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 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 increased in the first nine 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 nine months ended September 30, 2020 we experienced adverse loss reserve development of $17.3 million on previously received delinquencies primarily related to severity. For the nine months ended September 30, 2019, we experienced favorable loss reserve development of $47.8 million on previously received delinquencies, due in large part to the resolution of approximately 61% 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 delinquency notices that do not cure. All else being equal, the longer the period between delinquency and claim filing, the greater the severity.

In light of the uncertainty caused by the COVID-19 pandemic, specifically the foreclosure moratoriums and forbearance plans, we expect the average time it takes to receive a claim will increase.

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 $29 million and $30 million at September 30, 2020 and December 31, 2019, respectively. The slight decrease is primarily due to a decrease in claims received and delinquencies entering foreclosure due to foreclosure moratoriums and forbearance plans.

Table 11.1 provides a reconciliation of beginning and ending loss reserves as of and for the nine months ended September 30, 2020 and 2019.


Development of reserves for losses and loss adjustment expenses
Table	11.1
		Nine Months Ended September 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		301,699		142,644
Prior years (1)		17,317		(47,760)
Total losses incurred		319,016		94,884

Losses paid:
Losses and LAE paid in respect of delinquency notices received in:
Current year		1,486		980
Prior years		93,937		165,844
Reinsurance terminations		(20)		(13,980)
Total losses paid		95,403		152,844
Net reserve at end of period		757,306		582,731
Plus reinsurance recoverables		83,143		19,566
Reserve at end of period		$	840,449	$	602,297

(1)A positive number for prior year loss development indicates a deficiency of prior year reserves. A negative number for prior year loss development 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 2020 and 2019 is reflected in table 11.2 below.


Reserve development on previously received delinquencies
Table	11.2
		Nine Months Ended September 30,
(In thousands)		2020		2019
Decrease in estimated claim rate on primary defaults		$	(1,626)	$	(94,294)
Increase in estimated severity on primary defaults		13,503		2,637
Change in estimates related to pool reserves, LAE reserves, reinsurance, and other		5,440		43,897
Total prior year loss development (1)		$	17,317	$	(47,760)

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

Delinquency inventory

A rollforward of our primary delinquency inventory for the three and nine months ended September 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 September 30,		Nine Months Ended September 30,
		2020	2019	2020	2019
Delinquency inventory at beginning of period		69,326	29,795	30,028	32,898
New notices		20,924	14,019	90,906	40,545
Cures		(25,446)	(12,592)	(54,523)	(39,822)
Paid claims		(375)	(1,045)	(1,933)	(3,345)
Rescissions and denials		(11)	(42)	(60)	(141)
Other items removed from inventory		—	(195)	—	(195)
Delinquency inventory at end of period		64,418	29,940	64,418	29,940

COVID-19 Activity

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. In the third quarter of 2020, we experienced an increase in cures associated with our COVID-19 new delinquency notices. 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: an initial forbearance period up to 180 days and, if requested by the borrower, an extension of up to 180 days. As of September 30, 2020, 67% of our delinquency inventory was reported as subject to a forbearance plan. We believe substantially all represent forbearances related to COVID-19. Forbearance information is based on the most recent information provided by the GSEs, as well as loan servicer. 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 remain at elevated levels during the year due to the impacts of the COVID-19 pandemic and initiatives intended to reduce the transmission of COVID-19.

Table 11.4 below shows the number of consecutive months a borrower is delinquent. Historically as a delinquency ages it becomes more likely to result in a claim.


Primary delinquency inventory - consecutive months delinquent
Table	11.4
		September 30, 2020		December 31, 2019		September 30, 2019
3 months or less		15,879		9,447		9,462
4-11 months		37,702		9,664		9,082
12 months or more (1)		10,837		10,917		11,396
Total		64,418		30,028		29,940
3 months or less		25	%	32	%	32	%
4-11 months		58	%	32	%	30	%
12 months or more		17	%	36	%	38	%
Total		100	%	100	%	100	%
Primary claims received inventory included in ending delinquent inventory		172		538		557

(1)Approximately 32%, 36%, and 36% of the primary delinquency inventory delinquent for 12 consecutive months or more has been delinquent for at least 36 consecutive months as of September 30, 2020, December 31, 2019, and September 30, 2019, respectively.

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 see Note 5 – “Litigation and Contingencies.”