Reserves for Insurance Claims and Claim Expenses

3 Months Ended

Mar. 31, 2020

Reserves for Insurance Claims and Claim Expenses

We establish reserves to recognize the estimated liability for insurance claims and claim expenses related to defaults on insured mortgage loans. Consistent with industry practice, we establish reserves for loans that have been reported to us by servicers as having been in default for at least 60 days, referred to as case reserves, and additional loans that we estimate (based on actuarial review) have been in default for at least 60 days that have not yet been reported to us by servicers, referred to as incurred but not reported (IBNR) reserves. We also establish claim expense reserves, which represent the estimated cost of the claim administration process, including legal and other fees, as well as other general expenses of administering the claims settlement process. As of March 31, 2020, we had reserves for insurance claims and claim expenses of $29.5 million for 1,449 primary loans in default. During the three months ended March 31, 2020, we paid 34 claims totaling $1.5 million of claims and claims expense, including 31 claims covered under the QSR Transactions representing $0.3 million of ceded claims and claim expenses.

In 2013, we entered into a pool insurance transaction with Fannie Mae. The pool transaction includes a deductible, which represents the amount of claims to be absorbed by Fannie Mae before we are obligated to pay any claims. We only establish reserves for pool risk if we expect claims to exceed this deductible. At March 31, 2020, 46 loans in the pool were past due by 60 days or more. These 46 loans represented approximately $3.0 million of RIF. Due to the size of the remaining deductible, the low level of notices of defaults (NODs) reported on loans in the pool through March 31, 2020 and the expected severity (all loans in the pool have loan-to-value (LTV) ratios under 80%), we did not establish any case or IBNR reserves for pool risk at March 31, 2020. In connection with the settlement of pool claims, we applied $0.9 million to the pool deductible through March 31, 2020. At March 31, 2020, the remaining pool deductible was $9.5 million. We have not paid any pool claims to date. 100% of our pool RIF is reinsured under the 2016 QSR Transaction.

The following table provides a reconciliation of the beginning and ending reserve balances for primary insurance claims and claim expenses:


	For the three months ended March 31,
	2020		2019
	(In Thousands)
Beginning balance	$	23,752	$	12,811
Less reinsurance recoverables ⁽¹⁾	(4,939)		(3,001)
Beginning balance, net of reinsurance recoverables	18,813		9,810

Add claims incurred:
Claims and claim expenses incurred:
Current year ⁽²⁾	7,558		3,909
Prior years⁽³⁾	(1,861)		(1,166)
Total claims and claim expenses incurred	5,697		2,743

Less claims paid:
Claims and claim expenses paid:
Current year ⁽²⁾	—		—
Prior years ⁽³⁾	1,224		694

Total claims and claim expenses paid	1,224		694

Reserve at end of period, net of reinsurance recoverables	23,286		11,859
Add reinsurance recoverables ⁽¹⁾	6,193		3,678
Ending balance	$	29,479	$	15,537

⁽¹⁾ Related to ceded losses recoverable under the QSR Transactions, included in "Other assets" on the Condensed Consolidated Balance Sheets. See Note 5, "Reinsurance" for additional information.

⁽²⁾Related to insured loans with their most recent defaults occurring in the current year. For example, if a loan defaulted in a prior year and subsequently cured and later re-defaulted in the current year, the default would be included in the current year. Amounts are presented net of reinsurance.

⁽³⁾Related to insured loans with defaults occurring in prior years, which have been continuously in default before the start of the current year. Amounts are presented net of reinsurance.

The "claims incurred" section of the table above shows claims and claim expenses incurred on NODs for current and prior years, including IBNR reserves and is presented net of reinsurance. The amount of claims incurred relating to current year NODs represents the estimated amount of claims and claim expenses to be ultimately paid on such loans in default. We recognized $1.9 million and $1.2 million of favorable prior year development during the three months ended March 31, 2020 and 2019, respectively, due to NOD cures and ongoing analysis of recent loss development trends. We may increase or decrease our original estimates as we learn additional information about individual defaults and claims and continue to observe and analyze loss development trends in our portfolio. Gross reserves of $19.9 million related to prior year defaults remained as of March 31, 2020.