Note 12 – Loss Reserves

We establish reserves to recognize the estimated liability for losses and loss adjustment expenses (“LAE”) related to defaults on insured mortgage loans. Loss reserves are established by estimating the number of loans in our inventory of delinquent loans 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.

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. 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 borrower income and thus their ability to make mortgage payments, 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. Changes to our estimates could result in a material impact to our results of operations and capital position, even in a stable economic environment.

The following table provides a reconciliation of beginning and ending loss reserves for the three months ended March 31, 2015 and 2014:

	Three months ended March 31,
	2015			2014
	(In thousands)

Reserve at beginning of period	$	2,396,807		$	3,061,401
Less reinsurance recoverable		57,841			64,085
Net reserve at beginning of period		2,338,966			2,997,316

Losses incurred:
Losses and LAE incurred in respect of default notices related to:
Current year		109,381			155,982
Prior years (1)		(27,596	)		(33,374	)
Subtotal		81,785			122,608

Losses paid:
Losses and LAE paid in respect of default notices related to:
Current year		312			314
Prior years		231,230			342,669
Subtotal		231,542			342,983

Net reserve at end of period		2,189,209			2,776,941
Plus reinsurance recoverables		55,415			57,618

Reserve at end of period	$	2,244,624		$	2,834,559

(1)	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.

The “Losses incurred” section of the table above shows losses incurred on default notices received in the current year and in prior years. The amount of losses incurred relating to default notices received in the current year represents the estimated amount to be ultimately paid on such default notices. The amount of losses incurred relating to default notices received in prior years represents the actual claim rate and severity associated with those defaults notices resolved in the current year differing from the estimated liability at the prior year-end, as well as a re-estimation of amounts to be ultimately paid on defaults remaining in inventory from the end of the prior year. This re-estimation of the estimated claim rate and estimated severity is the result of our review of current trends in the default inventory, such as percentages of defaults that have resulted in a claim, the amount of the claims, changes in the relative level of defaults by geography and changes in average loan exposure.

Losses incurred on default notices received in the current year decreased in the first three months of 2015 compared to the same period in 2014, primarily due to a decrease in the number of new default notices received, net of cures, as well as a decrease in the estimated claim rate on new delinquencies.

The prior year development of the reserves in the first three months of 2015 and 2014 is reflected in the table below.

	Three months ended March 31,
	2015			2014
	(In millions)

Decrease in estimated claim rate on primary defaults	$	(39	)	$	(30	)
Increase in estimated severity on primary defaults		17			5
Change in estimates related to pool reserves, LAE reserves and reinsurance		(6	)		(8	)
Total prior year loss development (1)	$	(28	)	$	(33	)

(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.

For the three months ended March 31, 2015 and 2014 we experienced favorable prior year loss reserve development. This development was based on the resolution of approximately 24% and 25% for the three months ended March 31, 2015 and 2014, respectively of the prior year default inventory. In addition, during the first quarter of 2015, the claim rate development was favorably impacted by $20 million due to re-estimation of previously recorded reserves relating to disputes on our claims paying practices and adjustments to incurred but not reported losses (IBNR). This favorable development was offset, in part, by an increase in the claim rate and severity on prior year defaults remaining in the delinquent inventory.

The “Losses paid” section of the table above shows the breakdown between claims paid on default notices received in the current year and claims paid on default notices received in prior years. Until a few years ago, it took, on average, approximately twelve months for a default that is not cured to develop into a paid claim. Over the past several years, the average time it takes to receive a claim associated with a default has increased. This is, in part, due to new loss mitigation protocols established by servicers and to changes in some state foreclosure laws that may include, for example, a requirement for additional review and/or mediation processes. It is difficult to estimate how long it may take for current and future defaults that do not cure to develop into paid claims.

The liability associated with our estimate of premiums to be refunded on expected claim payments is accrued for separately at March 31, 2015 and December 31, 2014 and approximated $112 million and $115 million, respectively. Separate components of this liability are included in “Other liabilities” and “Premium deficiency reserve” on our consolidated balance sheet. Changes in the liability affect premiums written and earned and change in premium deficiency reserve.

A rollforward of our primary default inventory for the three months ended March 31, 2015 and 2014 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 March 31,
	2015			2014

Default inventory at beginning of period		79,901			103,328
New notices		18,896			23,346
Cures		(21,767	)		(27,318	)
Paids (including those charged to a deductible or captive)		(4,573	)		(7,064	)
Rescissions and denials		(221	)		(450	)
Default inventory at end of period		72,236			91,842

Pool insurance notice inventory was 3,350 at March 31, 2015 and 5,646 at March 31, 2014.

The decrease in the primary default inventory experienced during 2015 and 2014 was generally across all markets and primarily in book years 2008 and prior. As of March 31, 2015, the percentage of loans in the inventory that have been in default for 12 or more consecutive months is consistent with one year prior, but higher than the percentage as of December 31, 2014, 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 and the number of loans in our primary claims received inventory have been affected by our suspended rescissions and the resolution of certain of those rescissions discussed below and in Note 5 – “Litigation and Contingencies.”

	March 31, 2015				December 31, 2014				March 31, 2014
Consecutive months in default
3 months or less		11,604	16	%		15,319	19	%		14,313	16	%
4 - 11 months		18,940	26	%		19,710	25	%		23,305	25	%
12 months or more		41,692	58	%		44,872	56	%		54,224	59	%

Total primary default inventory		72,236	100	%		79,901	100	%		91,842	100	%

Primary claims received inventory included in ending default inventory (1)		4,448	6	%		4,746	6	%		5,990	7	%

(1)

Our claims received inventory includes suspended rescissions, as we have voluntarily suspended rescissions of coverage related to loans that we believed would be included in a potential resolution. As of March 31, 2015, rescissions of coverage on approximately 1,470 loans had been voluntarily suspended compared to 1,425 at December 31, 2014 and 1,525 at March 31, 2014.

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.

	March 31, 2015				December 31, 2014				March 31, 2014

3 payments or less		19,159	27	%		23,253	29	%		23,035	25	%
4 - 11 payments		18,372	25	%		19,427	24	%		22,766	25	%
12 payments or more		34,705	48	%		37,221	47	%		46,041	50	%

Total primary default inventory		72,236	100	%		79,901	100	%		91,842	100	%

Claims paying practices

Our loss reserving methodology incorporates our estimates of future rescissions. A variance between ultimate actual rescission rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses.

The liability associated with our estimate of premiums to be refunded on expected future rescissions is accrued for separately. At March 31, 2015 and December 31, 2014 the estimate of this liability totaled $27 million and $28 million, respectively. Separate components of this liability are included in “Other liabilities” and “Premium deficiency reserve” on our consolidated balance sheet. Changes in the liability affect premiums written and earned and change in premium deficiency reserve.

For information about discussions and legal proceedings with customers with respect to our claims paying practices, including settlements that we believe are probable, as defined in ASC 450-20, see Note 5 – “Litigation and Contingencies.”