

NOTE 8		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 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.

LOSSES INCURRED

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 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 2018 compared to 2017 and in 2017 compared to 2016, in each case, 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.

LOSSES PAID

The “Losses paid” section of table 8.1 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 it takes servicers 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.

Premium refunds

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 $40 million and $61 million at December 31, 2018 and 2017, respectively.

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



Development of reserves for losses and loss adjustment expenses
Table	8.1
(In thousands)		2018			2017			2016
Reserve at beginning of year		$	985,635		$	1,438,813		$	1,893,402
Less reinsurance recoverable		48,474			50,493			44,487
Net reserve at beginning of year		937,161			1,388,320			1,848,915

Losses incurred:
Losses and LAE incurred in respect of delinquent notices received in:
Current year		203,928			284,913			387,815
Prior years ⁽¹⁾		(167,366		)	(231,204		)	(147,658		)
Total losses incurred		36,562			53,709			240,157

Losses paid:
Losses and LAE paid in respect of delinquent notices received in:
Current year		7,298			11,267			14,823
Prior years		327,743			493,300			689,258
Reinsurance terminations		(2,009		)	301			(3,329		)
Total losses paid		333,032			504,868			700,752
Net reserve at end of year		640,691			937,161			1,388,320
Plus reinsurance recoverables		33,328			48,474			50,493
Reserve at end of year		$	674,019		$	985,635		$	1,438,813


⁽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.

Table 8.2 below shows the development of reserves in 2018, 2017 and 2016 for previously received delinquencies.



Reserve development on previously received delinquencies
Table	8.2
(In millions)		2018			2017			2016
Decrease in estimated claim rate on primary delinquencies		$	(213	)	$	(248	)	$	(148	)
Increase in estimated severity on primary delinquencies		29			9			9
Change in estimates related to pool reserves, LAE reserves, reinsurance and other		17			8			(9		)
Total prior year loss development ⁽¹⁾		$	(167	)	$	(231	)	$	(148	)


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

For the years ended December 31, 2018, 2017 and 2016, we experienced favorable development on previously received delinquencies. This development was, in part, due to the resolution of approximately 73%, 67% and 63% for the years ended December 31, 2018, 2017 and 2016, respectively, of the prior year delinquent inventory, with improved cure rates. During 2018 and 2017, cure activity on loans that were delinquent twelve months or more was significantly higher than our previous estimates. The favorable development for the years ended 2018, 2017, and 2016 was offset, in part, by an increase in the estimated severity on previously reported delinquencies remaining in the delinquent inventory.

DELINQUENT INVENTORY

A roll-forward of our primary delinquent inventory for the years ended December 31, 2018, 2017, and 2016 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.



Primary delinquent inventory roll-forward
Table	8.3
		2018		2017		2016
Beginning delinquent inventory		46,556		50,282		62,633
New Notices		54,448		68,268		67,434
Cures		(60,511	)	(61,094	)	(65,516	)
Paid claims		(5,750	)	(9,206	)	(12,367	)
Rescissions and denials		(267	)	(357	)	(629	)
Other items removed from inventory		(1,578	)	(1,337	)	(1,273	)
Ending delinquent inventory		32,898		46,556		50,282

Hurricane activity

New delinquent notice activity increased in 2017 compared to 2016 (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 declared Individual Assistance Disaster Areas ("IADA") which we used 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 majority of notices of delinquency received from the IADAs due to the hurricane activity cured during 2018.

Other items removed from inventory

During 2018, 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. The impacts of the commutations of coverage on NPLs and/or settlements in each of the past three years were as follows:


•	2018 - 1,578 notices removed from delinquent inventory with an amount paid of $50 million,


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


•	2016 - 1,273 notices removed from delinquent inventory with an amount paid of $53 million. In addition, we made a final payment of $42 million in connection with a 2012 settlement agreement with Freddie Mac regarding the aggregate loss limit under certain pool insurance policies.

Aging of delinquent inventory

Historically as a delinquency ages it becomes more likely to result in a claim. The new notice activity from hurricane impacted areas in the fourth quarter of 2017 increased the percentage of our delinquent inventory that has been delinquent for three months or less (table 8.4) as of December 31, 2017 when compared to December 31, 2016.

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



Primary delinquent inventory - consecutive months delinquent
Table	8.4
		December 31,
		2018		2017		2016
3 months or less		9,829		17,119		12,194
4 - 11 months		9,655		12,050		13,450
12 months or more⁽¹⁾		13,414		17,387		24,638
Total		32,898		46,556		50,282

3 months or less		30	%	37	%	24	%
4 - 11 months		29	%	26	%	27	%
12 months or more		41	%	37	%	49	%
Total		100	%	100	%	100	%

Primary claims received inventory included in ending delinquent inventory		809		954		1,385


⁽¹⁾	Approximately 38%, 45%, and 47% 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, 2018, 2017 and 2016, respectively.

POOL INSURANCE DEFAULT INVENTORY

Pool insurance default inventory decreased to 859 at December 31, 2018 from 1,309 at December 31, 2017 and 1,883 at December 31, 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. 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.”