Note 10 - Losses and Loss Adjustment Expense

9 Months Ended

Sep. 30, 2018

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



(In thousands)	September 30, 2018		December 31, 2017
Mortgage insurance loss reserves	$	408,980	$	507,588
Services loss reserves (1)	3,480		—
Total reserve for losses and LAE	$	412,460	$	507,588

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(1)	A majority of this 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)	September 30, 2018		December 31, 2017
Reserves for losses by category:
Prime	$	231,916	$	285,022
Alt-A and A minus and below	129,262		170,873
IBNR and other	14,505		16,021
LAE	11,203		13,349
Reinsurance recoverable (1)	9,977		8,315
Total primary reserves	396,863		493,580
Total pool reserves (2)	11,705		13,463
Total First-lien reserves	408,568		507,043
Other (3)	412		545
Total reserve for losses	$	408,980	$	507,588

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(1)	Represents ceded losses on captive reinsurance transactions, the QSR Program and the Single Premium QSR Program. These amounts are included in the reinsurance recoverables reported in other assets in our condensed consolidated balance sheets.


(2)	Includes reinsurance recoverable of $20 thousand and $35 thousand as of September 30, 2018 and December 31, 2017, respectively.


(3)	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:



	Nine Months Ended September 30,
(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)	100,047			145,798
Prior years	(24,075		)	(45,331		)
Total incurred	75,972			100,467
Deduct: Paid claims and LAE related to:
Current year (2)	2,316			3,639
Prior years	173,911			301,228
Total paid	176,227			304,867			(3)
Balance at end of period, net of reinsurance recoverables	398,983			549,018
Add: Reinsurance recoverables (1)	9,997			7,470
Balance at end of period	$	408,980		$	556,488

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(1)	Related to ceded losses recoverable, if any, on captive reinsurance transactions, the QSR Program and the Single Premium QSR Program. 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.


(3)	Includes the payment of $54.8 million made in connection with the scheduled final settlement of the Freddie Mac Agreement in the third quarter of 2017.

Reserve Activity

2018 Activity

Our mortgage insurance loss reserves at September 30, 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 incurred losses for the nine months ended September 30, 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 was 8.5% as of September 30, 2018. The provision for losses during the first nine months of 2018 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 the assumptions used at December 31, 2017. The reductions in Default to Claim Rate assumptions resulted from observed trends, primarily higher Cures than were previously estimated.

Following Hurricanes Harvey and Irma, which occurred in the third quarter of 2017, we observed an increase in new primary defaults from FEMA Designated Areas associated with these hurricanes. We expect most of these hurricane-related defaults to cure by the end of 2018, and at higher cure rates than the rates for 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 in 2017 or 2018.

Total claims paid decreased for the nine months ended September 30, 2018, compared to the same period in 2017. The decrease in claims paid is consistent with the ongoing decline in the outstanding default inventory. In addition, claims paid for

the nine months ended September 30, 2017 were higher because they included payments that were made in connection with the scheduled final settlement of the Freddie Mac Agreement in the third quarter of 2017.

2017 Activity

Our loss reserves at September 30, 2017 declined as compared to December 31, 2016, primarily as a result of the amount of paid claims and Cures 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 nine months ended September 30, 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 10.5% as of September 30, 2017. The provision for losses during the first nine 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 resulted from observed trends, primarily higher Cures than were previously estimated. The positive development in prior year defaults was partially offset by incremental IBNR reserves of $14.2 million to reflect the estimated payment for future losses, primarily on certain performing loans in our portfolio with insurance written in years prior to and including 2008 that were expected to be affected by an upcoming pool commutation.

Reserve Assumptions

Default to Claim Rate

Our aggregate weighted-average net Default to Claim Rate assumption (net of Claim Denials and Rescissions) used in estimating our primary reserve for losses was 34% at September 30, 2018, compared to 31% at December 31, 2017. This increase in the Default to Claim Rate was primarily driven by a reduction in the number of defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma (which had a lower Default to Claim Rate of 3%). Excluding the impact of defaults associated with these FEMA Designated Areas, our aggregate weighted-average net Default to Claim Rate (net of Claim Denials and Rescissions) was 35% at September 30, 2018, as compared to 38% at December 31, 2017. As of September 30, 2018 our gross Default to Claim Rate assumptions on our primary portfolio ranged from 8.5% 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.

Loss Mitigation

As our insurance written in years prior to and including 2008 has become a smaller percentage of our overall insured portfolio, a reduced amount of Loss Mitigation Activity has occurred with respect to the claims we receive, and we expect this general trend to continue. As a result, our future Loss Mitigation Activity is not expected to mitigate our paid losses significantly. 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. Our estimate of net future Loss Mitigation Activities has not materially impacted our loss reserves at September 30, 2018 or December 31, 2017.

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 $5.9 million and $10.4 million at September 30, 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.