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 six 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 six months ended June 30, 2017 and 2016 we experienced favorable prior year loss reserve development. This development was, in part, due to the resolution of approximately 48% and 43% of the prior year default inventory during the six months ended June 30, 2017 and 2016, respectively. During the first six months of 2017 and 2016, we experienced improved cure rates on prior year defaults, which were 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 six months of 2017 and 2016, our losses paid included amounts paid in connection with disputes concerning our claims paying practices and settlements of coverage on pools of non-performing loans (“NPLs”). The impacts of the settlements were as follows:


•	2017 - Items removed from inventory totaled 1,128 notices with an amount paid of $45 million.


•	2016 - Items removed from inventory totaled 1,273 notices with an amount paid of $51 million.

The liability associated with our estimate of premiums to be refunded on expected claim payments is accrued for separately at June 30, 2017 and December 31, 2016 and approximated $74 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 six months ended June 30, 2017 and 2016:



	Six months ended June 30,
(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	158,906			196,543
Prior years ⁽¹⁾	(103,948		)	(64,941		)
Total losses incurred	54,958			131,602

Losses paid:
Losses and LAE paid in respect of default notices received in:
Current year	2,125			1,396
Prior years	298,847			392,007
Reinsurance terminations	—			(4		)
Total losses paid	300,972			393,399
Net reserve at end of period	1,142,306			1,587,118
Plus reinsurance recoverables	44,783			45,215
Reserve at end of period	$	1,187,089		$	1,632,333


⁽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 six months of 2017 and 2016 is reflected in the following table.



	Six months ended June 30,
(In millions)	2017			2016
Decrease in estimated claim rate on primary defaults	$	(104	)	$	(76	)
Increase in estimated severity on primary defaults	2			17
Change in estimates related to pool reserves, LAE reserves and reinsurance	(2		)	(6		)
Total prior year loss development ⁽¹⁾	$	(104	)	$	(65	)


⁽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 and six months ended June 30, 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 accuracy of the data provided by servicers, the number of business days in a month, transfers of servicing between loan servicers and whether all servicers have provided the reports in a given month.



	Three months ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Default inventory at beginning of period	45,349		55,590		50,282		62,633
New notices	14,463		16,080		29,402		32,811
Cures	(14,708	)	(15,640	)	(31,836	)	(34,693	)
Paids (including those charged to a deductible or captive)	(2,573	)	(3,195	)	(5,208	)	(6,568	)
Rescissions and denials	(100	)	(142	)	(195	)	(352	)
Other items removed from inventory	(1,114	)	(135	)	(1,128	)	(1,273	)
Default inventory at end of period	41,317		52,558		41,317		52,558

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

	June 30, 2017			December 31, 2016			June 30, 2016
3 months or less	10,299	25	%	12,194	24	%	11,547	22	%
4 - 11 months	11,018	27	%	13,450	27	%	12,680	24	%
12 months or more ^{(1) (2)}	20,000	48	%	24,638	49	%	28,331	54	%
Total primary default inventory	41,317	100	%	50,282	100	%	52,558	100	%

Primary claims received inventory included in ending default inventory:
	1,258	3	%	1,385	3	%	1,829	3	%


⁽¹⁾	Approximately 46%, 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 June 30, 2017, December 31, 2016, and June 30, 2016, respectively.


⁽²⁾	The majority of items removed from our default inventory under NPL settlements during the six months ended June 30, 2017 were in default for 12 consecutive months or more as of December 31, 2016.

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

	June 30, 2017			December 31, 2016			June 30, 2016
3 payments or less	15,858	38	%	18,419	36	%	17,299	33	%
4 - 11 payments	10,560	26	%	12,892	26	%	12,746	24	%
12 payments or more ⁽¹⁾	14,899	36	%	18,971	38	%	22,513	43	%
Total primary default inventory	41,317	100	%	50,282	100	%	52,558	100	%


⁽¹⁾	The majority of items removed from our default inventory under NPL settlements during the six months ended June 30, 2017 had 12 or more payments delinquent as of December 31, 2016.

Pool insurance default inventory decreased to 1,511 at June 30, 2017 from 1,883 at December 31, 2016, and 2,024 at June 30, 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 and is 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.”