Private mortgage insurer PMI Group Inc. is seeking shelter from creditors under the Chapter 11 bankruptcy code after the seizure of two of its subsidiaries by regulators in Arizona.
The company said Wednesday that it filed a petition for relief with the U.S. Bankruptcy Court in Delaware, but will continue operating as usual.
PMI intends to use bankruptcy protection to assess its options in light of the action taken by the Arizona Department of Insurance.
On Oct. 20, insurance regulators in Arizona seized PMI's main subsidiaries in the state, PMI Mortgage Insurance Co. and PMI Insurance Co., because the companies did not have enough money on hand to meet state requirements.
The state obtained an order from an Arizona Superior Court judge to take over the PMI subsidiaries. Shortly after, PMI said it would begin paying claims at just 50 percent.
PMI asked the court to vacate the state's takeover of the subsidiaries, but that motion was rejected Tuesday.
As part of its bankruptcy filing, PMI wants the court to appoint a receiver for the seized subsidiaries. A hearing has been set for Jan. 10.
The seizure of PMI's subsidiaries followed heavy losses at the company since the housing market bubble burst.
Private mortgage insurance protects lenders from losses if a homeowner defaults and the lender doesn't recoup costs through foreclosure. The insurance costs the borrower a monthly fee, typically a set percentage of the total mortgage loan.
Like other mortgage insurers, PMI has been able to sell profitable policies in recent years, but the gains from those sales hasn't outpaced losses from policies sold before the housing market collapsed. As flagging home prices have strapped borrowers, the company has had to pay more claims.
PMI said it had been in talks with Arizona's insurance regulators and policyholders over how to stabilize PMI Mortgage in order to maximize the claim payments when the state moved to seize the subsidiaries.
PMI noted it had sought to raise capital from new investors to enable a subsidiary of PMI Mortgage to serve as a platform to write new mortgage insurance nationwide.
Because its subsidiaries were seized, PMI decided pursuing a transaction to raise capital would be impractical now without bankruptcy protection.
Meanwhile, as a result of the bankruptcy filing, PMU's $685 million of senior unsecured notes and about $51.5 million of junior unsecured notes have become due. But PMI said bond holders' ability to enforce their rights under the notes has been halted because of the bankruptcy filing.