PMI, which has reported about $3 billion in losses since the fourth quarter of 2007, said a backup plan intended to allow the company to stay open for business if its primary subsidiary falters had "no assurance" of continuing to work.
That backup plan gained importance when PMI reported Thursday its primary subsidiary had missed key capital-adequacy targets in the second quarter. The subsidiary is likely to be shut down by its primary regulator in Arizona if it is unable to "obtain significant capital," or at least outline a credible plan for doing so, Chief Executive L. Stephen Smith said on a conference call with investors.
Obtaining such capital will be "very challenging to achieve," Smith said.
The Arizona insurance department could also exercise its authority to seize control of the subsidiary or seek court approval to send it into receivership, the company said in filing with securities regulators earlier Thursday.
The news sent PMI shares down 55% to 40 cents in afternoon trading, and also hurt the stocks of rival mortgage insurers. MGIC Investment Corp. dropped 16% to $3.40, Radian Group Inc. fell 16% to $2.90 and Genworth Financial Inc. was down 6.6% to $7.31.
The possibility that its main unit might be shut down by regulators has hovered over PMI for months, and prompted the Walnut Creek, Calif.-based insurer to get approval for a second subsidiary to sell coverage if the first is prohibited from doing so. But PMI warned the ability of the second unit to sell coverage was also under threat.
The second subsidiary was operating with the approval of its two main customers, Fannie Mae and Freddie Mac, but PMI said there was "no assurance" the two mortgage companies will continue to approve the second unit when their current approvals expire at the end of the year.
In fact, PMI said in the filing with securities regulators, the two mortgage companies could revoke their approvals before that date.
"If this were to occur, the company would not be able to offer mortgage insurance through its combined insurance subsidiaries in all 50 states," PMI wrote.
Mortgage insurers have suffered from billions in losses on policies they sold in the years just before the housing bubble burst. The insurers have since raised prices and tightened their underwriting standards, and the policies they've sold in more recent years have so far proven to be highly profitable.
However, PMI and others in the industry are still losing money because the cost of the older policies has so far outstripped the profits from the new ones. Reduced sales of new homes, a loss of market share to the Federal Housing Authority and stalled efforts by lenders to renegotiate terms on the older mortgages have hurt results.
PMI said it had a net loss of $134 million in the second quarter as lenders pushed back against its efforts to deny some claims. It ended the quarter with a policyholders' position about $320 million below the minimum required by Arizona law.
"Our financial results and the trends underlying them present us with serious challenges and a shortened timeline to address them," Smith said on the conference call.
"I do not know if we will be able to complete a capital transaction that will successfully allow us to continue to write new insurance business," he said. "I do believe, however, that there is recognition from a variety of parties that a creative solution to PMI's current challenges would be beneficial to PMI, its investors, policyholders, potential future investors and the housing market."
