Losses and Loss Adjustment Expense

Our reserve for losses and LAE, at the end of each period indicated, consisted of:



(In thousands)	March 31, 2018		December 31, 2017
Mortgage insurance loss reserves	$	485,192	$	507,588
Services loss reserves (1)	3,464		—
Total reserve for losses and LAE	$	488,656	$	507,588

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(1)	This full amount is included in the reinsurance recoverables reported in other assets in our condensed consolidated balance sheet, and relates to the acquisition of EnTitle Direct, completed on March 27, 2018.

The following table shows our mortgage insurance reserve for losses and LAE by category at the end of each period indicated:



(In thousands)	March 31, 2018		December 31, 2017
Reserves for losses by category:
Prime	$	274,595	$	285,022
Alt-A and A minus and below	158,612		170,873
IBNR and other	17,164		16,021
LAE	13,440		13,349
Reinsurance recoverable (1)	8,953		8,315
Total primary reserves	472,764		493,580
Pool	11,387		12,794
IBNR and other	226		278
LAE	319		356
Reinsurance recoverable (1)	20		35
Total pool reserves	11,952		13,463
Total First-lien reserves	484,716		507,043
Other (2)	476		545
Total reserve for losses	$	485,192	$	507,588

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(1)	Represents ceded losses on captive reinsurance transactions, the QSR Transactions and the Single Premium QSR Transactions.


(2)	Does not include our Second-lien premium deficiency reserve that is included in other liabilities.

The following table presents information relating to our mortgage insurance reserve for losses, including our IBNR reserve and LAE but excluding our Second-lien premium deficiency reserve, for the periods indicated:



	Three Months Ended March 31,
(In thousands)	2018		2017
Balance at beginning of period	$	507,588	$	760,269
Less: Reinsurance recoverables (1)	8,350		6,851
Balance at beginning of period, net of reinsurance recoverables	499,238		753,418
Add: Losses and LAE incurred in respect of default notices reported and unreported in:
Current year (2)	36,516		51,447
Prior years	391		(4,316		)
Total incurred	36,907		47,131
Deduct: Paid claims and LAE related to:
Current year (2)	226		42
Prior years	59,700		82,046
Total paid	59,926		82,088
Balance at end of period, net of reinsurance recoverables	476,219		718,461
Add: Reinsurance recoverables (1)	8,973		7,708
Balance at end of period	$	485,192	$	726,169

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(1)	Related to ceded losses recoverable, if any, on captive reinsurance transactions, the QSR Transactions and the Single Premium QSR Transactions. See Note 7 for additional information.


(2)	Related to underlying defaulted loans with a most recent default notice dated 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.

Reserve Activity

First Quarter 2018 Activity

Our mortgage insurance loss reserves at March 31, 2018 declined as compared to December 31, 2017, primarily as a result of the amount of paid claims continuing to outpace losses incurred related to new default notices reported in the current year. Reserves established for new default notices were the primary driver of our total incurred loss for the three months ended March 31, 2018, and they were primarily impacted by the number of new primary default notices received in the period and our related gross Default to Claim Rate assumption applied to those new defaults, which, except as discussed below for FEMA Designated Areas associated with Hurricanes Harvey and Irma, was approximately 9% for the three months ended March 31, 2018. This assumed rate reflects seasonal patterns as well as a continuation of a general improvement in cure rates. Historically, new defaults reported in the first quarter have cured at higher rates than subsequent quarters, and we considered this pattern in developing the estimate for the quarter. The net effect of changes in reserve estimates for defaults reported in prior years was not material for the three months ended March 31, 2018.

During the third quarter of 2017, Hurricanes Harvey and Irma caused extensive property damage to areas of Texas, Florida and Georgia, as well as other general disruptions including power outages and flooding. At March 31, 2018 and December 31, 2017, our total primary mortgage insurance exposure to mortgages in counties affected by these storms and subsequently designated as FEMA Designated Areas was approximately $4.7 billion and $4.6 billion of RIF, respectively, on approximately $17.9 billion and $17.4 billion of IIF, respectively. This exposure represents approximately 9% of our primary RIF as of both March 31, 2018 and December 31, 2017. Although the mortgage insurance we write protects the lenders from a portion of losses resulting from loan defaults, it does not provide protection against property loss or physical damage. Our Master Policies contain an exclusion against physical damage, including damage caused by floods or other natural disasters. Depending on the policy form and circumstances, we may, among other things, deduct the cost to repair or remedy physical damage above a de minimis amount from a claim payment and/or, under certain circumstances, deny a claim where (i) the property underlying a mortgage in default is subject to unrestored physical damage or (ii) the physical damage is deemed to be the principal cause of default.

While we observed an increase in new primary defaults from FEMA Designated Areas associated with Hurricanes Harvey and Irma following those two natural disasters, we expect most of these to cure by the end of 2018, and at higher cure rates than the rates of our general population of defaults. We therefore assigned a 3% Default to Claim Rate assumption to the new primary defaults from FEMA Designated Areas associated with Hurricanes Harvey and Irma that were reported subsequent to those two natural disasters and through February 2018. These incremental defaults did not have a material impact on our provision for losses as of March 31, 2018 or December 31, 2017. However, the future reserve impact may be affected by various factors, including the pace of economic recovery in the FEMA Designated Areas.

Total claims paid decreased for the three months ended March 31, 2018, compared to the same period in 2017, consistent with the ongoing decline in the outstanding default inventory.

First Quarter 2017 Activity

Our mortgage insurance loss reserves at March 31, 2017 declined as compared to December 31, 2016, primarily as a result of the amount of paid claims outpacing losses incurred related to new default notices reported in the current year. Reserves established for new default notices were the primary driver of our total incurred loss for the three months ended March 31, 2017, and they were primarily impacted by the number of new primary default notices received in the period and our related gross Default to Claim Rate assumption applied to those new defaults, which was 11.5% as of March 31, 2017. The provision for losses during the first three months of 2017 was positively impacted by favorable reserve development on prior year defaults, which was primarily driven by a reduction during the period in certain Default to Claim Rate assumptions for these prior year defaults compared to those used at December 31, 2016. The reductions in Default to Claim Rate assumptions primarily resulted from observed trends, including higher Cures than were previously estimated. The positive development in prior year defaults was partially offset by a decrease in estimated rates of future Loss Mitigation Activities compared to those used at December 31, 2016.

Total claims paid decreased for the three months ended March 31, 2017, compared to the same period in 2016, consistent with the ongoing decline in the outstanding default inventory.

Reserve Assumptions

Default to Claim Rate

Our aggregate weighted-average Default to Claim Rate assumption (net of Claim Denials and Rescissions) used in estimating our primary reserve for losses was 33% at March 31, 2018, compared to 31% at December 31, 2017. The increase in our Default to Claim Rate in the first three months of 2018 primarily resulted from a decrease in the proportion of defaults that have missed three payments or less, which generally have a lower assumed net Default to Claim Rate. This decrease in the proportion of defaults that missed three payments or less was partially offset by: (i) the lower Default to Claim Rate of 3% on new primary defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma subsequent to those two natural disasters through February 2018 and (ii) a decrease in the assumed gross Default to Claim Rate for new primary defaults that were not located in FEMA Designated Areas associated with Hurricanes Harvey and Irma, from 10.0% at December 31, 2017 to approximately 9% for the three months ended March 31, 2018. As of March 31, 2018, with the exception of new primary defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma, our gross Default to Claim Rate assumptions on our primary portfolio ranged from approximately 9% for new defaults, up to 68% for defaults not in foreclosure stage, and 75% for Foreclosure Stage Defaults. Our Default to Claim Rate estimates on defaulted loans are mainly developed based on the Stage of Default and Time in Default of the underlying defaulted loans grouped according to the period in which the default occurred, as measured by the progress toward foreclosure sale and the number of months in default. Our estimate of expected Rescissions and Claim Denials (net of expected Reinstatements) embedded in our estimated Default to Claim Rate is generally based on our recent experience. Consideration is also given to any differences in characteristics between those rescinded policies and denied claims and the loans remaining in our defaulted inventory, as well as the estimated impact of the BofA Settlement Agreement.

Loss Mitigation

Although our estimates of future Loss Mitigation Activities have been declining, they remain elevated compared to levels experienced before 2009. The elevated levels of our rate of Rescissions, Claim Denials and Claim Curtailments have significantly reduced our paid losses and have resulted in a reduction in our loss reserve. Our estimate of net future Loss Mitigation Activities reduced our loss reserves as of March 31, 2018 and December 31, 2017 by approximately $19 million and $21 million, respectively. The amount of estimated Loss Mitigation Activities 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, Claim Denials and Claim Curtailments 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.

As our Legacy Portfolio has become a smaller percentage of our overall insured portfolio, we have undertaken a reduced amount of Loss Mitigation Activity with respect to the claims we receive, and we expect this trend to continue. As a result, our future Loss Mitigation Activity is not expected to mitigate our paid losses to the same extent as in recent years.

Our reported Rescission, Claim Denial and Claim Curtailment activity in any given period is subject to challenge by our lender and servicer customers. We expect that a portion of previous Rescissions will be reinstated and previous Claim Denials will be resubmitted with the required documentation and ultimately paid; therefore, we have incorporated this expectation into our IBNR reserve estimate. Our IBNR reserve estimate of $9.1 million and $10.4 million at March 31, 2018 and December 31, 2017, respectively, includes reserves for this activity.

We also accrue for the premiums that we expect to refund to our lender customers in connection with our estimated Rescissions.