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 (all else being equal, the longer the period between delinquency and claim filing, the greater the severity); 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 September 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 +/- $22 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 nine months of 2021 compared to the same period last year primarily due to a decrease in new delinquency notices reported. In addition, we decreased IBNR reserve estimates by $5.9 million in the nine months ending September 30, 2021, compared to a $12.6 million increase in the nine months ending September 30, 2020. New delinquency notices and IBNR reserve estimates increased in the nine months ended September 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 nine months ended September 30, 2021 we experienced favorable loss development of $6.0 million on previously received notices primarily due to the decrease in the claim rate on pre-COVID-19 delinquencies. This was offset by the recognition of a probable loss of $6.3 million related to litigation of our claims paying practices and adverse development on LAE reserves and reinsurance. For the nine months ended September 30, 2020 we experienced adverse loss development of $17.3 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. 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.

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


Development of reserves for losses and loss adjustment expenses
Table	11.1
		Nine Months Ended September 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		95,534		301,699
Prior years (1)		(5,968)		17,317
Total losses incurred		89,566		319,016

Losses paid:
Losses and LAE paid in respect of delinquency notices received in:
Current year		339		1,486
Prior years		48,842		93,937
Reinsurance terminations		—		(20)
Total losses paid		49,181		95,403
Net reserve at end of period		825,880		757,306
Plus reinsurance recoverables		107,029		83,143
Reserve at end of period		$	932,909	$	840,449

(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 2021 and 2020 is reflected in table 11.2 below.


Reserve development on previously received delinquencies
Table	11.2
		Nine Months Ended September 30,
(In thousands)		2021		2020
Increase (decrease) in estimated claim rate on primary defaults		$	(18,147)	$	(1,626)
Increase (decrease) in estimated severity on primary defaults		(105)		13,503
Change in estimates related to pool reserves, LAE reserves, reinsurance, and other		12,284		5,440
Total prior year loss development (1)		$	(5,968)	$	17,317

(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, 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 September 30,		Nine Months Ended September 30,
		2021	2020	2021	2020
Delinquency inventory at beginning of period		42,999	69,326	57,710	30,028
New notices		9,862	20,924	31,909	90,906
Cures		(14,813)	(25,446)	(50,901)	(54,523)
Paid claims		(298)	(375)	(956)	(1,933)
Rescissions and denials		(11)	(11)	(23)	(60)
Other items removed from inventory		(360)	—	(360)	—
Delinquency inventory at end of period		37,379	64,418	37,379	64,418

During the three and nine months ended September 30, 2021, our losses paid included amounts paid upon commutation of coverage of pools of non-performing loans (“NPLs”). As a result of these payments, 360 items were removed from the delinquency inventory with an amount paid of $6.7 million.

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 is more likely to result in a claim.


Primary delinquency inventory - consecutive months delinquent
Table	11.4
		September 30, 2021		December 31, 2020		September 30, 2020
3 months or less		6,948		11,542		15,879
4-11 months		9,371		34,620		37,702
12 months or more (1)		21,060		11,548		10,837
Total		37,379		57,710		64,418
3 months or less		19	%	20	%	25	%
4-11 months		25	%	60	%	58	%
12 months or more		56	%	20	%	17	%
Total		100	%	100	%	100	%
Primary claims received inventory included in ending delinquent inventory		154		159		172

(1)Approximately 17%, 31%, and 32% 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, 2021, December 31, 2020, and September 30, 2020, respectively.

The increase in delinquency inventory that is 12 months or more consecutive months delinquent compared to September 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 nine months of 2021.

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 $37.3 million and $30.1 million at September 30, 2021 and December 31, 2020, respectively.