Loss Reserves (Tables)

9 Months Ended

Sep. 30, 2013

Reconciliation of beginning and ending loss reserves

The following table provides a reconciliation of beginning and ending loss reserves for the nine months ended September 30, 2013 and 2012:

	Nine Months Ended
	September 30,
	2013			2012
	(In thousands)

Reserve at beginning of period	$	4,056,843		$	4,557,512
Less reinsurance recoverable		104,848			154,607
Net reserve at beginning of period (1)		3,951,995			4,402,905

Losses incurred:
Losses and LAE incurred in respect of default notices related to:
Current year		686,454			1,091,326
Prior years (2)		(43,783	)		287,291
Subtotal (3)		642,671			1,378,617

Losses paid:
Losses and LAE paid in respect of default notices related to:
Current year		28,792			54,813
Prior years		1,286,833			1,840,992
Reinsurance terminations (4)		(3,332	)		(425	)
Subtotal (5)		1,312,293			1,895,380

Net reserve at end of period (6)		3,282,373			3,886,142
Plus reinsurance recoverables		70,621			117,859

Reserve at end of period	$	3,352,994		$	4,004,001

(1)

At December 31, 2012 and 2011, the estimated reduction in loss reserves related to rescissions approximated $0.2 billion and $0.7 billion, respectively.

(2)

A negative number for prior year losses incurred indicates a redundancy of prior year loss reserves, and a positive number for prior year losses incurred indicates a deficiency of prior year loss reserves.

(3)

Rescissions did not have a significant impact on incurred losses in the nine months ended September 30, 2013 or 2012.

(4)

In a termination, the reinsurance agreement is cancelled, with no future premium ceded and funds for any incurred but unpaid losses transferred to us. The transferred funds result in an increase in our investment portfolio (including cash and cash equivalents) and a decrease in net losses paid (reduction to losses incurred). In addition, there is an offsetting decrease in the reinsurance recoverable (increase in losses incurred), and thus there is no net impact to losses incurred.

(5)

Rescissions mitigated our paid losses by an estimated $0.1 billion and $0.2 billion in the nine months ended September 30, 2013 and 2012, respectively, which excludes amounts that may have been applied to a deductible.

(6)

At September 30, 2013 and 2012, the estimated reduction in loss reserves related to rescissions approximated $0.1 billion and $0.5 billion, respectively.

Prior year development of the reserves

The prior year development of the reserves in the first nine months of 2013 and 2012 is reflected in the table below.

	Nine months ended September 30,
	2013			2012
	(In millions)
Prior year loss development (1):

Increase in estimated claim rate on primary defaults	$	10		$	300
Decrease in estimated severity on primary defaults		(40	)		-
Change in estimates related to pool reserves, LAE reserves and reinsurance		(14	)		(13	)
Total prior year loss development	$	(44	)	$	287

(1) A negative number for prior year loss development indicates a redundancy of prior year loss reserves, and a positive number indicates a deficiency of prior year loss reserves.

Rollforward of primary default inventory

A rollforward of our primary default inventory for the three and nine months ended September 30, 2013 and 2012 appears in the table 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 by transfers of servicing between loan servicers.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012


Default inventory at beginning of period		117,105			153,990			139,845			175,639
New Notices		27,755			34,432			81,044			101,454
Cures		(24,105	)		(27,384	)		(80,677	)		(90,896	)
Paids (including those charged to a deductible or captive)		(8,659	)		(11,344	)		(27,155	)		(34,991	)
Rescissions and denials		(509	)		(809	)		(1,470	)		(2,321	)
Default inventory at end of period		111,587			148,885			111,587			148,885

Aging of the primary default inventory

The decrease in the primary default inventory experienced during 2013 and 2012 was generally across all markets and all book years. However, the percentage of loans in the inventory that have been in default for 12 or more consecutive months has increased, as shown in the table below. Historically as a default ages it becomes more likely to result in a claim. The percentage of loans that have been in default for 12 or more consecutive months has been affected by our suspended rescissions discussed below.

Aging of the Primary Default Inventory

	September 30,				December 31,				September 30,
	2013				2012				2012

Consecutive months in default
3 months or less		20,144	18	%		23,282	17	%		25,593	17	%
4 - 11 months		24,138	22	%		34,688	25	%		35,029	24	%
12 months or more		67,305	60	%		81,875	58	%		88,263	59	%

Total primary default inventory		111,587	100	%		139,845	100	%		148,885	100	%

Primary claims received inventory included in ending default inventory (1)		9,858	9	%		11,731	8	%		12,508	8	%

(1) Our claims received inventory includes suspended rescission as discussed in Note 5 – “Litigation and Contingencies.” In connection with the Countrywide proceedings, we have voluntarily suspended rescissions of coverage related to loans that we believed would be included in a potential resolution. As of September 30, 2013, coverage on approximately 2,100 loans under the agreement with BANA, representing total potential claim payments of approximately $150 million and 800 loans under the agreement with CHL, representing total potential claims payments of approximately $70 million, that we had determined was rescindable was affected by our decision to suspend such rescissions. Substantially all of these potential rescissions relate to claims received beginning in the first quarter of 2011 or later. As of September 30, 2013, coverage on approximately 540 loans, representing total potential claim payments of approximately $38 million, was affected by our decision to suspend rescissions for other customers for which we also consider settlement probable. In addition, as of September 30, 2013, coverage on approximately 85 loans, representing total potential claim payments of approximately $5 million, was affected by our decision to suspend rescissions for customers other than those for which we consider settlement probable, as defined in ASC 450-20.

Number of payments delinquent

The number of months a loan is in the default inventory can differ from the number of payments that the borrower has not made or is considered delinquent. These differences typically result from a borrower making monthly payments that do not result in the loan becoming fully current. The number of payments that a borrower is delinquent is shown in the table below.

Number of Payments Delinquent

	September 30,				December 31,				September 30,
	2013				2012				2012


3 payments or less		28,777	26	%		34,245	24	%		35,130	24	%
4 - 11 payments		25,089	22	%		34,458	25	%		36,359	24	%
12 payments or more		57,721	52	%		71,142	51	%		77,396	52	%

Total primary default inventory		111,587	100	%		139,845	100	%		148,885	100	%

- Definition

Tabular disclosure of the reasons for the change in incurred claims and claim adjustment expenses recognized in the income statement attributable to insured events of prior fiscal years. Also includes disclosures of additional premiums or return premiums accrued as a result of changes in incurred claims and claim adjustment expenses.

+ References+ Details

- Definition

Tabular disclosure of the activity in the reserve for settling insured claims and expenses incurred in the claims settlement process for the period. The estimated liability includes the amount of money that will be required for future payments of (a) claims that have been reported to the insurer, (b) claims related to insured events that have occurred but that have not been reported to the insurer as of the date the liability is estimated, and (c) claim adjustment expenses. Claim adjustment expenses include costs incurred in the claim settlement process such as legal fees; outside adjuster fees; and costs to record, process, and adjust claims.

+ References+ Details