Fitch Ratings Affirms PMI's 'AA+' Rating

Business Wire, May 24, 2002

Business Editors

CHICAGO--(BUSINESS WIRE)--May 24, 2002

Fitch Ratings has affirmed PMI Mortgage Insurance Co.'s (PMI Mortgage) 'AA ' insurer financial strength rating. Fitch has also affirmed the PMI Group, Inc.'s (PMI) 'AA-' long-term and senior debt ratings and PMI Capital I's 'A ' capital securities rating. The Rating Outlook is Stable.

Fitch's affirmations reflect PMI Mortgage's good risk-based capitalization, strong competitive position, and favorable earnings performance. Partially offsetting these positives is an increased exposure to sub-prime quality loans, a continued movement towards higher levels of premium sharing arrangements with lender customers, and the capital strain associated with international expansion.

As part of its analysis, Fitch stress tests PMI Mortgage's insured portfolio to estimate the impact a severe economic downturn and the resulting mortgage loan defaults could have on the company's capital position. The results suggest that PMI would be able to meet its financial obligations during a period of heightened mortgage defaults, such as those experienced during a severe recession, at the 'AA ' level.

PMI Mortgage's strong competitive position is evident by its share of the mortgage insurance industry's new insurance written, which is consistently in the 14%-18% range. In 2001, the company was the mortgage insurance industry's second largest writer of new insurance written.

PMI Mortgage reported strong earnings and capital formation in 2001 as generally favorable housing market trends and strong premium growth more than offset the impact of the economic downturn and a fairly significant increase in the company's default rate. On a statutory basis the company's 2001 pretax operating income increased 12% to $398 million and statutory capital increased 17% to $2.1 billion.

PMI's recent consolidated GAAP basis operating results have also been strong. The company's first quarter 2002 operating income increased 19% over the prior-year period to $86 million. For the full year 2001, PMI's pretax operating income increased 20% to $447 million.

PMI continues to utilize a moderate amount of financial leverage and its earnings-based interest and preferred dividend coverage is strong. At March 31, 2002, the company's ratio of debt and preferred capital securities to total capital was 20%. PMI's earnings based interest and preferred dividend coverage is very strong averaging 20 times (x) over the last three years.

In recent years, an increasing portion of PMI Mortgage's new insurance written has come from bulk or negotiated transactions. Fitch believes that these transactions include a higher proportion of sub-prime loans than PMI's overall insured portfolio and that these loans default at a significantly higher rate and season more quickly than prime loans. Although PMI Mortgage has significant expertise in pricing such transactions, Fitch believes that this trend could pressure the company's default rate going forward.

Competition in the mortgage insurance industry has increased in recent years as mortgage originators have established captive mortgage insurance subsidiaries. Like many of its peers, PMI Mortgage has entered into a number of reinsurance agreements with captive reinsurers under which it cedes a portion of its premiums and exposure. Fitch has industry-wide concerns about the pricing of these transactions and about their impact on the mortgage insurance industry's profitability.

    Entity/Issue/Type                Action   Rating/Outlook

    PMI Mortgage Insurance Co.
    --Insurer financial strength     Affirm   'AA '/Stable.

    The PMI Group, Inc.
    --Long-term rating               Affirm   'AA-'/Stable.
    --Senior unsecured debt          Affirm   'AA-'/Stable.

    PMI Capital I
    --Capital securities             Affirm   'A '/Stable.