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Loss Reserves | 3 Months Ended
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Mar. 31, 2020
Insurance Loss Reserves [Abstract] |
Loss Reserves | Loss Reserves We establish case reserves and loss adjustment expenses (“LAE”) reserves when we receive notices of delinquency on insured mortgage loans. Notices of delinquency are typically reported to us when loans are two payments past due. Case reserves are established by estimating the number of loans in our inventory of delinquent loans that will result in a claim payment, which is referred to as the claim rate, and further estimating the amount of the claim payment, which is referred to as claim severity. IBNR reserves are established for estimated losses from delinquencies occurring prior to the close of an accounting period on notices of delinquency not yet reported to us. IBNR reserves are also established using estimated claim rates and claim severities. Estimation of losses is inherently judgmental. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy, including unemployment and the current and future strength of local housing markets; exposure on insured loans; the amount of time between delinquency and claim filing; and curtailments and rescissions. The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of regional or national economic conditions, including unemployment, leading to a reduction in borrowers’ income and thus their ability to make mortgage payments, and a drop in housing values which may affect borrower willingness to continue to make mortgage payments when the value of the home is below the mortgage balance. Changes to our estimates could result in a material impact to our consolidated results of operations and financial position, even in a stable economic environment. The “Losses incurred” section of table 11.1 below shows losses incurred on delinquencies that occurred in the current year and in prior years. The amount of losses incurred relating to delinquencies that occurred in the current year represents the estimated amount to be ultimately paid on such delinquencies. The amount of losses incurred relating to delinquencies that occurred in prior years represents the difference between the actual claim rate and severity associated with those delinquencies resolved in the current year compared to the estimated claim rate and severity at the prior year-end, as well as a re-estimation of amounts to be ultimately paid on delinquencies continuing from the end of the prior year. This re-estimation of the claim rate and severity is the result of our review of current trends in the delinquent inventory, such as percentages of delinquencies that have resulted in a claim, the amount of the claims relative to the average loan exposure, changes in the relative level of delinquencies by geography and changes in average loan exposure. Losses incurred on delinquencies that occurred in the current year increased in the first three months of 2020 compared to the same period in 2019, due to an increase in the claim rate and severity due to the current macroeconomic environment related to the COVID-19 pandemic. This was offset by a decrease of approximately 9% fewer new delinquency notices received in 2020, compared to the same period last year. In the first quarter of 2020, we also increased our IBNR reserve by $7.8 million. The “Losses paid” section of table 11.1 below shows the amount of losses paid on delinquencies that occurred in the current year and losses paid on delinquencies that occurred in prior years. For several years, the average time it took to receive a claim associated with a delinquency had increased significantly from our historical experience of approximately twelve months. This was, in part, due to new loss mitigation protocols established by servicers and to changes in some state foreclosure laws that may include, for example, a requirement for additional review and/or mediation processes. In recent quarters, we have experienced a decline in the average time it takes servicers to process foreclosures, which has reduced the average time to receive a claim associated with new delinquent notices that do not cure. All else being equal, the longer the period between delinquency and claim filing, the greater the severity In light of the uncertainty caused by the COVID-19 pandemic, specifically the foreclosure moratoriums, the average time it takes to receive a claim may increase. Premium refunds Our estimate of premiums to be refunded on expected claim payments is accrued for separately in “Other Liabilities” on our consolidated balance sheets and approximated $29 million and $30 million at March 31, 2020 and December 31, 2019, respectively. Table 11.1 provides a reconciliation of beginning and ending loss reserves as of and for the three months ended March 31, 2020 and 2019.
Development of reserves for losses and loss adjustment expenses
Table | 11.1 |  |  |  |
|  |  | Three Months Ended March 31,
(In thousands) |  | 2020 |  | 2019
Reserve at beginning of period |  | $ | 555,334 |  |  | $ | 674,019 |
Less reinsurance recoverable |  | 21,641 |  |  | 33,328 |
Net reserve at beginning of period |  | 533,693 |  |  | 640,691 |
Losses incurred: |  |  |  |
Losses and LAE incurred in respect of delinquency notices received in: |  |  |  |
Current year |  | 59,799 |  |  | 47,488 |
Prior years (1) |  | 1,157 |  |  | (8,425 | )
Total losses incurred |  | 60,956 |  |  | 39,063 |
Losses paid: |  |  |  |
Losses and LAE paid in respect of delinquency notices received in: |  |  |  |
Current year |  | 39 |  |  | — |
Prior years |  | 45,633 |  |  | 56,365 |
Reinsurance terminations |  | (20 | ) |  | — |
Total losses paid |  | 45,652 |  |  | 56,365 |
Net reserve at end of period |  | 548,997 |  |  | 623,389 |
Plus reinsurance recoverables |  | 25,756 |  |  | 31,875 |
Reserve at end of period |  | $ | 574,753 |  |  | $ | 655,264 |
(1) | A positive number for prior year loss development indicates a deficiency of prior year reserves. A negative number for prior year losses incurred indicates a redundancy of prior year loss reserves. See the following table for more information about prior year loss development.
The prior year development of the reserves in the first three months of 2020 and 2019 is reflected in table 11.2 below.
Reserve development on previously received delinquencies
Table | 11.2 |  |  |  |
|  |  | Three Months Ended March 31,
(In millions) |  | 2020 |  | 2019
Decrease in estimated claim rate on primary defaults |  | $ | — |  |  | $ | (31 | )
Increase in estimated severity on primary defaults |  | 3 |  |  | — |
Change in estimates related to pool reserves, LAE reserves, reinsurance, and other |  | (2 | ) |  | 23 |
Total prior year loss development (1) |  | $ | 1 |  |  | $ | (8 | )
(1) | A positive number for prior year loss development indicates a deficiency of prior year reserves. A negative number for prior year loss development indicates a redundancy of prior year loss reserves.
Delinquent inventory A rollforward of our primary delinquent inventory for the three months ended March 31, 2020 and 2019 appears in table 11.3 below. The information concerning new notices and cures is compiled from monthly reports received from loan servicers. The level of new notice and cure activity reported in a particular month can be influenced by, among other things, the date on which a servicer generates its report, the number of business days in a month and transfers of servicing between loan servicers.
Delinquent inventory rollforward
Table | 11.3 |  |  |  |
|  | Three Months Ended March 31,
|  | 2020 |  | 2019
Delinquent inventory at beginning of period |  | 30,028 |  |  | 32,898 |
New notices |  | 12,398 |  |  | 13,611 |
Cures |  | (14,113 | ) |  | (14,348 | )
Paid claims |  | (897 | ) |  | (1,188 | )
Rescissions and denials |  | (32 | ) |  | (52 | )
Delinquent inventory at end of period |  | 27,384 |  |  | 30,921 |
The decrease in the primary delinquent inventory experienced during 2020 was generally across all markets and primarily in books years 2008 and prior. Historically as a delinquency ages it becomes more likely to result in a claim. The CARES Act and other related actions includes payment forbearance on mortgages to borrowers experiencing a hardship during the COVID-19 pandemic. Forbearance allows for mortgage payments to be suspended for up to 360 days. Loans in forbearance are included in our delinquent inventory. Table 11.4 below shows the number of consecutive months a borrower is delinquent. Historically as a delinquency ages it becomes more likely to result in a claim.
Primary delinquent inventory - consecutive months delinquent
Table | 11.4 |  |  |
| March 31, 2020 | December 31, 2019 | March 31, 2019
3 months or less | 7,567 |  | 9,447 |  | 8,568 |
4-11 months | 9,535 |  | 9,664 |  | 9,997 |
12 months or more (1) | 10,282 |  | 10,917 |  | 12,356 |
Total | 27,384 |  | 30,028 |  | 30,921 |
3 months or less | 28 | % | 32 | % | 28 | %
4-11 months | 35 | % | 32 | % | 32 | %
12 months or more | 37 | % | 36 | % | 40 | %
Total | 100 | % | 100 | % | 100 | %
Primary claims received inventory included in ending delinquent inventory | 472 |  | 538 |  | 665 |
(1) | Approximately 34%, 36%, and 38% of the primary delinquent inventory delinquent for 12 consecutive months or more has been delinquent for at least 36 consecutive months as of March 31, 2020, December 31, 2019, and March 31, 2019, respectively.
Claims paying practices Our loss reserving methodology incorporates our estimates of future rescissions. A variance between ultimate actual rescission rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses. Our estimate of premiums to be refunded on expected future rescissions is accrued for separately and is included in “Other liabilities” on our consolidated balance sheets. For information about discussions and legal proceedings with customers with respect to our claims paying practices see Note 5 – “Litigation and Contingencies.”

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- Definition The entire disclosure for liabilities related to future policy benefits and unpaid claims and claim adjustments. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 944 -SubTopic 40 -URI http://asc.fasb.org/subtopic&trid=2560295 + Details
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