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 11.1 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 2019 compared to the same period in 2018, 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 three months ended March 31, 2019 and 2018, we experienced favorable loss reserve development on previously received delinquencies. This was, in large part, due to the resolution of approximately 32% and 31%, 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 three months ended March 31, 2019 by the recognition of a probable loss of $23.5 million related to litigation of our claims paying practices, and for the three months ended March 31, 2018, by an increase in our severity assumption on previously received delinquencies.

The “Losses paid” section of table 11.1 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 three months of 2018, our losses paid included $7 million paid upon commutation of coverage of pools of non-performing loans (“NPLs”). The commutations reduced our delinquent inventory by 224 delinquencies and had no material impact on our losses incurred, net.

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 $37 million and $40 million at March 31, 2019 and December 31, 2018, respectively.

Table 11.1 provides a reconciliation of beginning and ending loss reserves as of and for the three months ended March 31, 2019 and 2018.



Development of reserves for losses and loss adjustment expenses
Table	11.1
		Three Months Ended March 31,
(In thousands)		2019			2018
Reserve at beginning of period		$	674,019		$	985,635
Less reinsurance recoverable		33,328			48,474
Net reserve at beginning of period		640,691			937,161

Losses incurred:
Losses and LAE incurred in respect of delinquency notices received in:
Current year		47,488			59,070
Prior years ⁽¹⁾		(8,425		)	(35,220		)
Total losses incurred		39,063			23,850

Losses paid:
Losses and LAE paid in respect of delinquency notices received in:
Current year		—			95
Prior years		56,365			81,983
Reinsurance terminations		—			236
Total losses paid		56,365			82,314
Net reserve at end of period		623,389			878,697
Plus reinsurance recoverables		31,875			45,474
Reserve at end of period		$	655,264		$	924,171


⁽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 2019 and 2018 is reflected in table 11.2 below.



Reserve development on previously received delinquencies
Table	11.2
		Three Months Ended March 31,
(In millions)		2019			2018
Decrease in estimated claim rate on primary defaults		$	(31	)	$	(47	)
Increase in estimated severity on primary defaults		—			16
Change in estimates related to pool reserves, LAE reserves, reinsurance, and other		23			(4		)
Total prior year loss development ⁽¹⁾		$	(8	)	$	(35	)


⁽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 months ended March 31, 2019 and 2018 appears in table 11.3 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.



Delinquent inventory rollforward
Table	11.3
		Three Months Ended March 31,
		2019		2018
Delinquent inventory at beginning of period		32,898		46,556
New notices		13,611		14,623
Cures		(14,348	)	(18,073	)
Paid claims		(1,188	)	(1,571	)
Rescissions and denials		(52	)	(68	)
Other items removed from inventory		—		(224	)
Delinquent inventory at end of period		30,921		41,243

The decrease in the primary delinquent inventory experienced during 2019 and 2018 was generally across all markets and primarily in book years 2008 and prior. Historically as a delinquency 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. Many of the loans from the hurricane impacted areas remained delinquent through the period ending March 31, 2018 and are shown in the 4-11 months delinquent category in table 11.4. The majority of the delinquent notices received from the hurricane activity cured as of December 31, 2018.

Table 11.4 below shows the number of consecutive months a borrower is delinquent.



Primary delinquent inventory - consecutive months delinquent
Table	11.4
		March 31, 2019		December 31, 2018		March 31, 2018
3 months or less		8,568		9,829		8,770
4-11 months		9,997		9,655		16,429
12 months or more ⁽¹⁾		12,356		13,414		16,044
Total		30,921		32,898		41,243

3 months or less		28	%	30	%	21	%
4-11 months		32	%	29	%	40	%
12 months or more		40	%	41	%	39	%
Total		100	%	100	%	100	%

Primary claims received inventory included in ending delinquent inventory:		665		809		819


⁽¹⁾	Approximately 38%, 38%, and 44% 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, 2019, December 31, 2018, and March 31, 2018, respectively.

Pool insurance delinquent inventory decreased to 723 at March 31, 2019 from 859 at December 31, 2018, and 1,200 at March 31, 2018.

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.”