Note 10 - Losses and Loss Adjustment Expense

3 Months Ended

Mar. 31, 2019

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



(In thousands)	March 31, 2019		December 31, 2018
Mortgage insurance loss reserves	$	385,361	$	397,891
Services loss reserves (1)	3,423		3,470
Total reserve for losses and LAE	$	388,784	$	401,361

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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 condensed consolidated balance sheet, and relates to EnTitle Insurance. See Note 7 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:



(In thousands)	March 31, 2019		December 31, 2018
Reserve for losses by category (1):
Prime	$	240,489	$	242,135
Alt-A and A minus and below	111,955		119,553
IBNR and other	13,008		13,864
LAE	8,994		10,271
Total primary reserves	374,446		385,823
Total pool reserves	10,621		11,640
Total First-lien reserves	385,067		397,463
Other (2)	294		428
Total reserve for losses	$	385,361	$	397,891

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(1)	Includes ceded losses on reinsurance transactions, which are expected to be recovered and are included in the reinsurance recoverables reported in other assets in our condensed consolidated balance sheets. See Note 8.


(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 mortgage loan premium deficiency reserve, for the periods indicated:



	Three Months Ended March 31,
(In thousands)	2019			2018
Balance at beginning of period	$	397,891		$	507,588
Less: Reinsurance recoverables (1)	11,009			8,350
Balance at beginning of period, net of reinsurance recoverables	386,882			499,238
Add: Losses and LAE incurred in respect of default notices reported and unreported in:
Current year (2)	38,922			36,516
Prior years	(18,173		)	391
Total incurred	20,749			36,907
Deduct: Paid claims and LAE related to:
Current year (2)	295			226
Prior years	34,294			59,700
Total paid	34,589			59,926
Balance at end of period, net of reinsurance recoverables	373,042			476,219
Add: Reinsurance recoverables (1)	12,319			8,973
Balance at end of period	$	385,361		$	485,192

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(1)	Related to ceded losses recoverable, if any, on reinsurance 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 2019 Activity

Our mortgage insurance loss reserves at March 31, 2019 declined as compared to December 31, 2018, primarily as a result of the amount of paid claims and the favorable reserve development on prior year defaults exceeding 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 losses for the three months ended March 31, 2019, 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 8.0% as of March 31, 2019. This assumed rate reflects seasonal patterns as well as a continuation of 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 provision for losses during the first three months of 2019 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, 2018. The reductions in Default to Claim Rate assumptions resulted from observed trends, primarily higher Cures than were previously estimated.

Total claims paid decreased for the three months ended March 31, 2019, compared to the same period in 2018. The decrease in claims paid is consistent with the ongoing decline in the outstanding default inventory.

First Quarter 2018 Activity

Our 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 9.5% as of March 31, 2018. This assumed rate reflects seasonal patterns as well as a continuation of a general improvement in cure rates. 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.

We had 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. While we observed an increase in new primary defaults from FEMA Designated Areas associated with Hurricanes Harvey and Irma, most of them cured by the end of 2018, as expected, and at higher cure rates than the rates of our general population of defaults. These incremental defaults did not have a material impact on our provision for losses as of March 31, 2018.

Mortgage Insurance 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 33% at both March 31, 2019 and December 31, 2018. As of March 31, 2019 our gross Default to Claim Rate assumptions on our primary portfolio ranged from 8.0% for new defaults, up to 68% for defaults not in foreclosure stage, and 72% 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. Our estimate, with respect to future Rescissions, Claim Denials and Claim Curtailments, inclusive of claim withdrawals, reduced our loss reserve as of March 31, 2019 and December 31, 2018 by $32 million.

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 $10.4 million and $11.3 million at March 31, 2019 and December 31, 2018, respectively, includes reserves for this activity.