PMI warned that it may have to stop writing insurance policies in 16 states due to the company’s severe financial losses. 

On Thursday, Standard & Poor's downgraded the PMI Group and its subsidiary PMI Mortgage Insurance Co.’s credit and financial strength rating, giving it a negative outlook due to the company’s steep losses in recent months. 

“We believe PMI remains highly vulnerable to further adverse reserve development over the next 12 months,” S&P said in a statement, lowering PMI Mortgage Insurance Co.’s rating from “B-” to “CCC-” and PMI’s holding company, The PMI Group, from “CCC-” to “CC.”

While the Dow fell drastically 500 points Thursday over fears of a weakening economy, PMI faced one of the biggest hits, seeing its stock drop more than 50 percent. In the second quarter of 2011, PMI recorded net operating losses of $338.4 million. The excess losses were a result of a $242.6 million increase in reserves caused primarily by a decrease in expected future claim denials net of reversals, according to S&P.

“We may not be able to raise additional capital or achieve capital relief in order to preserve our ability to continue to write new insurance business,” PMI wrote in a statement regarding its second quarter losses. “We are exploring capital alternatives that, if successful, could provide capital or capital relief to [PMI Mortgage Insurance Co.] or capital to other insurance subsidiaries so that they may replace [PMI Mortgage Insurance Co.] as our primary writer of new insurance. ... Our ability to obtain debt or equity financing is limited as a result of, among other factors, the substantial decline in our market capitalization, the downgrades in the ratings of our debt securities, and our significant operating losses, combined with difficult market conditions generally and in our industry specifically.”

The company’s mortgage insurance subsidiary holds $257.8 million in statutory capital--that is $320.3 million below the minimum set by Arizona law, which regulates the company, HousingWire reports. Plus, the company ‘s risk-to-capital ratio is 58.1-to-1 as of June 30, which is much higher than the regulatory maximum of 25-to-1. 

"Given PMI's estimated statutory capitalization of $257.8 million at the end of second-quarter 2011, we believe statutory insolvency is possible by the end of 2011 or in early 2012," said S&P’s credit analyst Miles Kaschalk in a statement. "Further, we believe PMI could be placed into regulatory supervision or court-ordered receivership by the Arizona Department of Insurance at or before the occurrence of statutory insolvency.”

Source: “S&P: Lowers PMI Mortgage Ins. C. Ratings to ‘CCC’,” Reuters (Aug. 4, 2011); “S&P Downgrades PMI Mortgage Insurance on Shutdown Risk,” HousingWire (Aug. 4, 2011); and “The PMI Group Inc. Reports Second Quarter 2011 Financial Results,” PMI (Aug. 4, 2011)