Alt-A Loans-We define Alt-A loans as loans where the borrower’s FICO score is 620 or higher and the borrower requests and is given the option of providing reduced documentation verifying the borrower’s income, assets, deposit information or employment. Beginning in 2007, we began
The decreases in amortization of deferred policy acquisition costs in 2008 compared to 2007 were primarily due to our $33.6 million impairment in 2007 of PMI’s deferred policy acquisition costs associated with PMI’s 2007 book year. As a result of this impairment, current period amortization includes only costs associated with book years prior to 2007 and the year ended December 31, 2008. PMI’s deferred policy acquisition cost asset increased to $32.3 million at December 31, 2008 from $10.5 million at December 31, 2007. The increase in amortization of deferred policy acquisition costs in 2007 compared to 2006 was also primarily due to the above impairment of $33.6 million.
As of December 31, 2008, we ceded $482.7 million in loss reserves primarily to captive reinsurers, which we record as reinsurance recoverables. Reinsurance recoverables do not exceed assets in captive trust accounts. As of December 31, 2008, assets in captive trust accounts held for the benefit of PMI totaled approximately $860.1 million. See Conditions and Trends Affecting our Business-U.S. Mortgage Insurance Operations-Captive Reinsurance, above.
The increases in loans in default for modified pool with deductible in 2008 and 2007 were due to deterioration in the 2007 and 2006 book years. We expect the numbers of modified pool loans in default to increase as PMI’s modified pool portfolio seasons due to continued housing and employment deterioration. The increases in loans in default for modified pool without deductible in 2008 were primarily due to a large modified pool transaction in which PMI insured predominantly seasoned, less-than-A quality loans. Our modified pool portfolios are aging under severe economic conditions and certain deductibles on individual pool transactions were pierced in 2008. We expect additional deductibles to be exceeded in 2009. In 2008, due to increases in pending defaults and higher average loan amounts, claim rates, claim sizes and severity, we established significant loss reserves with respect to our modified pool with deductibles portfolios. Additional reserves may be recorded in the future with respect to these portfolios.
Equity in losses from RAM Re in 2008 was $57.7 million compared to equity in earnings of $4.5 million and $8.7 million in 2007 and 2006, respectively. The equity in losses from RAM Re in 2008 was due primarily to RAM Re’s increases in loss reserves related to continued deterioration in the performance of RMBS. In the third quarter of 2008, we realized an other-than-temporary impairment charge of $2.9 million with respect to our investment in RAM Re. The carrying value of our investment in RAM Re was zero at December 31, 2008.
Our policy acquisition costs are those costs that vary with, and are primarily related to, our acquisition, underwriting and processing of new mortgage insurance policies, including contract underwriting and sales related activities. To the extent we provided contract underwriting services on loans that did not require mortgage insurance, associated underwriting costs were not deferred. We defer policy acquisition costs when incurred and amortize these costs in proportion to estimated gross profits for each policy year by type of insurance contract (i.e. monthly, annual and single premium). The amortization estimates for each underwriting year are monitored regularly to reflect persistency and expected loss development by type of insurance contract. The deferred costs related to single premium policies are adjusted as appropriate for policy cancellations to be consistent with our revenue recognition policy. We review our estimation process on a regular basis and any adjustments made to the estimates are reflected in the current period’s consolidated net income.
We are affected by economic downturns, natural disasters and other events in specific regions of the United States where a large portion of our U.S. business is concentrated. As of December 31, 2008, 10.3% of PMI’s primary risk in force was located in Florida, and 8.0% was located in California. We are currently experiencing accelerated delinquency and loss development in those states. In addition, we expect higher default and claim rates for high LTV loans, ARMs, 2/28 Hybird ARMs, Alt-A loans, interest only loans, payment option ARMS and less-than-A quality loans. We also insure loans that have more than one of the above risk characteristics. This “layering” of risk has further increased the risk of borrower default. Although we attempt to incorporate the higher default and claim rates associated with these loans into our underwriting and pricing models, there can be
policy requires an insured to notify PMI of a default no later than the last business day of the month following the month in which the borrower becomes three monthly payments in default. SFAS No. 60 specifically excludes mortgage guaranty insurance from its guidance relating to reserves for losses and LAE. Consistent with industry accounting practices, the Company considers its mortgage insurance policies short-duration contracts and, accordingly, does not establish loss reserves for future claims on insured loans that are not currently in default. The Company establishes loss reserves when insured loans are identified as currently in default using estimated claim rates and claim amounts for each report year, net of recoverables. The Company also establishes loss reserves for defaults that it believes have been incurred but not yet reported to the Company prior to the close of an accounting period using estimated claim rates and claim amounts applied to the estimated number of defaults not reported.
As of January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109 (“FIN 48”).
Revolving Credit Facility-The Company has a $250 million revolving credit facility (the “facility”) for working capital, capital expenditures and other business purposes. The facility includes a $50 million letter of credit sub-limit. The revolving credit facility contains certain financial covenants and restrictions, including an adjusted consolidated net worth threshold and a risk-to-capital ratio threshold of 20 to 1. There was $200 million outstanding under this facility and one letter of credit for approximately $0.25 million as of December 31, 2008.
The components of the income tax expense for 2008 included no foreign provision for current tax expense and a deferred tax benefit of $4.0 million primarily related to PMI Europe.
PMI has provided for U.S. federal income tax on the undistributed earnings from its foreign subsidiaries, except to the extent such earnings are reinvested indefinitely.
Included in the underfunded status of the pension benefits is the underfunded status of The SERP Plan of $12.9 million and the underfunded status of PMI’s retirement plan of $23.4 million resulting in a net underfunded status of $36.3 million.
Reporting segments are based upon the Company’s internal organizational structure, the manner in which the Company’s operations are managed, the criteria used by the Company’s chief operating decision-maker to evaluate segment performance, the availability of separate financial information and overall materiality considerations.
The following table shows the components of other comprehensive (loss) income for the years ended December 31, 2008 and 2007:
The following table shows the accumulated balances for each component of accumulated other comprehensive (loss) income for the years ended December 31, 2008 and 2007: