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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

**
 
**

**FORM 10-K**

**For the fiscal year ended December 31, 2010**

**OR**

**For the transition periodfrom                     to                     **

**Commission file number 1-13664**

**
 
**

**THE PMI GROUP,INC.**

**(Exact name of registrant as specified in its charter)**

**(925) 658-7878**

**(Registrant’s telephone number, including area code)**

**
 
**

**Securities registered pursuant to Section 12(b) of the Act:**

**Securities registered pursuant to Section 12(g) of the Act:**

**None**

**
 
**

Indicate bycheck mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuantto Section 13 or Section 15(d) of the Act.    Yes   ̈    No  x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post suchfiles).    Yes   ̈    No   ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one): 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).    Yes   ̈    No  x

The aggregate market value of the voting stock (common stock) held by non-affiliates of the registrant as of the close of business onJune 30, 2010 was approximately $403.8 million based on the closing sale price of the common stock on the New York Stock Exchange consolidated tape on that date. All executive officers and directors, and beneficial owners of 10% or more of theoutstanding shares, of the registrant have been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant. 

Number of shares outstanding of registrant’s common stock, as of close of business on March 11, 2011: 161,309,088. 

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of the Proxy Statement forregistrant’s Annual Meeting of Stockholders to be held on May 19, 2011 are incorporated by reference into Items 10 through 14 of Part III. 

 

 

Table of Contents
**TABLE OF CONTENTS**

 
**PART I** Item 1.  
Business 
   2    
A.    Overview of Operations
   2    
B.    PMI, The Mortgage Insurance Industry and the Current Pronounced Real Estate Cycle
   4    
C.    Certain Regulatory and Other Issues Facing PMI
   4    
D.    U.S. Mortgage Insurance Operations
   8    
1.      Products
   8    
2.      Competition
   11    
3.      Customers
   13    
4.      Sales and Product Development
   13    
5.      Business Composition
   14    
6.      Risk Management
   18    
7.      Defaults and Claims
   20    
8.      Sustainable Homeownership
   28    
9.      Reinsurance
   28    
10.    Regulation
   30    
E.    International Operations
   35    
F.    Corporate and Other
   39    
G.    Investment Portfolio
   39    
H.    Employees
   41  Item 1A.  
Risk Factors
   41  Item 2.  
Properties
   62  Item 3.  
Legal Proceedings
   62  Executive Officers of Registrant   64  **PART II****  **Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   65  Item 6.  
Selected Financial Data
   68  Item 7.  
Management’s Discussion and Analysis of Financial Condition and Results ofOperations
   70  Item 7A.  
Quantitative and Qualitative Disclosures About Market Risk
   121  Item 8.  
Financial Statements and Supplementary Data
   124  Item 9A.  
Controls and Procedures
   191  **PART III****  **Item 10.  
Directors, Executive Officers and Corporate Governance
   192  Item 11.  
Executive Compensation
   192  Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   192  Item 13.  
Certain Relationships and Related Transactions, and Director Independence
   192  Item 14.  
Principal Accountant Fees and Services
   192  **PART IV****  **Item 15.  
Exhibits and Financial Statement Schedules 
   193  
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**Cautionary Statement Regarding Forward-Looking Statements**

 

Statements we make or incorporate by reference in this andother documents filed with the Securities and Exchange Commission that are not historical facts, that are preceded by, followed by or include the words “believes,” “expects,” “anticipates,” “estimates” orsimilar expressions, or that relate to future plans, events or performance are “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements in this report include discussions of futurepotential trends relating to losses, claims paid, loss reserves, default inventories, claim rates, rescission and claim denial activity and the challenges thereto, persistency, premiums, new insurance written, refinance activity, the make-up of ourvarious insurance portfolios, utilization of our deferred tax assets, the impact of market and competitive conditions, unemployment, liquidity, capital requirements and initiatives, captive reinsurance agreements, fair value of debt instruments, theperformance of our derivative contracts as well as certain securities held in our investment portfolios, and potential litigation. When a forward-looking statement includes an underlying assumption, we caution that, while we believe the assumptionto be reasonable and make it in good faith, assumed facts almost always vary from actual results, and the difference between assumed facts and actual results can be material. Where, in any forward-looking statement, we express an expectation orbelief as to future results, there can be no assurance that the expectation or belief will result. Our actual results may differ materially from those expressed in our forward-looking statements. Forward-looking statements involve a number of risksor uncertainties including, but not limited to, the Risk Factors addressed in Item 1A below. Other risks are referred to from time to time in our periodic filings with the Securities and Exchange Commission. **All of our forward-lookingstatements are qualified by and should be read in conjunction with our risk disclosures. Except as may be required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.**

 
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**PART I**

 
**ITEM 1.*********BUSINESS*******
 
**A.** **Overview of Operations**
 

Through our subsidiary, PMI Mortgage Insurance Co. (“MIC”), and its affiliated companies (collectively “PMI”), weprovide residential mortgage insurance in the United States. Mortgage insurance provides loss protection to mortgage lenders and investors in the event of borrower default. By protecting lenders and investors from credit losses, we help to ensurethat mortgages are available to prospective U.S. homebuyers. 

 

Our business has undergone significant changes in the past few years. The protracted weak housing, credit and economic environments continue to negatively affect our financial condition and results ofoperations. Our consolidated net loss was $773.0 million for the year ended December 31, 2010. Our financial condition and results of operations for 2010 are discussed on both a consolidated and segment basis in Item 7.*Management’s Discussion and Analysis of Financial Condition and Results of Operations*(*“MD&A”)*, below. As a result of our significant net losses, we face a number of regulatory and other issues as discussed in *C.Certain Regulatory and Other Issues Facing PMI*, below, and in *MD&A*. 

 

We are primarily focused on our U.S. Mortgage Insurance Operations. In 2010, the private mortgage insurance industry continued to be significantly challenged by the slow pace of economic recovery andinstability in the housing and mortgage markets. While we experienced lower levels of new notices of default and a reduction in our delinquent loan inventory in 2010, we expect to continue to incur losses in 2011. Our new business writings in 2010were limited as a result of continued competition with the Federal Housing Administration (“FHA”), which has become a significant competitor, and from the impact of Fannie Mae’s and Freddie Mac’s (collectively the“GSEs”) risk-based pricing structures, which include additive loan level pricing adjustments (“LLPA”) that the GSEs increased in 2010. Our new business writings were also limited by the continued impact of the changes we made toPMI’s underwriting guidelines and customer management strategies prior to 2010. As discussed in *D.2. Competition—U.S. and State Government Agencies,*we expect a variety of factors to continue to impact our new business writings.Such factors include, among others, mortgage and private mortgage insurance market and regulatory conditions and potential changes in the role of the GSEs and their business practices, including future increases to the GSEs’ LLPAs. 

 

In 2010, we engaged in a number of capital and businessinitiatives, including: 

 

*CapitalOfferings***—**In the second quarter of 2010, we completed the sale of 77,765,000 shares of our common stock and $285 million aggregate principal amount of 4.50% Convertible Senior Notes due 2020 (“Convertible Notes”) andreceived aggregate net proceeds of approximately $732 million. Of these aggregate net proceeds, we contributed approximately $610 million to MIC in the form of capital and two surplus notes with aggregate face amounts of $285 million (the“Surplus Notes”). In addition to increasing the statutory capital of MIC, the proceeds from the capital offerings strengthened our holding company liquidity and reduced the outstanding borrowings on our revolving credit facility.

 

*Homeownership Preservation*—In 2007,we formed PMI’s Homeownership Preservation Initiatives department (“HPI”) to develop and carry out our loss mitigation strategies. One of our strategies is to help loan servicers with their implementation of programs, including theHome Affordable Modification Program (“HAMP”), designed to assist troubled borrowers with finding solutions to avoid foreclosure and potentially cure and reinstate their loans. In 2010, the collective loss mitigation efforts by PMI and ourservicer customers have resulted in loan modifications and other payment plans affecting approximately $1.9 billion of PMI’s risk-in-force. 

 

*Modified Pool Restructuring*—In 2010, we restructured a significant portion of our modified pool exposure, including throughcommutations, which resulted in the elimination of $0.5 billion of risk-in-force and the release of loss reserves, which in turn resulted in capital benefits to MIC, on both a statutory and GAAP basis. 

 
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*Sale of FGIC*—In 2010, MIC sold its investment in FGIC Corporation, the holdingcompany of Financial Guaranty Insurance Company (collectively “FGIC”). While the proceeds from the sale of FGIC were not significant, MIC could potentially realize certain tax benefits in future periods from the disposition of FGIC.

 

*Reduction of PMI Europe’sRisk-In-Force—*In 2010, through contract commutations and terminations of credit default swap and other transactions, PMI Europe’s risk-in-force declined from $4.9 billion at December 31, 2009 to $0.7 billion at December 31,2010. 

 

*Repositioning of InvestmentPortfolio—*In response to operating losses in 2010, we significantly reduced our investments in tax-advantaged securities and we recorded realized investment gains of approximately $97 million. 

 

**We continue to focus on capital and capital reliefinitiatives. There can be no assurance that we will be able to achieve further statutory capital relief or improve our capital and liquidity position. See Item 1A. *Risk Factors—Risks Relating to Capital and Liquidity Matters.*

 

We divide our business into threesegments—U.S. Mortgage Insurance Operations, International Operations and Corporate and Other. 

 

*U.S. Mortgage Insurance Operations.*    As a U.S. residential mortgage insurer, PMI offers a variety of mortgage insurance products to meet the capital and credit risk mitigationneeds of its customers. PMI also owns 50% of CMG Mortgage Insurance Company, or CMG MI, a joint venture that provides mortgage insurance exclusively to credit unions. 

 

*International Operations.*    OurInternational Operations segment consists of our European and Canadian subsidiaries (“PMI Europe” and “PMI Canada”), neither of which is writing new business. PMI Europe offered mortgage insurance and mortgage credit enhancementproducts tailored primarily to the European mortgage markets, through 2008. PMI Canada offered residential mortgage insurance products in Canada in 2007 and 2008. Our International Operations segment also consists of the discontinued operations ofour former Australian and Asian mortgage insurance subsidiaries, which we sold in 2008. Our International Operations segment did not generate significant revenues in 2010. In connection with our sale of PMI Australia, we received a note in theprincipal amount of approximately $187 million, with interest accruing through September 2011, when it matures. Other than revenues from the amounts due on the note in 2011, we do not expect that our International Operations segment will generatesignificant revenues in the future. 

 

*Corporateand Other.*    Our Corporate and Other segment consists of corporate debt and expenses of our holding company, The PMI Group, Inc. (“The PMI Group” or “TPG”), contract underwriting operations (which werediscontinued in April 2009), our former investments in FGIC Corporation which we sold in the third quarter of 2010 and RAM Re which was sold in the fourth quarter of 2009, and equity in earnings or losses from investments in certain limitedpartnerships. 

 

As of December 31, 2010, ourconsolidated total assets were $4.2 billion, including our investment portfolio of $2.8 billion and total cash and cash equivalents of $0.3 billion. Our consolidated shareholders’ equity was $0.4 billion as of December 31, 2010. SeeItem 8.*Financial Statements and Supplementary Data—Note 18. Business Segments*, for financial information regarding our business segments. 

 

Our website address is *http://www.pmi-us.com.* Information on our website does not constitute part of this report. Our annual reporton Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are available free of charge on our website via a hyperlink as soon as reasonably practicable after such material iselectronically filed with or furnished to the Securities and Exchange Commission. The PMI Group is a Delaware corporation founded in 1972. Our principal executive offices are located at 3003 Oak Road, Walnut Creek, California 94597-2098, andour telephone number is (925) 658-7878. 

 
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Table of Contents**B.** **PMI, the Mortgage Insurance Industry and the Current Pronounced Real Estate Cycle**
 

The insurance coverage issued by PMI and other U.S. mortgageinsurers has several attributes that make mortgage insurance companies more susceptible to the cyclical nature of the economy in general and the housing and labor markets in particular than many other types of insurance companies. Mortgage insuranceis generally renewable at the option of the insured at the premium rate fixed when the insurance on the loan was initially issued. As a result, losses from increased claims from policies originated in a particular year cannot be offset by renewalpremium increases on policies in force. Because PMI recognizes its losses when it receives notices of default, the period over which PMI generates losses can be prolonged. In addition, we may not cancel the insurance coverage we issue except in theevent of nonpayment of premiums or certain violations of PMI’s master policies. Therefore, the average life of a PMI mortgage insurance policy generally has ranged from approximately four to ten years and may span a significant portion of aneconomic or real estate cycle. As a result, the loss ratios, which are the ratios of an insurer’s incurred losses to premiums earned, of PMI and the mortgage insurance industry are particularly affected by the cyclical nature of the U.S.economy and housing and labor markets. The chart below shows the mortgage insurance industry’s average loss ratios between 1989 and September 30, 2010 (the most recent date for which industry data is available) and PMI’s loss ratiosbetween 1989 and 2010.