Claim Severity . In addition to claim volume, claim severity is another significant factor af fecting losses. The severity of a  claim is determined by dividing the claim paid by the original loan amount.  The main determinants of the severity of a claim  are the size of the loan, the amount of mortgage insurance coverage placed on the loan and the impact of our loss management  activities with respect to the loan. Pre-foreclosure sales, acquisitions and other early workout ef forts help to reduce overall  claim severity, as do actions we may take to reduce claim payment due to servicer negligence, as discussed below in “Claims  Management.” The average claim severity for loans covered by our primary insurance was 25.5% for  2012, compared to 27.2%  in 2011 and 27.4% in 2010. The average claim severity for loans covered by our pool insurance was 46.0% for  2012, compared  to 45.1% in 2011 and 48.1% in 2010. Loss Reserves . We do not establish loss reserves upon the origination of any insured loan. Rather , we establish reserves  for losses when we are notified that a borrower has missed at least two monthly payments.  We also establish reserves for  associated loss adjustment expenses (“LAE”), consisting of the estimated cost of the claims administration process, including  legal and other fees. We maintain an extensive database of default and claim payment history and we use models, based on a  variety of loan characteristics, including the status of the loan as reported by the entity servicing the loan and the type of loan  product, to determine the likelihood that a default will reach claim status (the “default to claim rate”).  We also forecast the  impact of our loss mitigation ef forts in protecting us against fraud, underwriting negligence, breach of representation and  warranties, inadequate documentation and other items that may give rise to insurance rescissions and claim denials, to help  determine the default to claim rate. Lastly , we project the amount that we will pay if a default becomes a claim, which is also  impacted by claim curtailments. Based on these estimates at a given point in time, we arrive at our estimate of loss reserves as  of that time. A detailed description of our reserve policy and methodology is contained in “Part II. Item 7. Management’ s  Discussion and Analysis of Financial Condition and Results of Operations—Critical  Accounting Policies—Reserve for Losses”  and in Notes 2 and 10 of Notes to Consolidated Financial Statements. We have significant resources dedicated to our mortgage insurance claims management department in order to ef fectively  manage losses in a high default and claim environment.  Claims management pursues opportunities to mitigate losses both  before and after claims are received.  In our traditional mortgage insurance business, upon receipt of a valid claim, we generally have the following three  settlement options: (1) pay the maximum liability—determined by multiplying the claim amount (which consists of the unpaid loan  principal, plus past due interest (up to a maximum of two years) and certain expenses associated with the default)  by the applicable coverage percentage—and allow the insured lender to keep title to the property; (2) pay the amount of the claim required to make the lender whole, commonly referred to as the “deficiency  amount” (not to exceed our maximum liability), following an approved sale; or (3) pay the full claim amount and acquire title to the property . 18 D. Claims Management The following table shows the states with the highest direct claims paid (measured as of  December 31, 2012) as of the  dates indicated: Year Ended December 31, (In millions) 2012 2011 2010 States with highest direct claims paid (first-lien): California. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 168.0 $ 255.7 $ 344.1 Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138.8 216.2 235.8 Arizona. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83.8 139.7 140.7 Georgia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57.1 78.4 85.2 Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56.8 64.8 61.5