoff support agreement restrict MIC in the event that its risk-to-capital ratio exceeds 23 to 1. Under the runoff support agreement, among other things, MIC may not declare or pay dividends at any time that its risk-to-capital ratio equals or exceeds 23 to 1 or if such a dividend would cause its risk-to-capital ratio to equal or exceed 23 to 1. In addition, if MIC’s risk-to-capital ratio equals or exceeds 23 to 1 at three consecutive monthly measurement dates,

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MIC may not enter into new insurance or reinsurance contracts without the consent of Allstate. Following such time as MIC’s risk-to-capital ratio were to exceed 24.5 to 1, the runoff support agreement requires MIC to transfer substantially all of its liquid assets to a trust account for the payment of MIC’s obligations to policyholders, therefore negatively affecting MIC’s and The PMI Group’s liquidity position. The original risk-in-force on policies covered under the Allstate runoff support agreement has been reduced from approximately $13 billion in 1994 to approximately $31.9 million as of March 31, 2011 (0.3% of the original risk-in-force).

Consolidated Contractual Obligations

Our consolidated contractual obligations include reserves for losses and LAE, long-term debt obligations, credit default swap 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, $2.7 million of additional equity in certain limited partnership investments.

Consolidated Investments

Net Investment Income

Net investment income consists of:

	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Fixed income securities	$	16,070		$	23,619
Equity securities		1,695			3,101
Short-term investments, cash and cash equivalents and other		(197	)		817
Investment income before expenses		17,568			27,537
Investment expenses		(846	)		(849	)
Net investment income	$	16,722		$	26,688

The decrease in net investment income in the first quarter of 2011 compared to the first quarter of 2010 was primarily due to lower average pre-tax book yields. Our consolidated pre-tax book yield was 2.4% and 3.0% as of March 31, 2011 and 2010, respectively. The decline in our consolidated pre-tax book yield was primarily due to our decision to liquidate the majority of our tax-advantaged municipal bond and preferred stock securities which generally had higher average book yields. A significant majority of the proceeds were reinvested in taxable securities with lower average book yields. The negative net investment income related to short-term investments, cash and cash equivalents and other for the first quarter of 2011 was primarily due to foreign exchange remeasurement losses on U.S. denominated short-term monetary assets in PMI Europe arising from the strengthening of the Euro against the U.S. dollar.

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Net Realized Investment Gains (Losses)

Net realized investment gains (losses) on investments are composed of:

	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Fixed income securities:
Gross gains	$	99		$	5,758
Gross losses		(14	)		(1,381	)
Net gains		85			4,377
Equity securities:
Gross gains		248			3,492
Gross losses		(392	)		(148	)
Net (losses) gains		(144	)		3,344
Short-term investments:
Gross losses		(22	)		(288	)
Net losses		(22	)		(288	)
Net realized investment (losses) gains before income taxes		(81	)		7,433
Income tax expense		—			2,602
Total net realized investment (losses) gains after income taxes	$	(81	)	$	4,831

We realized investment losses in the first quarter of 2011 primarily from the realized losses on the sale of a certain common stock distribution from a limited partnership offset by realized gains on the sale of certain preferred stocks. Net realized investment gains for the first quarter of 2010 resulted primarily from sales of municipal bonds and preferred stocks.

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Investment Portfolio by Operating Segment

The following table summarizes the estimated fair value of the consolidated investment portfolio as of March 31, 2011 and December 31, 2010. 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.

	U.S.  Mortgage Insurance Operations		International Operations		Corporate and Other		Consolidated Total
	(Dollars in thousands)
March 31, 2011
U.S. Municipal bonds	$	216,406	$	—	$	—	$	216,406
Foreign governments		134,444		18,723		—		153,167
Corporate bonds		1,144,855		93,008		—		1,237,863
FDIC corporate bonds		168,463		20,563		—		189,026
U.S. governments and agencies		310,715		10,860		—		321,575
Asset-backed securities		219,781		567		—		220,348
Mortgage-backed securities		332,770		—		1,864		334,634
Total fixed income securities		2,527,434		143,721		1,864		2,673,019
Equity securities:
Common stocks		27,235		—		—		27,235
Preferred stocks		113,492		—		—		113,492
Total equity securities		140,727		—		—		140,727
Short-term investments		17,535		24		—		17,559
Total investments	$	2,685,696	$	143,745	$	1,864	$	2,831,305
	U.S. Mortgage Insurance Operations		International Operations		Corporate and Other		Consolidated Total
	(Dollars in thousands)
December 31, 2010
U.S. Municipal bonds	$	220,111	$	—	$	—	$	220,111
Foreign governments		135,198		17,141		—		152,339
Corporate bonds		1,127,275		104,542		—		1,231,817
FDIC corporate bonds		169,169		11,601		—		180,770
U.S. governments and agencies		310,713		12,410		—		323,123
Asset-backed securities		220,872		—		—		220,872
Mortgage-backed securities		320,342		—		1,832		322,174
Total fixed income securities		2,503,680		145,694		1,832		2,651,206
Equity securities:
Common stocks		30,664		—		—		30,664
Preferred stocks		120,421		—		—		120,421
Total equity securities		151,085		—		—		151,085
Short-term investments		17,843		24		—		17,867
Total investments	$	2,672,608	$	145,718	$	1,832	$	2,820,158

Our consolidated investment portfolio holds primarily investment grade securities comprised of readily marketable fixed income and equity securities. The fair value of these securities in our consolidated investment portfolio remained constant at $2.8 billion from December 31, 2010 to March 31, 2011.

Our consolidated investment portfolio consists primarily of publicly traded corporate bonds, U.S. and foreign government bonds, municipal bonds, mortgage-backed securities, asset-backed securities and preferred stocks. Our investment policies and strategies are subject to change depending on regulatory, economic and market conditions and our financial condition and operating requirements, including our tax position.

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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 March 31, 2011:

	U.S. Mortgage Insurance Operations			International Operations			Corporate and Other			Consolidated Total
AAA or equivalent		49	%		49	%		100	%		50	%
AA		17	%		16	%		—			17	%
A		27	%		30	%		—			26	%
BBB		7	%		5	%		—			7	%
Total		100	%		100	%		100	%		100	%

As of March 31, 2011, approximately $115.9 million, or 3.8% of our consolidated investment portfolio (including cash and cash equivalents, excluding common stocks) was insured by monoline financial guarantors. The financial guarantors include AMBAC, NPFG, FGIC, AGC, AGMC and others.

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 March 31, 2011, 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.

	U.S. Mortgage Insurance Operations			International Operations			Corporate and Other			Consolidated Total
AAA or equivalent		48	%		49	%		100	%		50	%
AA		17	%		16	%		—			16	%
A		28	%		30	%		—			27	%
BBB		7	%		5	%		—			7	%
Total		100	%		100	%		100	%		100	%

Capital Support Obligations

MIC has a capital support agreement with PMI Europe, with a corresponding guarantee from The PMI Group, under which MIC may be required to make additional capital contributions from time-to-time as necessary to maintain PMI Europe’s minimum capital requirements. Under the PMI Europe capital support agreement, MIC also guarantees timely payment of PMI Europe’s obligations. MIC also has a capital support agreement whereby it agreed to contribute funds, under specified conditions, to maintain CMG MI’s risk-to-capital ratio (as defined in the agreement) at or below 23 to 1. MIC’s obligation under the CMG MI capital support agreement is limited to an aggregate of $37.7 million. As of March 31, 2011, CMG MI’s risk-to-capital ratio was 19.8 to 1. MIC also has a capital support agreement with PMI Canada. We believe it is unlikely that there is any remaining material support obligation under this agreement.

Cash Flows

With respect to our holding company, our principal sources of funds are cash flows generated by our 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. We believe that we currently have sufficient liquidity at our holding company to pay holding company expenses (including interest expense on our outstanding debt) through 2011. The PMI Group currently has sufficient funds or other sources of liquidity to enable it to repay our credit facility if the obligation is required to be repaid prior to maturity.

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Consolidated cash flows used in operating activities, including premiums, investment income, underwriting and operating expenses and losses, were $33.4 million in the first quarter of 2011 compared to consolidated cash flows used in operating activities of $108.3 million in the first quarter of 2010. Cash flows used in operations decreased in the first quarter of 2011 compared to the first quarter of 2010 primarily due to lower levels of claim payments from PMI. We expect cash flows from operating activities to be negatively affected throughout 2011 due to payment of claims from loss reserves recorded by PMI in 2008, 2009 and 2010, the continued reduction in premiums earned (which is driven by lower premiums written) due to the continued decline of insurance in force, and the decline in net investment income due to lower investment balances and lower investment yields.

Consolidated cash flows used in investing activities in the first quarter of 2011, including purchases and sales of investments and capital expenditures, were $24.8 million compared to consolidated cash flows provided by investing activities of $282.4 million in the first quarter of 2010. Cash flows used in investing activities increased in the first quarter of 2011 compared to cash flows provided by investing activities in the first quarter of 2010 due primarily to proceeds from sales of fixed income and equity securities being less than purchases of investment securities. We expect to continue to maintain significant cash and cash equivalents available to pay current and future obligations.

Consolidated cash flows provided by financing activities were $0.3 million in the first quarters of 2011 and 2010. No significant financing activities took place in the first quarters of 2011 and 2010.

Ratings

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

	Standard & Poor’s		Moody’s		Fitch
Financial Strength Ratings
PMI Mortgage Insurance Co.		B+		B2		NR
CMG MI		BBB		NR		BBB

Ratings assigned to our holding company or its debt are set out below.

	Holding Company Ratings
	Standard &  Poor’s Counterparty Credit Rating	Moody’s Senior Unsecured Debt Rating	Fitch Senior Unsecured Debt Rating
The PMI Group, Inc.	CCC+	Caa2	NR

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 or our holding company or its debt will not be downgraded in the future. If our wholly-owned insurance subsidiaries are downgraded by one or more rating agencies, our business could be adversely affected. If our holding company or its debt is downgraded by one or more rating agencies, we could face an increased challenge in securing external sources of financing.

CRITICAL ACCOUNTING ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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 (“GAAP”). 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.

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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 or loss. The process of estimating loss reserves requires us to forecast interest rate, employment and housing market environments, which are highly uncertain. Therefore, the process requires significant management judgment and estimation. The use of different estimates would have resulted in the establishment of different reserves. In addition, changes in the accounting estimates are 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 losses and LAE reserves, as determined by our actuaries, and recorded reserves for losses and LAE (gross of recoverables) as of March 31, 2011 and December 31, 2010 by segment and on a consolidated basis:

	As of March 31, 2011						As of December 31, 2010
	Low		High		Recorded		Low		High		Recorded
	(Dollars in millions)						(Dollars in millions)
U.S. Mortgage Insurance Operations	$	2,435.0	$	3,385.0	$	2,860.6	$	2,335.0	$	3,285.0	$	2,846.6
International Operations		18.7		35.9		25.8		17.2		33.1		23.2
Consolidated loss and LAE reserves*	$	2,453.7	$	3,420.9	$	2,886.4	$	2,352.2	$	3,318.1	$	2,869.8

* May not total due to rounding.

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 (“IBNR”) to PMI by its customers. 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 and unemployment. We also evaluate various scenarios representing possible losses and LAE under different economic assumptions.

Our actuaries utilize a number of generally recognized actuarial projection methodologies in order to determine a single point estimate of loss reserves. The actuarial reviews and documentation are completed in accordance with professional actuarial standards with reserves established on a basis consistent with GAAP. The selected assumptions reflect the actuary’s judgment based on historical data and experience combined with information concerning current underwriting, economic, judicial, regulatory and other influences on ultimate claim settlements.

The lead methodology our actuaries use is a frequency-severity method based on the inventory of pending delinquencies. The frequency-severity method is preferable when there have been significant changes in established historical patterns of losses, as is the case in the recent and current credit cycle. In using this method, our actuaries can optimize results by utilizing our knowledge of the number of delinquent loans and the coverage amounts (“risk size”) on those loans. The delinquencies are grouped by the year in which they were reported to

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PMI (“report year”). A claim rate is then developed for each report year, which represents an estimate of the frequency with which the delinquencies may become claims. The claim rates are based on an analysis of the patterns of emerging cure counts and claim counts for the report year, the foreclosure status of the pending delinquencies, the product and geographical mix of the delinquencies and the actuaries’ views of future economic and claim conditions. The actuaries estimate the severity of projected claims by examining the risk sizes on the delinquent loans and estimating the portion of the coverage that will be paid, as well as any expenses. The actuaries’ estimation of the portion of coverage paid is based on a review of historical data and an assessment of economic conditions and consideration of the opportunities for loss mitigation techniques, various expenses claimable by insureds and the level of equity the borrowers may have in their homes.

In addition to the frequency-severity method, our actuaries use various chain-ladder methods utilizing actual loss amounts and expected patterns of loss emergence to determine an estimate of ultimate losses. These methods may be appropriate when there is a relatively stable pattern of loss emergence. Chain-ladder techniques are less suitable in cases in which the insurer does not have a developed claims history. In the chain-ladder technique, the ultimate value of a claim count, paid loss amount or other amount is estimated by applying a loss development factor to the current value. The loss development factor measures the portion of the loss emergence pattern that has been completed and extends the current amount to its ultimate value. The difference between the ultimate value and the current value is the amount carried in the loss reserve. The emergence pattern used in this technique is based on an analysis of historical patterns of emergence from prior report years.

Management believes the amounts recorded for U.S. Mortgage Insurance Operations as of March 31, 2011 represent the most likely outcome within the actuarial range. The recorded reserves, slightly below the midpoint of the actuarially-determined reserve range, are based upon, among many considerations, management’s estimates of claim rates and claim sizes. As discussed below, projected future loss mitigation, rescission and claim denial activity continue to positively affect management’s views of future claim rates and claim sizes. In the first quarter of 2011, however, fewer than expected cures of delinquent loans and loan modifications negatively affected management’s claim rate assumptions on notices of defaults received in 2010. In addition, management increased its estimation of future reinstatements of previously denied claims. This re-estimation negatively affected our IBNR reserves.

Loss mitigation activity and loss reserves. Our projection of future modifications of delinquent insured loans is a factor in management’s evaluation of the selected claim rate. We continue to expect that a material percentage of loans in our delinquent loan inventory will be modified or become current, and management’s loss reserve estimation process takes into consideration this expectation. Because the age of a delinquency is a primary factor in determining whether a loan is likely to modify and become current in the future, management develops its projections of future modifications of existing delinquent loans based on the year in which we received the notice of default (an “NOD report year”). Within each NOD report year, management divides the pending delinquent loans into various categories depending on their relative probabilities of modifying and curing in the future. To develop the categories and probabilities, management assesses numerous factors, including servicer reports on the stages of retention and liquidation workouts and forbearance arrangements; management’s assessment of loans in our default inventory that may have the potential to qualify for an available modification plan, including HAMP; and historical modification data and trends. As of March 31, 2011, we forecast that approximately 19% of our primary delinquent loan inventory will cure as a result of future loan modifications. The estimated amount of risk-in-force associated with this percentage was approximately $1.0 billion.

Management does not include a re-default assumption within its loss reserve estimates related to loan modifications. As loan modifications have the effect of curing the underlying default, successfully modified loans are removed from PMI’s delinquent loan inventory and, therefore, cease to be included in our loss reserve estimates. This is consistent with our loss reserving methodology of not establishing loss reserves for future claims on insured loans that are not currently in default and establishing reserves only with respect to loans currently identified as in default. We treat a subsequent re-default of a modified loan as a new default in the period it is reported to us and a reserve is established through our normal loss reserving process.

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Rescission activity and loss reserves. Our projection of future rescission activity with respect to the current inventory of delinquent loans has reduced and continues to materially reduce our loss reserve estimates. In each reporting period, management estimates the future rescission rate on the then existing inventory of delinquent loans. An increase in management’s estimate of the future rescission rate in a period would increase the reserve benefit, while a reduction in the estimated future rescission rate and actual rescission activity in a period would reduce the recognized benefit. Management’s estimate is based upon historical data and trends, including past percentages of delinquent loans rescinded, and other factors, including the characteristics and age of the delinquent loan inventory and the current inventory of loan files under or scheduled for investigation. In this estimation process, we also consider that we will in the future reinstate a portion of the policies subject to future rescission activity following requests by lenders for reconsideration or challenges of our rescission decisions. (For a discussion of our rescission reconsideration process, see Conditions and Trends Affecting our Business – U.S. Mortgage Insurance Operations – Rescission Activity and Claim Denials.) Accordingly, in our forecasting, we utilize an estimate of future rescissions net of estimated reinstatements. Our practice of projecting reinstatements has been refined over time as we gain further actual experience and utilizes, among other things, our experience of the cumulative incidence of rescission reinstatements that have also become paid claims and our views of likely future trends.

As of March 31, 2011 and December 31, 2010, our loss reserves balances were reduced by reserve benefits of approximately $0.23 billion and $0.28 billion, respectively, as a result of estimated future rescission activity (net of estimated reinstatements). The decrease in the reserve benefit in the first quarter of 2011 was driven by actual rescission activity (net of reinstatements) in the quarter of approximately $59 million. This rescission activity reduced the reserve benefit in the quarter but did not impact our first quarter 2011 consolidated statement of operations. The $59 million reduction was partially offset by an increase in the reserve benefit of approximately $12 million related to mix shifts in estimated future rescission activity, which had a positive impact on losses and LAE for the quarter.

As a result of our rescission reconsideration process, management also expects that PMI will reinstate coverage in the future on a portion of previously rescinded policies subject to requests by lenders that we reconsider our rescission. At any point in time, we have pending requests or challenges from lenders with respect to which we have not completed our reconsideration of our rescission decision. Based on our historical experience, we estimate the portion of policies that we expect to reinstate after our reconsideration is complete, and take such estimate into account in establishing our IBNR reserves. In the quarters ended March 31, 2011 and 2010, we reinstated approximately $22.8 million and $14.5 million, respectively, of previously delinquent rescinded risk. We increased our IBNR reserve by approximately $1.9 million in the first quarter of 2011 related to our change in estimates of future reinstatements of rescissions, which negatively impacted our losses and LAE for the quarter. With respect to loans as to which we have determined not to reinstate coverage, we do not include a reserve in our IBNR and loss reserves for the possibility that we may be unsuccessful in defending our rescissions in litigation or other dispute resolution processes.

Our investigation and rescission reconsideration processes require detailed reviews of loan level origination files, which are time and resource intensive. As a result, during any reporting period, we maintain inventories of: (i) loan files identified for investigation or files which are being investigated; and (ii) requests for PMI to reconsider its previous rescissions of coverage which are under review by PMI. We review the size and characteristics of these inventories in detail when we project future rescission and rescission reinstatement activity. In 2010, these inventories declined, thereby reducing our projected future rescission and rescission reinstatement activity.

Claim denials and loss reserves. Our projection of future claim denial activity with respect to the current inventory of delinquent loans has reduced, and is continuing to reduce, our loss reserve estimates. An increase in our estimate of future claim denial activity in a period would increase the reserve benefit, while a reduction in our estimate of future claim denial activity and actual claim denial activity in a period would reduce the recognized reserve benefit. Historically, the significant majority of claim denials resulted from the inability of servicers to produce documents necessary to perfect the claim (“documentation claim denials”). Management’s estimate of future documentation claim denials on the existing inventory of delinquent loans is based upon historical document claim denial data and trends, and the performance of various servicers of loans within the delinquent loan inventory. In arriving at its estimate, management also estimates the percentage of future documentation claim denials that will later be reversed, and therefore paid, as a result of the servicer ultimately providing to PMI the required loan or claim documentation. In considering future reversal rates, management reviews historical reversal data by particular servicers.

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As of March 31, 2011 and December 31, 2010, our loss reserves balances were reduced by approximately $0.52 billion and $0.49 billion, respectively, by our estimated future claim denial activity (net of estimated reversals of claim denials). This increase in the reserve benefit in the first quarter of 2011 was driven by an increase in our estimates of future claim denials related to existing notices of defaults by approximately $127 million which had a positive impact on losses and LAE for the quarter. This increase in reserve benefit in the first quarter of 2011 was partially offset by approximately $102 million related to actual claim denials, net of reversals of claim denials, occurring in the quarter. This $102 million reduction to the reserve benefit did not impact our first quarter 2011 consolidated statement of operations. See Item 1A. Risk Factors – Claim denials may not materially reduce our loss reserve estimates at the same levels as we expect, and our loss reserves will increase if future claim denial activity is lower than projected or if we reverse claim denials beyond expected levels.

Our estimate of future reversals of claims previously denied is one of the components of PMI’s IBNR reserve. The methodology we used to estimate future reversals of claims previously denied was similar to our rescission reversal estimate process described above. The amounts of risk related to previously denied claims that were subsequently reversed were $96.0 million and $36.9 million for the three months ended March 31, 2011 and 2010, respectively. In the first quarter of 2011, management increased its estimate of future reversals of previously denied claims resulting in an increase in the IBNR reserve and a negative impact on losses and LAE of approximately $91.9 million. This increase in estimate was driven by recent increases in the frequency of servicers’ production of previously requested loan documentation on denied claims.

Beginning in 2010, claim denials also included claims denied or curtailed as a result of servicers’ failure to, among other things, adhere to customary servicing standards applicable to delinquent loans (“servicer-related claim denials”). We expect the number of servicer-related claim denials to increase significantly in 2011. Beginning in the fourth quarter of 2010, we assessed the likelihood and estimated the impact of servicer-related claim denials on our loss reserves. In this process, we considered our internal reviews of various servicers’ performance as well as our review of specific claim files for which we identified potential servicing failures, but had not denied as of the balance sheet date. Based upon these reviews, we established a preliminary estimate of the potential future benefit of servicer-related claim denials. However, due to a lack of substantial historical data, we significantly limited this potential future benefit at the time of recording our loss reserves as of December 31, 2010 and March 31, 2011. The benefit recorded in our loss reserve estimate, net of estimated reversals, was limited to the actual claims files which were reviewed and met our criteria for denial, but for which the claim denial had not yet been processed as of the balance sheet date. As we develop additional data and experience, we may be able to increase our estimate of the future net benefit for servicer-related claim denials within our loss reserves. As with documentation claim denials, our servicer-related denial estimates include assumptions relating to the percentage of denials that will later be reversed and paid. In considering future reversal rates, we reviewed, among other things, historical reversal data related to documentation claim denials.

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The table below provides a reconciliation of our U.S. Mortgage Insurance Operations’ beginning and ending reserves for losses and LAE for the quarters ended March 31, 2011 and 2010:

	2011			2010
	(Dollars in millions)
Balance at January 1	$	2,846.6		$	3,138.3
Reinsurance recoverables		(459.7	)		(703.6	)
Net balance at January 1		2,386.9			2,434.7
Losses and LAE incurred (principally with respect to defaults occuring in):
Current year		177.4			291.0
Prior years		61.6			50.5
Total incurred		239.0			341.5
Losses and LAE payments (principally with respect to defaults occuring in):
Current year		—			(3.3	)
Prior years		(204.6	)		(267.6	)
Total payments		(204.6	)		(270.9	)
Net balance at March 31		2,421.3			2,505.3
Reinsurance recoverables		439.3			666.3
Balance at March 31	$	2,860.6		$	3,171.6

The above loss reserve reconciliation shows the components of our losses and LAE reserve changes for the periods presented. Losses and LAE payments of $204.6 million and $270.9 million for the three months ended March 31, 2011 and 2010, respectively, reflect amounts paid during the periods presented and are not subject to estimation. Total losses and LAE incurred of $239.0 million and $341.5 million for the three months ended March 31, 2011 and 2010, respectively, are management’s best estimates of ultimate losses and LAE on our existing delinquent loan inventory and are subject to change in subsequent periods. The $177.4 million of total losses and LAE incurred with respect to defaults occurring in the current quarter for the three months ended March 31, 2011 was lower than total losses and LAE incurred with respect to defaults reported in the first quarter of 2010 as a result of lower levels of new notices of defaults. In the first quarter of 2011, our rescission and claim denial estimates with respect to defaults reported during the first three months of 2011 did not significantly change. The changes in our estimates are principally reflected in the “Losses and LAE incurred” line items related to prior years of $61.6 million and $50.5 million for the three months ended March 31, 2011 and 2010, respectively.

The table below provides the changes in reserves related to prior years by particular accident years for the three months ended March 31, 2011 and 2010, respectively:

	Losses and LAE Incurred								Change in Incurred
Accident Year (year in which default occurred)	March 31, 2011		December 31, 2010		March 31, 2010		December 31, 2009		3/31/11 vs. 12/31/10			3/31/10 vs. 12/31/09
	(Dollars in millions)
2002 and prior	$	—	$	—	$	—	$	—	$	(0.3	)	$	0.1
2003		224.6		224.8		226.6		226.5		(0.2	)		0.1
2004		239.0		239.2		241.1		241.0		(0.2	)		0.1
2005		270.1		270.9		271.7		271.5		(0.8	)		0.2
2006		419.6		420.1		414.1		413.3		(0.5	)		0.8
2007		1,196.6		1,201.9		1,117.0		1,111.7		(5.3	)		5.3
2008		1,954.2		1,942.7		1,819.6		1,799.8		11.5			19.8
2009		1,659.5		1,598.7		1,526.2		1,502.1		60.8			24.1
2010		923.6		927.0		—		—		(3.4	)		—
2011		177.4		—		—		—		—			—
Total									$	61.6		$	50.5

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	Q1 2011		Q1 2010
	(Dollars in millions)
Primary insurance portfolio:	$	58.7	$	(4.9	)
Pool insurance portfolio:		2.9		55.4
Changes in reserves related to prior years	$	61.6	$	50.5

The $61.6 million and $50.5 million increases related to prior years’ reserves in the first quarters of 2011 and 2010 were due to increasing the IBNR reserves and re-estimations of ultimate claim rates and claim sizes from those established at the original notices of defaults, updated through the periods presented.

Many of the key assumptions used to develop our reserve estimates are inter-related and inter-dependent, including claim rates, our estimated rates of future rescission and claim denial activity on delinquent loans, and our estimated claim severity, among other assumptions. Such interdependencies make it difficult to isolate and quantify the effects of changes in individual factors. The principal drivers of changes in prior year development typically relate to our claim rate (including our estimated rate of rescissions), and our estimated claim size (including estimated future claim denials).

The $58.7 million net increase in prior years’ reserves in the first quarter of 2011 related to our primary portfolio was driven by increases in claim rates, representing a reserve increase of approximately $23.0 million, an increase to our IBNR reserve related to changes in estimates of future reinstatements of claim denials, representing a reserve increase of approximately $91.9 million, partially offset by decreases in claim sizes, representing a reserve decrease of approximately $56.2 million. The $23.0 million net reserve increase related to the increases in claim rates was primarily due to fewer than expected cures representing a $35.4 million increase in reserves offset by a $12.4 million reserve benefit related to rescissions. The $56.2 million net reserve decrease from claim size reductions was related to a reserve benefit of approximately $127 million from increases in future estimates of claim denials. This reserve benefit was offset by a reserve increase of approximately $70.7 million related to continued home price declines and changes in the geographic mix of our primary portfolio.

The $2.9 million increase in prior years’ reserves in the first quarter of 2011 related to our pool business was primarily the result of increases in claim rates, representing approximately $1.0 million, and increases in claim sizes, representing approximately $1.9 million. The development of the prior years’ reserves with respect to pool business was not significantly impacted by changes in our rescission or claim denial estimates.

The $4.9 million decrease in prior years’ reserves in the first quarter of 2010 related to our primary business was the result of decreases in claim rates, representing approximately $7.4 million, and decreases in claim sizes, representing approximately $10.3 million. These decreases were partially offset by an increase in our IBNR reserve of approximately $12.8 million.

In the first quarter of 2010, the $55.4 million increase in the prior years’ reserves related to our pool portfolio was due to increases in claim rates, representing $131.5 million, offset by decreases in claim sizes, representing $26.9 million, and modified pool contract restructurings, representing $49.2 million. The increases in pool claim rates were driven by fewer delinquencies curing than expected due to the significant weakening of the housing and mortgage markets, combined with an elevated percentage of Alt-A or limited documentation loans insured under the pool contracts.

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

	March 31, 2011		December 31, 2010
	(Dollars in millions)
Primary insurance	$	2,690.2	$	2,670.7
Pool insurance		149.9		155.4
Other *		20.5		20.5
Total reserves for losses and LAE	$	2,860.6	$	2,846.6

The increase in primary insurance reserves is driven primarily by increases in IBNR reserves as a result of re-estimating future reversals of previous claim denials, offset by the decrease in the delinquent loan inventory. The decrease in the pool insurance reserves is driven primarily by claims paid.

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:

	March 31, 2011		December 31, 2010
	(Dollars in millions)
Loans in default	$	2,505.2	$	2,584.4
IBNR		274.9		181.7
Cost to settle claims (LAE)		60.0		60.0
Other *		20.5		20.5
Total reserves for losses and LAE	$	2,860.6	$	2,846.6

* Other relates to PMI Guaranty’s loss reserves related to the agreement between PMI Guaranty, FGIC, and AG Re under which PMI Guaranty commuted certain risks with FGIC.

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 March 31, 2011 reserves for losses and LAE, the effect on pre-tax income would be an increase or decrease of approximately $125.3 million; (ii) for every 5% change in our estimate of incurred but not reported loans in default as of March 31, 2011, the effect on pre-tax income would be approximately $13.7 million; and (iii) for every 5% change in our estimate of the future cost of claims settlement expenses as of March 31, 2011, the effect on pre-tax income would be approximately $3.0 million.

If either the claim rate or claim size, or a combination of the claim rate and claim size, were to increase approximately 18.3% 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 14.9% of our current estimates, we would reach the bottom end of our actuarially determined range.

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The establishment of loss reserves is subject to inherent uncertainty and requires judgment by management. The actual amount of claim payments may vary substantially from the loss reserve estimates. For example, the relationship of a change in assumption relating to future average claim sizes, claim rates or cost of claims settlement to the change in value may not be linear. Also, the effect of a variation in a particular assumption on the value of the loss and LAE reserves is calculated without changing any other assumption.

Changes in one factor may result in changes in another which might magnify or counteract the sensitivities. Changes in factors such as persistency or cure rates can also affect the actual losses incurred. To the extent persistency increases and assuming all other variables remain constant, the absolute dollars of claims paid will increase as insurance in force will remain in place longer, thereby generating a higher potential for future incidences of loss. Conversely, if persistency were to decline, absolute claim payments would decline. In addition, changes in cure rates would positively or negatively affect total losses if cure rates increased or decreased, respectively.

International Operations — PMI Europe establishes loss reserves for all of its insurance and reinsurance business and for CDS transactions entered into before July 1, 2003. Revenue, losses and other expenses associated with CDS contracts 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 March 31, 2011 of $18.0 million to $33.0 million. PMI Europe’s recorded loss reserves at March 31, 2011 were $23.0 million, which represented our best estimate and an increase of $1.9 million from PMI Europe’s loss reserve balance of $21.1 million at December 31, 2010. The increase to PMI Europe’s loss reserves in the first quarter of 2011 was primarily due to increased severity assumptions associated with defaults in the U.S. sub-prime reinsurance portfolio partially offset by foreign exchange re-measurement gains due to the strengthening of the Euro against the dollar. The remaining loss reserves within our International Operations segment relate to PMI Canada, which ceased writing new business in 2008.

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

	March 31, 2011		December 31, 2010
	(Dollars in millions)
Loans in default	$	24.7	$	22.2
IBNR		0.7		0.7
Cost to settle claims (LAE)		0.4		0.3
Total loss and LAE reserves	$	25.8	$	23.2

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The following table provides a reconciliation of International Operations’ beginning and ending reserves for losses and LAE for the three months ended March 31, 2011 and 2010:

	2011			2010
	(Dollars in millions)
Balance at January 1,	$	23.2		$	40.1
Reinsurance recoverables		—			—
Net balance at January 1,		23.2			40.1
Losses and LAE incurred (principally with respect to defaults occurring in)
Current year		0.5			(1.4	)
Prior years		1.6			2.1
Total incurred		2.1			0.7
Losses and LAE payments (principally with respect to defaults occurring in)
Current year		—			—
Prior years		(0.6	)		(0.7	)
Total payments		(0.6	)		(0.7	)
Foreign currency translation		1.1			(1.9	)
Net balance at March 31,		25.8			38.2
Reinsurance recoverables		—			—
Balance at March 31,	$	25.8		$	38.2

Losses and LAE incurred relating to prior years of $1.6 million in the first quarter of 2011 was primarily due to increasing the severity assumptions established in prior years for defaults in the U.S. sub-prime reinsurance portfolio. Losses and LAE incurred relating to prior years of $2.1 million in 2010 was primarily due to aging of Italian defaults.

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Reinsurance

Loss reserves ceded to captive reinsurers are recorded as reinsurance recoverables and reduce total incurred losses in our consolidated statements of operations. Reinsurance recoverables are based on our estimates of unpaid claims as applied to the terms of the respective reinsurance arrangements. The methodology and key assumptions used in our estimate of reinsurance recoverables are the same as those used in our estimate of loss reserves and are allocated to reinsurance contracts using actuarial analysis for applicable reinsurance agreements. (For a discussion of our loss reserve estimation process and methodology, see Critical Accounting Estimates – Reserves for Losses and LAE.) As reinsurance recoverables are derived from our loss estimation process, amounts we will ultimately recover could differ materially from amounts recorded as reinsurance recoverables. PMI limits its recorded reinsurance recoverable to the amount currently available in the trust account maintained by the captive insurance company for PMI’s benefit, if that amount is less than PMI’s ceded loss reserves.

The following table shows amounts of reinsurance recoverables related to each type of reinsurance contract:

	March 31, 2011					December 31, 2010
	Dollar Amount		Percentage			Dollar Amount		Percentage
	(Dollars in thousands)					(Dollars in thousands)
Captives (1):
Excess-of-loss	$	436,803		99.4	%	$	457,082		99.4	%
Quota share		2,521		0.6	%		2,589		0.6	%
Total	$	439,324		100.0	%	$	459,671		100.0	%

(1) Amounts shown have been reduced by a valuation allowance of $68.0 million and $75.1 million as of March 31, 2011 and December 31, 2010, respectively, on reinsurance recoverables, to the extent applicable, if they are in excess of captive trust account balances.

The table below shows the total of all balances in trust accounts for the benefit of PMI. While certain recoverables from captives equal the amount in the respective captive trust account, the majority of captives have assets in excess of PMI’s related recoverable.

	March 31, 2011		December 31, 2010
	(Dollars in thousands)		(Dollars in thousands)
Off Balance Sheet Captive Trust Assets	$	679,023	$	724,278

Credit Default Swap Contracts

Through PMI Europe, we provide credit protection in the form of credit default swaps (“CDS”), which are considered derivatives and are marked to market through earnings under the requirements of Topic 815. The fair value of derivative liabilities was $4.6 million and $5.4 million as of March 31, 2011 and December 31, 2010, respectively, and is included in other liabilities on the consolidated balance sheet. The fair value of these CDS liabilities includes payment obligations that have been incurred but unpaid as of the balance sheet date. Our CDS exposures are dependent on the performance of certain prime residential mortgage loans originated throughout Europe, which are the reference assets for the underlying mortgage-related securities.

PMI may incur losses on its CDS exposures if losses on the underlying mortgage loans reach PMI’s risk layer. Losses on underlying mortgages may only occur following a credit event, which is typically defined as borrower default or bankruptcy, and only if recoveries (typically foreclosure proceeds) are less than the total outstanding mortgage balances and foreclosure expenses, and in the case of some transactions, accrued interest.

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Certain of PMI Europe’s CDS contracts contain collateral support provisions which, upon certain defined circumstances, including deterioration of the underlying mortgage loan performance, require PMI Europe to post collateral for the benefit of the counterparty. The methodology for determining the amount of the required posted collateral varies and can include mark-to-market valuations, contractual formulae (principally related to expected loss performance) and/or negotiated amounts. As of March 31, 2011, the aggregate fair value of all derivative instruments with collateral support provisions upon which we have been required to post collateral was a net liability of $4.6 million. PMI Europe has posted collateral, consisting of corporate securities and cash, of $4.8 million as of March 31, 2011 on these CDS transactions. Any further downgrades will have no impact on the required collateral, as our current ratings are below all the ratings related triggers. As of March 31, 2011, the maximum amount of collateral that PMI Europe could be required to post under these contracts is approximately $12.4 million, including the $4.8 million already posted.

On average, the loan portfolios underlying our CDS exposures were seasoned by at least one year when PMI Europe entered into the CDS transactions. Most portfolios had average seasoning of at least three years at issuance. PMI generally defines the notional amount of its exposure as its risk-in-force. Risk-in-force represents the maximum potential contractual obligation for PMI. PMI Europe’s risk-in-force related to its CDS contracts was $12.4 million as of March 31, 2011. Provided below are tables showing the risk-in-force or notional amounts by issue year, original and current credit rating and posted collateral for all CDS contracts as of March 31, 2011.

	Original and Current Credit Rating
Issue Year	Non-investment grade
	(Dollars in millions)
2003	$	3.6
2004		8.8
Total Notional*	$	12.4
Posted collateral	$	4.8
Maximum collateral	$	12.4

Notional and collateral amounts will change due to fluctuations in the value of the Euro as compared to the U.S. dollar. Maximum collateral represents the contractual limit of collateral that would be required to be posted.

* The reference assets underlying all of PMI Europe’s risk-in-force related to its CDS contracts are in Germany.

Provided in the table below are the weighted average expected life and the components of fair value for PMI’s CDS contracts in an asset/(liability) position as of March 31, 2011.

	Original and Current Credit Rating
	Non-investment grade
	(Dollars in millions)
Weighted average expected life in years		2.17
Components of fair value
Expected discounted future net cash outflows	$	(2.8	)
Market spread/cost of capital adjustment		(1.8	)
Fair value	$	(4.6	)

Fair value amounts will change due to fluctuations in the value of the Euro as compared to the U.S. dollar.

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PMI does not currently expect that the fair value portion of the CDS liability related to fluctuations in market spreads and PMI’s cost of capital will result in additional cash outflows. PMI’s expected future net cash flows could vary over time. Higher than expected defaults, higher loss severities or the acceleration in the timing of claim payments would likely result in an increase in expected discounted future net cash outflows and PMI’s fair value liability, which could materially impact our results of operations. PMI has paid, or expects to pay, losses on most of its CDS contracts. PMI expects to pay net cash outflows of approximately $2.8 million related to its CDS agreements over the next 6 years. PMI has a fair value liability of $4.6 million, which includes all expected lifetime future cash flows, against total notional exposure of $12.4 million on all non-investment grade contracts as of March 31, 2011.

Investment Securities

We review all of our fixed income and equity security investments on a periodic basis for impairment, with focus on those having unrealized losses. We specifically assess all investments with declines in fair value and, in general, monitor all security investments as to ongoing risk.

We review on a quarterly basis, or as needed in the event of specific credit events, unrealized losses on all investments with declines in fair value. These investments are then tracked to establish whether they meet our established other than temporary impairment criteria. This process involves monitoring market events and other items that could impact issuers. We consider relevant facts and circumstances in evaluating whether the impairment of a security is other-than-temporary.

Relevant facts and circumstances considered include, but are not limited to:

• 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 it is more likely than not we will hold the security for a sufficient period of time to allow for anticipated recoveries in fair value.

Once a security is determined to have met certain of the criteria for consideration as being other-than-temporarily impaired, further information is gathered and evaluated pertaining to the particular security. If the security is an unsecured obligation, the additional evaluation is a security specific approach with particular emphasis on the likelihood of the issuer to meet the contractual terms of the obligation.

We assess equity securities using the criteria outlined above and also consider whether in addition to these factors we have the ability and intent to hold the equity securities for a period of time sufficient for recovery to cost or amortized cost. If we lack the intent or if it is not more likely than not that we can hold the security for a sufficient time to allow for anticipated recoveries in value, the equity security’s decline in fair value is deemed to be other than temporary, and we record the full difference between fair value and cost in earnings.

Once the determination is made that a debt security is other-than-temporarily impaired, an estimate is developed of the portion of such impairment that is credit-related. The estimate of the credit-related portion of impairment is based upon a comparison of ratings at the time of purchase and the current ratings of the security, to establish whether there have been any specific credit events during the time we have owned the security, as well as the outlook through the expected maturity horizon for the security. We obtain ratings from nationally

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recognized rating agencies for each security being assessed. We also incorporate information on the specific securities internally and, as appropriate, from external investment advisors on their views on the probability of it receiving the interest and principal cash flows for the remaining life of the securities.

This information is used to determine our best estimate of what the credit related portion of the impairment is, based on a probability-weighted estimate of future cash flows. The probability weighted cash flows for the individual securities are modeled using internal models, which calculate the discounted cash flows at the implicit rate at purchase through maturity. If the cash flow projections indicate that we do not expect to recover its amortized cost basis, we recognize the estimated credit loss in earnings. For debt securities that are intended to be sold, or that management believes are more likely than not to be required to be sold prior to recovery, the full impairment is recognized immediately in earnings. For debt securities that management has no intention to sell and believes it is more likely than not that they will not be required to be sold prior to recovery, only the credit component of the impairment is recognized in earnings, with the remaining impairment loss recognized in AOCI.

The total impairment for any debt security that is deemed to have an other-than-temporary impairment is recorded in the statement of operations as a net realized loss from investments. The portion of such impairment that is determined to be non-credit related is deducted from net realized losses in the consolidated statement of operations and reflected in other comprehensive income (loss) and AOCI, the latter of which is a component of stockholders’ equity in the consolidated balance sheets.

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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 March 31, 2011 and December 31, 2010:

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
March 31, 2011
Fixed income securities:
Municipal bonds	$	129,219	$	(5,645	)	$	60,434	$	(7,952	)	$	189,653	$	(13,597	)
Corporate bonds		774,445		(22,972	)		495		(1	)		774,940		(22,973	)
FDIC corporate bonds		16,342		(882	)		—		—			16,342		(882	)
U.S. governments and agencies		194,095		(6,017	)		—		—			194,095		(6,017	)
Mortgage-backed securities		287,815		(5,290	)		278		(905	)		288,093		(6,195	)
Asset-backed securities		85,773		(667	)		—		—			85,773		(667	)
Total fixed income securities		1,487,689		(41,473	)		61,207		(8,858	)		1,548,896		(50,331	)
Equity securities:
Common stocks		25,340		(4,422	)		—		—			25,340		(4,422	)
Preferred stocks		—		—			41,755		(832	)		41,755		(832	)
Total equity securities		25,340		(4,422	)		41,755		(832	)		67,095		(5,254	)
Short-term investments		6,873		(20	)		—		—			6,873		(20	)
Total	$	1,519,902	$	(45,915	)	$	102,962	$	(9,690	)	$	1,622,864	$	(55,605	)
	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, 2010
Fixed income securities:
Municipal bonds	$	131,919	$	(5,631	)	$	61,391	$	(7,034	)	$	193,310	$	(12,665	)
Corporate bonds		714,901		(17,721	)		758		(5	)		715,659		(17,726	)
FDIC corporate bonds		11,622		(430	)		2,057		(201	)		13,679		(631	)
U.S. governments and agencies		186,635		(4,914	)		—		—			186,635		(4,914	)
Mortgage-backed securities		293,266		(5,120	)		—		—			293,266		(5,120	)
Asset-backed securities		118,117		(711	)		—		—			118,117		(711	)
Total fixed income securities		1,456,460		(34,527	)		64,206		(7,240	)		1,520,666		(41,767	)
Equity securities:
Common stocks		25,359		(4,403	)		—		—			25,359		(4,403	)
Preferred stocks		7,331		(150	)		40,981		(1,605	)		48,312		(1,755	)
Total equity securities		32,690		(4,553	)		40,981		(1,605	)		73,671		(6,158	)
Short-term investments		17,405		(22	)		—		—			17,405		(22	)
Total	$	1,506,555	$	(39,102	)	$	105,187	$	(8,845	)	$	1,611,742	$	(47,947	)

At March 31, 2011, we had gross unrealized losses of $55.6 million on investment securities, including fixed maturity and equity securities that had a fair value of $1.6 billion. There were no non-credit related other-than-temporary impairments on debt securities in the first quarters of 2011 or 2010. We did not record other-than-temporary impairments in the first quarter of 2011.

The increases in gross unrealized losses in the U.S. fixed income portfolio in the first quarter of 2011 were principally due to the rising yields across the fixed income investment categories and the effect of the strengthening of the Euro and the Canadian dollar on the U.S. dollar denominated corporate bond investments in our European and Canadian subsidiaries. The gross unrealized loss in the equity security portfolio decreased in the first quarter of 2011 as a result of the improvement in the valuation of the preferred stock portfolio.

We did not impair any investments in the first quarters of 2011 or 2010. Impaired investments must either meet the criteria established in our accounting policy regarding the extent and length of time the investment was in a loss position or be determined that management would not hold the security for a period of time sufficient to

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allow for any anticipated recovery. Additional factors considered in evaluating an investment for impairment include the financial condition and near-term prospects of the issuer, evidenced by debt ratings and analyst reports. As of March 31, 2011, our investment portfolio included 634 securities in an unrealized loss position compared to 629 securities as of December 31, 2010.

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 sales related activities. To the extent we provided contract underwriting services on loans that did not require mortgage insurance, associated underwriting costs were 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 persistency and expected loss development by type of insurance contract. 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. PMI’s deferred policy acquisition cost asset increased to $48.1 million at March 31, 2011 from $46.4 million at December 31, 2010 and $42.6 million at March 31, 2010.

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 and International Operations. We determined that there were premium deficiencies for PMI Europe and PMI Canada and recorded premium deficiency reserves in the fourth quarter of 2009. As of March 31, 2011, a premium deficiency reserve for PMI Europe was not required and the premium deficiency reserve for PMI Canada was $1.3 million. The premium deficiency reserves are recorded as losses and loss adjustment expenses on the consolidated statement of operations and as reserve for losses and loss adjustment expenses on the consolidated balance sheet. We determined there was no premium deficiency in our U.S. Mortgage Insurance Operations segment despite continued significant losses in 2010 and the first quarter of 2011. The excess of future expected premiums, reserves for losses and loss adjustment expenses and investment income over expected paid claims and expenses in our U.S. Mortgage Insurance Operations segment was approximately $0.9 billion for the three months ended March 31, 2011 and December 31, 2010. To the extent premium levels and actual loss experience differ from our assumptions, our results could be negatively affected in future periods.

There are several factors that, if different from the expectations used in the premium deficiency analysis, could result in a significant decrease in the excess noted above, and could potentially result in the recognition of a premium deficiency reserve. Some of the key assumptions and possible changes in circumstances that could result in negative changes to the excess include the following:

• Expected Losses – Losses could be higher than our estimate due to higher levels of delinquencies, higher claim rates and claim sizes driven by factors such as fewer than expected loan modifications, fewer borrowers bringing their loans current, and fewer than expected rescissions or claim denials.

• Persistency – Should policies terminate faster than our expectations, premiums earned will decline. However, fewer policies in force would also indicate a lower number of new delinquencies.

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• Economic Trends – Negative economic trends such as higher than expected unemployment levels could result in higher than expected new delinquencies and ultimately claims paid.

• Home Price Changes – Worse than expected home price changes, including significant declines in home values, could result in higher than expected delinquencies, claim payments and claim sizes.

As a result of their credit quality, PMI’s recent book years are expected to be profitable and are contributing to the decreasing likelihood that we will have a premium deficiency reserve in the future in the U.S. Mortgage Insurance Operations.

Valuation of Deferred Tax Assets

PMI’s management reviews the need to establish a valuation allowance against deferred tax assets on a quarterly basis. In the course of its review, PMI’s management analyzes several factors, including the severity and frequency of operating or capital losses, PMI’s capacity for the carryback or carryforward of any losses, the expected occurrence of future income or loss, available tax planning alternatives, and future contractual cash flows. As discussed below, PMI’s valuation allowance as of March 31, 2011 was approximately $578.9 million.

In periods prior to 2008, we deducted significant amounts of statutory contingency reserves on our federal income tax returns. The reserves were deducted to the extent we purchased tax and loss bonds in an amount equal to the tax benefit of the deduction pursuant to § 831(e) of the Internal Revenue Code. The reserves are included in taxable income in future years when they are released for statutory accounting purposes or if we elect to redeem the tax and loss bonds that were purchased in connection with the deduction for the reserves. Accordingly, prior to 2010, we did not have a domestic net operating loss carryforward for tax purposes.

We incurred net operating losses during the first quarter of 2011 on a consolidated basis and have unused net operating losses on a foreign and state level resulting in a deferred tax asset of $312.3 million, unused tax credits of nearly $195.1 million, and abnormal capital losses of nearly $245.5, that could offset future taxable income.

As of March 31, 2011, we had $722.8 million of net deferred tax assets. Our valuation allowance on our deferred tax assets was $578.9 million. We expect to utilize the remaining net deferred tax assets of $143.8 million based on contractual cash flow streams and tax strategies that are not dependent on generating taxable income from our mortgage insurance activities. In September 2011, we expect to utilize a portion of our deferred tax assets when the QBE Note matures and is payable by QBE. If we return to a period of sustained profitability, we may be able to utilize a substantial additional portion of our $722.8 million net deferred tax assets. However, if we do not return to profitability or such return to profitability is later than expected, future tax benefits may not be realized or, even if realized, may be significantly delayed. Additional valuation allowance benefits or charges could be recognized in the future due to changes in management’s expectations regarding the realization of tax benefits. In addition, in the event of an “ownership change” for federal income tax purposes under § 382 of the Internal Revenue Code, we may be restricted annually in our ability to use our deferred tax assets. See Item 1A. Risk Factors – We may be required to record a full valuation allowance or increase the current partial valuation allowance against our net deferred tax assets and may not be able to realize all of our deferred tax assets in the future.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and equity prices. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying financial instruments are traded. The following is a discussion of our market risk exposures and our risk management practices.

Interest rate risk

As of March 31, 2011, our consolidated investment portfolio excluding cash and cash equivalents was $2.8 billion. The fair value of investments in our portfolio is calculated from independent market quotations and is interest rate sensitive and subject to change based on interest rate movements. As of March 31, 2011, 94.4% of our investments were fixed income securities, primarily corporate 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 March 31, 2011:

	Estimated Increase/ (Decrease)  in Fair Value
	(Dollars in thousands)
300 basis point decline	$	327,036
200 basis point decline	$	245,275
100 basis point decline	$	126,573
100 basis point rise	$	(128,250	)
200 basis point rise	$	(234,880	)
300 basis point rise	$	(331,265	)

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 3.9 as of March 31, 2011.

Currency exchange rate risk

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 March 31, 2011 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 and the accounting effect on comprehensive income (pre-tax) based upon specified hypothetical percentage changes in foreign currency exchange rates as of March 31, 2011, with all other factors remaining constant:

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	Estimated Increase (Decrease) Foreign Currency Translation
Change in foreign currency exchange rates	Europe		Canada		Consolidated
	(USD in thousands)
15% decline	$	(6,263)	$	(889)	$	(7,152)
10% decline	$	(4,175)	$	(593)	$	(4,768)
5% decline	$	(2,088)	$	(296)	$	(2,384)
5% rise	$	2,088	$	296	$	2,384
10% rise	$	4,175	$	593	$	4,768
15% rise	$	6,263	$	889	$	7,152
Foreign currency translation rates as of March 31,

	U.S. Dollar relative to
	Euro		Canadian Dollar
2011		1.4158		1.0303
2010		1.3509		0.9847

The changes in the foreign currency exchange rates from the first quarter of 2010 to the first quarter of 2011 positively affected our investments in our foreign subsidiaries by $6.8 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 March 31, 2011, $158.1 million, including cash and cash equivalents of our invested assets, were held by PMI Europe. Of the $158.1 million, $48.4 million was denominated in Euros and $109.7 million was denominated in U.S. dollars. As of March 31, 2011, $17.8 million, including cash and cash equivalents of our invested assets, were held by PMI Canada. Of the $17.8 million, $9.2 million was denominated in Canadian dollars and $8.6 million was denominated in U.S. dollars. The above table shows the exchange rate of the U.S. dollar relative to the Euro and Canadian dollar as of March 31, 2011 and 2010. The values of the Euro and the Canadian dollar both strengthened relative to the U.S. dollar as of March 31, 2011 compared to March 31, 2010.

Credit spread risk

Through PMI Europe, we provide credit protection in the form of credit default swaps (“CDS”), which are considered derivatives and are marked to market through earnings under the requirements of Topic 815. The fair value of derivative liabilities was $4.6 million and $5.4 million as of March 31, 2011 and December 31, 2010, respectively, and is included in other liabilities on the balance sheet. The fair value of these CDS liabilities includes payment obligations that have been incurred but unpaid as of the balance sheet date. Our CDS exposures are dependent on the performance of certain prime residential mortgage loans originated throughout Europe, which are the reference assets for the underlying mortgage-related securities.

We do not currently expect that the fair value portion of the CDS liability related to fluctuations in our cost of capital will result in any cash outflows. PMI’s expectation of future net cash flows could change over time. Higher than expected defaults, higher loss severities or the acceleration in the timing of claim payments would likely result in an increase in PMI’s expected discounted future net cash outflows and fair value liability, which could materially impact our results of operations.

Debt instruments

Effective January 1, 2008, The PMI Group, Inc. adopted Topic 820 and the fair value option outlined in Topic 825. In particular, we elected to adopt the fair value option outlined in Topic 825 for certain corporate debt liabilities on the adoption date. The fair value of these corporate debt instruments is measured under level 2 of the fair value hierarchy and is measured at actual trading prices sourced from independent pricing services that use observable market data for similar transactions, including broker-dealer quotes and actual trade activity as a basis for valuation.

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Changes in the fair value of these corporate debt liabilities for which the fair value option was elected is principally due to changes in our credit spreads. The following table summarizes the estimated change in yield and corresponding fair value and the accounting effect on income (pre-tax) based upon reasonably likely changes in our credit spreads as of March 31, 2011, with all other factors remaining constant:

Change in credit spreads	Estimated (Decrease)/Increase in Liability
	(USD in thousands)
300 basis point decline	$	66,253
200 basis point decline	$	41,351
100 basis point decline	$	19,402
100 basis point increase	$	(17,503	)
200 basis point increase	$	(33,172	)
300 basis point increase	$	(47,351	)

Equity market price risk

At March 31, 2011, the market value and book value of equity securities in our investment portfolio were $140.7 million and $127.4 million, respectively. Exposure to changes in equity market prices can be estimated by assessing potential changes in market values on our equity investments resulting from a hypothetical broad-based decline in equity market prices of 20%. With all other factors remaining constant, we estimated that such a decrease would reduce our investment portfolio held in equity investments by $28.1 million as of March 31, 2011. Preferred securities make up approximately 80.6% of our equity security portfolio with a market value of $113.5 million. The majority of our preferred stocks are perpetual preferreds with dividends. The fair value of the preferred securities could be affected by a deferral of dividends. We believe that the fair value of our preferred securities would decrease significantly if the dividends were deferred.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures—Based on their evaluation as of March 31, 2011, 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.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As previously disclosed, in April 2008, The PMI Group and certain of our executive officers and directors were named in one federal and one state shareholder derivative suit. At a hearing held on April 1, 2011, the U.S. District Court for the Northern District of California entered an order preliminarily approving the settlement of the federal court action (“Preliminary Approval Order”) and set the final settlement approval hearing for May 20, 2011. See our Current Report on Form 8-K, filed on April 7, 2011 and our Annual Report on Form 10-K for the year-ended December 31, 2010.

As previously disclosed, on January 26, 2009, we were served with a complaint filed by Bayview Loan Servicing, LLC in California Superior Court. The complaint alleged that PMI improperly rescinded mortgage insurance coverage or terminated coverage for non-payment of premium on 94 loans and sought unspecified contractual and extra-contractual damages. The parties have reached a settlement of this action. The estimated costs associated with the settlement of this action were not material and were accrued in the first quarter of 2011.

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ITEM 1A. RISK FACTORS

The discussion of our business and financial results should be read together with the risk factors contained below and in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2010, which describe risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, or prospects in a material and adverse manner.

We expect that our primary insurance subsidiary, MIC, will not meet regulatory capital requirements in the second quarter of 2011. MIC could be required to cease writing new business and could be subject to restrictions under the terms of its runoff support agreement with Allstate.

As of March 31, 2011, MIC’s policyholders’ position exceeded the minimum policyholders’ position required by capital adequacy requirements by $39.2 million and MIC’s risk-to-capital ratio was 24.4 to 1. As a result of continuing losses, we expect that, in the second quarter of 2011, MIC’s policyholders’ position will decline below the minimum, and its risk-to-capital ratio will increase above the maximum, levels necessary to meet state regulatory capital adequacy requirements, described below. When MIC’s minimum policyholders’ position falls below the minimum, or risk-to-capital ratio rises above the maximum, levels necessary to meet regulatory capital adequacy requirements MIC could be required to immediately suspend writing new business in some or all states. In sixteen states, if a mortgage insurer does not meet a required minimum policyholders’ position (calculated in accordance with statutory formulae) or exceeds a maximum permitted risk-to-capital ratio of 25 to 1, it may be prohibited from writing new business until its policyholders’ position meets the minimum or its risk-to-capital ratio falls below the maximum, as applicable. In two of those states, mortgage insurers are required to cease writing new business immediately if and so long as they fail to meet capital requirements. In the remaining fourteen states, we believe that regulators exercise discretion as to whether the mortgage insurer may continue writing new business. As applicable, we have requested from state insurance departments either waivers of regulatory capital requirements or clarification that MIC’s inability to comply with capital requirements would not, by itself, require it to cease writing business in that state. Thirty-four other states do not have specific capital adequacy requirements for mortgage insurers.

MIC’s principal regulator is the Arizona Department of Insurance (the “Department”). On March 30, 2011, in response to our waiver request, the Department advised us that:

• Under the express requirements of Arizona law, MIC is not required to obtain a waiver from the Department in order to continue to write new business in the event that it does not maintain the minimum level of policyholders’ position (“MPP”).

• The Department considers MPP one of many measures of the financial condition of a mortgage insurer. The Department will continue to evaluate MIC’s MPP along with all other measures of PMI’s business operations and financial position in assessing its liquidity and financial resources to fulfill its obligations under existing and prospectively issued mortgage guaranty insurance contracts. The Department expects that its financial statutory examination and actuarial analysis of MIC, initiated in January 2011, will provide the Department with additional information regarding MIC’s financial position, operations and exposure to prospective risks.

• The Department requested that MIC provide it with additional periodic information regarding its operations and financial condition but did not impose restrictions upon its operations.

If the Department were to determine that MIC’s liquidity or financial resources warranted regulatory action, it could, among other actions, order MIC to suspend writing new business in all states.

In addition to the Department’s notice described above, MIC has received written waivers from three state departments of insurance. One of these waivers remains in effect only until MIC exceeds a 27 to 1 risk-to-capital ratio. Each of these waivers may be withdrawn at any time. We believe that our pending waiver requests in other

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states are under review by the applicable state insurance departments. We cannot predict whether or under what circumstances these insurance regulators might exercise discretion to permit MIC to continue to write new business. Moreover, even with waivers, if MIC breached capital requirements, there is a risk that certain of our customer relationships would be negatively impacted. If we are successful in obtaining waivers, there is no assurance that any insurance department that has granted a waiver will not modify or revoke the waiver, or that it will renew a waiver when it expires. It is not clear what actions the insurance regulators in states that do not have capital adequacy requirements would take if MIC were to fail to meet capital adequacy requirements established by one or more states.

If it were to be enforced by a court of final appeal or applicable regulator, the terms of a 1994 Allstate runoff support agreement restrict MIC in the event that its risk-to-capital ratio exceeds 23 to 1. The original risk-in-force on policies covered under the Allstate runoff support agreement has been reduced from approximately $13 billion in 1994 to approximately $31.9 million as of March 31, 2011 (0.3% of original risk-in-force). We expect any potential future losses associated with the remaining risk-in-force under the Allstate runoff support agreement to be immaterial. Under the runoff support agreement, among other things, MIC may not declare or pay dividends at any time that its risk-to-capital ratio equals or exceeds 23 to 1 or if such a dividend would cause its risk-to-capital ratio to equal or exceed 23 to 1. In addition, if MIC’s risk-to-capital ratio equals or exceeds 23 to 1 at three consecutive monthly measurement dates, MIC may not enter into new insurance or reinsurance contracts without the consent of Allstate. Following such time as MIC’s risk-to-capital ratio were to exceed 24.5 to 1, the runoff support agreement requires MIC to transfer substantially all of its liquid assets to a trust account for the payment of MIC’s obligations to policyholders, therefore negatively affecting MIC’s and The PMI Group’s liquidity position. Any failure to meet the capital requirements set forth in the runoff support agreement with Allstate could, if pursued by Allstate, have a material adverse impact on our financial condition, results of operations and business.

Our plan to write certain new mortgage insurance in a subsidiary of MIC may not be successful and, even if it is implemented in some states, it may not allow us to continue to write mortgage insurance in other states.

In the event that MIC is unable to continue to write new mortgage insurance in a limited number of states, we plan to write new mortgage insurance in those states through PMAC, a subsidiary of MIC. The GSEs approved the use of PMAC as a limited, direct issuer of mortgage guaranty insurance in certain states in which MIC is unable to continue to write new business. These approvals are subject to restrictions and currently expire on December 31, 2011. While we have requested extensions, there is no assurance that the GSEs will approve the use of PMAC as a direct issuer of mortgage guaranty insurance after their current approvals expire at the end of 2011. Fannie Mae’s approval is conditioned upon the requirement that PMAC’s direct written premiums for a calendar quarter not exceed 20% of the combined direct written premiums of MIC and PMAC for such calendar quarter, unless Fannie Mae provides prior written consent, which it shall not unreasonably withhold. Some of our customers may choose not to purchase mortgage insurance from us in any state unless we can offer mortgage insurance through the combined companies in all fifty states or if MIC were to exceed regulatory capital requirements in one or more states. If MIC is unable to continue to write mortgage insurance in certain states, our inability to successfully and timely implement our PMAC plan would have a material adverse impact on our financial condition, results of operation and business.

Our regulatory capital levels and the extent to which we may fail to meet regulatory capital requirements in the second quarter of 2011 depend on a variety of factors that are difficult to predict and many of which are outside our control.

As a result of continuing losses, we expect that, in the second quarter of 2011, MIC’s policyholders’ position will decline below the minimum, and its risk-to-capital ratio will increase above the maximum, levels necessary to meet state regulatory capital adequacy requirements, described above. The degree of MIC’s future noncompliance with applicable capital requirements will depend on the magnitude of losses in the second quarter of 2011 and thereafter. Estimating future losses, and the timing of future losses, is inherently uncertain and requires significant judgment. Our expectations regarding MIC’s future losses may change significantly over time.

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Our losses have exceeded our estimates in past periods, and our future losses could materially exceed our estimates.

Our future losses could be affected by a variety of factors. Such factors include, among others:

• Current and future economic conditions, including continued slow economic recovery from the most recent recession or the potential of the U.S. economy to reenter a recessionary period, borrower access to credit, levels of unemployment, interest rates and home prices.

• The level of new delinquencies, the claim rates of delinquencies (including the level of future modifications of delinquent loans) and the claim severity within MIC’s mortgage insurance portfolio.

• Potentially negative economic changes in geographic regions where our insurance in force is more concentrated.

• The levels of future modifications, rescissions and claim denials and future reversals of rescissions and claim denials.

• The rate at which our U.S. mortgage insurance portfolio remains in force (persistency rate).

• The timing of future claims paid.

• Future levels of new insurance written (and the profitability of such business), which will impact future premiums written and earned and future losses.

• GSE and rating agency requirements and determinations.

• The performance of our investment portfolio and the extent to which issuers of the fixed-income securities that we own default on principal and interest payments or the extent to which we are required to impair portions of the portfolio as a result of deteriorating capital markets.

• The statutory credit MIC can continue to receive with respect to its subsidiary investments.

• The performance of PMI Europe, which is affected by the U.S. and European mortgage markets.

• Any requirements to provide capital under the PMI Europe or CMG Mortgage Insurance Company (“CMG MI”) capital support agreements.

Many of these factors are outside of our control and difficult to predict. In addition, some of these factors, such as the views and requirements of the GSEs and rating agencies, are subjective and not subject to specific quantitative standards. Due to the inherent uncertainty and significant judgment involved in the numerous assumptions required in order to estimate our losses, loss estimates have varied widely. Internal models and various third parties have estimated our losses based on their own perspectives on such assumptions and have projected such losses to be materially higher than management’s estimates have indicated and/or that the time frame in which we would have to make payments with respect to such losses will occur sooner than we anticipate. If the amount and/or timing of MIC’s mortgage insurance losses were to emerge in a manner that is consistent with certain of those estimates, MIC could exhaust its available claims-paying resources and capital and surplus, the GSEs could withdraw their approval of MIC as an eligible mortgage insurer and MIC could be required to cease writing new business, unless we raise additional capital or are able to take other steps to enhance our capital.

The substantial decline in our market capitalization, the downgrades in the ratings of our debt securities and our significant operating losses, combined with difficult market conditions generally and in our industry specifically, limit our ability to obtain debt or equity financing in capital markets transactions or from private sources. We cannot be sure that we will be able to raise capital on favorable terms and in the amounts that we require, or at all. Moreover, to the extent a capital raising transaction is undertaken in an effort to avoid an adverse action by a third party, we cannot be sure that the transaction could be completed in a timely manner to avoid such 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

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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. If we were to obtain equity financing for a significant portion of our capital needs, any such financing would likely be significantly dilutive to our existing shareholders or result in the issuance of securities that have rights, preferences and privileges that are senior to those of our common stock, or both. 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, if any.

Claim denials may not materially reduce our loss reserve estimates at the same levels as we expect, and our loss reserves will increase if future claim denial activity is lower than projected or if we reverse claim denials beyond expected levels.

In some cases, our servicing customers do not produce documents necessary to perfect a claim. This is often the result of the servicer’s inability to provide the loan origination file or other servicing records for our review. If the requested documents are not produced after repeated requests by PMI, the claim will be denied (“documentation claim denials”). Beginning in 2010, claim denial activity also included claims denied or curtailed as a result of servicers’ failure to, among other things, adhere to customary standards relating to the servicing of delinquent loans (“servicer-related claim denials”). We expect the number of servicer-related claim denials to significantly increase in 2011. In 2010, we increased our assumptions of future documentation and servicer-related claim denials. Our projection of future claim denials with respect to the current inventory of delinquent loans has reduced, and is continuing to reduce, our loss reserve estimates. If future expected documentation and servicer-related claim denials are lower than expected, we would be required to increase our loss reserves in future periods. There can be no assurance that we will not significantly adjust our claim denial assumptions in the future. In estimating loss reserves, we also take into consideration the possibility of future claim denials that will later be reversed, and therefore paid. We increased those assumptions in the first quarter of 2011, negatively impacting our losses. There can be no assurance that the reversal frequency will not exceed our expectations or that our loss reserve estimates adequately provide for such occurrences. To date, we have not received material challenges to our documentation and servicer-related claim denials. However, there can be no assurance that we will not receive significant challenges in the future or that such challenges will not result in disputes with our customers. Our claim denial practices have not been subject to judicial interpretation; therefore, it is unclear whether a court would adopt the same interpretation of our rights as we do. If we are not successful in defending our claim denials, we could be required to pay significant additional amounts in claims, which could materially harm our financial condition and results of operations.

Due to continued losses, we may be required to record a premium deficiency reserve in the future.

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, which is the present value of expected future losses and expenses to the extent they exceed the present value of expected future premium, 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.

A premium deficiency analysis was performed on a GAAP basis, as of March 31, 2011, and we determined there was no premium deficiency in our U.S. Mortgage Insurance Operations segment despite continued significant losses in the first quarter of 2011. Because this premium deficiency calculation required significant judgment and estimation, to the extent actual losses are higher or actual premiums are lower than the assumptions we used in our analysis, we could be required to record a premium deficiency reserve in future reporting periods, which would negatively affect our financial condition and results of operations.

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Implementation of the Dodd-Frank Act could negatively impact private mortgage insurers and PMI.

Among other things, the Dodd-Frank Act, passed by Congress in July 2010, expands federal oversight of the insurance industry and consumer financial products and services, including mortgage loans. One component of the Dodd-Frank Act will require mortgage lenders and securitizers to retain a portion of the risk on mortgage loans they sell or securitize, unless the mortgage loans are “qualified residential mortgages” or are insured by the FHA or another federal agency. On March 30, 2011, federal regulators released a proposed rule that details the regulatory definition of a qualified residential mortgage, including a requirement that such mortgages include a cash down-payment equal to at least the sum of (i) the closing costs payable by the borrower, (ii) 20% of the lesser of the applicable property’s estimated market value and its purchase price, and (iii) the difference, if a positive amount, between the applicable property’s purchase price and its estimated market value. Regulators are seeking public comment and data regarding the credit risk mitigation effects of private mortgage insurance and an alternative definition that would include a down-payment of 10% (as opposed to 20%) of the lesser of the applicable property’s estimated market value and its purchase price and take into account private mortgage insurance for higher LTV ratio maximum requirements. The proposed rule exempts the GSEs from the risk retention requirement as long as they remain in conservatorship. Comments to the proposed rule are due on June 10, 2011. Depending on the maximum LTV allowed in the final definition and whether, and to what extent, if any, the presence of mortgage insurance becomes a criterion for a “qualified residential mortgage” and whether lenders choose mortgage insurance for non-qualified residential mortgages, the proposed rule could negatively affect the private mortgage insurance industry and our future insurance writings.

In addition, the Dodd-Frank Act established the Bureau of Consumer Financial Protection to regulate the offering and provision of consumer financial products or services. It is unclear whether this new agency will issue any rules or regulations that affect our business or the volume of low-down-payment mortgage originations. Such rules and regulations could negatively impact our financial position or results of operations.

We may be required to record a full valuation allowance or increase the current partial valuation allowance against our net deferred tax assets and may not be able to realize all of our deferred tax assets in the future.

As of March 31, 2011, we had net deferred tax assets of $722.8 million. Our management reviews the need to establish a valuation allowance against our deferred tax assets on a quarterly basis. Under Topic 740, and beginning in 2010, we do not use forecasted taxable income from our mortgage insurance activities as positive evidence in determining whether or not the deferred tax assets will be utilized. In the first quarter of 2011, we evaluated our deferred tax assets in light of this and other factors and determined that it was necessary to increase the valuation allowance by $51.7 million to $578.9 million. We expect to be able to utilize our remaining net deferred tax assets of $143.8 million based on contractual cash flow streams and tax strategies that are not dependent on generating taxable income from our mortgage insurance activities. There is no assurance that our future expected cash flow streams or tax strategies will permit us to utilize our remaining $143.8 million net deferred tax assets. We may be required to record a full valuation allowance or increase the current partial valuation allowance against our remaining net deferred tax assets, with a corresponding charge to net income, which would have a material adverse effect on our results of operations and financial condition. See Management’s Discussion and Analysis of Financial Condition and Results of Operations —Critical Accounting Estimates—Valuation of Deferred Tax Assets for more discussion.

If we return to a period of sustained profitability, we may be able to utilize a substantial additional portion of our $722.8 million deferred tax assets. There is no assurance, however, that we will return to profitability. Even if we return to profitability, there is a risk that such period of profitability will not be long enough in duration to generate sufficient future taxable income to permit us to realize some or all tax benefits. Even if we were to realize future tax benefits, the timing may be significantly delayed.

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Our Amended and Restated Tax Benefits Preservation Plan may not be effective in preventing an “ownership change” as defined in Section 382 of the Internal Revenue Code and our deferred tax assets and other tax attributes could be significantly limited.

We have significant deferred tax assets that are generally available to offset future taxable income or income tax. On August 12, 2010, the Board of Directors of The PMI Group adopted a Tax Benefits Preservation Plan (the “Plan”). In connection with the adoption of the Plan, on August 12, 2010, The PMI Group’s Board of Directors declared a dividend of one preferred stock purchase right for each outstanding share of The PMI Group’s common stock payable to holders of record of the common stock on August 23, 2010. On February 17, 2011, the Board of Directors of The PMI Group adopted the Amended and Restated Tax Benefits Preservation Plan (as amended, the “Amended Plan”), which amends and restates the Plan in its entirety to (i) extend the final expiration date of the Amended Plan to February 16, 2014; (ii) provide that the Amended Plan will expire if The PMI Group’s Board of Directors determines that a limitation on the use of tax benefits under Section 382 of the Internal Revenue Code of 1986, as amended, would no longer be material to The PMI Group; (iii) provide that the Amended Plan will expire on August 11, 2011 if stockholder approval of the Amended Plan has not been received before such time; and (iv) provide that The PMI Group’s Board of Directors will consider at least annually whether to permit the Amended Plan to expire. All of the other terms of the Amended Plan remain the same as the Plan. The Amended Plan will be submitted to The PMI Group’s stockholders for approval at its 2011 annual meeting.

The purpose of the Amended Plan is to help protect our ability to recognize certain tax benefits in future periods from net unrealized built in losses and tax credits, as well as any net operating losses that may be expected in future periods (the “Tax Benefits”). Our use of the Tax Benefits in the future would be significantly limited if we experience an “ownership change” for U.S. federal income tax purposes. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5-percent shareholders” (as defined under U.S. income tax laws) that exceeds 50 percentage points over a rolling three-year period. The Amended Plan is designed to reduce the likelihood that we will experience an ownership change by (i) discouraging any person or group from becoming a “5-percent shareholder” and (ii) discouraging any existing “5-percent shareholder” from acquiring more than a minimal number of additional shares of our stock.

Although the Amended Plan is designed to reduce the likelihood that we will experience an ownership change, there can be no assurance that the Amended Plan will be effective in preventing an ownership change. In addition, if the Amended Plan is not approved by stockholders at the 2011 annual meeting, the Amended Plan will expire on August 11, 2011 (unless such date is advanced). If an ownership change were to occur, our ability to use the Tax Benefits in the future would likely be limited, which would have a significant negative impact on our financial position and results of operations.

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ITEM 6. EXHIBITS

Exhibit Number	Description of Exhibit
4.1	Specimen common stock certificate (incorporated by reference to exhibit 4.1 to the registrant’s annual report on Form 10-K, filed on March 13, 2011 (File No. 001-13664)).
4.2	Amended and Restated Tax Benefits Preservation Plan, dated as of February 17, 2011, between The PMI Group, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent, which includes the Form of Certificate of Designation of Series A Participating Preferred Stock of The PMI Group, Inc. as Exhibit A, the Summary of Terms of the Amended and Restated Tax Benefits Preservation Plan as Exhibit B and the Form of Right Certificate as Exhibit C (incorporated by reference to exhibit 4.1 to the registrant’s current report on Form 8-K filed on February 22, 2011 (File No. 001-13664)).
10.1*	Amendment No. 3 effective February 16, 2011 to the PMI Amended and Restated Equity Incentive Plan dated May 21, 2009 (incorporated by reference to exhibit 10.1 to the registrant’s current report on Form 8-K filed on February 22, 2011 (File No. 001-13664)).
10.2*	Form of 2011 Stock Unit Agreement for Section 16 Officers (incorporated by reference to exhibit 10.12e to the registrant’s annual report on Form 10-K, filed on March 13, 2011 (File No. 001-13664)).
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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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.

May 9, 2011

    /s/ Donald P. Lofe, Jr.

Donald P. Lofe, Jr.

Executive Vice President, Chief

    Financial Officer and Chief

    Administrative Officer (Duly

    Authorized Officer and Principal

    Financial Officer)

May 9, 2011

    /s/ Thomas H. Jeter

Thomas H. Jeter

Group Senior Vice President, Chief

    Accounting Officer and Corporate

    Controller

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