UPDATE 3-PMI Group posts narrower Q3 loss, may recapitalize unit

* Q3 loss/shr from cont ops $1.06 vs est $1.36

* Says working on a plan to recapitalize unit

* Revenue up slightly at $226.9 mln * Total expenses down 16 pct

* Shares rise as much as 10 pct (Adds details, analyst comments, updates share movement)

By Abhinav Sharma and Brenton Cordeiro

BANGALORE, Nov 6 (Reuters) - Mortgage insurer PMI Group Inc (PMI.N) posted a narrower-than-expected quarterly loss, helped by its European operations and lower expenses, sending its shares up 10 percent.

The company said it is working on a plan that will enable it to continue writing new mortgage insurance business in certain states, even in the face of regulatory restrictions aimed at containing the amount of risk mortgage insurers can take on.

If PMI can not write new business in those states due to regulatory restrictions, it will do so through an existing unit to be renamed PMI Mortgage Assurance Co (PMAC), it said.

PMI, in an effort to continue to write business in all 50 states, is seeking to reactivate an existing subsidiary … that will enable it to essentially recapitalize the company, analyst Matthew Howlett of Fox Pitt Kelton said.

"This is a positive," Howlett said.

In July, largest mortgage insurer MGIC Investment Corp (MTG.N) had said it plans to wind down its existing operations and capitalize a subsidiary at the beginning of next year in a move that could let the company build fresh investments as the housing market stabilizes.

For the latest third quarter, PMI posted a net loss of $93.2 million, or $1.13 a share, compared with a loss of $229.4 million, or $2.81 a share, a year ago.

Loss from continuing operations was $1.06 per share.

Analysts on average had expected a loss of $1.36 per share, excluding special items, according to Thomson Reuters I/B/E/S.

Losses and loss-adjustment expenses, which include paid claims, fell to $336.6 million from $382.7 million, the company said.

Total revenue rose marginally to $226.9 million while total losses and expenses fell 16 percent to $384.8 million.

EUROPEAN PUSH

PMI Europe recorded a net income from continuing operations of $27.4 million, primarily due to a tax benefit and net gains from credit default transactions, it said.

The European operations had a loss of $44.5 million in the year-ago period.

Net premiums earned were down 4 percent for the quarter, totaling $176.6 million.

The company also completed various capital initiatives including restructuring of certain modified pool policies, which boosted its unit PMI Mortgage Insurance Co's statutory capital by about $139 million.

Mortgage insurers are hoping for a capital injection from the U.S. Treasury in face of record home loan defaults that has threatened the stability of these companies.

PMI joins larger rival Radian Group Inc (RDN.N), which posted a narrower-than-expected quarterly loss on fewer claims earlier in the week.

In October, MGIC Investment Corp (MTG.N), the largest U.S. mortgage insurer, posted a wider-than-expected quarterly loss as more people failed to repay their home loans.

Shares of the Walnut Creek, California-based company were trading up a percent at $2.26 in morning trade on the New York Stock Exchange. The stock touched a high of $2.46 earlier in the session. (Additional reporting by Sweta Singh in Bangalore; Editing by Gopakumar Warrier)