Loss Reserves

12 Months Ended

Dec. 31, 2020


NOTE 8						Loss Reserves

As described in Note 3 – “Summary of Significant Accounting Policies – Loss Reserves,” We establish case reserves and loss adjustment expenses ("LAE") reserves on delinquent loans that were reported to us as two or more payments past due and have not become current or resulted in a claim payment. Case 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.

IBNR reserves are established for estimated losses from delinquencies we estimate have occurred prior to the close of an accounting period, but have not yet been reported to us. IBNR reserves are also established using estimated 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 and the continued impact of the COVID-19 pandemic, leading to a reduction in borrowers’ income and thus their ability to make mortgage payments, the impact of past and future government initiatives and actions taken by the GSEs (including mortgage forbearance programs and foreclosure moratoriums), 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. Loss reserves in future periods will also be dependent on the number of loans reported to us as delinquent.

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. It is reasonably possible that given the uncertainty of the impacts of the COVID 19 pandemic, our reserve estimate may continue to be impacted.

In considering the potential sensitivity of the factors underlying our estimate of loss reserves, it is possible that even a relatively small change in our estimated claim rate or severity could have a material impact on loss reserves and, correspondingly, on our consolidated results of operations even in a stable economic environment. For example, as of December 31, 2020, assuming all other factors remain constant, a $1,000 increase/decrease in the average severity reserve factor would change the loss reserve amount by approximately +/- $16 million. A one percentage point increase/decrease in the average claim rate reserve factor would change the loss reserve amount by approximately +/- $34 million.

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 delinquency 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 2020 compared to 2019 due to an increase in the new delinquency notices reported and IBNR reserve estimates, due to the impact of the COVID-19 pandemic. Given the uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related delinquencies and forbearances on our loss incidence.

Losses incurred on delinquencies that occurred in the current year decreased in 2019 compared to 2018 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, before the second quarter of 2020, we had begun to experience a decline in the average time it takes servicers to process foreclosures, which had reduced the average time to receive a claim associated with new delinquencies 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, the average time it takes to receive a claim may 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 $30 million each at December 31, 2020 and 2019.

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


Development of loss reserves
Table	8.1
(In thousands)		2020		2019		2018
Reserve at beginning of year		$	555,334	$	674,019	$	985,635
Less reinsurance recoverable		21,641		33,328		48,474
Net reserve at beginning of year		533,693		640,691		937,161

Losses incurred:
Losses and LAE incurred in respect of delinquent notices received in:
Current year		345,170		189,581		203,928
Prior years (1)		19,604		(71,006)		(167,366)
Total losses incurred		364,774		118,575		36,562

Losses paid:
Losses and LAE paid in respect of delinquent notices received in:
Current year		3,069		4,018		7,298
Prior years		109,923		235,551		327,743
Reinsurance terminations		(20)		(13,996)		(2,009)
Total losses paid		112,972		225,573		333,032
Net reserve at end of year		785,495		533,693		640,691
Plus reinsurance recoverables		95,042		21,641		33,328
Reserve at end of year		$	880,537	$	555,334	$	674,019

(1)A positive number for prior year loss development indicates a deficiency of prior year reserves. 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 2020, 2019 and 2018 for previously received delinquencies.


Reserve development on previously received delinquencies
Table	8.2
(In thousands)		2020		2019		2018
(Decrease) in estimated claim rate on primary delinquencies		$	(2,536)	$	(111,848)	$	(212,738)
Increase (decrease)in estimated severity on primary delinquencies		13,535		(434)		28,528
Change in estimates related to pool reserves, LAE reserves, reinsurance and other		8,605		41,276		16,844
Total prior year loss development (1)		$	19,604	$	(71,006)	$	(167,366)

(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.

For the year ended December 31, 2020, we experienced adverse development on previously received delinquencies primarily related to severity and adjustments to LAE reserves. For the years ended December 31, 2019 and 2018, we experienced favorable development on previously received delinquencies. This development was, in part, due to the resolution of approximately 69% and 73% for the years ended December 31, 2019 and 2018, respectively, of the prior year delinquency inventory, with improved cure rates. During 2019 and 2018, cure activity on loans that were delinquent twelve months or more was significantly higher than our previous estimates. During 2019, the favorable development was offset by adjustments to LAE reserves and amounts paid in settlement of disputes for claim paying practices. See Note 17 – “Litigation and Contingencies.” The favorable development for the year ended 2018 was offset, in part, by an increase in the estimated severity on previously reported delinquencies remaining in the delinquency inventory.

DELINQUENT INVENTORY

A roll-forward of our primary delinquent inventory for the years ended December 31, 2020, 2019, and 2018 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 delinquency inventory roll-forward
Table	8.3
		2020	2019	2018
Beginning delinquent inventory		30,028	32,898	46,556
New Notices		106,099	54,239	54,448
Cures		(76,107)	(52,035)	(60,511)
Paid claims		(2,245)	(4,267)	(5,750)
Rescissions and denials		(65)	(168)	(267)
Other items removed from inventory		—	(639)	(1,578)
Ending delinquent inventory		57,710	30,028	32,898

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 COVID-19. In the last half of 2020, we experienced an increase in cures associated with our COVID-19 new delinquency notices. Government initiatives and actions taken by the GSEs provide for payment forbearance on mortgages to borrowers experiencing 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 of up to 180 days and, if requested by the borrower, an extension of up to 180 days. For loans in a COVID-19 forbearance plan as of February 28, 2021, the plan may be extended for an additional three months, subject to certain limits.

Other items removed from inventory

During 2019 and 2018 our losses paid included amounts paid upon commutation of coverage on policies. The impacts of the commutations of coverage on policies and/or settlements were as follows:

•2019 - 639 notices removed from delinquent inventory with an amount paid of $30 million,

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

In 2019, our losses paid included $23.5 million paid in connection with settlements of disputes concerning our claims paying practices.

Aging of delinquent inventory

Historically as a delinquency ages it becomes more likely to result in a claim.

The number of consecutive months that a borrower has been delinquent is shown in table 8.4 below.


Primary delinquency inventory - consecutive months delinquent
Table	8.4
		December 31,
		2020		2019		2018
3 months or less		11,542		9,447		9,829
4 - 11 months		34,620		9,664		9,655
12 months or more (1)		11,548		10,917		13,414
Total		57,710		30,028		32,898

3 months or less		20	%	32	%	30	%
4 - 11 months		60	%	32	%	29	%
12 months or more		20	%	36	%	41	%
Total		100	%	100	%	100	%

Primary claims received inventory included in ending delinquent inventory		159		538		809

(1)Approximately 31%, 36%, and 38% of the delinquent inventory that has been delinquent for 12 consecutive months or more has been delinquent for at least 36 consecutive months as of December 31, 2020, 2019 and 2018, respectively.

The increase in delinquency inventory that is 4-11 consecutive months delinquent is primarily due to the number of new delinquency notices received in the second quarter of 2020 resulting from the impacts of the COVID-19 pandemic. This was partially offset by an increase in cures in the third and fourth quarter of 2020.

POOL INSURANCE DEFAULT INVENTORY

Pool insurance default inventory was 680 at December 31, 2020, 653 at December 31, 2019, and 859 at December 31, 2018.

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. For information about discussions and legal proceedings with customers with respect to our claims paying practices, see Note 17 – “Litigation and Contingencies.”