Losses and LAE

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



(In thousands)	March 31, 2014		December 31, 2013
Mortgage insurance reserves	$	1,893,960	$	2,164,353
Financial guaranty reserves	29,751		21,068
Total reserve for losses and LAE	$	1,923,711	$	2,185,421

See Note 9 for information regarding our financial guaranty reserves.

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



(In thousands)	March 31, 2014		December 31, 2013
Reserves for losses by category:
Prime	$	790,529	$	937,307
Alternative-A (“Alt-A”)	351,695		384,841
A minus and below	189,453		215,545
Incurred but not reported (“IBNR”) and other	347,674		347,698
LAE	50,684		51,245
Reinsurance recoverable (1)	25,751		38,363
Total primary reserves	1,755,786		1,974,999
Pool	123,596		169,682
IBNR and other	5,679		8,938
LAE	4,517		5,439
Total pool reserves	133,792		184,059
Total first-lien reserves	1,889,578		2,159,058
Second-lien and other (2)	4,382		5,295
Total reserve for losses	$	1,893,960	$	2,164,353

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(1)	Primarily represents ceded losses on captive transactions and the Reinsurance Transactions.


(2)	Does not include our second-lien premium deficiency reserve that is included in other liabilities.

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



	Three Months Ended March 31,
(In thousands)	2014			2013
Mortgage Insurance
Balance at January 1	$	2,164,353		$	3,083,608
Less reinsurance recoverables (1)	38,363			83,238
Balance at January 1, net of reinsurance recoverables	2,125,990			3,000,370
Add losses and LAE incurred in respect of default notices reported and unreported in:
Current year (2)	142,696			182,534
Prior years	(93,536		)	(50,578		)
Total incurred	49,160			131,956
Deduct paid claims and LAE related to:
Prior years	306,941			309,927
Total paid	306,941			309,927
Balance at end of period, net of reinsurance recoverables	1,868,209			2,822,399
Add reinsurance recoverables (1)	25,751			72,101
Balance at March 31	$	1,893,960		$	2,894,500

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(1)	Related to ceded losses on captive reinsurance transactions and the Reinsurance Transactions. See Note 7 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 the first quarter of 2014, primarily as a result of the volume of paid claims, cures and insurance rescissions and claim denials continuing to outpace new default notices received. Reserves established for new default notices were the primary driver of our total incurred loss for 2014. The impact to incurred losses from default notices reported in 2014 was partially mitigated by favorable reserve development on prior year defaults, which was driven primarily by higher cures and lower claim severity rates than were previously estimated. Total paid claims were generally consistent in the first quarter of 2014 with the comparable period in 2013.

In August 2013, Radian Guaranty entered into a Master Transaction Agreement with Freddie Mac (the “Freddie Mac Agreement”) related to a group of first-liens guaranteed by Freddie Mac that were insured by Radian Guaranty and were in default as of December 31, 2011. We deposited funds into a collateral account to cover future loss mitigation activity on these loans. From the time the collateral account was established through March 31, 2014, approximately $13.0 million of additional loss mitigation activity had become final in accordance with the Freddie Mac Agreement and $137.2 million of submitted claims had been rescinded, denied, curtailed or cancelled, but were not considered final in accordance with the Freddie Mac Agreement.

Our mortgage insurance loss reserves declined in the first quarter of 2013, 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 during the quarter. Favorable reserve development on default notices reported in prior years partially mitigated the impact from new defaults, as the benefit to prior year defaults from higher cures and claim curtailments was more than previously estimated.

Our aggregate weighted average default to claim rate assumption (net of denials and rescissions) used in estimating our reserve for losses was 46% at March 31, 2014, compared to 47% at December 31, 2013. 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 March 31, 2014, 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 19% 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 March 31, 2014 and December 31, 2013 by approximately $219 million and $247 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 March 31, 2014 and December 31, 2013 by approximately $285 million and $283 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 an adverse effect on our paid losses and loss reserves.

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:



	Three Months Ended March 31,
(In millions)	2014		2013
Rescissions	$	16.1	$	15.3
Denials	12.2		27.2
Total first-lien claims submitted for payment that were rescinded or denied (1)	$	28.3	$	42.5

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

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 $288.2 million and $281.9 million at March 31, 2014 and December 31, 2013, respectively. For the first quarter of 2014, our IBNR estimate of $288.2 million includes an estimate of future reinstatements of previously denied claims, rescinded policies and curtailments of $163.8 million, $93.3 million and $13.4 million, respectively. These reserves relate to $266.9 million of claims that were denied within the preceding 12 months, $362.5 million of policies rescinded within the preceding 24 months, and $80.2 million of claim curtailments within the preceding 24 months, as well as a significant number of additional denials and rescissions that were denied or rescinded in earlier periods but remain the subject of continuing settlement discussions with certain of our lender and servicer customers.

Until a liability associated with such activities or discussions becomes probable and can be reasonably estimated, we consider our claim payments or our rescissions, denials and curtailments to be resolved for financial reporting purposes. Under the accounting standard regarding contingencies, an estimated loss is accrued only if we determine that the loss is probable and can be reasonably estimated. For the first quarter of 2014, a significant portion of our IBNR estimate of $288.2 million relates to one servicer, with whom we are currently in settlement discussions regarding a large population of disputed rescissions, denials, curtailments and potential insurance cancellations. For these populations, we have determined that a settlement is probable and that a loss can be reasonably estimated, and have reflected our best estimate of the expected loss related to the populations under discussion with this servicer in our financial statements, primarily as a component of our IBNR reserve. While our reserves include our best estimate of this loss, the outcome of the discussions or potential legal proceedings that could ensue is uncertain, and it is reasonably possible that a loss exists in excess of the amount accrued. Due to the dynamic nature of these discussions, the range of factors that could impact settlement negotiations and the inherent uncertainty of the outcome of such matters, we cannot estimate the amount of any additional loss that is reasonably possible.

Generally, we estimate our claim liability related to the potential future reinstatement of previously denied claims and rescinded policies 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 March 31, 2014, 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 severity on such paid claims, as well as the potential outcome of any discussions with our lender and servicer customers regarding such rescissions or denials. In addition, as of March 31, 2014, our IBNR reserve estimate incorporates an ultimate overturn rate assumption of approximately 30% for previously curtailed claims.

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 condensed consolidated balance sheets, was $14.8 million and $17.0 million as of March 31, 2014 and December 31, 2013, respectively.

We considered the sensitivity of first-lien loss reserve estimates at March 31, 2014 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 March 31, 2014), we estimated that our loss reserves would change by approximately $49 million at March 31, 2014. For every one percentage point change in pool claim severity (which we estimate to be 44% of unpaid principal balance at March 31, 2014), we estimated that our loss reserves would change by approximately $2 million at March 31, 2014. For every one percentage point change in our overall net default to claim rate (which we estimate to be 46% at March 31, 2014, including our assumptions related to rescissions and denials), we estimated an approximately $32 million change in our loss reserves at March 31, 2014.