Loss Reserves

We establish reserves to recognize the estimated liability for losses and loss adjustment expenses (“LAE”) related to defaults on insured mortgage loans. Loss reserves are established by estimating the number of loans in our inventory of delinquent loans that will result in a claim payment, which is referred to as the claim rate, and further estimating the amount of the claim payment, which is referred to as claim severity.

Estimation of losses is inherently judgmental. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy, including unemployment and the current and future strength of local housing markets; exposure on insured loans; the amount of time between default and claim filing; and curtailments and rescissions. The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of regional or national economic conditions, including unemployment, leading to a reduction in borrowers’ income and thus their ability to make mortgage payments, and a drop in housing values which may affect borrower willingness to continue to make mortgage payments when the value of the home is below the mortgage balance. Changes to our estimates could result in a material impact to our results of operations and capital position, even in a stable economic environment.

The “Losses incurred” section of the table below shows losses incurred on defaults that occurred in the current year and in prior years. The amount of losses incurred relating to defaults that occurred in the current year represents the estimated amount to be ultimately paid on such defaults. The amount of losses incurred relating to defaults that occurred in prior years represents the actual claim rate and severity associated with those defaults resolved in the current year differing from the estimated liability at the prior year-end, as well as a re-estimation of amounts to be ultimately paid on defaults continuing from the end of the prior year. This re-estimation of the claim rate and severity is the result of our review of current trends in the default inventory, such as percentages of defaults that have resulted in a claim, the amount of the claims relative to the average loan exposure, changes in the relative level of defaults by geography and changes in average loan exposure.

Losses incurred on defaults that occurred in the current year decreased in the first three months of 2017 compared to the same period in 2016, primarily due to a decrease in the estimated claim rate on recently reported defaults and a decrease in the number of new defaults, net of related cures.

For the three months ended March 31, 2017 and 2016 we experienced favorable prior year loss reserve development. This development was, in part, due to the resolution of approximately 29% and 28% of the prior year default inventory during the three months ended March 31, 2017 and 2016, respectively. During the first three months of 2017 and 2016, we experienced improved cure rates on prior year defaults, which was offset in part by an increase in severity on the prior year defaults in both periods.

The “Losses paid” section of the table below shows the breakdown between claims paid on new default notices in the current year and claims paid on defaults from prior years. Until a few years ago, it took, on average, approximately twelve months for a default that is not cured to develop into a paid claim. Over the past several years, the average time it takes to receive a claim associated with a default has increased. This is, in part, due to new loss mitigation protocols established by servicers and to changes in some state foreclosure laws that may include, for example, a requirement for additional review and/or mediation processes. It is difficult to estimate how long it may take for current and future defaults that do not cure to develop into paid claims.

During the first three months of 2016, our losses paid included $47 million associated with settlements for claims paying practices and a nonperforming loan settlement. These settlements reduced our delinquent inventory by 1,138 notices. These settlements had no material impact on our losses incurred, net.

The liability associated with our estimate of premiums to be refunded on expected claim payments is accrued for separately at March 31, 2017 and December 31, 2016 and approximated $81 million and $85 million, respectively. This liability was included in “Other liabilities” on our consolidated balance sheets.

The following table provides a reconciliation of beginning and ending loss reserves as of and for the three months ended March 31, 2017 and 2016:



	Three months ended March 31,
(In thousands)	2017			2016
Reserve at beginning of period	$	1,438,813		$	1,893,402
Less reinsurance recoverable	50,493			44,487
Net reserve at beginning of period	1,388,320			1,848,915

Losses incurred:
Losses and LAE incurred in respect of default notices received in:
Current year	80,416			92,479
Prior years ⁽¹⁾	(52,797		)	(7,467		)
Total losses incurred	27,619			85,012

Losses paid:
Losses and LAE paid in respect of default notices received in:
Current year	331			204
Prior years	127,224			221,457
Reinsurance terminations	—			(4		)
Total losses paid	127,555			221,657
Net reserve at end of period	1,288,384			1,712,270
Plus reinsurance recoverables	46,658			41,119
Reserve at end of period	$	1,335,042		$	1,753,389


⁽¹⁾	A negative number for prior year losses incurred indicates a redundancy of prior year loss reserves. See the following table for more information about prior year loss development.

The prior year development of the reserves in the first three months of 2017 and 2016 is reflected in the following table.



	Three months ended March 31,
(In millions)	2017			2016
Decrease in estimated claim rate on primary defaults	$	(54	)	$	(26	)
Increase in estimated severity on primary defaults	4			22
Change in estimates related to pool reserves, LAE reserves and reinsurance	(3		)	(3		)
Total prior year loss development ⁽¹⁾	$	(53	)	$	(7	)


⁽¹⁾	A negative number for prior year loss development indicates a redundancy of prior year loss reserves.

Default inventory

A rollforward of our primary default inventory for the three months ended March 31, 2017 and 2016 appears in the following table. The information concerning new notices and cures is compiled from monthly reports received from loan servicers. The level of new notice and cure activity reported in a particular month can be influenced by, among other things, the date on which a servicer generates its report, the number of business days in a month and transfers of servicing between loan servicers.



	Three months ended March 31,
	2017		2016
Default inventory at beginning of period	50,282		62,633
New notices	14,939		16,731
Cures	(17,128	)	(19,053	)
Paids (including those charged to a deductible or captive)	(2,635	)	(3,373	)
Rescissions and denials	(95	)	(210	)
Other items removed from inventory	(14	)	(1,138	)
Default inventory at end of period	45,349		55,590

The decrease in the primary default inventory experienced during 2017 and 2016 was generally across all markets and primarily in book years 2008 and prior. Historically as a default ages it becomes more likely to result in a claim.

Consecutive months in default

	March 31, 2017			December 31, 2016			March 31, 2016
3 months or less	9,184	20	%	12,194	24	%	10,120	18	%
4 - 11 months	13,617	30	%	13,450	27	%	15,319	28	%
12 months or more ⁽¹⁾	22,548	50	%	24,638	49	%	30,151	54	%
Total primary default inventory	45,349	100	%	50,282	100	%	55,590	100	%

Primary claims received inventory included in ending default inventory	1,390	3	%	1,385	3	%	2,267	4	%


⁽¹⁾	Approximately 48%, 47%, and 49% of the primary default inventory in default for 12 consecutive months or more has been in default for at least 36 consecutive months as of March 31, 2017, December 31, 2016, and March 31, 2016, respectively.

The number of months a loan is in the default inventory can differ from the number of payments that the borrower has not made or is considered delinquent. These differences typically result from a borrower making monthly payments that do not result in the loan becoming fully current. The number of payments that a borrower is delinquent is shown in the table below.

Number of payments delinquent

	March 31, 2017			December 31, 2016			March 31, 2016
3 payments or less	15,692	35	%	18,419	36	%	16,864	30	%
4 - 11 payments	12,275	27	%	12,892	26	%	14,595	26	%
12 payments or more	17,382	38	%	18,971	38	%	24,131	44	%
Total primary default inventory	45,349	100	%	50,282	100	%	55,590	100	%

Pool insurance default inventory decreased to 1,714 at March 31, 2017 from 1,883 at December 31, 2016. and 2,247 at March 31, 2016.

Claims paying practices

Our loss reserving methodology incorporates our estimates of future rescissions. A variance between ultimate actual rescission rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses.

The liability associated with our estimate of premiums to be refunded on expected future rescissions is accrued for separately. At both March 31, 2017 and December 31, 2016 the estimate of this liability totaled $5 million. This liability was included in “Other liabilities” on our consolidated balance sheets.

For information about discussions and legal proceedings with customers with respect to our claims paying practices see Note 5 – “Litigation and Contingencies.”