Loss Reserves

As described in Note 3 – “Summary of Significant Accounting Policies – Loss Reserves,” we establish reserves to recognize the estimated liability for losses and 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 table 8.1 below shows losses incurred on delinquencies that occurred in the current year and in prior years. The amount of losses incurred relating to delinquencies that occurred in the current year represents the estimated amount to be ultimately paid on such delinquencies. The amount of losses incurred relating to delinquencies that occurred in prior years represents the difference between the actual claim rate and severity associated with those delinquencies 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 delinquencies 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 delinquent 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 delinquencies by geography and changes in average loan exposure.

Losses incurred on delinquencies that occurred in the current year decreased in 2017 compared to 2016 due to a decrease in the estimated claim rate on recently reported delinquencies, and in 2016 compared to 2015, primarily due to a decrease in the number of new delinquencies, net of cures, as well as a decrease in the estimated claim rate on recently reported delinquencies.

See "Hurricane activity" below for additional information on new notice activity and items in our delinquent inventory from the hurricane impacted areas. Based on our analysis and past experience, new notices received in areas impacted by hurricanes generally cure at a higher rate than notices received in the normal course of business and we have estimated a materially lower claim rate on the estimated new notices caused by the hurricane activity; however, our estimated severity was similar to other new notices received.

The “Losses paid” section of table 8.1 below shows the amount of losses paid on delinquent notices received in the current year and losses paid on delinquent notices received in prior years. For several years, the average time it took to receive a claim associated with a delinquency 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 delinquent notices that do not cure. All else being equal, the longer the period between delinquency and claim filing, the greater the severity.

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 $61 million and $85 million at December 31, 2017 and 2016, respectively.

During 2017 and 2016, our losses paid included amounts paid upon commutation of coverage on pools of non-performing loans ("NPLs"), and in 2016 our losses paid also included amounts paid in connection with settlements for disputes concerning our claims paying practices. Losses paid in 2015 included amounts paid in connection with settlements for disputes concerning our claims paying practices. The impacts of the commutations of coverage on NPLs and/or settlements in each of the past three years 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 $53 million,


•	2015 - 1,121 notices removed from default inventory with an amount paid of $10 million.

In each of 2016 and 2015, we paid $42 million in connection with a 2012 settlement agreement with Freddie Mac regarding the aggregate loss limit under certain pool insurance policies. The final payment under that settlement agreement was made on December 1, 2016.

Table 8.1 provides a reconciliation of beginning and ending loss reserves for each of the past three years:



	Table	8.1
Development of reserves for losses and loss adjustment expenses	(In thousands)		2017			2016			2015
	Reserve at beginning of year		$	1,438,813		$	1,893,402		$	2,396,807
	Less reinsurance recoverable		50,493			44,487			57,841
	Net reserve at beginning of year		1,388,320			1,848,915			2,338,966

	Losses incurred:
	Losses and LAE incurred in respect of delinquent notices received in:
	Current year		284,913			387,815			453,849
	Prior years ⁽¹⁾		(231,204		)	(147,658		)	(110,302		)
	Total losses incurred		53,709			240,157			343,547

	Losses paid:
	Losses and LAE paid in respect of delinquent notices received in:
	Current year		11,267			14,823			25,980
	Prior years		493,300			689,258			823,058
	Reinsurance terminations ⁽²⁾		301			(3,329		)	(15,440		)
	Total losses paid		504,868			700,752			833,598
	Net reserve at end of year		937,161			1,388,320			1,848,915
	Plus reinsurance recoverables		48,474			50,493			44,487
	Reserve at end of year		$	985,635		$	1,438,813		$	1,893,402


⁽¹⁾	A negative number for prior year losses incurred indicates a redundancy of prior year loss reserves. See table 8.2 below 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. (See Note 9 – “Reinsurance”).

Table 8.2 below shows the development of reserves in 2017, 2016 and 2015 for previously received delinquencies.



	Table	8.2
Reserve development on previously received delinquencies	(In millions)		2017			2016			2015
	Decrease in estimated claim rate on primary delinquencies		$	(248	)	$	(148	)	$	(141	)
	Increase in estimated severity on primary delinquencies		9			9			43
	Change in estimates related to pool reserves, LAE reserves, reinsurance and other		8			(9		)	(12		)
	Total prior year loss development ⁽¹⁾		$	(231	)	$	(148	)	$	(110	)


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

For the years ended December 31, 2017, 2016 and 2015, we experienced favorable development on previously received delinquencies. This development was, in part, due to the resolution of approximately 67%, 63% and 60% for the years ended December 31, 2017, 2016 and 2015, respectively, of the prior year delinquent inventory, with improved cure rates. During 2017, cure activity on loans that were delinquent twelve months or more was significantly higher than our previous estimates. During 2015, the claim rate development was also favorably impacted by re-estimations of previously recorded reserves relating to disputes on our claims paying practices and adjustments to IBNR. The favorable development for the years ended 2017, 2016, and 2015 was offset, in part, by an increase in the estimated severity on previously reported delinquencies remaining in the delinquent inventory.

Delinquent Inventory

A rollforward of our primary delinquent inventory for the years ended December 31, 2017, 2016, and 2015 appears in table 8.3 below. 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.



	Table	8.3
Delinquent inventory rollforward			2017		2016		2015
	Delinquent inventory at beginning of year		50,282		62,633		79,901
	New Notices		68,268		67,434		74,315
	Cures		(61,094	)	(65,516	)	(73,610	)
	Paids (including those charged to a deductible or captive)		(9,206	)	(12,367	)	(16,004	)
	Rescissions and denials		(357	)	(629	)	(848	)
	Other items removed from inventory		(1,337	)	(1,273	)	(1,121	)
	Delinquent inventory at end of year		46,556		50,282		62,633

2017 delinquent inventory

Hurricane activity

New default notice activity increased in 2017 compared to the prior year (particularly in the fourth quarter) because of hurricane activity that primarily impacted Puerto Rico, Texas, and Florida in the third quarter of 2017. In response to the hurricanes, the Federal Emergency Management Agency has declared Individual Assistance Disaster Areas ("IADA") which we are utilizing to identify new notices of delinquency for reserving and loss mitigation purposes. We received 9,294 new notices of delinquency on loans in the IADAs in the fourth quarter of 2017, which compares to 1,968 new notices in the same areas in the fourth quarter of 2016. Loans in our ending delinquent inventory within the IADAs were 12,446 and 7,162 as of December 31, 2017 and 2016, respectively.

The new notice activity from hurricane impacted areas in the fourth quarter of 2017 has increased the percentage of our delinquent inventory that has been delinquent for three months or less (table 8.4) and correspondingly our percentage of delinquent inventory with three payments or less (table 8.5) delinquent has also increased.

2016 and 2015 delinquent inventory

The decrease in the primary delinquent inventory experienced during 2016 and 2015 from the respective prior year was generally across all markets and all book years prior to 2013. In 2016 and 2015, the percentage of loans in the inventory that had been delinquent for 12 or more consecutive months had decreased compared to the respective prior year.

Historically as a delinquency ages it becomes more likely to result in a claim. The percentage of loans that have been delinquent for 12 or more consecutive months and the number of loans in our primary claims received inventory have been affected by our suspended rescissions and the resolution of certain of those rescissions discussed below and in Note 17 - "Litigation and Contingencies".

The number of consecutive months that a borrower has been delinquent is shown in the table below.



	Table	8.4
Delinquent inventory - consecutive months delinquent			December 31,
			2017			2016			2015
	3 months or less		17,119	37	%	12,194	24	%	13,053	21	%
	4 - 11 months		12,050	26	%	13,450	27	%	15,763	25	%
	12 months or more⁽¹⁾		17,387	37	%	24,638	49	%	33,817	54	%
	Total primary delinquent inventory		46,556	100	%	50,282	100	%	62,633	100	%

	Primary claims received inventory included in ending delinquent inventory		954	2	%	1,385	3	%	2,769	4	%


⁽¹⁾	Approximately 45%, 47% and 50% of the primary delinquent inventory delinquent for 12 consecutive months or more has been delinquent for at least 36 consecutive months as of December 31, 2017, 2016 and 2015, respectively.

The length of time a loan is in the delinquent 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 table 8.5 below.



	Table	8.5
Delinquent inventory - number of payments delinquent			December 31,
			2017			2016			2015
	3 payments or less		21,678	46	%	18,419	36	%	20,360	33	%
	4 - 11 payments		12,446	27	%	12,892	26	%	15,092	24	%
	12 payments or more		12,432	27	%	18,971	38	%	27,181	43	%
	Total primary delinquent inventory		46,556	100	%	50,282	100	%	62,633	100	%

Pool insurance default inventory decreased to 1,309 at December 31, 2017 from 1,883 at December 31, 2016 and 2,739 at December 31, 2015.

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. 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, including settlements that we believe are probable, as defined in ASC 450-20, see Note 17 – “Litigation and Contingencies.”