PMI to Sell Australian Operations to QBE Insurance for $920M

Just one week after stating its Australian operations were delivering solid results, The PMI Group, a mortgage insurance company, announced today it has agreed to sell its Australian subsidiary and related holding company to QBE Insurance Group for approximately $920 million. The two companies also reached an agreement in principle for the sale of Hong Kong-based PMI Asia to QBE, Australia’s largest international general insurance and reinsurance group, for about $55 million. Details of that transaction will be released when both parties reach a definitive agreement. PMI said in a news release today that the Australian transaction would improve its overall liquidity and help its struggling U.S. mortgage insurance operations. On Aug. 7, PMI stated it had a net loss of $246.3 million, or $3.03 per share, in the second quarter of 2008 compared to net income of $83.8 million in the same quarter in 2007. The company said it had a loss of $225.9 million in its U.S. mortgage insurance operations because of rising delinquencies and defaults on home mortgages that it must pay claims on. And those numbers are continuing to escalate. RealtyTrac, an online marketplace for foreclosure properties, stated today that July foreclosure filings on U.S. properties had risen 8 percent from June to July and 55 percent from July 2007. Steve Smith, PMI chairman & CEO, said the transaction is an important step in the company’s “five-point plan for progress, specifically maintaining our financial strength and focusing on our core U.S. mortgage insurance business.” The five-point plan calls for PMI to focus on its core business, book high quality new business, mitigate losses, manage losses, manage expenses and maintain financial strength. The Australian sale and pending Asian transaction are part of PMI’s plan to retreat from overseas markets while it deals with the task of rebuilding its American business. The company had previously said it was closing down its operations in Canada, giving it $60 million in capital to use back in the United States. It is also shutting down most of its European offices and consolidating its operations to Dublin to save money. PMI Mortgage Insurance Co. had acquired the Australian operations from AMP Ltd. in 1999. Two years later, PMI acquired CGU’s Australian mortgage insurance company and merged the entities into PMI Australia. Smith said last week the Australian and Asian operations had been delivering “solid results” for the company. PMI Australia had net income of $24.5 million in the second quarter and $54.5 million for the first half of 2007. PMI Asia had net income of $2.5 million for 2Q and 5.2 million for the first six months. During a conference call with analysts last week to discuss the second-quarter results, Smith said, “Our international platforms have provided us with financial flexibility that we believe is important as we continue to navigate the market conditions in the U.S..” Donald Lofe, PMI’s CFO, also alluded to a possible sale of assets when he was asked during the call whether the company needed more capital than the $60 million it expected to gain from the Canada closure. “We are looking at various capital initiatives which leads us back to the partial or complete sale of assets or looking at various reinsurance structures and other matters. We haven’t gone to the capital markets and we have indicated that could be a combination of types of securities but actually looking from an equity capital raise that is not a primary source of capital raise at this point in time, or that we anticipate that at this point in time, he said.” Wall Street apparently liked the Australian deal. The company’s stock, which trades as PMI on the New York Stock Exchange, had surged more than 70 percent today on the news of the sale. As of nearly 1:30 p.m., the stock was trading at $4.80, up $2.01, or 72 percent from Wednesday’s closing. The Australian transaction is expected to close by the end of September. Credit Suisse and Caliburn Partnership served as financial co-advisors to The PMI Group. Allens Arthur Robinson and Sullivan & Cromwell L.L.P. provided legal advice to PMI.