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 nine months of 2018 compared to the same period in 2017, primarily due to a decrease in the number of new delinquencies, net of related cures and a decrease in the estimated claim rate on delinquencies that occurred in the current year.

For the nine months ended September 30, 2018 and 2017, we experienced favorable loss reserve development on previously received delinquencies. This was, in large part, due to the resolution of approximately 65% and 59%, respectively, of the prior year delinquent inventory, with lower claim rates due to improved cure rates. The favorable loss reserve development resulting from a reduction in the estimated claim rate was partially offset in the nine months ended September 30, 2018 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 delinquencies that occurred in the current year and losses paid on delinquencies that occurred 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 nine months of 2018 and 2017, our losses paid included amounts paid upon commutation of coverage of pools of non-performing loans (“NPLs”) and/or amounts paid in connection with disputes concerning our claims paying practices. The impacts of these payments were as follows:


•	2018 - 1,243 items were removed from the delinquent inventory with an amount paid of $40 million.


•	2017 - 1,337 items were removed from the delinquent inventory with amount paid of $54 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 $44 million and $61 million at September 30, 2018 and December 31, 2017, respectively.

Table 12.1 provides a reconciliation of beginning and ending loss reserves as of and for the nine months ended September 30, 2018 and 2017.



	Table	12.1
Development of reserves for losses and loss adjustment expenses			Nine months ended September 30,
	(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		155,808			219,485
	Prior years ⁽¹⁾		(146,931		)	(134,780		)
	Total losses incurred		8,877			84,705

	Losses paid:
	Losses and LAE paid in respect of delinquency notices received in:
	Current year		2,449			5,474
	Prior years		257,808			407,977
	Reinsurance terminations		(1,984		)	301
	Total losses paid		258,273			413,752
	Net reserve at end of period		687,765			1,059,273
	Plus reinsurance recoverables		33,281			45,878
	Reserve at end of period		$	721,046		$	1,105,151


⁽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 nine months of 2018 and 2017 is reflected in table 12.2 below.



	Table	12.2
Reserve development on previously received delinquencies			Nine months ended September 30,
	(in millions)		2018			2017
	Decrease in estimated claim rate on primary defaults		$	(184	)	$	(138	)
	Increase in estimated severity on primary defaults		22			(2		)
	Change in estimates related to pool reserves, LAE reserves and reinsurance		15			5
	Total prior year loss development ⁽¹⁾		$	(147	)	$	(135	)


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

Delinquent inventory

A rollforward of our primary delinquent inventory for the three and nine months ended September 30, 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 September 30,				Nine Months Ended September 30,
			2018		2017		2018		2017
	Delinquent inventory at beginning of period		36,037		41,317		46,556		50,282
	New notices		13,569		15,950		40,351		45,352
	Cures		(14,197	)	(13,546	)	(47,620	)	(45,382	)
	Paids (including those charged to a deductible or captive)		(1,374	)	(2,195	)	(4,446	)	(7,403	)
	Rescissions and denials		(56	)	(82	)	(200	)	(277	)
	Other items removed from inventory		(581	)	(209	)	(1,243	)	(1,337	)
	Delinquent inventory at end of period		33,398		41,235		33,398		41,235

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. 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 September 30, 2017.

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



	Table	12.4
Delinquent inventory - consecutive months in default			September 30, 2018			December 31, 2017			September 30, 2017
	3 months or less		9,484	28	%	17,119	37	%	11,331	27	%
	4-11 months		9,564	29	%	12,050	26	%	11,092	27	%
	12 months or more ^{(1) (2)}		14,350	43	%	17,387	37	%	18,812	46	%
	Total primary delinquent inventory		33,398	100	%	46,556	100	%	41,235	100	%

	Primary claims received inventory included in ending delinquent inventory:		766	2	%	954	2	%	1,063	3	%


⁽¹⁾	Approximately 39%, 45%, and 45% of the primary delinquent inventory delinquent for 12 consecutive months or more has been delinquent for at least 36 consecutive months as of September 30, 2018, December 31, 2017, and September 30, 2017, respectively.


⁽²⁾	The majority of items removed from our delinquent inventory due to commutations of NPLs during the nine months ended September 30, 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			September 30, 2018			December 31, 2017			September 30, 2017
	3 payments or less		14,813	44	%	21,678	46	%	16,916	41	%
	4-11 payments		9,156	28	%	12,446	27	%	10,583	26	%
	12 payments or more ^{(1) (2)}		9,429	28	%	12,432	27	%	13,736	33	%
	Total primary delinquent inventory		33,398	100	%	46,556	100	%	41,235	100	%


⁽¹⁾	Approximately 39%, 43%, and 43% of the primary delinquent inventory with 12 payments or more delinquent has at least 36 payments delinquent as of September 30, 2018, December 31, 2017, and September 30, 2017, respectively.


⁽²⁾	The majority of items removed from our delinquent inventory due to commutations of NPLs during the nine months ended September 30, 2018 had 12 or more payments delinquent as of December 31, 2017.

Pool insurance delinquent inventory decreased to 1,032 at September 30, 2018 from 1,309 at December 31, 2017, and 1,426 at September 30, 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.”