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Note 11 - Losses and LAE Level 1 (Notes)

12 Months Ended

Dec. 31, 2018

Liability for Future Policy Benefits and Unpaid Claims Disclosure [Text Block]

Losses and Loss Adjustment Expenses

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



	Year Ended December 31,
(In thousands)	2018		2017
Mortgage Insurance loss reserves	$	397,891	$	507,588
Services loss reserves (1)	3,470		—
Total reserve for losses and LAE	$	401,361	$	507,588

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(1)	A majority of this amount is subject to reinsurance, with the related reinsurance recoverables reported in other assets in our consolidated balance sheet, and relates to the acquisition of EnTitle Direct, completed on March 27, 2018. See Note 8 for information about our use of reinsurance in our title insurance business.

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



	Year Ended December 31,
(In thousands)	2018		2017
Reserves for losses by category:
Prime	$	231,169	$	285,022
Alt-A and A minus and below	119,527		170,873
IBNR and other	13,864		16,021
LAE	10,271		13,349
Reinsurance recoverable (1)	10,992		8,315
Total primary reserves	385,823		493,580
Total pool reserves (2)	11,640		13,463
Total First-lien reserves	397,463		507,043
Other (3)	428		545
Total reserve for losses	$	397,891	$	507,588

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


(2)	Includes reinsurance recoverable of $17 thousand and $35 thousand as of December 31, 2018 and December 31, 2017, respectively.


(3)	Does not include our second-lien PDR that is included in other liabilities.

For the periods indicated, the following table presents information relating to our mortgage insurance reserve for losses, including our IBNR reserve and LAE, but excluding our second-lien mortgage loan PDR:



	Year Ended December 31,
(In thousands)	2018			2017				2016
Balance at January 1,	$	507,588		$	760,269			$	976,399
Less: Reinsurance recoverables (1)	8,350			6,851				8,286
Balance at January 1, net of reinsurance recoverables	499,238			753,418				968,113
Add: Losses and LAE incurred in respect of default notices reported and unreported in:
Current year (2)	135,291			185,486				206,383
Prior years	(31,699		)	(49,286		)		(3,516		)
Total incurred	103,592			136,200				202,867
Deduct: Paid claims and LAE related to:
Current year (2)	5,856			25,011				11,410
Prior years	210,092			365,369				406,152
Total paid	215,948			390,380			(3)	417,562
Balance at end of period, net of reinsurance recoverables	386,882			499,238				753,418
Add: reinsurance recoverables (1)	11,009			8,350				6,851
Balance at December 31,	$	397,891		$	507,588			$	760,269

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(1)	Related to ceded losses recoverable, if any, on reinsurance transactions, the QSR Program and the Single Premium QSR Program. See Note 8 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. For 2017, includes payments made on pool commutations, in some cases for loans not previously in 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

Loss Reserves. Our mortgage insurance loss reserves at December 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 incurred losses for 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 declined from 10% at December 31, 2017 to 8% at December 31, 2018. The provision for losses during 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.

Hurricane Impact 2018/2017. 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. 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. Following Hurricanes Harvey and Irma, we observed an increase in new primary defaults from FEMA Designated Areas associated with these hurricanes. As expected most of these hurricane-related defaults cured by the end of 2018, and at higher cure rates than the rates for our general population of defaults. We 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.

Claims Paid. Total claims paid decreased for 2018, compared to 2017. The decrease in claims paid is consistent with the ongoing decline in the outstanding default inventory. In addition, claims paid for 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 December 31, 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 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, except as discussed above for FEMA Designated Areas associated with Hurricanes Harvey and Irma, declined from 12% at December 31, 2016 to 10% at December 31, 2017. The provision for losses during 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 the assumptions used at December 31, 2016. The reductions in Default to Claim Rate assumptions resulted from observed trends, primarily higher Cures than were previously estimated.

2016 Activity

Our loss reserves at December 31, 2016 declined as compared to December 31, 2015, primarily as a result of the amount of paid claims continuing to exceed 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 2016, and they were impacted primarily 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 12% as of December 31, 2016. The impact to incurred losses from reserve development on default notices reported in prior years was not significant during 2016.

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% (31% excluding pending claims) at December 31, 2018 compared to 31% (29% excluding pending claims) at December 31, 2017. The increase in our Default to Claim Rate in 2018 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 Claims Denials and Rescissions) was 33% at December 31, 2018, as compared to 38% at December 31, 2017. As of December 31, 2018, our gross Default to Claim Rates on our primary portfolio ranged from 8% for new defaults, to 68% for other defaults not in Foreclosure Stage, and 75% for Foreclosure Stage Defaults. As of December 31, 2017, these gross Default to Claim Rates ranged from 10% for new defaults, to 62% for other defaults not in Foreclosure Stage, and 81% 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 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. Our estimate of such net future Loss Mitigation Activities, inclusive of claim withdrawals, reduced our loss reserve as of December 31, 2018 and 2017 by $32 million and $31 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.

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 $11.3 million and $10.4 million at December 31, 2018 and 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.

Sensitivity Analysis

We considered the sensitivity of first-lien loss reserve estimates at December 31, 2018 by assessing the potential changes resulting from a parallel shift in Claim Severity and Default to Claim Rate estimates for primary loans. For example, assuming all other factors remain constant, for every one percentage point change in primary Claim Severity (which we estimate to be 96.0% of risk exposure at December 31, 2018), we estimated that our loss reserves would change by approximately $3.8 million at December 31, 2018. Assuming all other factors remain constant, for every one percentage point change in our overall primary net Default to Claim Rate (which we estimate to be 33% at December 31, 2018, including our assumptions related to Rescissions and Claim Denials), we estimated a $10.4 million change in our loss reserves at December 31, 2018.

Additional Disclosures

The following tables provide information as of and for the periods indicated about: (i) incurred losses, net of reinsurance; (ii) the total of IBNR liabilities plus expected development on reported claims, included within the net incurred loss amounts; (iii) the cumulative number of reported defaults; and (iv) cumulative paid claims, net of reinsurance. The default year represents the period that a new default notice is first reported to us by loan servicers, related to borrowers that missed two monthly payments.

The information about net incurred losses and paid claims development for the years ended prior to 2018 is presented as supplementary information.



	Incurred Losses, Net of Reinsurance
	Year Ended December 31,																				As of December 31, 2018
($ in thousands)																					Total of IBNR Liabilities Plus Expected Development on Reported Claims (1)		Cumulative Number of Reported Defaults (2)
	Unaudited
Default Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	1,671,239	$	1,894,783	$	1,930,263	$	1,939,479	$	1,974,568	$	1,991,796	$	2,016,412	$	2,018,907	$	2,022,629	$	2,025,828	$	1,572	213.836
2010			1,102,856		1,215,136		1,192,482		1,195,056		1,207,774		1,220,289		1,218,264		1,219,469		1,221,938		1,019		146.324
2011					1,058,625		1,152,016		1,052,277		1,050,555		1,062,579		1,061,161		1,059,116		1,060,376		970		118.972
2012							803,831		763,969		711,213		720,502		715,646		714,783		713,750		586		89.845
2013									505,732		405,334		401,444		404,333		402,259		400,243		344		71.749
2014											337,784		247,074		265,891		264,620		260,098		241		58.215
2015													222,555		198,186		178,042		183,952		292		49.825
2016															201,016		165,440		149,753		428		46.264
2017																	180,851		151,802		1,212		47.283
2018																			131,513		1,876		39.598
																	Total		$	6,299,253

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(1)	Represents reserves as of December 31, 2018 related to IBNR liabilities.

(2)

Represents total number of new default notices received in each calendar year as compiled monthly based on reports received from loan servicers. As reflected in our Default to Claim Rate assumptions, a significant portion of reported defaults generally do not result in a claim. In certain instances, a defaulted loan may cure, and then re-default in a later period. Consistent with our reserving practice, each new event of default is treated as a unique occurrence and therefore certain loans that cure and re-default may be included as a reported default in multiple periods. Included in this amount for the year ended December 31, 2018 and December 31, 2017 are 3,776 and 8,862 notices, respectively, of new primary defaults related to the FEMA Designated Areas associated with Hurricanes Harvey and Irma.



	Cumulative Paid Claims, Net of Reinsurance
	Year Ended December 31,
(In thousands)
	Unaudited
Default Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	136,413	$	619,496	$	1,236,210	$	1,471,264	$	1,711,019	$	1,807,031	$	1,921,134	$	1,958,660	$	1,986,076	$	2,004,219
2010			11,810		394,278		700,316		956,598		1,055,935		1,145,497		1,178,546		1,198,031		1,210,281
2011					40,392		323,216		756,820		892,959		982,830		1,016,855		1,038,582		1,048,966
2012							19,200		295,332		528,744		631,982		672,271		692,291		702,136
2013									34,504		191,040		307,361		357,087		379,036		388,688
2014											13,108		115,852		200,422		233,607		246,611
2015													10,479		84,271		142,421		163,916
2016															11,061		76,616		119,357
2017																	24,653		66,585
2018																			5,584
																	Total		$	5,956,343
									All outstanding liabilities before 2009, net of reinsurance										33,479
									Liabilities for claims, net of reinsurance (1)										$	376,389

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(1)	Calculated as follows:



(In thousands)
Incurred losses, net of reinsurance	$	6,299,253
Add: All outstanding liabilities before 2009, net of reinsurance	33,479
Less: Cumulative paid claims, net of reinsurance	5,956,343
Liabilities for claims, net of reinsurance	$	376,389

The following table provides a reconciliation of the net incurred losses and paid claims development tables above to the Mortgage Insurance reserve for losses and LAE at December 31, 2018:



(In thousands)	December 31, 2018
Net outstanding liabilities - Mortgage Insurance:
Reserve for losses and LAE, net of reinsurance	$	376,389
Reinsurance recoverables on unpaid claims	11,009
Unallocated LAE	10,493
Total gross reserve for losses and LAE (1)	$	397,891

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(1)	Excludes Services reserve for losses and LAE of $3.5 million.

The following is supplementary information about average historical claims duration as of December 31, 2018, representing the average distribution of when claims are paid relative to the year of default:



	Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance (Unaudited)
Years	1	2	3	4	5	6	7	8	9	10
Mortgage Insurance	6.1%	34.5%	31.4%	13.8%	7.4%	4.1%	2.9%	1.5%	1.2%	0.9%