Loss Reserves

6 Months Ended

Jun. 30, 2022

We establish case reserves and 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 June 30, 2022, 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 +/- $13 million. A one percentage point increase/decrease in the average claim rate reserve factor would change the loss reserve amount by approximately +/- $16 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 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 were flat in the first half of 2022 compared to the same period last year.

For the six months ended June 30, 2022 we experienced favorable loss development of $186.6 million on previously received notices primarily related to a decrease in the estimated claim rate. The favorable development resulted from greater than expected cures on delinquency notices received during the COVID-19 pandemic as well as delinquency notices received prior to the COVID-19 pandemic. For the six months ended June 30, 2021 we experienced adverse loss development of $1.7 million.

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, the average time it takes to receive a claim has increased.

Table 11.1 provides a reconciliation of beginning and ending loss reserves as of and for the six months ended June 30, 2022 and 2021.


Development of reserves for losses and loss adjustment expenses
Table	11.1
		Six Months Ended June 30,
(In thousands)		2022		2021
Reserve at beginning of period		$	883,522	$	880,537
Less reinsurance recoverable		66,905		95,042
Net reserve at beginning of period		816,617		785,495

Losses incurred:
Losses and LAE incurred in respect of delinquency notices received in:
Current year		68,210		67,068
Prior years (1)		(186,582)		1,732
Total losses incurred		(118,372)		68,800

Losses paid:
Losses and LAE paid in respect of delinquency notices received in:
Current year		116		48
Prior years		24,909		29,164

Total losses paid		25,025		29,212
Net reserve at end of period		673,220		825,083
Plus reinsurance recoverable		53,958		111,153
Reserve at end of period		$	727,178	$	936,236

(1)A positive number for prior year loss reserve development indicates a deficiency of prior year reserves. A negative number for prior year loss reserve development indicates a redundancy of prior year loss reserves. See the following table for more information about prior year loss reserve development.

The prior year loss reserve development for the six months of June 30, 2022 and 2021 is reflected in table 11.2 below.


Reserve development on previously received delinquencies
Table	11.2
		Six Months Ended June 30,
(In thousands)		2022		2021
Increase (decrease) in estimated claim rate on primary defaults		$	(186,163)	$	(356)
Increase (decrease) in estimated severity on primary defaults		(9,945)		512
Change in estimates related to pool reserves, LAE reserves, reinsurance, and other		9,526		1,576
Total prior year loss development (1)		$	(186,582)	$	1,732

(1)A positive number for prior year loss reserve development indicates a deficiency of prior year loss reserves. A negative number for prior year loss reserve 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, 2022 and 2021 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,
		2022	2021	2022	2021
Delinquency inventory at beginning of period		30,462	52,775	33,290	57,710
New notices		9,396	9,036	20,099	22,047
Cures		(12,677)	(18,460)	(25,877)	(36,088)
Paid claims		(319)	(346)	(641)	(658)
Rescissions and denials		(7)	(6)	(16)	(12)

Delinquency inventory at end of period		26,855	42,999	26,855	42,999

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
		June 30, 2022		December 31, 2021		June 30, 2021
3 months or less		6,791		7,586		6,513
4-11 months		7,946		7,990		12,840
12 months or more (1)		12,118		17,714		23,646
Total		26,855		33,290		42,999
3 months or less		25	%	23	%	15	%
4-11 months		30	%	24	%	30	%
12 months or more		45	%	53	%	55	%
Total		100	%	100	%	100	%
Primary claims received inventory included in ending delinquent inventory		254		211		159

(1)Approximately 29%, 20%, and 15% 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, 2022, December 31, 2021, and June 30, 2021, respectively.

COVID-19 Pandemic Delinquencies

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.

Forbearance programs enacted by the GSEs provide for payment forbearance on mortgages to borrowers experiencing a hardship during the COVID-19 pandemic. Historically, forbearance plans

have reduced the incidence of our losses on affected loans. However, given the uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related forbearances on our loss incidence.

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 $32.8 million and $37.3 million at June 30, 2022 and December 31, 2021, respectively.