We establish case reserves and loss adjustment expenses (“LAE”) reserves on delinquent loans that were reported to us as two payments past due and have not become current or resulted in a claim payment. Such loans are referred to as being in our delinquency inventory. Case reserves are established by estimating the number of loans in our delinquency inventory 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.

IBNR reserves are established for estimated losses from delinquencies occurring prior to the close of an accounting period on notices of delinquency not yet reported to us. IBNR reserves are also established using estimated notices of delinquency, claim rates, and claim severities.

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 delinquency 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 increased in the first six months of 2020 compared to the same period in 2019, due to an increase in the new delinquency notices reported and IBNR reserve estimates, due to the impact of the COVID-19 pandemic.

For the six months ended June 30, 2020 we experienced adverse loss reserve development of $12.8 million on previously received delinquencies primarily related to severity. For the six months ended June 30, 2019, we experienced favorable loss reserve development on previously received delinquencies, due in large part to the resolution of approximately 49% of the prior year delinquent inventory, with lower claim rates due to improved cure rates. This favorable loss reserve development was partially offset by the recognition of a probable loss of $23.5 million related to litigation of our claims paying practices.

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 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.

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 $28 million and $30 million at June 30, 2020 and December 31, 2019, respectively.



Development of reserves for losses and loss adjustment expenses
Table	11.1
		Six Months Ended June 30,
(In thousands)		2020			2019
Reserve at beginning of period		$	555,334		$	674,019
Less reinsurance recoverable		21,641			33,328
Net reserve at beginning of period		533,693			640,691

Losses incurred:
Losses and LAE incurred in respect of delinquency notices received in:
Current year		265,546			94,063
Prior years ⁽¹⁾		12,784			(33,164		)
Total losses incurred		278,330			60,899

Losses paid:
Losses and LAE paid in respect of delinquency notices received in:
Current year		271			2,650
Prior years		77,820			109,420
Reinsurance terminations		(20		)	(13,980		)
Total losses paid		78,071			98,090
Net reserve at end of period		733,952			603,500
Plus reinsurance recoverables		63,444			18,402
Reserve at end of period		$	797,396		$	621,902



Reserve development on previously received delinquencies
Table	11.2
		Six Months Ended June 30,
(In thousands)		2020			2019
Decrease in estimated claim rate on primary defaults		$	(2,104	)	$	(67,465	)
Increase in estimated severity on primary defaults		13,767			3,140
Change in estimates related to pool reserves, LAE reserves, reinsurance, and other		1,121			31,161
Total prior year loss development ⁽¹⁾		$	12,784		$	(33,164	)

A rollforward of our primary delinquency inventory for the three and six months ended June 30, 2020 and 2019 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 number of business days in a month and transfers of servicing between loan servicers.



Delinquency inventory rollforward
Table	11.3
		Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019
Delinquency inventory at beginning of period		27,384		30,921		30,028		32,898
New notices		57,584		12,915		69,982		26,526
Cures		(14,964	)	(12,882	)	(29,077	)	(27,230	)
Paid claims		(661	)	(1,112	)	(1,558	)	(2,300	)
Rescissions and denials		(17	)	(47	)	(49	)	(99	)
Delinquency inventory at end of period		69,326		29,795		69,326		29,795

New delinquency notices increased in 2020 because of the impacts of the COVID-19 pandemic, including the high level of unemployment and economic uncertainty resulting from measures to reduce the transmission of the COVID-19. The CARES Act and other related actions provide for payment forbearance on mortgages to borrowers experiencing a hardship during the COVID-19 pandemic. These forbearance plans generally allow for mortgage payments to be suspended for up to 360 days. As of June 30, 2020, 67% of our delinquency inventory was reported as subject to a COVID-19 forbearance plan. Forbearance information is based on the most recent information provided by the GSEs, as well as loan servicers, and we believe represents only forbearances related to COVID-19. While the forbearance information provided by the GSEs refers to delinquent loans in forbearance as of the prior month-end, the information provided by loan servicers may be more current. We expect our delinquency inventory will continue to increase during the year due to the impacts of the COVID-19 pandemic and initiatives intended to reduce the transmission of COVID-19.



Primary delinquency inventory - consecutive months delinquent
Table	11.4
		June 30, 2020		December 31, 2019		June 30, 2019
3 months or less		50,646		9,447		8,970
4-11 months		8,370		9,664		8,951
12 months or more ⁽¹⁾		10,310		10,917		11,874
Total		69,326		30,028		29,795
3 months or less		73	%	32	%	30	%
4-11 months		12	%	32	%	30	%
12 months or more		15	%	36	%	40	%
Total		100	%	100	%	100	%
Primary claims received inventory included in ending delinquent inventory		247		538		630

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 see Note 5 – “Litigation and Contingencies.”