Exhibit 99.1



PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES

(An Indirect Wholly-Owned Subsidiary of The PMI Group, Inc.)



Consolidated Financial Statements



For the years ended December 31, 2006, 2005 and 2004



(With Report of Independent Registered Public Accounting Firm)





F-1



---

INDEX TO FINANCIAL STATEMENTS



PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS:



|                                                                                                     |  |    
|---------------------------------------------------------------------------------------------------- |  | ---
|Report of Independent Registered Public Accounting Firm                                              |  | F-3
|                                                                                                     | 
|Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004           |  | F-4
|                                                                                                     | 
|Consolidated Balance Sheets as of December 31, 2006 and 2005                                         |  | F-5
|                                                                                                     | 
|Consolidated Statements of Shareholders Equity for the years ended December 31, 2006, 2005 and 2004 |  | F-6
|                                                                                                     | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004           |  | F-7
|                                                                                                     | 
|Notes to Consolidated Financial Statements                                                           |  | F-8





F-2



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Shareholders of PMI Mortgage
Insurance Ltd



We have audited the accompanying consolidated balance sheets of
PMI Mortgage Insurance Ltd and subsidiaries (the Company, an indirect wholly-owned subsidiary of The PMI Group, Inc.) as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders
equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.



We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PMI Mortgage Insurance Ltd and subsidiaries at December 31, 2006 and 2005, and the consolidated
results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.



/s/ Ernst & Young LLP



Los Angeles, California

February 26, 2007





F-3



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PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                  |  |                         |         |      |   |         |  |   |        
|------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | -------
|                                                  |  | Year ended December 31,
|                                                  |  | 2006                    |         | 2005 |   | 2004   
|                                                  |  | (Dollars in thousands) 
|REVENUES                                          |  |                         |         |      |   |         |  |   |        
|Premiums earned                                   |  | $                       | 148,751 |      | $ | 113,559 |  | $ | 96,637 
|Net investment income                             |  |                         | 50,169  |      |   | 36,255  |  |   | 28,135 
|Net realized investment gains                     |  |                         | 3,001   |      |   | 202     |  |   | 39     
|Other income                                      |  |                         | 597     |      |   | 1,240   |  |   | 1,144  
|                                                  |  |                         |         |      |   |         |  |   |        
|Total revenues                                    |  |                         | 202,518 |      |   | 151,256 |  |   | 125,955
|                                                  |  |                         |         |      |   |         |  |   |        
|LOSSES AND EXPENSES                               |  |                         |         |      |   |         |  |   |        
|Losses and loss adjustment expenses               |  |                         | 36,253  |      |   | 3,577   |  |   | 2,489  
|Amortization of deferred policy acquisition costs |  |                         | 14,770  |      |   | 11,321  |  |   | 10,973 
|Other underwriting and operating expenses         |  |                         | 29,377  |      |   | 26,897  |  |   | 22,634 
|                                                  |  |                         |         |      |   |         |  |   |        
|Total losses and expenses                         |  |                         | 80,400  |      |   | 41,795  |  |   | 36,096 
|                                                  |  |                         |         |      |   |         |  |   |        
|Income before income taxes and minority interest  |  |                         | 122,118 |      |   | 109,461 |  |   | 89,859 
|Income taxes                                      |  |                         | 36,341  |      |   | 31,276  |  |   | 26,920 
|                                                  |  |                         |         |      |   |         |  |   |        
|Income before minority interest                   |  |                         | 85,777  |      |   | 78,185  |  |   | 62,939 
|Minority interest, net                            |  |                         | 1,949   |      |   | 1,990   |  |   | 1,733  
|                                                  |  |                         |         |      |   |         |  |   |        
|NET INCOME                                        |  | $                       | 83,828  |      | $ | 76,195  |  | $ | 61,206 
|                                                  |  |                         |         |      |   |         |  |   |        



See accompanying notes
to consolidated financial statements.



F-4



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PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



|                                                                                                 |  |                                  |           |      |   |        
|------------------------------------------------------------------------------------------------ |  | -------------------------------- | --------- | ---- | - | -------
|                                                                                                 |  | As of December 31,              
|                                                                                                 |  | 2006                             |           | 2005
|                                                                                                 |  | (Dollars and shares inthousands)
|ASSETS                                                                                           |  |                                  |           |      |   |        
|Investments  available-for-sale, at fair value:                                                 |  |                                  |           |      |   |        
|Fixed income securities                                                                          |  | $                                | 882,978   |      | $ | 603,828
|Equity securities  common                                                                       |  |                                  | 34,435    |      |   | 27,694 
|                                                                                                 |  |                                  |           |      |   |        
|Total investments                                                                                |  |                                  | 917,413   |      |   | 631,522
|Cash and cash equivalents                                                                        |  |                                  | 151,818   |      |   | 100,712
|Related party receivables                                                                        |  |                                  | 1,724     |      |   | 13     
|Accrued investment income                                                                        |  |                                  | 13,934    |      |   | 8,635  
|Reinsurance receivables                                                                          |  |                                  | 7,787     |      |   | 4,845  
|Deferred policy acquisition costs                                                                |  |                                  | 37,694    |      |   | 35,562 
|Leasehold improvements, equipment and software, net of accumulated depreciation and amortization |  |                                  | 2,454     |      |   | 2,528  
|Deferred tax assets                                                                              |  |                                  | 44        |      |   |       
|Other assets                                                                                     |  |                                  | 4,843     |      |   | 2,746  
|                                                                                                 |  |                                  |           |      |   |        
|Total assets                                                                                     |  | $                                | 1,137,711 |      | $ | 786,563
|                                                                                                 |  |                                  |           |      |   |        
|LIABILITIES                                                                                      |  |                                  |           |      |   |        
|Reserve for losses and loss adjustment expenses                                                  |  | $                                | 30,425    |      | $ | 7,526  
|Unearned premiums                                                                                |  |                                  | 367,986   |      |   | 300,618
|Reinsurance payables                                                                             |  |                                  | 8,053     |      |   | 6,424  
|Deferred tax liabilities                                                                         |  |                                  |          |      |   | 5,503  
|Other liabilities and accrued expenses                                                           |  |                                  | 16,792    |      |   | 16,721 
|                                                                                                 |  |                                  |           |      |   |        
|Total liabilities                                                                                |  |                                  | 423,256   |      |   | 336,792
|                                                                                                 |  |                                  |           |      |   |        
|                                                                                                 |  |                                 
|Commitments and contingencies (Note 11)                                                          |  |                                  |           |      |   |        
|                                                                                                 |  |                                 
|Minority interest                                                                                |  |                                  | 16,297    |      |   | 9,229  
|                                                                                                 |  |                                 
|SHAREHOLDERS EQUITY                                                                             |  |                                  |           |      |   |        
|Ordinary shares  no par value; 327,800 and 265,800 shares issued and outstanding                |  |                                  | 263,980   |      |   | 117,085
|Retained earnings                                                                                |  |                                  | 355,738   |      |   | 271,910
|Accumulated other comprehensive income, net of deferred taxes                                    |  |                                  | 78,440    |      |   | 51,547 
|                                                                                                 |  |                                  |           |      |   |        
|Total shareholders equity                                                                       |  |                                  | 698,158   |      |   | 440,542
|                                                                                                 |  |                                  |           |      |   |        
|Total liabilities and shareholders equity                                                       |  | $                                | 1,137,711 |      | $ | 786,563
|                                                                                                 |  |                                  |           |      |   |        



See accompanying notes
to consolidated financial statements.



F-5



---

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY



|                                                                                              |  |                                   |         |   |                 |         |                  |   |                                            |  |   |         |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | --------------------------------- | ------- | - | --------------- | ------- | ---------------- | - | ------------------------------------------ |  | - | ------- |  | - | ------- | - |  | - | ------- | -
|                                                                                              |  | ComprehensiveIncome               |         |   | Ordinary Shares |         | RetainedEarnings |   | AccumulatedOtherComprehensiveIncome (Loss) |  |   | Total   | 
|                                                                                              |  |                                   | Shares  |   | Amount          |         |                  |  
|                                                                                              |  | (Dollars and shares in thousands) |        
|BALANCE, JANUARY 1, 2004                                                                      |  |                                   |         |   |                 | 210,800 |                  | $ | 76,753                                     |  | $ | 134,509 |  | $ | 50,784  |   |  | $ | 262,046 |  
|Net income                                                                                    |  | $                                 | 61,206  |   |                 |        |                  |   |                                           |  |   | 61,206  |  |   |        |   |  |   | 61,206  |  
|Change in unrealized gains on investments, net of deferred taxes of $3,595 (Note 4)           |  |                                   | 8,385   |   |                 |        |                  |   |                                           |  |   |        |  |   | 8,385   |   |  |   | 8,385   |  
|Change in currency translation gains                                                          |  |                                   | 13,407  |   |                 |        |                  |   |                                           |  |   |        |  |   | 13,407  |   |  |   | 13,407  |  
|                                                                                              |  |                                   |         |   |                 |         |                  |   |                                            |  |   |         |  |   |         |   |  |   |         |  
|Comprehensive income                                                                          |  | $                                 | 82,998  |   |                 |         |                  |   |                                            |  |   |         |  |   |         |   |  |   |         |  
|                                                                                              |  |                                   |         |   |                 |         |                  |   |                                            |  |   |         |  |   |         |   |  |   |         |  
|BALANCE, DECEMBER 31, 2004                                                                    |  |                                   |         |   |                 | 210,800 |                  |   | 76,753                                     |  |   | 195,715 |  |   | 72,576  |   |  |   | 345,044 |  
|                                                                                              |  |                                   |         |   |                 |        
|Ordinary stock issued                                                                         |  |                                   |         |   |                 | 55,000  |                  |   | 40,332                                     |  |   |        |  |   |        |   |  |   | 40,332  |  
|Net income                                                                                    |  | $                                 | 76,195  |   |                 |        |                  |   |                                           |  |   | 76,195  |  |   |        |   |  |   | 76,195  |  
|Change in unrealized gains on investments, net of deferred taxes of $960 (Note 4)             |  |                                   | 2,240   |   |                 |        |                  |   |                                           |  |   |        |  |   | 2,240   |   |  |   | 2,240   |  
|Change in currency translation gains                                                          |  |                                   | (23,269 | ) |                 |        |                  |   |                                           |  |   |        |  |   | (23,269 | ) |  |   | (23,269 | )
|                                                                                              |  |                                   |         |   |                 |         |                  |   |                                            |  |   |         |  |   |         |   |  |   |         |  
|Comprehensive income                                                                          |  | $                                 | 55,166  |   |                 |         |                  |   |                                            |  |   |         |  |   |         |   |  |   |         |  
|                                                                                              |  |                                   |         |   |                 |         |                  |   |                                            |  |   |         |  |   |         |   |  |   |         |  
|BALANCE, DECEMBER 31, 2005                                                                    |  |                                   |         |   |                 | 265,800 |                  |   | 117,085                                    |  |   | 271,910 |  |   | 51,547  |   |  |   | 440,542 |  
|                                                                                              |  |                                   |         |   |                 |        
|Ordinary stock issued (Note 15)                                                               |  |                                   |         |   |                 | 62,000  |                  |   | 45,892                                     |  |   |        |  |   |        |   |  |   | 45,892  |  
|Capital contributions from shareholder (Note 15)                                              |  |                                   |         |   |                 |        |                  |   | 101,003                                    |  |   |        |  |   |        |   |  |   | 101,003 |  
|Net income                                                                                    |  | $                                 | 83,828  |   |                 |        |                  |   |                                           |  |   | 83,828  |  |   |        |   |  |   | 83,828  |  
|Change in unrealized gains on investments, net of deferred tax (benefit) of ($6,005) (Note 4) |  |                                   | (14,013 | ) |                 |        |                  |   |                                           |  |   |        |  |   | (14,013 | ) |  |   | (14,013 | )
|Change in currency translation gains                                                          |  |                                   | 40,906  |   |                 |        |                  |   |                                           |  |   |        |  |   | 40,906  |   |  |   | 40,906  |  
|                                                                                              |  |                                   |         |   |                 |         |                  |   |                                            |  |   |         |  |   |         |   |  |   |         |  
|Comprehensive income                                                                          |  | $                                 | 110,721 |   |                 |         |                  |   |                                            |  |   |         |  |   |         |   |  |   |         |  
|                                                                                              |  |                                   |         |   |                 |         |                  |   |                                            |  |   |         |  |   |         |   |  |   |         |  
|BALANCE, DECEMBER 31, 2006                                                                    |  |                                   |         |   |                 | 327,800 |                  | $ | 263,980                                    |  | $ | 355,738 |  | $ | 78,440  |   |  | $ | 698,158 |  
|                                                                                              |  |                                   |         |   |                 |         |                  |   |                                            |  |   |         |  |   |         |   |  |   |         |  



See accompanying notes
to consolidated financial statements.





F-6



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PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                              |  | Year ended December 31, |         
|                                                                                              |  | 2006                    |          |   | 2005 |   |          | 2004 | 
|                                                                                              |  | (Dollars in thousands)  |         
|CASH FLOWS FROM OPERATING ACTIVITIES                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|Net income                                                                                    |  | $                       | 83,828   |   |      | $ | 76,195   |      |  | $ | 61,206   |  
|Adjustments to reconcile net income to net cash provided by operating activities:             |  |                         |          |   |      |   |          |      |  |   |          |  
|Minority interest, net                                                                        |  |                         | 1,949    |   |      |   | 1,990    |      |  |   | 1,733    |  
|Net realized investment gains                                                                 |  |                         | (3,001   | ) |      |   | (202     | )    |  |   | (39      | )
|Depreciation and amortization                                                                 |  |                         | 2,713    |   |      |   | 3,336    |      |  |   | 1,532    |  
|Deferred income taxes                                                                         |  |                         | (5,547   | ) |      |   | (1,977   | )    |  |   | 5,347    |  
|Policy acquisition costs incurred and deferred                                                |  |                         | (16,902  | ) |      |   | (12,754  | )    |  |   | (18,134  | )
|Amortization of deferred policy acquisition costs                                             |  |                         | 14,770   |   |      |   | 11,321   |      |  |   | 10,973   |  
|Changes in:                                                                                   |  |                         |          |   |      |   |          |      |  |   |          |  
|Accrued investment income                                                                     |  |                         | (5,299   | ) |      |   | (1,039   | )    |  |   | (1,945   | )
|Reinsurance receivables, net of reinsurance payables                                          |  |                         | (4,571   | ) |      |   | 229      |      |  |   | 1,507    |  
|Reserve for losses and loss adjustment expenses                                               |  |                         | 22,899   |   |      |   | (146     | )    |  |   | 1,697    |  
|Unearned premiums                                                                             |  |                         | 67,368   |   |      |   | 19,979   |      |  |   | 65,888   |  
|Other                                                                                         |  |                         | 7,931    |   |      |   | 10,778   |      |  |   | (3,520   | )
|                                                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                                     |  |                         | 166,138  |   |      |   | 107,710  |      |  |   | 126,245  |  
|                                                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|Proceeds from sales and maturities of fixed income securities                                 |  |                         | 88,485   |   |      |   | 49,128   |      |  |   | 105,893  |  
|Proceeds from sales of equity securities                                                      |  |                         | 8,751    |   |      |   | 3,044    |      |  |   | 4,510    |  
|Investment purchases:                                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Fixed income securities                                                                       |  |                         | (392,566 | ) |      |   | (129,828 | )    |  |   | (272,667 | )
|Equity securities  common                                                                    |  |                         | (10,361  | ) |      |   | (2,890   | )    |  |   | (6,272   | )
|Net change in short-term investments                                                          |  |                         |         |   |      |   | 6,171    |      |  |   | 5,619    |  
|Net change in related party receivables                                                       |  |                         | (1,711   | ) |      |   | 2,798    |      |  |   | (2,809   | )
|Capital expenditures and capitalized software, net of dispositions                            |  |                         | (550     | ) |      |   | (1,348   | )    |  |   | (737     | )
|                                                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                                                         |  |                         | (307,952 | ) |      |   | (72,925  | )    |  |   | (166,463 | )
|                                                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|Proceeds from issuance of ordinary shares                                                     |  |                         | 45,892   |   |      |   | 40,332   |      |  |   |         |  
|Capital contributions from shareholder                                                        |  |                         | 101,003  |   |      |   |         |      |  |   |         |  
|Proceeds from issuance of ordinary shares of subsidiary to minority interest holder (Note 15) |  |                         | 5,119    |   |      |   |         |      |  |   |         |  
|                                                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                                     |  |                         | 152,014  |   |      |   | 40,332   |      |  |   |         |  
|                                                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Foreign currency translation adjustment                                                       |  |                         | 40,906   |   |      |   | (23,269  | )    |  |   | 13,407   |  
|                                                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                          |  |                         | 51,106   |   |      |   | 51,848   |      |  |   | (26,811  | )
|Cash and cash equivalents at beginning of year                                                |  |                         | 100,712  |   |      |   | 48,864   |      |  |   | 75,675   |  
|                                                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                                      |  | $                       | 151,818  |   |      | $ | 100,712  |      |  | $ | 48,864   |  
|                                                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|SUPPLEMENTAL CASH FLOW DISCLOSURES:                                                           |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash paid during the year:                                                                    |  |                         |          |   |      |   |          |      |  |   |          |  
|Income taxes paid, net of refunds                                                             |  | $                       | 37,820   |   |      | $ | 30,729   |      |  | $ | 23,854   |  



See accompanying notes
to consolidated financial statements.





F-7



---

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1. BASIS OF PRESENTATION AND BUSINESS



PMI Mortgage Insurance Ltd (PMI Ltd) is a wholly owned subsidiary of PMI
Mortgage Insurance Australia (Holdings) Pty Limited (PMI Holdings) and was incorporated in Australia on September 24, 1965. The accompanying consolidated financial statements include the accounts of PMI Ltd, an Australian
corporation; its majority owned subsidiaries, Western Lenders Mortgage Insurance Company Ltd and Permanent LMI Pty Ltd. PMI Ltd and its subsidiaries are collectively referred to as the Company. All material intercompany transactions and
balances have been eliminated in the consolidated financial statements. PMI Holdings is a wholly owned subsidiary of PMI Mortgage Insurance Co. (PMI). The ultimate parent of PMI is The PMI Group, Inc. (The PMI Group), a
United States domiciled corporation.



The Company offers mortgage insurance in
Australia and New Zealand. The Company is headquartered in Sydney, Australia, and has offices throughout Australia and New Zealand. PMI Ltds financial strength is rated AA by S&P and Fitch, and Aa2 by Moodys.
Australian mortgage insurance, known as lenders mortgage insurance, or LMI, is characterized by single premiums and coverage of 100% of the loan amount. Lenders usually collect the single premium from a prospective borrower and remit the
amount to the Company as the mortgage insurer. The Company recognizes earnings from single premiums in its consolidated financial statements over time in accordance with the expiration of risk. Premiums are partly refundable if the policy is
canceled within the first year.



LMI covers the unpaid loan balance, plus
selling costs and expenses, following the sale of the security property. Historically, loss severities have normally ranged from 20% to 30% of the original loan amount. In New Zealand, insurance coverage is predominantly top cover, where
the total loss (including expenses) is paid up to a prescribed percentage of the original loan amount. Typical top cover in New Zealand ranges between 20% to 30% of the original loan amount.



The Companys primary net insurance written includes direct insurance and insurance on
loans underlying residential mortgage-backed securities, (RMBS). RMBS transactions include insurance on seasoned portfolios comprised of prime credit quality loans that have loan to values often below 80%.



Effective January 1, 2006, the Companys regulator, the Australian Prudential
Regulation Authority (APRA) established new capital and prudential requirements which, among other things, raised the minimum capital requirements for PMI Ltd. and other mortgage insurers. These capital requirements increased the
calculation of a mortgage insurers catastrophic claim risk, increased the concentration risk capital charge and capped the offset allowance of reinsurance to 60% that can be considered for minimum capital levels. PMI Ltd. currently complies
with these new requirements.



NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES



The consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) and the requirements of Article 7 of Regulation S-X. The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. In the opinion of



F-8



---

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation, have been included.



Risks and Uncertainties  The Company is dependent upon lenders and
mortgage originators to provide mortgage loans to insure. In the event any of its largest customers choose to stop providing the Company with mortgage loans to insure, the Companys ability to generate new insurance business could be adversely
affected. The Companys five largest customers generated 58%, 63% and 65% of its premiums earned in 2006, 2005 and 2004, respectively.



The Company is subject to comprehensive regulation. These regulations are generally intended to protect policyholders, rather than to benefit investors. Although their
scope varies, applicable laws and regulations grant broad powers to these supervisory agencies and officials to examine companies and to enforce rules or exercise discretion touching almost every significant aspect of the insurance business. The
licensing of the Companys insurance business, the review of its financial statements and periodic financial reporting, permissible investments and adherence to financial standards relating to regulatory capital, dividends to the Company and
other criteria of solvency are all subject to detailed regulation.



The Company
establishes loss reserves to recognize the liability of unpaid losses related to insured mortgages that are in default. These loss reserves are based upon the Companys estimates of the claim rate and average claim amounts, as well as the
estimated costs of settling claims. These estimates are regularly reviewed and updated using currently available information. Any adjustments due to positive or adverse developments, which may be material, resulting from these reviews would impact
current reserve requirements. The Companys reserves may not be adequate to cover ultimate loss development on incurred defaults. The Companys consolidated financial condition, results of operations or cash flows could be seriously harmed
if the Companys reserve estimates are insufficient to cover the actual related claims paid and loss related expenses incurred.



Significant accounting policies are as follows:



Investments  The Company has designated its entire portfolio of fixed income and equity securities as available-for-sale. These securities are
recorded at fair value based on quoted market prices with unrealized gains and losses, net of deferred income taxes, accounted for as a component of accumulated other comprehensive income in shareholders equity. The Company evaluates its
investments regularly to determine whether there are declines in value and whether such declines meet the definition of other-than-temporary impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities and SEC Staff Accounting Bulletin No. 59, Accounting for Noncurrent Marketable Equity Securities. The fair value of a security below cost or amortized cost for
consecutive quarters is a potential indicator of an other-than-temporary impairment. When the Company determines a security has suffered an other-than-temporary impairment a realized investment loss is recognized to the extent of the decline in fair
value in the current periods consolidated net income.



The Companys
short-term investments have maturities of greater than three and less than 12 months when purchased and are carried at fair value. Realized gains and losses on sales of investments are determined on a specific-identification basis. Investment income
consists primarily of interest and dividends. Interest income and preferred stock dividends are recognized on an accrual basis.



F-9



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PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Dividend income on common stock 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.



Deferred Policy Acquisition Costs The Company defers certain costs in its mortgage insurance operations relating to the acquisition of new insurance
and amortizes these costs against related premium revenue in order to match costs and revenues. Costs related to the issuance of mortgage insurance business are initially deferred and reported as deferred policy acquisition costs. SFAS No. 60,
Accounting and Reporting by Insurance Enterprises,(SFAS No. 60), specifically excludes mortgage guaranty insurance from its guidance relating to the amortization of deferred policy acquisition costs. Consistent with industry
accounting practice, amortization of these costs for each underwriting year book of business is charged against revenue in proportion to earned premiums. All or predominantly all of the policies written by the Company are single premium. The
deferred costs related to single premium policies are adjusted as appropriate for policy cancellations to be consistent with the Companys revenue recognition policy. The amortization estimates for each underwriting year are monitored regularly
to reflect actual experience and any changes to persistency or loss development. Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed recoverable amounts, after considering investment income.



Leasehold Improvements, Equipment and Software  Leasehold improvements
and equipment, including software, are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from 2.5 to 13 years. Leasehold improvements are recorded at cost and amortized over the
lesser of the useful life of the assets or the remaining term of the related lease.



Under the provisions of Statement of Position (SOP) No. 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use,the Company capitalizes costs incurred during the application
development stage related to software developed for internal-use purposes and for which it has no substantive plan to market externally. Capitalized costs are amortized at such time as the software is ready for its intended use on a straight-line
basis over the estimated useful life of the asset, which is generally three to seven years.



Reserve for Losses and Loss Adjustment Expenses  The reserve for mortgage insurance losses and loss adjustment expenses (LAE) is the estimated claim settlement costs on notices of
default that have been received by the Company, as well as loan defaults that have been incurred but have not been reported by the lenders. The Companys master policies define default as the borrowers failure to pay when due
an amount equal to the scheduled monthly mortgage payment under the terms of the mortgage. Generally, however, the master policies require an insured to notify the Company of a default 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, the Company does not consider a loan to be in default until it has been delinquent for two consecutive monthly payments. SFAS
No. 60 specifically excludes mortgage guaranty insurance from its guidance relating to reserves for losses and LAE. Consistent with industry accounting practice, the Company considers its mortgage insurance policies as short duration contracts
and, accordingly, does not establish loss reserves for future claims on insured loans that are not currently in default. The Company establishes loss reserves on a case-by-case basis



F-10



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PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



when insured loans are identified as currently in default using estimated claim rates and average claim amounts for each report year, net of salvage
recoverable. The Company also establishes loss reserves for defaults that have been incurred but have not been reported to the Company prior to the close of an accounting period using estimated claim rates and claim amounts applied to the estimated
number of defaults not reported. The reserve levels as of the consolidated balance sheet date represent managements best estimate of existing losses and LAE incurred. The estimates are continually reviewed and adjusted as necessary as
experience develops or new information becomes known to the Company. Such adjustments, to the extent of increasing or decreasing loss reserves, are recognized in the current periods consolidated results of operations.



Reinsurance  The Company uses reinsurance to reduce net risk in force and
optimize capital allocation. The Companys reinsurance agreements typically provide for recovery of a proportionate level of claim expenses from reinsurers, and reinsurance recoverable is recorded as an asset. The Company remains liable to its
policyholders if the reinsurers are unable to satisfy their obligations under the agreements as with all reinsurance contracts. Reinsurance recoverables on paid losses and loss estimates are based on the Companys actuarial analysis of the
applicable business. Amounts the Company will ultimately recover could differ materially from amounts recorded as reinsurance recoverables. Reinsurance transactions are recorded in accordance with the provisions of the reinsurance agreements and the
accounting guidance provided in SFAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. Accordingly, management assesses, among other factors, risk transfer criteria for all reinsurance
agreements. Ceded premiums for quota share reinsurance are deferred and amortized on the same basis as our single premium policies as described below.



Revenue Recognition  Mortgage guarantee insurance policies are contracts that are generally noncancelable by the insurer and provide payment of
premiums on a monthly, annual or single basis. Primary mortgage insurance premiums written on policies covering more than one year are referred to as single premiums. A portion of revenue on single premiums is recognized in premiums earned in the
current period, and the remaining portion is deferred as unearned premiums and earned over the expected life of the policy, a range of eight to nine years. If single premium policies related to insured loans are canceled due to repayment by the
borrower, and the premium is nonrefundable, then the remaining unearned premium related to each canceled policy is recognized to earned premiums upon notification of the cancellation. Unearned premiums represent the portion of premiums written that
is applicable to the estimated unexpired risk of insured loans. Rates used to determine the earning of single premiums are estimates based on the actuarial analysis of the expiration of risk. The earnings pattern calculation is an estimation process
and, accordingly, the Company reviews its premium earnings pattern for each policy acquisition year (Book Year) annually, and any adjustments to the estimates are reflected for each Book Year as appropriate.



Income Taxes  PMI Ltd and its subsidiaries are included in the
consolidated tax return of PMI Holdings. The tax provision for the Company for financial reporting purposes is determined on a stand-alone basis.



The Company accounts for income taxes using the liability method in accordance with SFAS No. 109, Accounting for Income Taxes. The liability method measures
the expected future tax effects of temporary differences at the enacted tax rates applicable for the period in which the deferred asset or liability is expected to be realized or settled. Temporary differences are differences between the tax basis
of an asset or liability and its reported amount in the consolidated financial statements that will result in future increases or decreases in taxes owed on a cash basis compared to amounts already recognized as tax



F-11



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PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



expense in the consolidated statements of operations. The Companys effective tax rate was 29.8%, 28.6% and 30.0% for 2006, 2005 and 2004, respectively,
compared to the Australian statutory rate of 30.0%. Differences are principally due to prior year adjustments.



Foreign Currency Translation  The consolidated financial statements have been translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency Translation.Accordingly,
assets and liabilities in the functional currency are translated using the year-end spot exchange rates. Revenues and expenses are translated at monthly-average exchange rates. Gains and losses on currency remeasurement incurred by the Company
represent the revaluation of assets and liabilities denominated in nonfunctional currency into the functional currency into the reporting currency. The effects of translating operations with a functional currency other than the reporting currency
are reported as a component of accumulated other comprehensive income (loss) included in consolidated shareholders equity.



Comprehensive Income Comprehensive income includes net income, foreign currency translation gains or losses, changes in unrealized gains and losses
on investments, and the reclassification of realized gains and losses previously reported in comprehensive income, net of related tax effects. The Company reports the components of comprehensive income in its consolidated statements of
shareholders equity.



NOTE 3. NEW ACCOUNTING STANDARDS



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



In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements(SAB No. 108). This release provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a current year misstatement. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006, with early application encouraged. The adoption of SAB
108 is not expected to have a material effect on the Companys consolidated financial statements.



In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS No. 157) which defines fair value, establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements but does not expand the use of fair value in any new circumstances. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is still evaluating the impact of SFAS No. 157 on its consolidated financial statements.



In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income
TaxesAn Interpretation of FASB Statement No. 109, (FIN 48) which prescribes a recognition threshold and measurement process for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interim reporting and disclosure requirements for uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15,
2006. FIN 48 is not currently expected to materially impact the Companys consolidated financial condition.



On January 1, 2006, the Company adopted SFAS No. 123R which requires the fair value of share-based payments, including grants of employee stock options and
employee stock purchase plan shares, to be recognized in the income statement based on their fair values unless a fair value is not reasonably



F-12



---

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



estimable. Prior to the Companys adoption of SFAS No. 123R, the Company followed the intrinsic value method prescribed in APB No. 25,and its related interpretations, as permitted by SFAS No. 123.Accordingly, no share-based employee compensation cost was recognized in the consolidated statement of operations for the year ended December 31, 2005. The Company
elected to adopt the modified prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS No. 123R apply to new grants and to grants that were outstanding as of the effective date and
are subsequently modified. Estimated compensation for grants that were outstanding as of the effective date will be recognized over the remaining service period using the compensation cost estimated for the SFAS No. 123 pro forma disclosures.



NOTE 4. INVESTMENTS



Fair Values and Gross Unrealized Gains and Losses on InvestmentsThe cost or amortized cost, estimated fair value, and gross unrealized gains and losses on investments are shown in the table below:



|                                                              |  |                        |         |                  |        |        |            |   |         |   |  |   |        
|------------------------------------------------------------- |  | ---------------------- | ------- | ---------------- | ------ | ------ | ---------- | - | ------- | - |  | - | -------
|                                                              |  | Cost orAmortizedCost   |         | Gross Unrealized |        |        | Fair Value
|                                                              |  |                        | Gains   |                  | Losses |        |           
|                                                              |  | (Dollars in thousands)
|December 31, 2006                                             |  |                        |         |                  |        |        |            |   |         |   |  |   |        
|Fixed income securities:                                      |  |                        |         |                  |        |        |            |   |         |   |  |   |        
|Australian and New Zealand Federal and State Government bonds |  | $                      | 380,957 |                  | $      |       |            | $ | (7,163  | ) |  | $ | 373,794
|Corporate bonds                                               |  |                        | 516,457 |                  |        | 99     |            |   | (7,372  | ) |  |   | 509,184
|                                                              |  |                        |         |                  |        |        |            |   |         |   |  |   |        
|Total fixed income securities                                 |  |                        | 897,414 |                  |        | 99     |            |   | (14,535 | ) |  |   | 882,978
|Equity securities  common stocks                             |  |                        | 23,189  |                  |        | 11,256 |            |   | (10     | ) |  |   | 34,435 
|                                                              |  |                        |         |                  |        |        |            |   |         |   |  |   |        
|Total investments                                             |  | $                      | 920,603 |                  | $      | 11,355 |            | $ | (14,545 | ) |  | $ | 917,413
|                                                              |  |                        |         |                  |        |        |            |   |         |   |  |   |        



|                                                              |  |                        |         |                  |          |        |            |   |      |   |  |   |        
|------------------------------------------------------------- |  | ---------------------- | ------- | ---------------- | -------- | ------ | ---------- | - | ---- | - |  | - | -------
|                                                              |  | Cost orAmortizedCost   |         | Gross Unrealized |          |        | Fair Value
|                                                              |  |                        | Gains   |                  | (Losses) |        |           
|                                                              |  | (Dollars in thousands)
|December 31, 2005                                             |  |                        |         |                  |          |        |            |   |      |   |  |   |        
|Fixed income securities:                                      |  |                        |         |                  |          |        |            |   |      |   |  |   |        
|Australian and New Zealand Federal and State Government bonds |  | $                      | 313,922 |                  | $        | 4,361  |            | $ | (43  | ) |  | $ | 318,240
|Corporate bonds                                               |  |                        | 282,100 |                  |          | 3,529  |            |   | (41  | ) |  |   | 285,588
|                                                              |  |                        |         |                  |          |        |            |   |      |   |  |   |        
|Total fixed income securities                                 |  |                        | 596,022 |                  |          | 7,890  |            |   | (84  | ) |  |   | 603,828
|Equity securities  common stocks                             |  |                        | 18,672  |                  |          | 9,148  |            |   | (126 | ) |  |   | 27,694 
|                                                              |  |                        |         |                  |          |        |            |   |      |   |  |   |        
|Total investments                                             |  | $                      | 614,694 |                  | $        | 17,038 |            | $ | (210 | ) |  | $ | 631,522
|                                                              |  |                        |         |                  |          |        |            |   |      |   |  |   |        





F-13



---

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Scheduled MaturitiesThe following table sets forth the amortized cost and fair value of
fixed income securities by contractual maturity at December 31, 2006:



|                                       |  |                        |         |            |   |        
|-------------------------------------- |  | ---------------------- | ------- | ---------- | - | -------
|                                       |  | AmortizedCost          |         | Fair Value
|                                       |  | (Dollars in thousands)
|Due in one year or less                |  | $                      | 54,447  |            | $ | 54,262 
|Due after one year through five years  |  |                        | 489,863 |            |   | 481,967
|Due after five years through ten years |  |                        | 328,377 |            |   | 322,686
|Due after ten years                    |  |                        | 24,727  |            |   | 24,063 
|                                       |  |                        |         |            |   |        
|Total fixed income securities          |  | $                      | 897,414 |            | $ | 882,978
|                                       |  |                        |         |            |   |        



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:



|                                  |  |                        |        |   |      |   |        |      |  |   |        |  
|--------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                  |  | 2006                   |        |   | 2005 |   |        | 2004 | 
|                                  |  | (Dollars in thousands) |       
|Fixed income securities           |  | $                      | 44,780 |   |      | $ | 31,558 |      |  | $ | 25,022 |  
|Equity securities                 |  |                        | 1,204  |   |      |   | 1,183  |      |  |   | 869    |  
|Cash and cash equivalents         |  |                        | 5,377  |   |      |   | 4,418  |      |  |   | 2,946  |  
|                                  |  |                        |        |   |      |   |        |      |  |   |        |  
|Investment income before expenses |  |                        | 51,361 |   |      |   | 37,159 |      |  |   | 28,837 |  
|Investment expenses               |  |                        | (1,192 | ) |      |   | (904   | )    |  |   | (702   | )
|                                  |  |                        |        |   |      |   |        |      |  |   |        |  
|Net investment income             |  | $                      | 50,169 |   |      | $ | 36,255 |      |  | $ | 28,135 |  
|                                  |  |                        |        |   |      |   |        |      |  |   |        |  



Realized Investment Gains and Losses Realized gains and losses on investments are composed of:



|                                                       |  |                        |       |   |      |   |      |      |  |   |       |  
|------------------------------------------------------ |  | ---------------------- | ----- | - | ---- | - | ---- | ---- |  | - | ----- | -
|                                                       |  | 2006                   |       |   | 2005 |   |      | 2004 | 
|                                                       |  | (Dollars in thousands) |      
|Fixed income securities:                               |  |                        |       |   |      |   |      |      |  |   |       |  
|Gross gains                                            |  | $                      | 123   |   |      | $ |     |      |  | $ | 240   |  
|Gross losses                                           |  |                        | (30   | ) |      |   | (302 | )    |  |   | (948  | )
|                                                       |  |                        |       |   |      |   |      |      |  |   |       |  
|Net gains (losses)                                     |  |                        | 93    |   |      |   | (302 | )    |  |   | (708  | )
|Equity securities  common stocks:                     |  |                        |       |   |      |   |      |      |  |   |       |  
|Gross gains                                            |  |                        | 3,216 |   |      | $ | 871  |      |  |   | 1,035 |  
|Gross losses                                           |  |                        | (308  | ) |      |   | (367 | )    |  |   | (288  | )
|                                                       |  |                        |       |   |      |   |      |      |  |   |       |  
|Net gains                                              |  |                        | 2,908 |   |      |   | 504  |      |  |   | 747   |  
|                                                       |  |                        |       |   |      |   |      |      |  |   |       |  
|Net realized investment gains before income taxes      |  |                        | 3,001 |   |      |   | 202  |      |  |   | 39    |  
|Income taxes                                           |  |                        | (900  | ) |      |   | (60  | )    |  |   | (12   | )
|                                                       |  |                        |       |   |      |   |      |      |  |   |       |  
|Total net realized investment gains after income taxes |  | $                      | 2,101 |   |      | $ | 142  |      |  | $ | 27    |  
|                                                       |  |                        |       |   |      |   |      |      |  |   |       |  



F-14



---

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Unrealized Investment Gains and Losses  The change in unrealized
gains and losses net of deferred taxes consists of:



|                                                                                                                                               |  |                        |         |   |      |   |       |      |  |   |       |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                                                                                               |  | 2006                   |         |   | 2005 |   |       | 2004 | 
|                                                                                                                                               |  | (Dollars in thousands) |        
|Total change in unrealized gains/losses arising during the period, net of taxes                                                                |  | $                      | (11,912 | ) |      | $ | 2,382 |      |  | $ | 8,412 |  
|Less: Realized investment gains, net of income taxes                                                                                           |  |                        | (2,101  | ) |      |   | (142  | )    |  |   | (27   | )
|                                                                                                                                               |  |                        |         |   |      |   |       |      |  |   |       |  
|Change in unrealized gains/losses arising during the period, net of deferred tax (benefit) expense of $(6,005), $960, and $3,595,
respectively |  | $                      | (14,013 | ) |      | $ | 2,240 |      |  | $ | 8,385 |  
|                                                                                                                                               |  |                        |         |   |      |   |       |      |  |   |       |  



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 that individual securities have been in a continuous unrealized
loss position as of December 31, 2006.



|                                                              |  |                        |         |                  |                      |         |            |       |                  |        |  |            |      |                  |  |   |         |  |   |         |  
|------------------------------------------------------------- |  | ---------------------- | ------- | ---------------- | -------------------- | ------- | ---------- | ----- | ---------------- | ------ |  | ---------- | ---- | ---------------- |  | - | ------- |  | - | ------- | -
|                                                              |  | Less Than 12 Months    |         |                  | 12 Months or Greater |         |            | Total |                 
|                                                              |  | Fair Value             |         | UnrealizedLosses |                      |         | Fair Value |       | UnrealizedLosses |        |  | Fair Value |      | UnrealizedLosses | 
|                                                              |  | (Dollars in thousands) |        
|Fixed income securities:                                      |  |                        |         |                  |                      |         |            |       |                  |        |  |            |      |                  |  |   |         |  |   |         |  
|Australian and New Zealand Federal and State Government bonds |  | $                      | 366,612 |                  | $                    | (6,792  | )          |       | $                | 7,190  |  | $          | (371 | )                |  | $ | 373,802 |  | $ | (7,163  | )
|Corporate bonds                                               |  |                        | 466,160 |                  |                      | (6,840  | )          |       |                  | 23,044 |  |            | (532 | )                |  |   | 489,204 |  |   | (7,372  | )
|                                                              |  |                        |         |                  |                      |         |            |       |                  |        |  |            |      |                  |  |   |         |  |   |         |  
|Total fixed income securities                                 |  |                        | 832,772 |                  |                      | (13,632 | )          |       |                  | 30,234 |  |            | (903 | )                |  |   | 863,006 |  |   | (14,535 | )
|Equity securities  common stocks                             |  |                        | 397     |                  |                      | (10     | )          |       |                  |       |  |            |     |                  |  |   | 397     |  |   | (10     | )
|                                                              |  |                        |         |                  |                      |         |            |       |                  |        |  |            |      |                  |  |   |         |  |   |         |  
|Total                                                         |  | $                      | 833,169 |                  | $                    | (13,642 | )          |       | $                | 30,234 |  | $          | (903 | )                |  | $ | 863,403 |  | $ | (14,545 | )
|                                                              |  |                        |         |                  |                      |         |            |       |                  |        |  |            |      |                  |  |   |         |  |   |         |  



Unrealized losses were primarily due
to interest rate fluctuations during the year and are not considered to be other-than-temporarily impaired as the Company has the intent and ability to hold such investments until they recover in value or mature. The Company determined that the
decline in the market value of certain equity securities in its investment portfolio met the definition of other-than-temporary impairment and recognized realized losses of $0.4 million, $0.4 million and $0.2 million in 2006, 2005 and 2004,
respectively.



Investment Concentrations and Other Items
The Company maintains a diversified portfolio principally of fixed income securities. The following entities represent the largest concentrations in the portfolio, expressed as a percentage of the fair value of the entire portfolio. Holdings that
exceed 5% of the fixed income security portfolio at December 31, for the respective years, are presented below:



|                                        |  |                        |         |  |      |   |  |   |         |  |      |  
|--------------------------------------- |  | ---------------------- | ------- |  | ---- | - |  | - | ------- |  | ---- | -
|                                        |  | 2006                   |         |  | 2005 |  
|                                        |  | (Dollars in thousands) |        
|Australian Commonwealth Government Bond |  | $                      | 120,068 |  | 13.6 | % |  | $ | 124,475 |  | 20.6 | %
|Queensland Treasury Corp. Bond          |  | $                      | 83,029  |  | 9.4  | % |  | $ | 71,533  |  | 11.8 | %
|Western Australian Treasury Corp. Bond  |  | $                      | 67,147  |  | 7.6  | % |  | $ | 34,786  |  | 5.8  | %
|New South Wales Treasury Corp. Bond     |  | $                      | 48,969  |  | 5.6  | % |  | $ | 30,681  |  | 5.1  | %
|Victorian Treasury Corp. Bond           |  | $                      | 47,119  |  | 5.3  | % |  | $ | 38,307  |  | 6.3  | %



The Company has bonds with
restrictions on redemption deposited with the New Zealand Public Trust Office. The fair value of such bonds at December 31, 2006, was $0.3 million.





F-15



---

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 5. DEFERRED POLICY ACQUISITION COSTS



The following table summarizes deferred policy acquisition cost activity as of and for the years ended;



|                                                  |  |                        |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                  |  | 2006                   |         |   | 2005 |   |         | 2004 | 
|                                                  |  | (Dollars in thousands) |        
|Balance at January 1,                             |  | $                      | 35,562  |   |      | $ | 34,129  |      |  | $ | 26,968  |  
|Policy acquisition costs incurred and deferred    |  |                        | 16,902  |   |      |   | 12,754  |      |  |   | 18,134  |  
|Amortization of deferred policy acquisition costs |  |                        | (14,770 | ) |      |   | (11,321 | )    |  |   | (10,973 | )
|                                                  |  |                        |         |   |      |   |         |      |  |   |         |  
|Balance at December 31,                           |  | $                      | 37,694  |   |      | $ | 35,562  |      |  | $ | 34,129  |  
|                                                  |  |                        |         |   |      |   |         |      |  |   |         |  



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



NOTE 6. LEASEHOLD IMPROVEMENTS, EQUIPMENT AND SOFTWARE



The
following table sets forth the cost basis of, and accumulated depreciation and amortization for, leasehold improvements, equipment and software as of the years ended;



|                                                                                                 |  |                        |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------ |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                 |  | 2006                   |        |   | 2005 |  
|                                                                                                 |  | (Dollars in thousands) |       
|Leasehold improvements                                                                           |  | $                      | 3,707  |   |      | $ | 3,444  |  
|Furniture and equipment                                                                          |  |                        | 2,570  |   |      |   | 2,049  |  
|Software                                                                                         |  |                        | 1,945  |   |      |   | 1,788  |  
|                                                                                                 |  |                        |        |   |      |   |        |  
|Leasehold improvements, equipment and software, at cost                                          |  |                        | 8,222  |   |      |   | 7,281  |  
|Less accumulated depreciation and amortization                                                   |  |                        | (5,768 | ) |      |   | (4,753 | )
|                                                                                                 |  |                        |        |   |      |   |        |  
|Leasehold improvements, equipment and software, net of accumulated depreciation and amortization |  | $                      | 2,454  |   |      | $ | 2,528  |  
|                                                                                                 |  |                        |        |   |      |   |        |  



Depreciation and amortization expense
related to leasehold improvements, equipment and software totaled $0.6 million in 2006, $1.3 million in 2005 and $1.5 million in 2004. Capitalized costs associated with software developed for internal use were $1.1 million in 2006, $1.0 million in
2005 and $0.8 million in 2004.





F-16



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PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 7. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES



The Company establishes reserves for losses and LAE to recognize the estimated liability for
potential losses and related loss adjustment expenses 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 reserves for losses and loss adjustment expenses for each of the three years ended December 31:



|                                                                            |  |                        |         |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                            |  | 2006                   |         |   | 2005 |   |        | 2004 | 
|                                                                            |  | (Dollars in thousands) |        
|Balance at January 1                                                        |  | $                      | 7,526   |   |      | $ | 7,672  |      |  | $ | 5,975  |  
|Reinsurance recoverables                                                    |  |                        |        |   |      |   | (81    | )    |  |   | (77    | )
|                                                                            |  |                        |         |   |      |   |        |      |  |   |        |  
|Net balance at January 1,                                                   |  |                        | 7,526   |   |      |   | 7,591  |      |  |   | 5,898  |  
|Losses and LAE incurred, principally with respect to defaults occurring in: |  |                        |         |   |      |   |        |      |  |   |        |  
|Current year                                                                |  |                        | 28,236  |   |      |   | 8,445  |      |  |   | 7,556  |  
|Prior years(1) (2)                                                          |  |                        | 8,017   |   |      |   | (4,868 | )    |  |   | (5,067 | )
|                                                                            |  |                        |         |   |      |   |        |      |  |   |        |  
|Total incurred                                                              |  |                        | 36,253  |   |      |   | 3,577  |      |  |   | 2,489  |  
|Losses and LAE payments, principally with respect to defaults occurring in: |  |                        |         |   |      |   |        |      |  |   |        |  
|Current year                                                                |  |                        | (2,590  | ) |      |   | (994   | )    |  |   | (479   | )
|Prior years                                                                 |  |                        | (12,920 | ) |      |   | (2,258 | )    |  |   | (639   | )
|                                                                            |  |                        |         |   |      |   |        |      |  |   |        |  
|Total payments                                                              |  |                        | (15,510 | ) |      |   | (3,252 | )    |  |   | (1,118 | )
|Foreign currency translation effects                                        |  |                        | 1,179   |   |      |   | (390   | )    |  |   | 322    |  
|Transfer of Insurance Portfolio from PMI Indemnity                          |  |                        | 977     |   |      |   |       |      |  |   |       |  
|                                                                            |  |                        |         |   |      |   |        |      |  |   |        |  
|Net ending balance at December 31,                                          |  |                        | 30,425  |   |      |   | 7,526  |      |  |   | 7,591  |  
|Reinsurance recoverables                                                    |  |                        |        |   |      |   |       |      |  |   | 81     |  
|                                                                            |  |                        |         |   |      |   |        |      |  |   |        |  
|Balance at December 31,                                                     |  | $                      | 30,425  |   |      | $ | 7,526  |      |  | $ | 7,672  |  
|                                                                            |  |                        |         |   |      |   |        |      |  |   |        |  

---

(1)The increase in losses and LAE incurred relating to prior years in 2006 was primarily due to our
reestimation of claim sizes and claim rates as a result of declines in regional home appreciation rates and interest rates increases.



(2)The reductions in losses and LAE incurred relating to prior years in 2005 and 2004 were primarily due to favorable development of actual claim amounts and adjustments to ultimate claim rates due to the strong housing
appreciation and overall economic conditions experienced in Australia over the two year period.



NOTE 8. FAIR VALUE OF FINANCIAL INSTRUMENTS



In the normal course of business, the Company invests in various financial assets and incurs various financial liabilities. The estimated fair value of the financial instruments indicated in the table below has been determined by available
market information and appropriate valuation methodology. The carrying values of cash and cash equivalents and accrued investment income approximate their fair values primarily due to their liquidity and short-term nature.



F-17



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PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                          |  |                         |         |                         |   |               |  |                     |         |  |   |        
|------------------------- |  | ----------------------- | ------- | ----------------------- | - | ------------- |  | ------------------- | ------- |  | - | -------
|                          |  | As of December 31, 2006 |         | As of December 31, 2005
|                          |  | CarryingValue           |         | EstimatedFair Value     |   | CarryingValue |  | EstimatedFair Value
|                          |  | (Dollars in thousands) 
|Fixed income securities   |  | $                       | 882,978 |                         | $ | 882,978       |  | $                   | 603,828 |  | $ | 603,828
|Equity securities         |  | $                       | 34,435  |                         | $ | 34,435        |  | $                   | 27,694  |  | $ | 27,694 
|Cash and cash equivalents |  | $                       | 151,818 |                         | $ | 151,818       |  | $                   | 100,712 |  | $ | 100,712
|Accrued investment income |  | $                       | 13,934  |                         | $ | 13,934        |  | $                   | 8,635   |  | $ | 8,635  



Considerable judgment is required in
interpreting market data to develop the estimates of fair value and, therefore, changes in the assumptions may have a material effect on the fair value estimates. A number of the Companys other significant assets and liabilities, including
deferred policy acquisition costs, reserves for loss and LAE, unearned premiums, reinsurance receivables and deferred income taxes are not considered financial instruments.



NOTE 9. REINSURANCE



The following table shows the effects of reinsurance on premiums written, premiums earned and losses and loss adjustment expenses of the Companys operations for the
years ended:



|                                        |  |                         |         |   |      |   |         |      |  |   |         |  
|--------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                        |  | Year ended December 31, |        
|                                        |  | 2006                    |         |   | 2005 |   |         | 2004 | 
|                                        |  | (Dollars in thousands)  |        
|Premiums written                        |  |                         |         |   |      |   |         |      |  |   |         |  
|Direct                                  |  | $                       | 159,086 |   |      | $ | 120,589 |      |  | $ | 114,435 |  
|Assumed                                 |  |                         | 28,403  |   |      |   | 37,325  |      |  |   | 44,338  |  
|Ceded                                   |  |                         | (3,232  | ) |      |   | (6,876  | )    |  |   | (6,783  | )
|                                        |  |                         |         |   |      |   |         |      |  |   |         |  
|Net premiums written                    |  | $                       | 184,257 |   |      | $ | 151,038 |      |  | $ | 151,990 |  
|                                        |  |                         |         |   |      |   |         |      |  |   |         |  
|Premiums earned                         |  |                         |         |   |      |   |         |      |  |   |         |  
|Direct                                  |  | $                       | 115,947 |   |      | $ | 89,934  |      |  | $ | 75,394  |  
|Assumed                                 |  |                         | 36,347  |   |      |   | 29,526  |      |  |   | 29,070  |  
|Ceded                                   |  |                         | (3,543  | ) |      |   | (5,901  | )    |  |   | (7,827  | )
|                                        |  |                         |         |   |      |   |         |      |  |   |         |  
|Net premiums earned                     |  | $                       | 148,751 |   |      | $ | 113,559 |      |  | $ | 96,637  |  
|                                        |  |                         |         |   |      |   |         |      |  |   |         |  
|Losses and loss adjustment expenses     |  |                         |         |   |      |   |         |      |  |   |         |  
|Direct                                  |  | $                       | 34,775  |   |      | $ | 3,245   |      |  | $ | 2, 681  |  
|Assumed                                 |  |                         | 1,478   |   |      |   | 371     |      |  |   | (161    | )
|Ceded                                   |  |                         |        |   |      |   | (39     | )    |  |   | (31     | )
|                                        |  |                         |         |   |      |   |         |      |  |   |         |  
|Net losses and loss adjustment expenses |  | $                       | 36,253  |   |      | $ | 3,577   |      |  | $ | 2,489   |  
|                                        |  |                         |         |   |      |   |         |      |  |   |         |  



Ceded premiums include premiums paid
to PMI for excess of loss reinsurance (see Note 14). In 2005 and 2004, ceded premiums also included amounts paid to a third party reinsurer.





F-18



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PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Assumed premiums include amounts relating to a reinsurance contract with a captive insurer affiliated with a mortgage
originator. The Company reinsures policies assumed from the captive insurer on a quota share basis.



NOTE 10. INCOME TAXES



The components of income tax expenses for the years ended December 31 are as follows:



|                                            |  |                        |        |      |   |        |      |  |   |       
|------------------------------------------- |  | ---------------------- | ------ | ---- | - | ------ | ---- |  | - | ------
|                                            |  | 2006                   |        | 2005 |   |        | 2004
|                                            |  | (Dollars in thousands)
|Current                                     |  | $                      | 36,124 |      | $ | 33,124 |      |  | $ | 25,380
|Deferred                                    |  |                        | 217    |      |   | (1,848 | )    |  |   | 1,540 
|                                            |  |                        |        |      |   |        |      |  |   |       
|Total income taxes before minority interest |  | $                      | 36,341 |      | $ | 31,276 |      |  | $ | 26,920
|                                            |  |                        |        |      |   |        |      |  |   |       



A reconciliation of the Australian
income tax rate to the effective tax rate reported on income before income taxes is shown in the following table:



|                                                   |  |      |    |  |      |    |  |      |  
|-------------------------------------------------- |  | ---- | -- |  | ---- | -- |  | ---- | -
|                                                   |  | 2006 |    |  | 2005 |    |  | 2004 |  
|Statutory federal income tax rate                  |  | 30.0 | %  |  | 30.0 | %  |  | 30.0 | %
|Other                                              |  | (0.2 | )% |  | (1.4 | )% |  |     |  
|                                                   |  |      |    |  |      |    |  |      |  
|Effective income tax rate before minority interest |  | 29.8 | %  |  | 28.6 | %  |  | 30.0 | %
|                                                   |  |      |    |  |      |    |  |      |  



The
components of the deferred income tax assets and liabilities as of the years ended December 31 are as follows:



|                                     |  |                        |        |   |      |   |         |  
|------------------------------------ |  | ---------------------- | ------ | - | ---- | - | ------- | -
|                                     |  | 2006                   |        |   | 2005 |  
|                                     |  | (Dollars in thousands) |       
|Deferred tax assets:                 |  |                        |        |   |      |   |         |  
|Other loss reserves                  |  | $                      | 1,046  |   |      | $ | 307     |  
|Accrued expenses                     |  |                        | 1,904  |   |      |   | 1,279   |  
|Unrealized net losses on investments |  |                        | 1,258  |   |      |   |        |  
|Purchased interest and amortization  |  |                        | 5,209  |   |      |   | 3,636   |  
|Reinsurance                          |  |                        | 95     |   |      |   | 152     |  
|Other assets                         |  |                        | 1      |   |      |   |        |  
|                                     |  |                        |        |   |      |   |         |  
|Total deferred tax assets            |  |                        | 9,513  |   |      |   | 5,374   |  
|                                     |  |                       
|Deferred tax liabilities:            |  |                        |        |   |      |   |         |  
|Accrued income                       |  |                        | (4,165 | ) |      |   | (2,401  | )
|Unrealized net gains on investments  |  |                        |       |   |      |   | (4,855  | )
|Deferred policy acquisition costs    |  |                        | (664   | ) |      |   | (834    | )
|Unearned premium                     |  |                        | (4,631 | ) |      |   | (2,555  | )
|Other liabilities                    |  |                        | (9     | ) |      |   | (232    | )
|                                     |  |                        |        |   |      |   |         |  
|Total deferred tax liabilities       |  |                        | (9,469 | ) |      |   | (10,877 | )
|                                     |  |                        |        |   |      |   |         |  
|Net deferred tax asset (liability)   |  | $                      | 44     |   |      | $ | (5,503  | )
|                                     |  |                        |        |   |      |   |         |  





F-19



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PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Although realization is not assured, management believes it is more likely than not that the deferred tax assets will
be realized.



NOTE 11. COMMITMENTS AND CONTINGENCIES



Leases  The Company leases certain office space and office equipment.
Minimum rental payments under noncancelable operating leases in the aggregate for the five years subsequent to 2006 are as follows:



|                             |  |                      |       
|---------------------------- |  | -------------------- | ------
|                             |  | OperatingLeases     
|                             |  | (Dollarsinthousands)
|Year ending December 31,     |  |                      |       
|2007                         |  | $                    | 3,034 
|2008                         |  |                      | 2,336 
|2009                         |  |                      | 1,911 
|2010                         |  |                      | 1,717 
|2011                         |  |                      | 1,682 
|Thereafter                   |  |                      | 1,305 
|                             |  |                      |       
|Total minimum lease payments |  | $                    | 11,985
|                             |  |                      |       



Rent expense for all leases was $2.7
million for 2006, $2.6 million for 2005 and $2.4 million for 2004. As of December 31, 2006, the Companys operating leases for office space had renewal options ranging between three and five years.



Legal ProceedingsVarious legal actions are currently pending that
involve the Company and specific aspects of its conduct of business. In the opinion of management, the ultimate liability in one or more of these actions is not expected to have a material effect on the consolidated financial condition, results of
operations or cash flows of the Company.



NOTE 12. BENEFIT PLANS



Superannuation PlansIt is compulsory for superannuation
contributions to be made by the Company to a regulated and complying superannuation fund for all Australian employees. The minimum required contribution, based on an employees salary, which is paid by the Company is 9% in 2006, 2005 and 2004.
Employees may elect to pay additional contributions out of their salary. The default superannuation plan for Australian employees is the ING Corporate Super although employees may elect for the contributions relating to them to be paid into another
plan. The Company has made superannuation payments on behalf of their employees of $1.6 million, $1.4 million and $1.1 million for 2006, 2005 and 2004, respectively.



In New Zealand all permanent employees are members of the PMI Mortgage Insurance Limited Superannuation Plan. Employer contributions are
8.06% of an employees salary.



The Company also pays salary continuance
insurance premiums. Salary continuance insurance provides permanent employees payments in the event that an individual is unable to work due to disability following a nonwork-related accident or injury. Contractors are not covered under this
benefit.





F-20



---

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Employee Stock Purchase Plan  PMI Ltds employees participate in The PMI Groups
Employee Stock Purchase Plan (ESPP) which allows eligible employees to purchase The PMI Groups common shares at a 15% discount to fair market value as determined by the plan. The ESPP offers participants the 15% discount to current
fair market value or fair market value with a look-back provision of the lesser of the duration an employee has participated in the ESPP or two years.



Equity Incentive Plan PMI Ltds employees participate in The PMI Groups Amended and Restated Equity Incentive Plan (the Equity
Incentive Plan) which provides for awards of stock options subject to various restrictions and performance hurdles, entitling the recipient to receive cash or common stock in the future. Generally options are granted with an exercise price
equal to the market value on the date of the grant, expire ten years from the grant and have a three year vesting period. The Companys consolidated shareholders equity is not impacted by either of these plans as common shares are issued
out of The PMI Group.



Impact of the Adoption of SFAS No. 123R The Companys ultimate parent, The PMI Group adopted SFAS No. 123R using the modified prospective method beginning January 1, 2006. Accordingly, during 2006, the Company recorded stock-based compensation expense for
awards granted prior to, but not yet vested at January 1, 2006, as if the fair value method required for pro forma disclosure under SFAS No. 123 were in effect for expense recognition purposes, adjusted for estimated forfeitures.



The Company has recognized compensation expense for all awards granted based
on the estimated grant date fair value method using the Black-Scholes option pricing model to determine the fair value of stock options and ESPP shares. For stock options, compensation expense is recognized using the accelerated amortization method.
The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Companys share price as well as assumptions regarding a number of complex and subjective variables. These
variables include the Companys expected share price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends.



As SFAS No. 123R requires that share-based compensation expense be based on awards that
are ultimately expected to vest, share-based compensation for the year ended December 31, 2006 has been reduced for estimated forfeitures. The Company is required to estimate forfeitures at the time of grant and revise those estimates in
subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest.



The fair value of each stock option grant is estimated on the date of the
grant using the Black-Scholes option pricing model with an expected volatility of 28.8%, expected dividends of 0.49%, an expected term of 4.3 years and risk-free rate of return of 4.40%.



As of December 31, 2006, compensation expense recognized due to the effect of adopting SFAS No. 123R was $0.74 million;
additionally, there was $0.35 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested share-based payments granted to employees. This unrecognized expense is expected to be recognized over a weighted
average period of 2.2 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.





F-21



---

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 13. STATUTORY ACCOUNTING



PMI Ltd and its insurance subsidiaries prepare financial statements for their regulator, APRA, in accordance with the accounting practices
prescribed by the regulator, which is a comprehensive basis of accounting other than GAAP.



The Companys APRA capital base, minimum capital requirement and solvency ratio as of December 31 are as follows:



|                                 |  |                        |         |      |   |         |  |   |        
|-------------------------------- |  | ---------------------- | ------- | ---- | - | ------- |  | - | -------
|                                 |  | 2006                   |         | 2005 |   | 2004   
|                                 |  | (Dollars in thousands)
|APRA capital base                |  | $                      | 824,775 |      | $ | 575,522 |  | $ | 467,564
|APRA minimum capital requirement |  | $                      | 560,239 |      | $ | 176,911 |  | $ | 152,856
|APRA solvency ratio              |  |                        | 1.47    |      |   | 3.25    |  |   | 3.06   



Under the insurance laws of Australia,
mortgage insurers are required to establish a catastrophic risk charge defined as a 1 in 250 year event. The Company is required to maintain adequate capital to fund this charge in addition to normal insurance liabilities.



From January 1, 2006, the minimum calculation was altered significantly by APRA
increasing the capital required by the Company. During the year the Company received capital injections from PMI holdings. The Company continues to hold capital in excess of the minimum required by APRA.



The Companys ability to pay dividends to PMI Holdings is restricted to the extent the
payment of dividends causes the solvency ratio to drop below the level established by APRA.



NOTE 14. RELATED PARTY TRANSACTIONS



Related Party Receivables As of December 31, 2006, related party receivables were $2.4 million, consisting of non interest bearing receivables due from the Australian holding company. There were no related party
receivables as of December 31, 2005.



Related Party Payables As of December 31, 2006, related party payables were $0.7 million consisting of non interest bearing payables, due to U.S. based related entities. As of December 31, 2005, related party payables were $0.2 million consisting
of non interest bearing payables due to Australian and U.S. based related entities. Additionally, included in other liabilities and accrued expenses are $5.7 million and $8.5 million of income taxes payable to PMI Holdings as of December 31, 2006
and 2005, respectively.



Other Related Party Transactions
PMI Ltd has a capital support arrangement with PMI. Under the capital support arrangement, the related company has undertaken to ensure that PMI Ltd exceeds the minimum required level of regulatory capital. No fees were incurred in 2006, 2005 and
2004, respectively, in relation to this arrangement.



PMI Ltd has an excess of
loss outward reinsurance arrangement with PMI. Reinsurance premiums totaling $3.2 million, $2.8 million and $2.2 million were incurred during 2006, 2005 and 2004, respectively, in relation to this arrangement.





F-22



---

PMI MORTGAGE INSURANCE LTD AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



PMI Ltd has a management services agreement with PMI Indemnity Limited (PMI Indemnity), a related Company
in Australia, under normal commercial terms and conditions. Under the agreement PMI Ltd managed all of the operational activities of PMI Indemnity. Fees of $0.0 million, $0.2 million and $0.3 million were earned in 2006, 2005 and 2004, respectively.
This agreement was discontinued in connection with the Companys acquisition of PMI Indemnitys mortgage insurance portfolio in June 2006 (see Note 15).



NOTE 15. PORTFOLIO TRANSFER AND CAPITAL MATTERS



In January 2006, PMI Indemnity transferred its mortgage insurance portfolio along with the associated liabilities and assets to PMI Ltd. The
transfer followed the decision by PMI Holdings to combine the operations of PMI Indemnity and the Company. Liabilities of $9.5 million and assets of $2.4 million were transferred at fair value and an additional capital contribution of $16.3 million
was made by PMI Holdings. In December 2006, PMI Holdings contributed $84.7 million to the Company to strengthen its capital position. The Company did not issue any ordinary shares as a result of these capital contributions.



These capital contributions from PMI Holdings were funded by distributions from PMI Indemnity
in conjunction with PMI Indemnitys transfer of liabilities and assets to PMI Ltd.



Also in January 2006, PMI Holdings contributed $45.9 million to the Company pursuant to APRAs new capital and prudential requirements applicable to all Australian mortgage insurers. The Company issued 62 million shares to PMI
Holdings in connection with this capital contribution. These new capital requirements increased the calculation of a mortgage insurers catastrophic claim risk, increased the concentration risk capital charge and capped the offset of the
allowance of reinsurance that can be considered for minimum capital levels to 60%. The Company is currently in compliance with all of these new capital requirements.



Also in connection with APRAs new capital requirements, the Company received $5.1 million of capital contributions during 2006 from
the minority interest holder of Western Lenders Mortgage Insurance Company Ltd (Western LMI), a majority owned subsidiary of the Company. Western LMI issued 5.1 million shares to the minority interest holder in connection with these
capital contributions.



F-23