Losses and LAE

Our reserve for losses and LAE, as of the dates indicated, consisted of:



	December 31,
(In thousands)	2013		2012
Mortgage insurance reserves	$	2,164,353	$	3,083,608
Financial guaranty reserves	21,068		66,328
Total reserve for losses and LAE	$	2,185,421	$	3,149,936

See Note 10 for information regarding our financial guaranty claim liabilities.

The following table presents information relating to our mortgage insurance reserves for losses, including IBNR, and LAE for the periods indicated:



	Year Ended December 31,
(In thousands)	2013			2012		2011
Mortgage Insurance
Balance at January 1	$	3,083,608		$	3,247,900	$	3,524,971
Less reinsurance recoverables (1)	83,238			151,569		223,254
Balance at January 1, net of reinsurance recoverables	3,000,370			3,096,331		3,301,717
Add losses and LAE incurred in respect of default notices reported and unreported in:
Current year (2)	584,174			899,511		1,127,079
Prior years	(19,526		)	21,996		166,778
Total incurred	564,648			921,507		1,293,857
Deduct paid claims and LAE related to:
Current year (2)	31,399			12,503		39,642
Prior years	1,407,629			1,004,965		1,459,601
Total paid	1,439,028			1,017,468		1,499,243
Balance at end of period, net of reinsurance recoverables	2,125,990			3,000,370		3,096,331
Add reinsurance recoverables (1)	38,363			83,238		151,569
Balance at December 31	$	2,164,353		$	3,083,608	$	3,247,900

_________________________


(1)	Related to ceded losses on captive reinsurance transactions, Smart Home and Reinsurance Transactions. See Note 8 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.

Our mortgage insurance loss reserves declined in 2013, primarily as a result of a decrease in our total inventory of defaults (due in large part to the Freddie Mac Agreement described below), and also because the volume of paid claims, cures and insurance rescissions and claim denials continued to outpace new default notices received. Total paid claims increased for 2013 from 2012, driven primarily by the $255 million payment made upon the closing of the Freddie Mac Agreement, and by greater efficiencies in our claims review process that has allowed us to pay valid claims more quickly than in previous periods. In addition to reserves established for new default notices, which were the primary driver of our total incurred loss for 2013, losses incurred in 2013 were also favorably impacted by reserve development on prior year defaults, as the initial loss of $22 million related to prior year defaults included in the Freddie Mac Agreement was more than offset by a benefit from claim curtailments and cures that was higher than previously estimated.

In August 2013, Radian Guaranty entered into the Freddie Mac Agreement related to a group of 25,760 first-liens guaranteed by Freddie Mac that were insured by Radian Guaranty and were in default as of December 31, 2011. This transaction significantly impacted our financial position in 2013 by reducing our primary delinquent loan inventory and capping Radian Guaranty’s total exposure on the entire population of loans subject to the agreement to $840 million, leaving Radian Guaranty with no additional exposure to claims on these loans. The Freddie Mac Agreement provides for the future treatment of the loans subject to the terms of the agreement including claim payments, loss mitigation activity and insurance coverage, and eliminated Radian Guaranty’s claim exposure on 9,756 loans that were delinquent and 4,586 loans that were re-performing as of July 31, 2013. The remaining loans in the original population of 25,760 loans had been paid off, had resulted in a rescission or claim denial or had become a paid claim prior to July 31, 2013. The maximum exposure of $840 million is comprised of $625 million of claim payments (consisting of $370 million of claims previously paid on this population of loans prior to July 12, 2013, which is the measurement date for purposes of the transaction, and an additional $255 million paid at closing) and $215 million related to rescissions, denials, claim curtailments and cancellations (“Loss Mitigation Activity”) on these loans. At the closing, Radian Guaranty deposited $205 million into a collateral account to cover future Loss Mitigation Activity on these loans. The amount deposited in the collateral account represents $215 million, less $10 million of Loss Mitigation Activity that had become final in accordance with the Freddie Mac Agreement prior to the date the collateral account was established. The collateral account consists of investment securities and remains on our consolidated balance sheets as a result of the rights that Radian Guaranty has with respect to the funds. Subject to certain conditions in the Freddie Mac Agreement, amounts in the collateral account may be released to Radian Guaranty over time to the extent that Loss Mitigation Activity becomes final in accordance with the terms of the Freddie Mac Agreement. From the time the collateral account was established through December 31, 2013, approximately $6.0 million of additional Loss Mitigation Activity had become final in accordance with the Freddie Mac Agreement and $142.9 million of submitted claims had been rescinded, denied, curtailed or cancelled, but were not considered final in accordance with the Freddie Mac Agreement. If the amount of Loss Mitigation Activity that becomes final in accordance with the Freddie Mac Agreement after the collateral account was established does not accumulate to $205 million prior to termination of the Freddie Mac Agreement, then any remaining funds will be paid to Freddie Mac. Radian Guaranty will continue to administer all claims submitted with respect to these loans in accordance with the applicable insurance policy for these loans and in a manner consistent with its normal claims handling practices. The Freddie Mac Agreement will terminate upon the earliest to occur of: (1) August 29, 2017; (2) any time after August 29, 2015 if the amounts remaining in the collateral account are reduced to $0; or (3) any time after August 29, 2015 if Radian Guaranty exercises its early termination option to conclude the transactions under the Freddie Mac Agreement, by paying to Freddie Mac an amount equal to the initial collateral amount less the amount of Loss Mitigation Activity that had then become final under the terms of the agreement.

Our mortgage insurance loss reserves declined in 2012, primarily as a result of a decrease in our total inventory of defaults, as the volume of paid claims, cures and insurance rescissions and claim denials outpaced new default notices received. Total paid claims declined for 2012 from 2011, driven primarily by an increase in the number of claims received that we were reviewing for non-compliance with our insurance policies, which lengthened the claim resolution period and resulted in an increase in rescissions and denials, as well as by delays created by foreclosure slowdowns, servicer issues and loan modification programs. Reserves established for new default notices received in 2012 were the primary driver of our total incurred loss for 2012. The losses incurred in 2012 were also impacted by adverse reserve development on prior year defaults, primarily relating to the impact from the aging of underlying defaulted loans partially offset by higher actual insurance rescissions and claim denials than previously assumed in our loss reserve estimates. Our results for 2012 were also negatively impacted by a $46.8 million decrease in our estimated reinsurance recoverable from our Smart Home transactions resulting from lower claims paid and higher insurance rescissions and claim denials than were previously estimated.

Of the $166.8 million adverse development experienced in 2011 associated with default notices reported in prior years, $120.3 million related to an increase in both our actual and estimated reinstatements and resubmissions of policies and claims previously rescinded or denied in prior years, while the balance related primarily to the greater than anticipated impact from the aging of underlying defaulted loans on our default to claim rate.

Our aggregate weighted average default to claim rate assumption (net of denials and rescissions) used in estimating our reserve for losses was 47% at both December 31, 2013 and December 31, 2012. We develop our default to claim rate estimates on defaulted loans based on the age of the underlying defaulted loans, as measured by the number of monthly payments missed. As of December 31, 2013, our aggregate weighted average default to claim rate estimate on our total first-lien portfolio, net of estimated future denials and rescissions and excluding pending claims, was 39% and ranged from 20% for insured loans that had missed two to three monthly payments, to 48% for such loans that had missed 12 or more monthly payments. Our estimate of expected insurance rescissions and claim denials (net of expected reinstatements) embedded in our default to claim rate is generally based on our experience over the past year, with consideration given for differences in characteristics between those rescinded policies and denied claims and the loans remaining in our defaulted inventory.

Our estimates of future rescissions and denials remain elevated compared to levels experienced before 2009. The elevated levels of our rate of insurance rescissions and claim denials have reduced our paid losses and have resulted in a significant reduction in our loss reserves. Our estimate of net future rescissions and denials reduced our loss reserves as of December 31, 2013 and 2012 by approximately $247 million and $455 million, respectively. Conversely, our estimate of future reinstatements of previously rescinded policies and denied claims, which are primarily reflected in our IBNR reserve estimate, increased our loss reserves as of December 31, 2013 and 2012 by approximately $283.0 million and $303.0 million, respectively. The amount of estimated rescissions and denials incorporated into our reserve analysis at any point in time is affected by a number of factors, including not only our estimated rate of rescissions and denials on future claims, but also the volume and attributes of our defaulted insured loans, our estimated default to claim rate and our estimated claim severity, among other assumptions. Although we expect the amount of estimated rescissions and denials embedded within our reserve analysis to remain elevated as compared to levels before 2009, we expect them to continue to decrease over time, as the defaults related to our legacy portfolio decline as a proportion of our total default portfolio and as we realize the results through actual rescissions and denials, or the commutations of insured loans. In the event that we experience a more rapid than expected decrease in the level of future insurance rescissions and claim denials from the current levels, it could have a material adverse effect on our paid losses and loss reserves.

Our reported rescission, denial and claim curtailment activity in any given period is subject to challenge by our lender and servicer customers. We expect that a large number of previously denied claims will be resubmitted with the required documentation and ultimately paid; therefore, we have considered this expectation in developing our IBNR reserve estimate. This IBNR estimate was $281.9 million and $323.0 million at December 31, 2013 and 2012, respectively. For 2013, our IBNR estimate of $281.9 million includes an estimate of future reinstatements of previously denied claims, rescinded policies and curtailments of $162.1 million, $83.7 million and $14.9 million, respectively. These reserves relate to $305.8 million of claims that were denied within the preceding 12 months, $417.4 million of policies rescinded within the preceding 24 months, and $72.4 million of claim curtailments within the preceding 24 months, as well as additional denials and rescissions that were denied or rescinded in earlier periods but remain the subject of discussion with certain of our lender and servicer customers.

The following table illustrates the amount of first-lien claims submitted to us for payment that were rescinded or denied, for the periods indicated, net of any reinstatements of previously rescinded policies or denied claims within each period:



	Year Ended December 31,
(In millions)	2013		2012		2011
Rescissions	$	81.2	$	279.3	$	474.2
Denials	171.7		539.4		170.9
Total first-lien claims submitted for payment that were rescinded or denied (1)	$	252.9	$	818.7	$	645.1

______________________


(1)	Includes an amount related to a small number of submitted claims that were subsequently withdrawn by the insured.

Generally, we estimate our claim liability related to the potential future reinstatement of these previously rescinded policies and denied claims by estimating an initial gross reinstatement rate at the time of denial or rescission, which then declines over a 12- or 24-month timeframe. As of December 31, 2013, for previously denied claims, this initial gross reinstatement assumption begins at approximately 60% and declines to 0% after 12 months, while for previously rescinded policies, the initial assumed reinstatement rate begins at approximately 20% and declines to 0% after 24 months. Our IBNR reserve estimate also includes the projected potential impact from future estimated rescissions on reinstated denials. Therefore, at any particular point in time, our IBNR reserve estimate with respect to previously rescinded policies or denied claims is affected not only by our initial reinstatement assumption, but also by the length of time since the denial or rescission, our estimated likelihood of such reinstatements resulting in a paid claim, and the expected claim curtailments on such paid claims, as well as the potential outcome of any discussions with our lender and servicer customers regarding such rescissions or denials.

We also accrue for the premiums that we expect to refund to our lender customers in connection with our estimated insurance rescission activity. Our accrued liability for such refunds, which is included within other liabilities on our consolidated balance sheets, was $17.0 million and $48.0 million as of December 31, 2013 and 2012, respectively.

We considered the sensitivity of first-lien loss reserve estimates at December 31, 2013 by assessing the potential changes resulting from a parallel shift in severity and default to claim rate. For example, assuming all other factors remain constant, for every one percentage point change in primary claim severity (which we estimate to be 28% of unpaid principal balance at December 31, 2013), we estimated that our loss reserves would change by approximately $57 million at December 31, 2013. For every one percentage point change in pool claim severity (which we estimate to be 45% of unpaid principal balance at December 31, 2013), we estimated that our loss reserves would change by approximately $3 million at December 31, 2013. For every one percentage point change in our overall net default to claim rate (which we estimate to be 47% at December 31, 2013, including our assumptions related to rescissions and denials), we estimated a $36 million change in our loss reserves at December 31, 2013.

The following table shows our mortgage insurance reserve for losses and LAE by category at the end of each period indicated:



	Year Ended December 31,
(In thousands)	2013		2012
Reserves for losses by category:
Prime	$	937,307	$	1,508,140
Alt-A	384,841		490,728
A minus and below	215,545		314,068
IBNR and other	347,698		289,032
LAE	51,245		64,252
Reinsurance recoverable (1)	38,363		83,238
Total primary reserves	1,974,999		2,749,458
Pool	169,682		281,937
IBNR and other	8,938		34,000
LAE	5,439		7,466
Total pool reserves	184,059		323,403
Total first-lien reserves	2,159,058		3,072,861
Second-lien and other (2)	5,295		10,747
Total reserve for losses	$	2,164,353	$	3,083,608

______________________


(1)	Primarily represents ceded losses on captive transactions and Smart Home (for 2012).


(2)	Does not include second-lien premium deficiency reserve.