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 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 June 30, 2021, 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 +/- $17 million. A one percentage point increase/decrease in the average claim rate reserve factor would change the loss reserve amount by approximately +/- $25 million.

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 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 decreased in the first six months of 2021 compared to the same period last year due to a decrease in new delinquency notices. In addition, we decreased IBNR reserve estimates by $5.9 million in the first six months of 2021, compared to a $38.9 million increase in the first six months of 2020. New delinquency notices and IBNR estimates increased in the six months ended June 30, 2020 due to the impact of the COVID-19 pandemic. Given the uncertainty surrounding the long-term impact of COVID-19, it is difficult to predict the ultimate effect of the COVID-19 related delinquencies and forbearances on our loss incidence.

For the six months ended June 30, 2021 we experienced adverse loss development of $1.7 million on previously received notices primarily due to the recognition of a probable loss of $6.3 million related to litigation of our claims paying practices, offset by favorable development on pool reserves, LAE reserves and reinsurance. For the six months ended June 30, 2020 we experienced adverse loss development of $12.8 million on previously received delinquencies primarily related to severity.

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. Prior to 2020, we had 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 $32.6 million and $30.1 million at June 30, 2021 and December 31, 2020, respectively.

Table 11.1 provides a reconciliation of beginning and ending loss reserves as of and for the six months ended June 30, 2021 and 2020.


Development of reserves for losses and loss adjustment expenses
Table	11.1
		Six Months Ended June 30,
(In thousands)		2021		2020
Reserve at beginning of period		$	880,537	$	555,334
Less reinsurance recoverable		95,042		21,641
Net reserve at beginning of period		785,495		533,693

Losses incurred:
Losses and LAE incurred in respect of delinquency notices received in:
Current year		67,068		265,546
Prior years (1)		1,732		12,784
Total losses incurred		68,800		278,330

Losses paid:
Losses and LAE paid in respect of delinquency notices received in:
Current year		48		271
Prior years		29,164		77,820
Reinsurance terminations		—		(20)
Total losses paid		29,212		78,071
Net reserve at end of period		825,083		733,952
Plus reinsurance recoverables		111,153		63,444
Reserve at end of period		$	936,236	$	797,396

(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 six months of 2021 and 2020 is reflected in table 11.2 below.


Reserve development on previously received delinquencies
Table	11.2
		Six Months Ended June 30,
(In thousands)		2021		2020
Increase (decrease) in estimated claim rate on primary defaults		$	(356)	$	(2,104)
Increase (decrease) in estimated severity on primary defaults		512		13,767
Change in estimates related to pool reserves, LAE reserves, reinsurance, and other		1,576		1,121
Total prior year loss development (1)		$	1,732	$	12,784

(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 six months ended June 30, 2021 and 2020 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,
		2021	2020	2021	2020
Delinquency inventory at beginning of period		52,775	27,384	57,710	30,028
New notices		9,036	57,584	22,047	69,982
Cures		(18,460)	(14,964)	(36,088)	(29,077)
Paid claims		(346)	(661)	(658)	(1,558)
Rescissions and denials		(6)	(17)	(12)	(49)
Delinquency inventory at end of period		42,999	69,326	42,999	69,326

COVID-19 Activity

Our delinquency inventory increased beginning in the second quarter of 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. Starting in the third quarter 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 18 months: an initial forbearance period of up to six months; if requested by the borrower, an extension of up to six months; and, for loans in a COVID-19 forbearance plan as of February 28, 2021, an additional extension up to six months, subject to certain limits.

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
		June 30, 2021		December 31, 2020		June 30, 2020
3 months or less		6,513		11,542		50,646
4-11 months		12,840		34,620		8,370
12 months or more (1)		23,646		11,548		10,310
Total		42,999		57,710		69,326
3 months or less		15	%	20	%	73	%
4-11 months		30	%	60	%	12	%
12 months or more		55	%	20	%	15	%
Total		100	%	100	%	100	%
Primary claims received inventory included in ending delinquent inventory		159		159		247

(1)Approximately 15%, 31%, and 33% of the primary delinquency inventory delinquent for 12 consecutive months or more has been delinquent for at least 36 consecutive months as of June 30, 2021, December 31, 2020, and June 30, 2020, respectively.

The increase in delinquency inventory that is 12 months or more consecutive months delinquent compared to June 30, 2020 and December 31, 2020 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 second half of 2020 and in the first half of 2021.

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 5 – “Litigation and Contingencies.”