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

Losses incurred on delinquencies that occurred in the current year decreased in the first nine months of 2019 compared to the same period in 2018, due to a decrease in the estimated claim rate on delinquencies that occurred in the current year.

For the nine months ended September 30, 2019 and 2018, we experienced favorable loss reserve development on previously received delinquencies. This was, in large part, due to the resolution of approximately 61% and 65%, 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, 2019 by the recognition of a probable loss of $23.5 million related to litigation of our claims paying practices and an increase in our LAE reserves, and for the nine months ended September 30, 2018, by an increase in our severity assumption on previously received delinquencies and an increase in our LAE reserves.

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.

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 $31 million and $40 million at September 30, 2019 and December 31, 2018, respectively.



Development of reserves for losses and loss adjustment expenses
Table	11.1
		Nine Months Ended September 30,
(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		142,644			155,808
Prior years ⁽¹⁾		(47,760		)	(146,931		)
Total losses incurred		94,884			8,877

Losses paid:
Losses and LAE paid in respect of delinquency notices received in:
Current year		980			2,449
Prior years		165,844			257,808
Reinsurance terminations		(13,980		)	(1,984		)
Total losses paid		152,844			258,273
Net reserve at end of period		582,731			687,765
Plus reinsurance recoverables		19,566			33,281
Reserve at end of period		$	602,297		$	721,046



Reserve development on previously received delinquencies
Table	11.2
		Nine Months Ended September 30,
(In millions)		2019			2018
Decrease in estimated claim rate on primary defaults		$	(94	)	$	(184	)
Increase in estimated severity on primary defaults		2			22
Change in estimates related to pool reserves, LAE reserves, reinsurance, and other		44			15
Total prior year loss development ⁽¹⁾		$	(48	)	$	(147	)

A rollforward of our primary delinquent inventory for the three and nine months ended September 30, 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 September 30,				Nine Months Ended September 30,
		2019		2018		2019		2018
Delinquent inventory at beginning of period		29,795		36,037		32,898		46,556
New notices		14,019		13,569		40,545		40,351
Cures		(12,592	)	(14,197	)	(39,822	)	(47,620	)
Paid claims		(1,045	)	(1,374	)	(3,345	)	(4,446	)
Rescissions and denials		(42	)	(56	)	(141	)	(200	)
Other items removed from inventory		(195	)	(581	)	(195	)	(1,243	)
Delinquent inventory at end of period		29,940		33,398		29,940		33,398

When compared to the prior year periods, the decrease in the primary delinquent inventory experienced during the three and nine months ended September 30, 2019 and 2018 was generally across all markets and primarily in book years 2008 and prior. New notices increased in the three and nine months ended September 2019 when compared to the same periods of 2018 primarily due to our larger, more recent book years entering their expected peak loss years, and an overall increase in our insurance in force and policies in force. New notice activity in the three months ended September 30, 2019 exceeded the reductions to our delinquent inventory resulting in a slight increase in our delinquent inventory from June 30, 2019.



Primary delinquent inventory - consecutive months delinquent
Table	11.4
		September 30, 2019		December 31, 2018		September 30, 2018
3 months or less		9,462		9,829		9,484
4-11 months		9,082		9,655		9,564
12 months or more ⁽¹⁾		11,396		13,414		14,350
Total		29,940		32,898		33,398
3 months or less		32	%	30	%	28	%
4-11 months		30	%	29	%	29	%
12 months or more		38	%	41	%	43	%
Total		100	%	100	%	100	%
Primary claims received inventory included in ending delinquent inventory		557		809		766

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.”