Losses and LAE

Our reserve for losses and LAE, as of the dates indicated, consisted of:



(In thousands)	September 30, 2011		December 31, 2010
Mortgage insurance reserves	$	3,214,854	$	3,524,971
Financial guaranty reserves	45,702		71,764
Total reserve for losses and LAE	$	3,260,556	$	3,596,735

The following table presents information relating to our mortgage insurance reserves for losses and LAE as of the dates indicated:



	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands)	2011			2010		2011		2010
Balance at beginning of period	$	3,268,582		$	3,656,746	$	3,524,971	$	3,450,538
Less reinsurance recoverables (1)	160,664			565,737		223,254		621,644
Balance at beginning of period, net of reinsurance recoverables	3,107,918			3,091,009		3,301,717		2,828,894
Add losses and LAE incurred in respect of default notices reported and unreported in:
Current year (2)	338,360			260,755		775,479		751,313
Prior years	(61,761		)	87,045		185,085		553,200
Total incurred	276,599			347,800		960,564		1,304,513
Deduct paid claims and LAE related to:
Current year (2)	59,693			15,811		61,894		20,326
Prior years	270,203			478,379		1,145,766		1,168,462
Total paid	329,896			494,190		1,207,660		1,188,788
Balance at end of period, net of reinsurance recoverables	3,054,621			2,944,619		3,054,621		2,944,619
Add reinsurance recoverables (1)	160,233			559,562		160,233		559,562
Balance at end of period	$	3,214,854		$	3,504,181	$	3,214,854	$	3,504,181

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(1)	Related to ceded losses on captive reinsurance transactions and Smart Home. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Off-Balance Sheet Arrangements" for additional information regarding our Smart Home transactions.


(2)	Related to underlying defaulted loans with a most recent date of default notice in the year indicated. For example, if a loan had defaulted in a prior year, but then subsequently cured and later re-defaulted in the current year, that default would be considered a current year default.

Our loss reserves were reduced in 2011, primarily as a result of a decrease in our total inventory of defaults, as the volume of paid claims, cures, and insurance rescissions and claim denials outpaced new default notices received during the year, as described below. Total paid claims declined for the three months ended September 30, 2011, from the comparable period in 2010, as foreclosure moratoriums, servicer delays and loan modification programs have reduced the number of defaults going to claim. In the third quarter of 2011, claims paid were further reduced by an increase in the number of claims received that we are reviewing for potential violations of our insurance policies, which has slowed our internal claims payment process. We cannot be certain of the ultimate impact of these programs on our business or results of operations, or the timing of this impact. Some of the most recent foreclosure backlogs, related to borrower challenges to allegations of improper foreclosure documentation, have further delayed our receipt of claims. Reserves established for new default notices received in the current year were the primary driver of our total incurred loss for both the three and nine months ended September 30, 2011. In addition, our results for the nine months ended September 30, 2011, were negatively affected by an increase in our incurred but not recorded ("IBNR") reserve estimate in the first quarter of 2011 of $77.8 million, related to an increase in our estimate of future reinstatements of previously rescinded policies and denied claims.

Of the $185.1 million adverse development experienced in 2011 associated with default notices reported in prior years, $95.0 million related to an increase in both our actual and estimated reinstatements of policies and claims previously rescinded or denied in prior years, while the balance related primarily to the greater than anticipated impact from the aging of underlying defaulted loans on our default to claim rate. With respect to loans that are in default, considerable judgment is exercised as to the adequacy of reserve levels. With continuing declines in home values, persistently high unemployment and delays by servicers in either modifying loans or foreclosing on properties, the time it has taken to cure or otherwise resolve a delinquent loan has exceeded our expected timeframe. Consequently, in recent years, our default inventory has experienced an increase in its weighted average age, and because we apply higher estimated default to claim rates on our more aged delinquent loans, this has resulted in higher reserves. The protracted amount of time it has taken for servicers to resolve certain aged loans has extended the period of uncertainty with regard to our ultimate claim liability beyond what we predicted as of the prior year end. As a consequence, our aggregate weighted average default to claim rate assumption (net of denials and rescissions) used in estimating our reserve for losses was 42% at September 30, 2011, compared to 40% at December 31, 2010. Our default to claim rate estimate varies depending on the age of the underlying defaulted loans, as measured by the number of monthly payments missed. As of September 30, 2011, our default to claim rate estimate, net of our estimate for insurance rescissions and claims denials, ranged from 19% for insured loans that had missed two to three monthly payments, to 51% for such loans that had missed 12 or more monthly payments.

During the three months ended September 30, 2011, changes in the composition of our delinquent loan inventory continued to impact our reserves and incurred losses; in addition, an increase in our actual and estimated amount of future insurance rescissions and claim denials for certain aged defaults positively impacted our losses incurred on prior year defaults during the quarter, primarily driven by the increase in the number of claims received that we are reviewing for violations of our insurance policies. With respect to loans that are in default, considerable judgment is exercised as to the adequacy of reserve levels. Adjustments are made to loss reserves as defaulted loans age, and therefore, are considered to be closer to foreclosure and more likely to result in a claim payment. In the past, as the default proceeded towards foreclosure, there was generally more certainty around these estimates as a result of the aged status of the defaulted loan. However, in light of existing foreclosure moratoriums and efforts to increase loan modifications among defaulted borrowers, significant uncertainty remains with respect to the ultimate resolution of later stage defaults. This uncertainty requires management to use considerable judgment in estimating the rate at which these loans will result in claims.

Our reserve for losses includes the impact of our estimate of future rescissions and denials, which remain elevated compared to levels experienced prior to 2009. The current elevated levels of insurance rescissions and claim denials have reduced our paid losses and have resulted in a significant reduction in our loss reserves. The impact of our estimate of future rescissions and denials reduced our loss reserves as of September 30, 2011, and December 31, 2010, by approximately $646 million and $922 million, respectively. In addition, the impact of our estimate of future reinstatements of previously rescinded policies and denied claims increased our loss reserves as of September 30, 2011, and December 31, 2010, by approximately $103 million and $25 million, respectively, as further described below. The amount of estimated rescissions and denials incorporated into our reserve analysis at any point in time is affected by a number of factors, including not only our estimated rate of rescissions and denials on future claims, but also the volume and attributes of our defaulted insured loans, our estimated default to claim rate, and our estimated claim severity, among other assumptions. We expect the amount of estimated rescissions and denials embedded within our reserve analysis to decrease over time, as the defaults related to the poor underwriting periods of 2005 through 2008 decline as a proportion of our total default portfolio and as we realize the results through actual rescissions and denials, or the commutations of insured loans. In the event that we experience a more rapid than expected decrease in the level of future insurance rescissions and claim denials from the current levels it could have a materially adverse effect on our paid losses and loss reserves.

Our reported rescission and denial activity in any given period is subject to future challenges by our lender customers. Our IBNR reserve estimate, which includes an estimate of the future reinstatements of previously rescinded policies and denied claims, was $115.1 million and $39.5 million at September 30, 2011, and December 31, 2010, respectively. The change in this estimate, which resulted in a significant increase in IBNR in the first quarter of 2011, primarily reflects recent trends in insurance rescissions and claim denial activity as a result of lenders challenging a greater number of rescissions and denials and the overall challenges being more substantive in nature (i.e., producing new or additional information that supports a reinstatement of coverage or a claim payment). As a result, we expect that an increasingly larger portion of previously rescinded policies will be reinstated and previously denied claims will be resubmitted with the required documentation and ultimately paid.

The following table illustrates the amount of first-lien mortgage ("first-lien") claims submitted to us for payment that were rescinded or denied, for the periods indicated, net of reinstatements within each period:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions)	2011		2010		2011		2010
Rescissions—first loss position	$	93.2	$	62.2	$	313.6	$	266.8
Denials—first loss position	35.4		91.7		74.2		123.8
Total first loss position (1)	128.6		153.9		387.8		390.6
Rescissions—second loss position	28.5		18.6		100.7		176.6
Denials—second loss position	8.4		28.4		22.1		52.2
Total second loss position (2)	36.9		47.0		122.8		228.8
Total first-lien claims submitted for payment that were rescinded or denied (3)	$	165.5	$	200.9	$	510.6	$	619.4

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(1)	Related to claims from policies in which we were in a first loss position and would have paid the claim absent the rescission or denial.


(2)	Related to claims from policies in which we were in a second loss position. These rescissions or denials may not have resulted in a claim payment obligation due to deductibles and other exposure limitations included in our policies.


(3)	Includes a small number of submitted claims that were subsequently withdrawn by the insured.

The following table illustrates the total amount of first-lien claims submitted to us for payment that have been rescinded since January 1, 2009, and then subsequently were challenged ("rebutted") by the lenders and policyholders, but not reinstated, for the period from January 1, 2009, through September 30, 2011.



(In millions)	As of September 30, 2011
First loss position	$	448.2
Second loss position	189.4
Total non-overturned rebuttals on rescinded first-lien claims	$	637.6

While the total potential claim amount of non-overturned rebuttals outstanding represents all challenged rescissions for which coverage has not been reinstated, our ongoing, active discussions with our lender customers typically involve only a small number of these non-overturned rebuttals. Accordingly, we expect that some portion of these rescinded claims may be reinstated in future periods. Absent litigation or other legal proceedings in which we are not successful, we do not expect that these discussions are likely to result in settlements that would materially impact our liquidity or results of operations.

We also accrue for the premiums that we expect to refund to our lender customers in connection with our estimated insurance rescission activity. Our accrued liability for such refunds, which is included within accounts payable and accrued expenses on our condensed consolidated balance sheets, was $52.1 million and $43.5 million as of September 30, 2011, and December 31, 2010, respectively.

The following table shows the cumulative denial and rescission rates, net of reinstatements, as of September 30, 2011, on our total first-lien portfolio for each quarter in which the claims were received for the periods indicated:



Claim Received Quarter	Cumulative Rescission/Denial Rate for Each Quarter (1)		Percentage of Claims Resolved (2)
Q1 2009	24.2	%	100	%
Q2 2009	25.9	%	100	%
Q3 2009	23.1	%	99	%
Q4 2009	21.2	%	99	%
Q1 2010	19.3	%	99	%
Q2 2010	18.8	%	98	%
Q3 2010	17.0	%	97	%
Q4 2010	18.0	%	92	%
Q1 2011	19.8	%	84	%

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(1)

Rescission/Denial rates represent the ratio of claims rescinded or denied to claims received (by claim count) and represent (as of September 30, 2011) the cumulative rate for each quarter based on number of claims received during that quarter. Until all of the claims received during the periods shown have been internally resolved, the rescission rates for each quarter will be subject to change. These rates also will remain subject to change based on reinstatements of previously rescinded policies or denied claims.

(2)

The percentage of claims resolved for each quarter presented in the table above, represents the number of claims that have been internally resolved as a percentage of the total number of claims received for that specific quarter. A claim is considered internally resolved when it is either paid or it is concluded that the claim should be denied or rescinded, though such denials or rescissions could be challenged and, potentially reinstated. For the second and third quarters of 2011, a significant portion of claims received for those quarters have not been internally resolved; therefore, we do not believe the cumulative rescission rates for those periods are presently meaningful.

We considered the sensitivity of first-lien loss reserve estimates at September 30, 2011, by assessing the potential changes resulting from a parallel shift in severity and default to claim rate. For example, assuming all other factors remain constant, for every one percentage point change in primary claim severity (which we estimate to be 27% of unpaid principal balance at September 30, 2011), we estimated that our loss reserves would change by approximately $94 million at September 30, 2011. For every one percentage point change in pool claim severity (which we estimate to be 45% of unpaid principal balance at September 30, 2011), we estimated that our loss reserves would change by approximately $7 million at September 30, 2011. For every one percentage point change in our overall default to claim rate (which we estimate to be 42% at September 30, 2011, including our assumptions related to rescissions and denials), we estimated a $69 million change in our loss reserves at September 30, 2011.

Estimating our loss reserves involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of each potential loss. The models, assumptions and estimates we use to establish loss reserves may not prove to be accurate, especially during an extended economic downturn or a period of extreme market volatility and uncertainty such as currently exists. As such, we cannot be certain that our reserve estimate will be adequate to cover ultimate losses on incurred defaults.