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 table 12.1 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 delinquencies 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 the first three months of 2018 compared to the same period in 2017, primarily due to a decrease in the estimated claim rate on recently reported delinquencies and a decrease in the number of new delinquencies, net of related cures.

For the three months ended March 31, 2018 and 2017, we experienced favorable loss reserve development on previously received delinquencies, in large part, due to the resolution of approximately 31% and 29%, respectively, of the prior year delinquent inventory, with improved cure rates. The favorable loss reserve development resulting from a reduction in the estimated claim rate was partially offset in each of the three months ended March 31, 2018 and 2017 by an increase in our severity assumption on previously received delinquencies.

The “Losses paid” section of table 12.1 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.

During the first three months of 2018, our losses paid included $7 million paid upon commutation of coverage on pools of non-performing loans (“NPLs”). The commutations reduced our delinquent inventory by 224 delinquencies. These commutations had no material impact on our losses incurred, net.

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 $56 million and $61 million at March 31, 2018 and December 31, 2017, respectively.

Table 12.1 provides a reconciliation of beginning and ending loss reserves as of and for the three months ended March 31, 2018 and 2017.



	Table	12.1
Development of reserves for losses and loss adjustment expenses			Three Months Ended March 31,
	(In thousands)		2018			2017
	Reserve at beginning of period		$	985,635		$	1,438,813
	Less reinsurance recoverable		48,474			50,493
	Net reserve at beginning of period		937,161			1,388,320

	Losses incurred:
	Losses and LAE incurred in respect of delinquency notices received in:
	Current year		59,070			80,416
	Prior years ⁽¹⁾		(35,220		)	(52,797		)
	Total losses incurred		23,850			27,619

	Losses paid:
	Losses and LAE paid in respect of delinquency notices received in:
	Current year		95			331
	Prior years		81,983			127,224
	Reinsurance terminations		236			—
	Total losses paid		82,314			127,555
	Net reserve at end of period		878,697			1,288,384
	Plus reinsurance recoverables		45,474			46,658
	Reserve at end of period		$	924,171		$	1,335,042


⁽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 2018 and 2017 is reflected in table 12.2 below.



	Table	12.2
Reserve development on previously received delinquencies			Three Months Ended March 31,
	(in millions)		2018			2017
	Decrease in estimated claim rate on primary defaults		$	(47	)	$	(54	)
	Increase in estimated severity on primary defaults		16			4
	Change in estimates related to pool reserves, LAE reserves and reinsurance		(4		)	(3		)
	Total prior year loss development ⁽¹⁾		$	(35	)	$	(53	)


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

Default inventory

A rollforward of our primary delinquent inventory for the three months ended March 31, 2018 and 2017 appears in table 12.3 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 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.



	Table	12.3
Delinquent inventory rollforward			Three Months Ended March 31,
			2018		2017
	Delinquent inventory at beginning of period		46,556		50,282
	New notices		14,623		14,939
	Cures		(18,073	)	(17,128	)
	Paids (including those charged to a deductible or captive)		(1,571	)	(2,635	)
	Rescissions and denials		(68	)	(95	)
	Other items removed from inventory		(224	)	(14	)
	Delinquent inventory at end of period		41,243		45,349

The decrease in the primary delinquent inventory experienced during 2018 and 2017 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.

Hurricane activity

New delinquent notice activity increased in the fourth quarter of 2017 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”), and during the fourth quarter of 2017 we received 9,294 new notices from the IADA. As a result, the number of loans delinquent three months or less was a higher percentage of our total inventory as of December 31, 2017 than it had been as of March 31, 2017. Many of the loans in the IADA first reported as delinquent in the fourth quarter of 2017 remained delinquent through the period ending March 31, 2018 and are shown as 4-11 months delinquent in table 12.4 below. Correspondingly, the combined number of loans in our delinquent inventory with up to eleven missed payments was elevated as of December 31, 2017, compared to March 31, 2017, and remained elevated as of March 31, 2018 as shown in table 12.5 below.

Table 12.4 below shows the number of consecutive months a borrower is delinquent.



	Table	12.4
Delinquent inventory - consecutive months in default			March 31, 2018			December 31, 2017			March 31, 2017
	3 months or less		8,770	21	%	17,119	37	%	9,184	20	%
	4-11 months		16,429	40	%	12,050	26	%	13,617	30	%
	12 months or more ^{(1) (2)}		16,044	39	%	17,387	37	%	22,548	50	%
	Total primary delinquent inventory		41,243	100	%	46,556	100	%	45,349	100	%

	Primary claims received inventory included in ending delinquent inventory:		819	2	%	954	2	%	1,390	3	%


⁽¹⁾	Approximately 44%, 45%, and 48% of the primary delinquent inventory delinquent for 12 consecutive months or more has been delinquent for at least 36 consecutive months as of March 31, 2018, December 31, 2017, and March 31, 2017, respectively.


⁽²⁾	The majority of items removed from our delinquent inventory were due to commutations of NPLs during the three months ended March 31, 2018 were delinquent for 12 consecutive months or more as of December 31, 2017.

The number of months 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. Table 12.5 below shows the number of payments that a borrower is delinquent.



	Table	12.5
Delinquent inventory - number of payments delinquent			March 31, 2018			December 31, 2017			March 31, 2017
	3 payments or less		16,023	39	%	21,678	46	%	15,692	35	%
	4-11 payments		13,734	33	%	12,446	27	%	12,275	27	%
	12 payments or more ^{(1) (2)}		11,486	28	%	12,432	27	%	17,382	38	%
	Total primary delinquent inventory		41,243	100	%	46,556	100	%	45,349	100	%


⁽¹⁾	Approximately 42%, 43%, and 45% of the primary delinquent inventory with 12 payments or more delinquent has at least 36 payments delinquent as of March 31, 2018, December 31, 2017, and March 31, 2017, respectively.


⁽²⁾	The majority of items removed from our delinquent inventory were due to commutations of NPLs during the three months ended March 31, 2018 had 12 or more payments delinquent as of December 31, 2017.

Pool insurance delinquent inventory decreased to 1,200 at March 31, 2018 from 1,309 at December 31, 2017, and 1,714 at March 31, 2017.

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.”