Loss Reserves

9 Months Ended

Sep. 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, 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 of the macroeconomic environment, including the effectiveness of loss mitigation efforts, change in home prices, and changes in unemployment, our loss reserve estimates 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 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 September 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 +/- $11 million. A one percentage point increase/decrease in the average claim rate reserve factor would change the loss reserve amount by approximately +/- $15 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 increased for the nine months ended September 30, 2022, compared to the same period last year. The increase is primarily due to a decrease in IBNR reserve estimates by $5.9 million in the nine months ended September 30, 2021, while IBNR reserve estimates remained flat for the nine months ended September 30, 2022.

For the nine months ended September 30, 2022 we experienced favorable loss development of $327.5 million on previously received notices primarily related to a decrease in the estimated claim rate. The favorable development primarily resulted from greater than expected cure rates on delinquencies received during and prior to the COVID-19 pandemic, as forbearance plans and loss mitigation efforts have resulted in more cures than originally estimated. 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 delinquencies received prior to the COVID-19 pandemic. 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.

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. The foreclosure moratoriums and forbearance plans in place have increased the average time it takes to receive a claim,.

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


Development of reserves for losses and loss adjustment expenses
Table	11.1
		Nine Months Ended September 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		104,086		95,534
Prior years (1)		(327,512)		(5,968)
Total losses incurred		(223,426)		89,566

Losses paid:
Losses and LAE paid in respect of delinquency notices received in:
Current year		116		339
Prior years		36,089		48,842

Total losses paid		36,205		49,181
Net reserve at end of period		556,986		825,880
Plus reinsurance recoverable		46,384		107,029
Reserve at end of period		$	603,370	$	932,909

(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 nine months of September 30, 2022 and 2021 is reflected in table 11.2 below.


Reserve development on previously received delinquencies
Table	11.2
		Nine Months Ended September 30,
(In thousands)		2022		2021
Increase (decrease) in estimated claim rate on primary defaults		$	(324,556)	$	(18,147)
Increase (decrease) in estimated severity on primary defaults		(18,682)		(105)
Change in estimates related to pool reserves, LAE reserves, reinsurance, and other		15,726		12,284
Total prior year loss development (1)		$	(327,512)	$	(5,968)

(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 nine months ended September 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 September 30,		Nine Months Ended September 30,
		2022	2021	2022	2021
Delinquency inventory at beginning of period		26,855	42,999	33,290	57,710
New notices		10,990	9,862	31,089	31,909
Cures		(11,494)	(14,813)	(37,371)	(50,901)
Paid claims		(337)	(298)	(978)	(956)
Rescissions and denials		(11)	(11)	(27)	(23)
Other items removed from inventory		(125)	(360)	(125)	(360)
Delinquency inventory at end of period		25,878	37,379	25,878	37,379

During the three and nine months ended September 30, 2022 and 2021, our losses paid included amounts paid upon commutation of coverage of pools of non-performing loans (“NPLs”). As a result of these payments, 125 and 360 delinquencies, were removed from delinquency inventory with an amount paid of $1.6 million and $6.7 million for 2022 and 2021, respectively.

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, 2022		December 31, 2021		September 30, 2021
3 months or less		7,825		7,586		6,948
4-11 months		7,619		7,990		9,371
12 months or more (1)		10,434		17,714		21,060
Total		25,878		33,290		37,379
3 months or less		30	%	23	%	19	%
4-11 months		30	%	24	%	25	%
12 months or more		40	%	53	%	56	%
Total		100	%	100	%	100	%
Primary claims received inventory included in ending delinquent inventory		244		211		154

(1)Approximately 33%, 20%, and 17% 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, 2022, December 31, 2021, and September 30, 2021, respectively.

COVID-19 Pandemic Delinquencies

We experienced an increase in new delinquency notices in the second and third quarters 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. Forbearance programs enacted by the GSEs provided 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. Through September 30, 2022 the vast majority of the delinquencies received in the second and third quarter of 2020 have cured.

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 $28.1 million and $37.3 million at September 30, 2022 and December 31, 2021, respectively. The decrease is primarily due to a decrease in the delinquency inventory.