Reserve for Premium Deficiency

The PDR in our mortgage insurance business at December 31, 2012 and 2011 relates to our second-lien business.

The following table reconciles our mortgage insurance segment’s beginning and ending second-lien PDR for the periods indicated:



	Year Ended December 31,
(In thousands)	2012			2011
Balance at January 1	$	3,644		$	10,736
Incurred losses recognized in loss reserves	(1,897		)	(11,143		)
Premiums recognized in earned premiums	1,530			2,851
Changes in underlying assumptions	241			595
Accretion of discount and other	167			605
Balance at December 31	$	3,685		$	3,644

For our first-lien insurance business, because the combination of the net present value of expected premiums and already established reserves (net of reinsurance recoverables) exceeds the net present value of expected losses and expenses, a first-lien PDR was not required as of December 31, 2012 or December 31, 2011. Our pre-tax investment yield used as the discount rate in these present value calculations was 1.98% and 2.62% as of December 31, 2012 and 2011, respectively. Expected losses are based on an assumed paid claim rate of approximately 11.7% on our total first-lien insurance portfolio (6.6% on performing loans and 46.8% on defaulted loans). Assuming all other factors remained constant, if our assumed paid claim rate increased to 14.5%, we would be required to establish a PDR. New business originated since the beginning of 2009 is expected to be profitable, which has contributed to the overall expected net profitability of our first-lien portfolio. In addition, estimated rescissions and denials on insured loans are expected to partially offset the impact of expected defaults and claims.

Evaluating the expected profitability of our existing mortgage insurance business and the need for a premium deficiency reserve for our first-lien business involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of potential losses and premium revenues. The models, assumptions and estimates we use to evaluate the need for a PDR may not prove to be accurate, especially during an extended economic downturn or a period of extreme market volatility and uncertainty as currently exists. We cannot be certain that we have correctly estimated the expected profitability of our existing first-lien portfolio or that the second-lien PDR established will be adequate to cover ultimate losses on our second-lien business.

For our financial guaranty business, no PDR was necessary as of December 31, 2012 or 2011.