PMI Group Inc., Walnut Creek, Calif., said it started on July 1 to write new business in two states through a subsidiary it set up as a contingency for when its main mortgage insurance underwriting subsidiary would exceed the risk-to-capital ratio mandates that 16 states have.
The company disclosed this in a July 1 Securities and Exchange Commission filing. The two states, which were not disclosed in the filing, were the only two that failed to give PMI a waiver so its main subsidiary, PMI Mortgage Insurance Co., could continue to write new business in those states.
Both Fannie Mae and Freddie Mac have approved this subsidiary, known as PMI Mortgage Assurance Co., to provide mortgage insurance on loans they will purchase, but that approval currently expires on Dec. 31.
PMI Mortgage Insurance Co.'s primary regulator in Arizona has said the company does not need a waiver to continue to do business if it exceeds its minimum policyholder position (an alternative measurement to risk-to-capital).
However, if the Arizona Department of Insurance found that PMI Mortgage Insurance Cos.' liquidity or financial resources warranted regulatory action, it could, among other actions, order it to suspend writing new business in all states.
But what might help PMI's liquidity is that it can now put on its balance sheet the promissory note from QBE Insurance Group Ltd., it received as part of the compensation for the PMI Australia deal in August 2008. PMI received 80% of the $920 million price or $736 million in cash at the time of the deal, with the remaining $184 million being part of the promissory note. With interest, the note at maturity will have a value of $208 million.
Now, QBE has waived the right to make deductions to the value of the promissory note and as a result, PMI will be able to recognize the value of the QBE Note in its consolidated GAAP and statutory financial statements for the second quarter. The note is due on Sept. 30.
Once QBE pays off the note, PMI Group is required to make a $25 million payment to PMI Mortgage Insurance Co. Furthermore, PMI will be required to repay the approximately $50 million outstanding under a credit facility. Following repayment of the credit facility, the company's next debt principal maturity is scheduled to occur in September 2016.
In a separate transaction, on June 30, PMI Mortgage Insurance Co. received a $25 million profit commission from QBE relating to a reinsurance transaction between the parties. This profit commission will be reflected in the subsidiary's second quarter statutory financial statements.
