Loss Reserves

12 Months Ended

Dec. 31, 2021


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. 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. 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.

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 claim 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, 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 +/- $16 million. A one percentage point increase/decrease in the average claim rate reserve factor would change the loss reserve amount by approximately +/- $19 million.

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 claim severity associated with those delinquencies resolved in the current year compared to the estimated claim rate and claim 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 claim 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 2021 compared to 2020 due to a decrease in new delinquency notices reported. New delinquency notices and IBNR reserve estimates increased in 2020 due to the impact of the COVID-19 pandemic.

In 2021, we experienced favorable loss development of $60.0 million on previously received delinquencies primarily due to the decrease in the claim rate on pre-COVID-19 and peak COVID-19 delinquencies (those delinquencies for which notices were received in the second and third quarter of 2020). 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 year ended December 31, 2020 we experienced adverse loss development of $19.6 million on previously received delinquencies primarily related to claim severity and adjustments to LAE reserves.

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. 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 has increased.

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


Development of loss reserves
Table	8.1
(In thousands)		2021		2020		2019
Reserve at beginning of year		$	880,537	$	555,334	$	674,019
Less reinsurance recoverable		95,042		21,641		33,328
Net reserve at beginning of year		785,495		533,693		640,691

Losses incurred:
Losses and LAE incurred in respect of delinquent notices received in:
Current year		124,592		345,170		189,581
Prior years (1)		(60,015)		19,604		(71,006)
Total losses incurred		64,577		364,774		118,575

Losses paid:
Losses and LAE paid in respect of delinquent notices received in:
Current year		664		3,069		4,018
Prior years		68,769		109,923		235,551
Reinsurance terminations (2)		(35,978)		(20)		(13,996)
Total losses paid		33,455		112,972		225,573
Net reserve at end of year		816,617		785,495		533,693
Plus reinsurance recoverables		66,905		95,042		21,641
Reserve at end of year		$	883,522	$	880,537	$	555,334

(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.

(2)In a termination, amounts for any incurred but unpaid losses are paid to us. As a result, the amount due from the reinsurers is reclassified from reinsurance recoverable on loss reserves to reinsurance recoverable on paid losses, resulting in no impact on losses incurred. (See Note 9 - "Reinsurance")

The prior year development of the reserves in 2021, 2020 and 2019 is reflected in the table 8.2 below.


Reserve development on previously received delinquencies
Table	8.2
(In thousands)		2021		2020		2019
(Decrease) in estimated claim rate on primary delinquencies		$	(82,904)	$	(2,536)	$	(111,848)
Increase (decrease)in estimated claim severity on primary delinquencies		310		13,535		(434)
Change in estimates related to pool reserves, LAE reserves, reinsurance and other		22,579		8,605		41,276
Total prior year loss development (1)		$	(60,015)	$	19,604	$	(71,006)

(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 roll-forward of our primary delinquency inventory for the years ended December 31, 2021, 2020, and 2019 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
		2021	2020	2019
Beginning delinquent inventory		57,710	30,028	32,898
New Notices		42,432	106,099	54,239
Cures		(64,896)	(76,107)	(52,035)
Paid claims		(1,223)	(2,245)	(4,267)
Rescissions and denials		(38)	(65)	(168)
Other items removed from inventory		(695)	—	(639)
Ending delinquent inventory		33,290	57,710	30,028

During 2021 and 2019, our losses paid included amounts paid upon commutation of coverage on pools of non-performing loans ("NPLs"). As a result of these payments 695 items were removed from the delinquency inventory with an amount paid of $13.8 million in 2021. During 2019, 639 items were removed from delinquency inventory with an amount paid of $30.0 million.

COVID-19 Activity

Our delinquency notices 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.

Historically as a delinquency ages it is 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,
		2021		2020		2019
3 months or less		7,586		11,542		9,447
4 - 11 months		7,990		34,620		9,664
12 months or more (1)		17,714		11,548		10,917
Total		33,290		57,710		30,028

3 months or less		23	%	20	%	32	%
4 - 11 months		24	%	60	%	32	%
12 months or more		53	%	20	%	36	%
Total		100	%	100	%	100	%

Primary claims received inventory included in ending delinquent inventory		211		159		538

(1)Approximately 20%, 31%, and 36% 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, 2021, 2020 and 2019, respectively.

The increase in loans in the delinquency inventory that are 12 months or more consecutive months delinquent compared to 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 throughout 2021.

POOL INSURANCE DEFAULT INVENTORY

Pool insurance default inventory was 498 at December 31, 2021, 680 at December 31, 2020, and 653 at December 31, 2019.

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