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 consolidated results of operations and financial 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 difference between the actual claim rate and severity associated with those defaults resolved in the current year compared to the estimated claim rate and severity 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 nine 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 nine months ended September 30, 2017 and 2016 we experienced favorable prior year loss reserve development, in large part, due to the resolution of approximately 59% and 54%, respectively, of the prior year default inventory, with improved cure rates.

The “Losses paid” section of the table below shows the amount of losses paid on default notices received in the current year and losses paid on default notices received in prior years. For several years, the average time it took to receive a claim associated with a default had increased significantly from our historical experience of approximately twelve months. This was, 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. In recent quarters, we have experienced a decline in the average time servicers are utilizing to process foreclosures, which has reduced the average time to receive a claim associated with new notices of default that do not cure. All else being equal, the longer the period between default and claim filing, the greater the severity.

During the first nine months of 2017 and 2016, our losses paid included amounts paid on commutations of coverage on pools of non-performing loans (“NPLs”) and in 2016, our losses paid also included amounts paid in connection with disputes concerning our claims paying practices. The impacts of the commutations of NPLs and settlements were as follows:


•	2017 - 1,337 notices removed from default inventory with an amount paid of $54 million.


•	2016 - 1,273 notices removed from default inventory with an amount paid of $52 million.

Our estimate of premiums to be refunded on expected claim payments is accrued for separately in “Other Liabilities” on our consolidated balance sheets and approximated $68 million and $85 million at September 30, 2017 and December 31, 2016, respectively.

The following table provides a reconciliation of beginning and ending loss reserves as of and for the nine months ended September 30, 2017 and 2016:



	Nine months ended September 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	219,485			292,090
Prior years ⁽¹⁾	(134,780		)	(99,591		)
Total losses incurred	84,705			192,499

Losses paid:
Losses and LAE paid in respect of default notices received in:
Current year	5,474			5,942
Prior years	407,977			549,706
Reinsurance terminations ⁽²⁾	301			(2,854		)
Total losses paid	413,752			552,794
Net reserve at end of period	1,059,273			1,488,620
Plus reinsurance recoverables	45,878			46,863
Reserve at end of period	$	1,105,151		$	1,535,483


⁽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.

⁽²⁾

In a termination, the reinsurance agreement is cancelled, with no future premium ceded and amounts for any incurred but unpaid losses paid to us. Amounts paid to (received from) reinsurers result in an increase (decrease) in net losses paid. The change in net losses paid on our losses incurred is offset by a corresponding change in the reinsurance recoverable, resulting in no net impact on losses incurred.

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



	Nine months ended September 30,
(In millions)	2017			2016
Decrease in estimated claim rate on primary defaults	$	(138	)	$	(108	)
(Decrease) increase in estimated severity on primary defaults	(2		)	12
Change in estimates related to pool reserves, LAE reserves and reinsurance	5			(4		)
Total prior year loss development ⁽¹⁾	$	(135	)	$	(100	)


⁽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 nine months ended September 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 September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Default inventory at beginning of period	41,317		52,558		50,282		62,633
New notices	15,950		17,607		45,352		50,418
Cures	(13,546	)	(15,556	)	(45,382	)	(50,249	)
Paids (including those charged to a deductible or captive)	(2,195	)	(3,051	)	(7,403	)	(9,619	)
Rescissions and denials	(82	)	(125	)	(277	)	(477	)
Other items removed from inventory	(209	)	—		(1,337	)	(1,273	)
Default inventory at end of period	41,235		51,433		41,235		51,433

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.

Subsequent event

As shown in the table below, we received an increased number of new default notices in October 2017 compared to October 2016 related to loans in locations that the Federal Emergency Management Agency has declared Individual Assistance Disaster Areas (“IADA”) in connection with recent hurricane activity primarily impacting Texas, Florida, and Puerto Rico.



	For the month ended October 31,
	2017	2016
Default notices for loans in IADAs	3,394	637
Other default notices	4,549	4,882
Total default notices	7,943	5,519

The number of consecutive months a borrower is delinquent is shown in the following table.

Consecutive months in default

	September 30, 2017			December 31, 2016			September 30, 2016
3 months or less	11,331	27	%	12,194	24	%	12,333	24	%
4-11 months	11,092	27	%	13,450	27	%	12,648	25	%
12 months or more ^{(1) (2)}	18,812	46	%	24,638	49	%	26,452	51	%
Total primary default inventory	41,235	100	%	50,282	100	%	51,433	100	%

Primary claims received inventory included in ending default inventory:
	1,063	3	%	1,385	3	%	1,636	3	%


⁽¹⁾	Approximately 45%, 47%, and 48% 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 September 30, 2017, December 31, 2016, and September 30, 2016, respectively.


⁽²⁾	The majority of items removed from our default inventory were due to commutations of NPLs during the nine months ended September 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 following table.

Number of payments delinquent

	September 30, 2017			December 31, 2016			September 30, 2016
3 payments or less	16,916	41	%	18,419	36	%	18,374	36	%
4-11 payments	10,583	26	%	12,892	26	%	12,282	24	%
12 payments or more ⁽¹⁾	13,736	33	%	18,971	38	%	20,777	40	%
Total primary default inventory	41,235	100	%	50,282	100	%	51,433	100	%


⁽¹⁾	The majority of items removed from our default inventory were due to commutations of NPLs during the nine months ended September 30, 2017 had 12 or more payments delinquent as of December 31, 2016.

Pool insurance default inventory decreased to 1,426 at September 30, 2017 from 1,883 at December 31, 2016, and 1,979 at September 30, 2016.

Claims paying practices

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

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.”