Executives
Bill Horning - VP of IR
Steve Smith - Chairman and CEO
Don Lofe - EVP, CFO and CAO
Analysts
Steve Stelmach - FBR Capital Markets
Donna Halverstadt - Goldman Sachs
Mark DeVries - Barclays Capital
Mike Grondahl - Northland Securities
Conor Ryan - Deutsche Bank
Matthew Howlett - Fox-Pitt Kelton
Jacob Waller - AYM Capital
Matt Otis - KBW
Chris Wolff - JAI Capital Management
Jordan Hymowitz - Philadelphia Financial
The PMI Group, Inc. (PMI) Q3 2009 Earnings Call November 6, 2009 12:00 PM ET
Operator
Hello and welcome to the Third Quarter 2009 Earnings Call for The PMI Group. (Operator Instructions).
Now, I will turn the meeting over to Mr. Bill Horning, Vice President, Investor Relations.
Bill Horning
Good morning and welcome to The PMI Group's third quarter 2009 financial results conference call. Today's call will begin with comments from Steve Smith, PMI's Chairman and Chief Executive Officer. Mr. Smith will discuss PMI's overall financial results and highlights for the third quarter. Don Lofe, PMI's Executive Vice President, Chief Financial Officer and Chief Administrative Officer, will then address other business results for the quarter as well as other financial and capital matters. We also have with us today David Katkov, PMI's Executive Vice President and Chief Business Officer who along with Steve and Don will be available to answer your questions following today's prepared remarks.
Also on today's call, we will be referencing non-Generally Accepted Accounting Principle measures, such as net operating income, which under SEC Regulation G we are required to reconcile to GAAP. The reconciliations of these measures with GAAP financial measures are available on our website.
Before we begin, I would like to review the company's Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this call, we may be making forward-looking statements. Actual results may differ materially from the statements made during this call. The company's business depends on investment considerations, which are highlighted in our Securities and Exchange Commission filings, including our 2008 Form 10-K and our most recent Form 10-Q. all forward-looking statements are made as of today, November 6, 2009, and we undertake no obligation to update such statements except as may be required by law.
With that, I'll turn the call over to PMI's Chairman and Chief Executive Officer, Steve Smith.
Steve Smith
The PMI Group had a net loss from continuing operations in the third quarter $87.9 million or a loss of $1.06 per share. Our consolidated results for the third quarter were driven by continued losses in your US MI operations, partially offset by net income from our European subsidiary.
In our US Mortgage Insurance Operations, we had a net loss of $110.6 million, primarily due to continued losses and loss adjustment expenses, but which also included accelerated claims payments related to restructurings of certain pool contracts.
In our International Operations segment, we had net income from continuing operations of $27.4 million, primarily as a result of favorable tax adjustment related to PMI Europe and net gains from credit default swaps and lower incurred losses.
Now, let me highlight for you some of our liquidity and capital positions. On a consolidated basis, The PMI Group had total liquidity of $3.7 billion, which comprised of cash and cash equivalents of $844 million and total investments of $2.8 billion. In addition, we have the benefit of $921 million in captive trust balances for US MI operations. Holding Company liquidity at September 30 totaled approximately $64 million.
Now, moving to PMI Mortgage Insurance Company, our primary Mortgage Insurance Company, we ended the third quarter of 2009 with statutory risk in-force of approximately $18 billion, and although not yet final, policyholder surplus and contingency reserves of approximately $963 million, resulting in a risk to capital ratio of 18.5-to-1 as of September 30, 2009. On an excess minimum policyholder position basis, PMI Mortgage Insurance Company ended the third quarter with approximately $215 million of excess MPP. Both risk to capital and excess MPP benefited in the third quarter from PMI's internal capital initiatives.
As we have discussed on previous conference calls, we have and continue to seek statutory capital relief through internal capital initiatives, which either free up existing capital or utilize our current capital base more efficiently. In the quarter, our internal initiatives were able to positively impact both PMI's risk to capital ratio and excess MPP by $139 million.
Let me highlight the initiatives. First, we were successful in restructuring certain modified pool contracts in addition to those we discussed with you last quarter. These restructurings effectively accelerated claim payments to the counterparty on a discounted basis, resulting in the release of loss reserves. These transactions added approximately $78 million to our statutory capital in the third quarter. Now, we will continue to assess opportunities for future restructurings within our pool insurance portfolio.
In order to most efficiently utilize existing capital of our various insurance companies, PMI Mortgage Insurance Company entered into three excessive loss reinsurance agreements with affiliated reinsurance companies effective September 30, 2009. In aggregate, the agreements provided PMI Mortgage Insurance Company with a layer of risk remote reinsurance on the 2007 vintage non-delinquent risk in-force as of September 30, 2009 subject to potential adjustment each quarter based on the affiliates' risk to capital ratios.
By entering into these agreements, our main operating company's excess MPP increased by approximately $41 million. Finally, we realized approximately $20 million of net gains from our investment portfolio, principally from the sale of municipal securities.
Now, in addition to these initiatives, we expect to contribute our subsidiary PMI Insurance Co to our main operating company, PMI Mortgage Insurance Company. We will conclude this contribution upon notice of non-objection from the applicable insurance department and we have been informed by that department that the notice is forthcoming. We expect this contribution will result in statutory capital benefit of approximately $92 million and increase PMI's excess above minimum policyholder position by the same amount. Based upon PMI's risk to capital ratio at September 30, 2009, this contribution would further reduce PMI's risk to capital ratio from 18.5-to-1 to 16.9-to-1.
Now, our capital strategy, which we announced in early 2008, is based on a principal philosophy of fully utilizing our available resources, taking advantage of capital market opportunities when appropriate opportunities present themselves, and doing what is best for our shareholders. Our actions to-date have aligned with this approach, as indicated by the sale of PMI Australia and PMI Asia in the fourth quarter of last year and the numerous internal capital initiatives we have completed.
Despite these successes, the company still requires additional capital. We continue to work with our financial advisor to evaluate market opportunities and to ensure that we are in a position to take advantage of favorable market opportunities, if and when they develop.
Additionally, we continue to examine reinsurance, looking at both traditional structures, which would allow us to hold less capital on new writings and other risk transfer solutions that may allow us to free-up capital on existing policies in-force. We will continue to explore opportunities where such transactions make economic sense.
We also continue to pursue legislative and regulatory changes in the 16 states that set specific minimum capital requirements for mortgage insurance. In those states, if a mortgage insurer does not meet required minimum policyholders position or exceeds the maximum risk to capital ratio, it may be prohibited from writing new business. This summer and fall three of those states, Arizona, our state of domicile, California and North Carolina, amended laws to provide the insurance department with discretion as to whether the mortgage insurer may continue writing new business.
Now, in the event that PMI is unable to continue to write new business in a limited number of states, we are working on a plan to enable us to write new mortgage insurance in those states through an existing insurance subsidiary, called Commercial Loan Insurance Corporation, which we're in the process of renaming PMI Mortgage Assurance Co, or PMAC.
We're also in the process of re-domesticating PMAC to Arizona. PMAC is licensed in all states except Connecticut, Michigan and New York. However, in order to begin writing new business in certain other states, it will need to revise the lines of business it is currently authorized to transact. We are currently discussing with the GSEs the potential approval of PMAC as an eligible mortgage insurer in a limited number of states. Of course, implementing our PMAC plan, should we need to, will be subject to capital, regulatory GSE and other considerations and approvals.
PMI's Homeownership Preservation Initiatives or HPI, which, as you know, helps our company and our servicers mitigate losses, enabled 5,278 borrowers to retain their homes through loan modifications and payment plans in the third quarter and 15,845 year-to-date. In total, this represents approximately $228 million of risk in-force that is secured in the third quarter and $730 million year-to-date which helps us conserve our capital base. Additionally, we enable another 1,811 borrowers to avoid foreclosure through short sales and deeds of lieu of foreclosure.
In regards to the Treasury's Homeowner Assistance Modification Program, based on the reporting we received, approximately 12,700 of our delinquent loans are currently enrolled in the HAMP trial period. Additionally, servicers have reported approximately 4,000 of our delinquent loans are currently enrolled in forbearance plans, many of which we believe to be in HAMP programs.
The volume of insured loan subject to investigations for misrepresentations, negligent underwriting and coverage eligibility is commensurate with increased levels of fraud and decreases in the quality of a mortgage origination underwriting seen by the industry during 2006 and 2007. As we have in the past when we find such activity pursuant to our insurance terms of coverage, we rescind coverage on the loan and refund all associated premiums.
When a claim is filed on the loan that is subject to investigation, but the loan file is not provided to us even after repeated requests, the claim will be denied. The aggregate dollar amount of primary and pool risk in-force of delinquent loans rescinded and denied in the third quarter was approximately $229 million and approximately $833 million year-to-date. We expect rescission and denial levels to remain high throughout the remainder of 2009.
Finally, let me briefly talk about new business writings. In the third quarter, our US Mortgage Insurance Operations rose $1.2 billion of new insurance written with $2 billion in the second quarter, and $6.2 billion one year ago. With new insurance written of just over $8 billion in the first nine months, we're on track to achieve our full year target of approximately $9 billion to $10 billion in new insurance written.
As discussed on previous calls, the new insurance written in 2009 is of high credit quality, with the potential for higher persistency and without any premium sessions in captive trust agreements. Absent additional economic dislocations and deteriorations, we project these writings should generate returns of approximately 20%.
Now, let me turn the call over to Don to cover the additional details of the third quarter results as well as other capital and liquidity matters.
Don Lofe
Let me first cover certain aspects of our business operations in the third quarter, and then detail for you other additional financial, capital and liquidity matters.
First, with regard to our consolidated financial results, our reported loss from continuing operations for the third quarter of 2009 was $1.06 per basic and diluted share and was primarily driven by a net loss in our US Mortgage Insurance Operations, and partly offset by net income in our International Operations.
Now, let me take a few moments to discuss each segment in more detail. Within the US Mortgage Insurance Operations, we had an operating loss of $110.6 million in the third quarter of 2009 as compared to a loss of $137.1 million in the third quarter of last year. Our third quarter results were primarily driven by lower incurred losses. We ended the quarter with primary insurance in-force of $116.9 billion and primary risk-in-force of $28.6 billion, both modestly lower than the prior quarter.
In the third quarter, we had a number of factors that influenced our net incurred losses in our US Mortgage Operations Segment. Foremost among these was the previously mentioned pool insurance restructuring. As a result of these transactions, we decreased our reserves for modified pool insurance by $181 million. In our primary insurance channel, we increased our reserves for losses by $134 million, primarily as a result of an increase in primary loans in default.
The difference between the pooled decrease and the primary increase represents the overall reduction to our gross reserve losses of $47 million. As a result, our gross reserve for losses and loss adjustment expenses decreased from approximately $3.19 billion last quarter to approximately $3.14 billion.
Now, with regard to modified pool, the existence of stop-loss protection results in a maximum loss amount, which is equal to our modified pool risk in-force. The existence of stop-loss protection and the significant reserves we recorded and expect to record provides PMI with opportunities to work with its insured customers to restructure the risk on certain modified pool policies or negotiate early discounted claim payments. This may be particularly so when both parties agree on the likely amount of the ultimate contract losses and where the counterparty, rather than waiting to receive future expected claim payments, prefers to receive an acceleration of claim payments although at a current discount of the expected future claim payments for the particular pool.
In the third quarter, the restructuring of certain pool policies resulted in the reduction in pool risk in-force of approximately $437 million or a reduction in loss reserves of approximately $312 million and an accelerated claim payment of approximately $234 million. The positive impact that these restructurings had in our loss reserves result in an estimated aggregate statutory capital benefit of approximately $78 million.
Also, modified pool with deductible risk in-force decreased from $1 billion at June 30, 2009 to approximately $771 million at September 30, 2009, and loss reserves from modified pool with deductible approximately $292 million. In terms of our primary insurance, the addition to the loss reserves was $134 million and was primarily due to the sequential increase in default inventory from 126,400 to 141,300 at the end of the third quarter.
As Steve mentioned in his opening remarks, PMI Mortgage Insurance Company ended the third quarter with excess MPP of $215 million and a risk to capital ratio of 18.5-to-1 at September 30, 2009. With the expected completion of the company's contribution of PMI insurance Company to PMI Mortgage Insurance Company and with the associated statutory capital benefit of approximately $92 million, excess MPP would approximate $307 million and the risk to capital ratio would further drop to 16.9-to-1. If we are not able to successfully raise additional capital or achieve additional statutory capital relief, there will be pressure as early as the fourth quarter of this year or the first quarter of 2010 with respect to these risk to capital and MPP measures.
Now, moving to our International Operations, in the third quarter of 2009, this segment had net income from continuing operations of $27.4 million. The segment's net income for the third quarter was primarily due to a $20.4 million tax benefit, net gains from credit default swaps and lower incurred losses. The tax benefit in the third quarter was due to a refinement between the booked and the tax basis of PMI Europe that was recorded in connection with the company's filings of its 2008 tax return.
With regard to Holding Company matters, the PMI Group ended the third quarter with cash and liquid investments of $64.4 million. Now, let me update you on two primary facility covenants of our Holding Company's amended and restated credit agreement, which we successfully renegotiated in the second quarter.
The two primary covenants in this facility are adjusted net worth and the value for the pledged note related to our sale of PMI Australia or what we refer to as the QBE note. The minimum required adjusted net worth at September 30, 2009 was $700 million. We exceeded the requirement by approximately $768 million with adjusted net worth of $1.47 billion at September 30, 2009. Now, beginning in January of 2010, the adjusted net worth requirement is further reduced to $500 million until the facility matures in October of 2011.
At September 30, 2009, the value of the QBE note was approximately $193 million, representing the original principal amount of $187 million plus the accrual of interest since October of 2008. Assuming the full payout of the note, we will realize at maturity in September of 2011 $208 million, which includes accrued interest.
As you may recall, the amount we ultimately received under the QBE note is subject to the actual and projected loss performance of PMI Australia's policies in-force as of June 30, 2008, while losses associated with these policies have increased since June 30, 2008. We do not currently expect as of September 30, 2009 the ultimate projected losses in this portfolio will trigger a reduction in the QBE note value.
The ultimate performance of this portfolio, however, will depend on a number of factors, including the performance of the Australian housing market and the economy over the next several years. Now, based in part on our expectation of full repayment of the QBE note in 2011, we believe that the liquidity at the Holding Company will be sufficient to meet our payment obligations through the end of 2012. Also, with respect to the credit facility, let me add that we believe we have the full support of our banking group in the release of PMI Insurance Company as pledged collateral, which will allow us to contribute it to PMI Mortgage Insurance Company when we receive the regulatory non-objection.
Finally, I'd like to direct those interested in a reconciliation of our consolidated net loss to our consolidated net operating loss to review disclosure posted on our website.
With regards to PMI Europe, we have treated our CDS mark-to-market adjustments as non-operating only to the extent any adjustments are deemed to relate to increases in credit spreads only. We have treated the fair value adjustment of FASB Topic 820 and 825, previously FASB 157 and 159 respectively, restructuring charges, net realized investment losses and losses from discontinued operations as non-operating. Therefore, as presented in the reconciliation, our consolidated net operating loss from continuing operations in the third quarter of 2009 was $104.5 million or $1.27 per common share.
Let me turn the call back to Steve for some closing remarks before we open up the call for questions.
Steve Smith
I wanted to leave you with some brief closing thoughts before we begin our question-and-answer session.
We are executing on or exploring a number of initiatives to internally build capital and we continue to explore all external capital options. Additionally, we are actively engaged in seeking regulatory change at the state level to permit continued writings of business.
Our liquidity and claims paying ability remains strong at our primary Mortgage Insurance Company and we believe that our Holding Company will have sufficient liquidity through the end of 2012. Finally, we feel strongly that the new business we are writing is of very high credit quality and should be very profitable for the company.
With that, let's open up the call for your questions.
Question-and-Answer Session
Operator
(Operator Instructions). Steve Stelmach, your line is open.
Steve Stelmach - FBR Capital Markets
Could you just go over the mechanics of the $92 million capital contribution again? I know you talked about it to some degree, but I'm not exactly clear what's going on there.
Don Lofe
We haven't received final written approval from the particular department, but basically we will contribute the PIC Company or PMI Insurance Company to the PMI Mortgage Insurance Company and we believe that would be effective as of September 30. However, we haven't completed that. If in fact that is done, it will become a downstream subsidiary of the main operating company.
Steve Stelmach - FBR Capital Markets
Got it. It's the value of $92 million?
Don Lofe
That's correct. It would reduce the risk to capital ratio, as Steve and I pointed out, to 16.9-to-1.
Steve Stelmach - FBR Capital Markets
There is no additional opportunities to do something similar in future quarters?
Don Lofe
At this time, we don't believe so. As Steve mentioned and I did, we continue to look at various internal capital initiatives.
Steve Stelmach - FBR Capital Markets
On the reserve per delinquent loan, it looked like it declined quarter-over-quarter. What's the thought process there? What's the mechanics that's driving that?
Don Lofe
Are you talking about how we presented it in the supplement?
Steve Stelmach - FBR Capital Markets
Given all the machination that was going on in the quarter, it seems like it should have been a little bit higher than perhaps quarter-over-quarter. Can you sort of walk through you expect the severity of the delinquent loans to go down or what's going on?
Don Lofe
Could you give a little more articulation to your question here. We're comfortable with what you articulated relative to security and claim rates and size.
Steve Stelmach - FBR Capital Markets
I'm just looking at your reserve for delinquent loan and I'm calculating something in the low $20,000, $22,000 range. Was it like $25,000 prior quarter, $26,000 prior quarter?
Don Lofe
$25,000, you're right and then it has come down.
Steve Stelmach - FBR Capital Markets
I guess the question is if that's lower, yet your average claim size is higher and your delinquent inventory is higher, just wondering what the thought process is.
Don Lofe
Part of that's going to be because of the pool commutations effect. That's really giving a little bit of a, for lack of better term, anomalous effect.
Steve Stelmach - FBR Capital Markets
The pool had an average higher severity, is that a fair assumption?
Don Lofe
Yes.
Steve Stelmach - FBR Capital Markets
That's all that's going on essentially.
Don Lofe
Yes. We're very comfortable with respect to the point that you raised concerning the average size.
Operator
Our next question comes from Donna Halverstadt from Goldman Sachs.
Donna Halverstadt - Goldman Sachs
One of the things I wanted to ask about is with respect to the discussions you're having with one state regarding its interpretation of their financially hazard condition regulations, I'm curious what percent of your risk in-force is in that state or just some metric to determine whether or not that's a big state for your business and I'm also curious whether or not it's an important regulatory state whose lead others may be interested in potentially following.
Steve Smith
The risk in-force is less than 4%. We really wouldn't want to do anything to disclose the name of the state or to guess the name of the state. So all states we consider important in the regulation of the company.
Donna Halverstadt - Goldman Sachs
Also curious if the NOL rules get changed and the carry-back gets extended from two years to five, would you expect to receive any tax refund in 2010, and if so, what size?
Don Lofe
As you know, we've utilize the tax and loss bond strategy and have continued to employ that through '09 and virtually have no NOLs at this point in time. So that legislation does get changed. We'll continue to go evaluate that. We wouldn't expect any really material effect in 2009 and really with respect to 2010. We just have to evaluate it relative to our tax position at that time.
Donna Halverstadt - Goldman Sachs
The other thing I wanted to ask about, with rescissions, you said that you expect them to remain high through 2009, but you didn't comment on 2010. What's your outlook for 2010 rescissions?
Steve Smith
We haven't given an outlook formally for 2010, but the pipelines have been building. We expect those to continue to build through 2009 and into 2010, but there will be a peaking at some point.
Donna Halverstadt - Goldman Sachs
Correct me if I'm wrong, but you don't ask for the files until you actually get a claim notice, right, as opposed to starting the process earlier when you get the NOD?
Steve Smith
The process could start at any time.
Donna Halverstadt - Goldman Sachs
What's been your practice?
Steve Smith
The processes could start at any time relative to compliance standards, negligent underwriting or fraudulent activity.
Donna Halverstadt - Goldman Sachs
You comment that Arizona is doing what you call a limited scope examination to determine whether or not to exercise discretion and let you keep writing. Can you just give us more color on what's meant by a limited scope examination?
Don Lofe
They had prepared a significant due diligence list, if you will, and procedures and additional items they want to look at. So it would not encompass your normal full examination that, as you know, can last several months. This is basically a very targeted and focused review and would cover, frankly, aspects. It could be statutory, capital base and various metrics. It is ongoing and we'll continue to keep the financial community advised as to the progress of that, but it clearly is not a full complete exam that you'd normally have under a regulatory review.
Operator
Our next question comes from Mark DeVries from Barclays Capital.
Mark DeVries - Barclays Capital
Could you provide any additional color on any other opportunities you may see to commute risk on to the pool transactions or take securities gains or enter into any reinsurance agreements with affiliated parties?
Steve Smith
We continue to evaluate the opportunities for restructurings or any risk transfer initiatives. That is a key element of looking at our internal opportunities. So that will continue. I can't comment on the likelihood of success in the fourth quarter going forward, but clearly, we continue to evaluate those.
Don Lofe
To your point about initiatives related to investment gains, we continue to look at that on an ongoing basis, and when it makes sense, both economically as well as from a capital perspective, we'll exercise that judgment. We balance that against the investment yield that we have to consider when liquidating those types of investments. So it's an ongoing process.
Mark DeVries - Barclays Capital
As far as your new writings, there's been a little bit more of a pronounced drop-off in peers, particularly from the peak. Is that a product of you tightening your credit loss more or is it more of an issue of being a little bit more aggressive in managing your capital?
Steve Smith
We had indicated I think early in the year and throughout the year that our target range was approximately $10 billion in NIW for the year. So as we have been active in conserving capital as well as pricing and underwriting criteria, we are coming in the range of what we expected and in my comments of what we expect to be $9 billion to $10 billion for the year.
Mark DeVries - Barclays Capital
Do any of your internal capital generation efforts and success there change your appetite for writing risk going forward?
Don Lofe
As Steve indicated and I did in my remarks as well, the 2009 book is of high quality and we'll continue to look at internal capital initiatives. As we stated on our call today and before, we have to balance those writings relative to the internal generation of capital and other capital opportunities. So, yes, they do, but again, we've been able as can you tell from the initiatives are generating internal capital.
Operator
Our next question comes from Mike Grondahl from Northland Securities.
Mike Grondahl - Northland Securities
On the modified pool exposure, the $771 million that you continue to have, did you say that reserves against that were $292 million? What do you project future reserves to be against that? Is all of that being reserved for, can you provide an update on that?
Don Lofe
Firstly, yes, that's what we said, but as you know, we won't project future loss reserves relative to modified pool.
Mike Grondahl - Northland Securities
Can you kind of just walk us through you how the inter-affiliate reinsurance deal worked just from an economic perspective?
Don Lofe
Basically, we have three affiliated entities and seen, if you will, Steve mentioned in his remarks, remote risk that is non-delinquent in the 2007 vintage year. Basically the session is balanced against the risk to capital metric that we need to maintain in those entities. So, really, it's just a traditional session and it's balanced against the risk to capital metrics. It really isn't anymore than that.
Steve Smith
It generates, as you can tell from our remarks, approximately $41 million of capital benefit to the main operating company, PMI Mortgage Insurance Co.
Mike Grondahl - Northland Securities
Do you have any capacity to do any more deals or did you use the capacity you had?
Steve Smith
As of 9/30, we have used the capacity to the extent we feel is appropriate and will continue to evaluate that each quarter.
Mike Grondahl - Northland Securities
What would allow you to do more of an inter-affiliate in the future quarter?
Don Lofe
Depending on the results of the particular entities, evaluate that against the risk to capital metric. Again, if you're using a metric, we obviously are going to look at a 25-to-1 and wouldn't want to exceed that.
Mike Grondahl - Northland Securities
Just a follow-up to a previous question on the State of Arizona's limited scope examination, when do you expect to get the results from that?
Steve Smith
Later this year, but we haven't been given a final date by the department. That's our expectation.
Mike Grondahl - Northland Securities
Am I correct in understanding that's pretty much going to be either a blessing or a cessation of your guys ability to write business because that's where you are domiciled in those 35ish states?
Steve Smith
It's a review to look at the overall financial condition of the company and where we are with metrics and as a part of an evaluation to the extent discretion could be applied, but I wouldn't want to speculate on what's going to happen in the fourth quarter.
Don Lofe
Mike, just to remind yourself and the folks on the call, again, that's only if we breach that MPP.
Operator
Conor Ryan with Deutsche Bank, your line is open.
Conor Ryan - Deutsche Bank
Do you mind just bridging the Holding Company cash position from last quarter to this quarter and what cash taxes did you pay from 2003 to 2005?
Don Lofe
Last quarter we had $82 million and this quarter, as I mentioned in my remarks, we had $64.4 million. The most significant difference between the two was the payment of the senior debt for the September payment and that approximated $16 million as well as our credit facility cost, but that's the main difference with respect to that. Your other question was taxes paid, is that your question?
Conor Ryan - Deutsche Bank
Yes, cash taxes paid from 2003 to 2005.
Don Lofe
I don't have that number just available off the top of my head. I can tell you the taxes we paid for the quarter was $5.8 million.
Operator
Matthew Howlett with Fox-Pitt Kelton, your line is open.
Matthew Howlett - Fox-Pitt Kelton
Fannie Mae said last night they expect credit losses to increase for the remainder of 2009 and during 2010, but credit-related expenses to decline or to be less in 2010 than in 2009. To me that implies, from the MI standpoint, but page are going to go up but reserving could go down next year and could be down year-over-year. Are you prepared to give 2010 guidance or some type in that respect? Do you expect your reserving to follow a similar path if that does happen?
Steve Smith
I wouldn't want to comment specifically what Fannie Mae or Freddie Mac or the GSEs could be implying in their results. We're not quite yet ready to give guidance or the level of guidance for 2010. We normally, if we're going to be giving guidance, would do that in our February or first quarter call of next year.
Matthew Howlett - Fox-Pitt Kelton
On the reserving side, there's been some confusion or some subjectivity around what you bake, what each MI bakes into their loss adjustment expense as it relates to rescissions. Some say its backward looking, some say its current experience, what is yours?
Steve Smith
In terms of loss adjustment expenses?
Matthew Howlett - Fox-Pitt Kelton
Right. In terms of per delinquent loan, what do you expect in terms of cures from rescissions, how much in your current reserve do you bake in the expectations that cures will be driven by rescissions?
Steve Smith
We don't have a percentage that I will quote you, but we do consider our own internal data and experience in looking at the delinquent risk that we have and we do make judgment on factors in terms of expectation of ultimate claim rates based upon that data.
Matthew Howlett - Fox-Pitt Kelton
So it sounds like it's sort of more current experience and you adjust it that way. The question I have is if HAMP is successful, and you mentioned about 9% of your delinquent inventory is in trial period, and a certain percent does cure and re-perform, will you then adjust your reserve based on your current experience with HAMP to those ones that are eligible for it?
Steve Smith
HAMP, at this point in looking at our reserve, is more of a qualitative factor because the clear data is still emerging, and quite frankly, our expectation is that it would be through the fourth quarter and first quarter of next year as we get more reliable data. We are encouraged by the increase as we've indicated in terms of the loans actually in the HAMP trial period of almost 12,700 loans that have been reported to us and the other 4,000 that are in forbearance programs, much of which is probably in the HAMP program. So that ramp up from quarter-to-quarter is encouraging.
Matthew Howlett - Fox-Pitt Kelton
Will you account for it the same way you do with your rescission experience? In other words, give it some benefit in your delinquency pipeline?
Steve Smith
It's a qualitative benefit at this point in time. Once the data is more sound and we really understand it and can quantify it, then we'll make the judgments of whether or not to put it in on a quantitative basis.
Operator
[Jacob Waller with AYM Capital], your line is open.
Jacob Waller - AYM Capital
A follow-up to the last question, what were your paid claims in the quarter against rescission benefits as far as paid claims were unpaid?
Steve Smith
We don't quote the data that way. It's a bit of an apples and oranges comparison because of the timing of those different events. So that's the reason we don't quote it that way. We do give you supplemental information. Don, do you have that?
Don Lofe
It's on page 14 where we detail the claim payments and break it out by pool.
Jacob Waller - AYM Capital
Would it be correct to assume regarding those prime differentials that if rescissions are actually exceeding claims paid, because rescissions have been pushed out from past few quarters and are being paid now, so that would imply that there are a lot more claims that have been put to the company in review? Is that the right way to think about that?
Don Lofe
No, I don't think you can think about it that way. I think we just stand by our remarks that we just indicate the claim payments by primary and by pool and we just show those effects. As Steve said from the earlier call that we do take into consideration the rescission activity in the building of our total incurred and the claim payments ultimately what they are. So, that is how we look at this. I don't know if you're trying to drive at another question or point.
Jacob Waller - AYM Capital
As far as the HAMP trial that you mentioned, the 12,000 number, was that at the end of September or was that at the end of October?
Steve Smith
That was September 30 data.
Jacob Waller - AYM Capital
What you are hearing as far as October is concerned, are you hearing (inaudible) continuing to ramp up or similar to September levels?
Steve Smith
We would expect increases in those overall numbers as you go through the fourth quarter.
Jacob Waller - AYM Capital
As far as the success of the trials going to completion, I mean have you gotten any feedback from services as far as what percentage of those are being completed? I mean I put out a number in the 70% range of what they've done so far, I know it's early but what have you been hearing?
Don Lofe
Yes, I think it is too early to answer that question because you have payments in the trial period that from one month to five months, et cetera, some of it is still waiting on documentation. So it really is too early to give you a definitive number.
Operator
(Operator Instructions). Matt Otis with KBW, your line is open.
Matt Otis - KBW
Any thoughts on what positive impact Fannie Mae's recent deep release program could possibly have in pushing any claims outward?
Steve Smith
We have entered into a pilot program with Fannie Mae on that. I think the expectation in terms of claim payment for us would be somewhat neutral, maybe minor on the positive side, but I would call it probably neutral. In terms of the effect in terms of housing and inventories, if the program is successful then I think that would be a benefit in terms of stabilizing communities and a more orderly transition of inventory on the market.
Operator
Chris Wolff with JAI Capital Management, your line is open.
Chris Wolff - JAI Capital Management
I just have a question, I'm not sure you break it out like this, but I'm trying to get a feel of what the risk to capital would have been if you hadn't done these commutations and transactions.
Don Lofe
We'd have to calculate it for you. I'd rather do that offline. I don't want to give a number off the top of my head, backing those numbers out. Again, the effect, as we indicated in our remarks, was substantial.
Chris Wolff - JAI Capital Management
Just in terms of the commutations that you are making with your reinsurance affiliates, I was just wondering if there is any color on permutations of these. What I mean is, could you guys end up having to pay more at a later date for sort of the liabilities that you've passed on to these affiliates?
Don Lofe
We wouldn't expect that to occur. As I said in my earlier remarks and Steve in his, that again we will clearly evaluate those transactions relative to the risk to capital ratios and maintaining the appropriate metric.
Operator
Steve Stelmach with FBR Capital Markets, your line is open.
Steve Stelmach - FBR Capital Markets
I just have a quick follow-up on cure rates and the Fannie Mae data last night. Fannie Mae disclosed after nine months cure rates on modifications were about 30%, which I think is lower than most would have expected. Is that what your experience looks like currently or is it better, is it worse, can you give us a feel for how you compare?
Steve Smith
Steve, you're talking about re-defaults?
Steve Stelmach - FBR Capital Markets
Yes, after the modifications, it seems like 70% is still re-default.
Steve Smith
There are a couple of different things here. Cure rates are going to be a little bit low because you are in a trial period and that trial period goes up to five months. There is a process of even if borrowers are making payments, you still need to get the documentation before you could complete the modification, and therefore, show it as a cure. So I think the question you are honing in on is the data that we're all looking for in terms of the monthly progression, and quite frankly, the data is Treasury data and it's just not readily available for us.
Operator
Jordan Hymowitz with Philadelphia Financial, your line is open.
Jordan Hymowitz - Philadelphia Financial
If you are in this Fannie Mae program where the person is allowed to rent the house for a year after being delinquent, do they still pay premiums to the MI companies and would you consider that a foreclosure or a default for your purposes?
Steve Smith
It would have been a foreclosure.
Jordan Hymowitz - Philadelphia Financial
So it will be a foreclosure but you won't recognize a loss then, correct?
Steve Smith
We would recognize the loss the same way we would, which is what I had indicated earlier. When we look at the program, we thing it will be neutral in terms of our expectations for losses.
Jordan Hymowitz - Philadelphia Financial
If the person is renting the house and the house is not sold, how do you know if there's a loss yet and how much the loss is until it's actually sold?
Steve Smith
We will have worked with them on the criteria for selection of loans that would have gone to foreclosure and we would have paid the claim. That's a part of the trial period evaluation.
Jordan Hymowitz - Philadelphia Financial
So you, in effect, would pay your portion of the claim even though the house hasn't officially been sold yet?
Steve Smith
If there's been a deed in lieu like in short sales where you know the claim is going to be paid, it's often in our best interest to go ahead and pay the claim and mitigate to some extent other interest payments. That's why I said, the effect to us for a claim payment, we expect to be neutral, may be slightly positive.
Operator
(Operator Instructions). I'm showing no final questions. I'll turn it back over to Mr. Bill Horning.
Bill Horning
Thanks, operator. This concludes our question-and-answer portion of the call. Thank you for joining us on today's call, and as always, we thank you for your interest in The PMI Group.
Operator
Thank you for participating in today's conference call and have a great day.
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