PMI GROUP INC

The Department also has the authority, if it were to make a finding that MIC was in a “hazardous financial condition,” to issue a corrective order and place MIC under “supervision.” Under supervision, MIC would likely be prohibited from writing new business and from engaging in transactions (including disposing of assets) out of the ordinary course of business unless it has the prior approval of the Director of the Department or the Director’s designated supervisor. Further, the Department at any time could initiate state court receivership proceedings for the rehabilitation or liquidation of MIC. In a court-ordered receivership, the Director would be appointed receiver of MIC and would have full and exclusive power of management and control of MIC. We cannot predict if, or under what circumstances or timing, the Department will take any of the above steps. One or more of these actions, if taken by the Arizona Department, would have a material adverse effect on our financial condition and results of operations. See Item 1A. Risk Factors — Our primary mortgage insurance subsidiary, MIC, no longer complies with minimum regulatory capital requirements. MIC could be required to cease writing new business, placed under regulatory supervision or ordered to enter into receivership.

In the third quarter, we began writing new mortgage insurance through PMAC, a subsidiary of MIC, in six states in which MIC either did not obtain, or exceeded the terms of, a waiver or other regulatory forbearance. Fannie Mae and Freddie Mac (collectively, the “GSEs”) approved the use of PMAC as a limited, direct issuer of mortgage guaranty insurance in certain states in which MIC is unable to continue to write new business. The GSEs’ approvals of PMAC expire on December 31, 2011. While we have requested extensions, there can be no assurance that the GSEs will grant them or that the GSEs will not revoke the PMAC approvals prior to December 31, 2011. We expect that the number of states in which we will seek to utilize PMAC for new business will significantly increase.

The GSEs’ approvals of PMAC are subject to restrictions. Fannie Mae’s approval is conditioned upon the requirements that: (1) the Department shall not have required MIC to cease transacting new business; and (2) PMAC’s direct written premiums for a calendar quarter not exceed 20% of the combined direct written premiums of MIC and PMAC for such calendar quarter, unless Fannie Mae provides prior written consent, which it shall not unreasonably withhold. If the Department requires MIC to cease transacting new business, under Fannie Mae’s approval, PMAC would no longer be an eligible mortgage insurer. If we are unable to satisfy any of the other GSE eligibility requirements for PMAC, if the GSEs do not extend PMAC’s approvals, or if the GSEs revoke PMAC’s approvals, we would be unable to offer mortgage insurance through PMAC. If this were to occur, we would not be able to offer mortgage insurance through our combined insurance subsidiaries in all fifty states. We have asked the GSEs to remove or amend these restrictions. There can be no assurance, however, that the restrictions will be removed or changed by either or both GSEs. Our inability to write new mortgage insurance in one or more states could significantly harm our customer relationships, revenues and results of operations. See Item 1A. Risk Factors—MIC is currently unable to write business in six states and we expect this number to significantly increase. Our plan to write certain new mortgage insurance in a subsidiary of MIC may not be successful.

Indenture Governing TPG’s Debt Securities — The indenture governing an aggregate of $685 million in principal amount of TPG’s outstanding debt securities provides that it will be an event of default with respect to those debt securities if, among other things, a court were to enter an order appointing a custodian, receiver, liquidator or similar official of MIC or a substantial part of its property and such order were to continue unstayed and in effect for a period of 60 consecutive days or if MIC were to consent to such an appointment. Accordingly, although an order by the Department requiring MIC to cease writing new business would not itself constitute an event of default, if the Department were to seek and obtain a court order appointing a receiver of MIC, and such order were to remain in effect unstayed for 60 consecutive days, an event of default would occur with respect to these debt securities. In addition, it is possible that other actions that the Department might take or to which MIC might consent involving the appointment of other officials with authority over MIC or its assets would also constitute such an event of default. If such an event of default were to occur, these debt securities would become immediately due and payable. TPG does not have access to sufficient funds or other sources of liquidity sufficient to enable it to repay such debt securities if they were to become due and payable.

Following our capital raise in the second quarter of 2010, The PMI Group contributed $610 million to MIC in the form of capital and two surplus notes with aggregate face amounts of $285 million (the “Surplus Notes”). The terms of the Surplus Notes provide for interest, principal and redemption payments that are generally concurrent with and equivalent to the payment of interest, principal or redemptions with respect to our convertible notes or cash settlements of our convertible notes once such conversions exceed a specified level. Pursuant to the Arizona Insurance Code, our interest in the Surplus Notes is subordinate to the claims of policyholders, claimants and beneficiaries and to all other classes of creditors, other than surplus noteholders. Amounts may only be paid out of surplus, and even if sufficient surplus is available, each interest, principal and redemption payment in respect of the Surplus Notes is subject to the prior approval of the Department. Although we have received a letter from the Department approving MIC’s payment of interest provided all of the terms and conditions of the Surplus Notes are satisfied, that approval may be rescinded at any time and it is more likely to be rescinded if the Department were to require MIC to cease writing new business in all states. In addition, the pre-approval letter does not contain any advance approval of the payment of principal or redemption amounts. There is a significant risk that the Department could require MIC to limit, or cease, making scheduled interest or principal payments on the Surplus Notes. Accordingly, there can be no assurance that we will receive any payments in respect of the Surplus Notes, either in a timely manner in order to satisfy our obligations, including our obligations under our convertible notes, or at all.

MIC and The PMI Group are parties to tax sharing agreements that have benefited, and expense cost allocation agreements that are benefitting, us materially by reducing our obligations and liquidity requirements. The tax sharing agreements allocate current tax expense (benefit) and tax payments (refunds) between TPG and its insurance subsidiaries. Due to significant losses, TPG is not expected to receive significant tax reimbursements from MIC until such time it begins to generate taxable income. There is a significant risk, particularly in the event that the Department were to require MIC to cease writing new business, that the Department could require TPG to pay higher portions of incurred expenses currently paid by MIC pursuant to the cost allocation agreements, or could cause MIC to limit, or cease making, tax and expense reimbursements to TPG. Accordingly, there can be no assurance that we will continue to receive payments pursuant to the allocation agreements, either in a timely manner in order to satisfy our obligations or at all. The inability of MIC and our other subsidiaries to pay amounts in respect of the Surplus Notes and the tax and expense cost allocation agreements in amounts sufficient to enable us to meet our cash requirements at the holding company level would affect our ability to repay our debt, pay holding company expenses and otherwise have a material adverse effect on The PMI Group’s liquidity.