Losses and Loss Adjustment Expense

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



(In thousands)	September 30, 2014		December 31, 2013
Mortgage insurance reserves	$	1,588,131	$	2,164,353
Financial guaranty reserves	32,220		21,068
Total reserve for losses and LAE	$	1,620,351	$	2,185,421

See Note 10 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)	September 30, 2014		December 31, 2013
Reserves for losses by category:
Prime	$	721,811	$	937,307
Alt-A	308,283		384,841
A minus and below	182,885		215,545
IBNR and other	212,908		347,698
LAE	52,690		51,245
Reinsurance recoverable (1)	21,201		38,363
Total primary reserves	1,499,778		1,974,999
Pool	80,664		169,682
IBNR and other	2,468		8,938
LAE	3,434		5,439
Total pool reserves	86,566		184,059
Total First-lien reserves	1,586,344		2,159,058
Second-lien and other (2)	1,787		5,295
Total reserve for losses	$	1,588,131	$	2,164,353

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


(2)	Does not include our Second-lien PDR that is included in other liabilities.

The following table presents information relating to our mortgage insurance reserves for losses, including IBNR reserves and LAE but excluding Second-lien PDR, for the periods indicated:



	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands)	2014			2013		2014			2013
Mortgage Insurance
Balance at beginning of period	$	1,714,681		$	2,690,861	$	2,164,353		$	3,083,608
Less reinsurance recoverables (1)	22,458			58,427		38,363			83,238
Balance at beginning of period, net of reinsurance recoverables	1,692,223			2,632,434		2,125,990			3,000,370
Add losses and LAE incurred in respect of default notices reported and unreported in:
Current year (2)	106,927			140,015		339,496			477,155
Prior years	(58,370		)	11,997		(177,514		)	(56,777		)
Total incurred	48,557			152,012		161,982			420,378
Deduct paid claims and LAE related to:
Current year (2)	2,911			21,334		3,348			21,483
Prior years	170,939			498,002		717,694			1,134,155
Total paid	173,850			519,336		721,042			1,155,638
Balance at end of period, net of reinsurance recoverables	1,566,930			2,265,110		1,566,930			2,265,110
Add reinsurance recoverables (1)	21,201			49,675		21,201			49,675
Balance at end of period	$	1,588,131		$	2,314,785	$	1,588,131		$	2,314,785

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(1)	Related to ceded losses on captive reinsurance transactions and the QSR 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 for the three months ended September 30, 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 the first nine months of 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. Our results for the three and nine months ended September 30, 2014 also include the impact of the BofA Settlement Agreement, as described below.

Total paid claims were lower for the three and nine months ended September 30, 2014 compared to the comparable period in 2013, primarily due to the impact of the Freddie Mac Agreement in 2013, which increased claims paid by $254.7 million for the three and nine months ended September 30, 2013. The additional decrease in paid claims in 2014 compared to prior year periods is consistent with the overall decline in defaulted loans.

In August 2013, Radian Guaranty entered into the Freddie Mac Agreement, related to a group of First-lien mortgage loans guaranteed by Freddie Mac that were insured by Radian Guaranty and were in default as of December 31, 2011. As discussed above, at closing we paid Freddie Mac for claims related to these loans, and also deposited funds into a collateral account to cover future Loss Mitigation Activity on these loans. Subject to certain conditions, 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 September 30, 2014, approximately $38 million of additional Loss Mitigation Activity had become final in accordance with the Freddie Mac Agreement and approximately $118 million of submitted claims had been rescinded, denied, curtailed or cancelled, but were not yet considered final in accordance with the Freddie Mac Agreement. If the BofA Settlement Agreement had been implemented as of September 30, 2014, these amounts would have been approximately $106 million and $32 million, respectively. If the amount of Loss Mitigation Activity that becomes final in accordance with the Freddie Mac Agreement after the collateral account was established is less than $205 million prior to the scheduled termination of the Freddie Mac Agreement, then any shortfall will be paid to Freddie Mac from the funds in the collateral account.

Our mortgage insurance loss reserves declined for the three months ended September 30, 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 primary reserve for losses was 53% at September 30, 2014, compared to 50% at December 31, 2013. We develop our Default to Claim Rate estimates on defaulted loans based on models that use a variety of loan characteristics to determine the likelihood that a default will reach claim status. During the third quarter of 2014, we continued to refine our approach to estimating loss reserves and developed additional portfolio segmentations, primarily based on a loan’s Time in Default and its current Stage of Default, in assessing the likelihood that a default will become a claim. Previously, we gave greater weight to other loan characteristics, including the status of the loan as reported by its servicer, as defined by the number of missed payments, and the type of loan product. As of September 30, 2014, our aggregate weighted average Default to Claim Rate estimate on our primary portfolio, net of estimated denials and rescissions and excluding pending claims, was 47%. Our estimates of gross Default to Claim rates on our primary portfolio ranged from 17% for new defaults, to 81% for Foreclosure Stage Defaults. 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. For the three months ended September 30, 2014, our estimates also reflect the expected impact of the BofA Settlement Agreement.

Although our estimates of future rescissions and denials have been declining, they 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 reduction in our loss reserves. Our estimate of net future rescissions and denials reduced our loss reserves as of September 30, 2014 and December 31, 2013 by approximately $134 million and $247 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. As of September 30, 2014, these estimates also reflect the estimated impact of the BofA Settlement Agreement, as further discussed below. As noted above, we expect the amount of estimated rescissions and denials embedded within our reserve analysis to remain elevated as compared to levels before 2009; however, 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 September 30,				Nine Months Ended September 30,
(In millions)	2014		2013		2014		2013
Rescissions	$	14.5	$	21.6	$	48.3	$	56.5
Denials	39.0		4.1		45.0		131.3
Total First-lien claims submitted for payment that were rescinded or denied (1)	$	53.5	$	25.7	$	93.3	$	187.8

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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 and denial activity in any given period is subject to challenge by our lender and servicer customers and from time to time, we engage in discussions with our lender and servicer customers regarding these loss mitigation activities. Unless a liability associated with such activities or discussions becomes probable and can be reasonably estimated, we consider our claim payments and our rescissions, denials and curtailments to be resolved for financial reporting purposes. In accordance with the accounting standard regarding contingencies, we accrue for an estimated loss when we determine that the loss is probable and can be reasonably estimated.

As previously disclosed, we have been in settlement discussions with one servicer regarding a large population of disputed rescissions, denials, curtailments, and potential insurance cancellations. On September 16, 2014, Radian Guaranty reached an agreement with this servicer and entered into a Confidential Settlement Agreement and Release (the “BofA Settlement Agreement”), as referenced above, with Countrywide Home Loans, Inc. and Bank of America, N.A. (together, the “Insureds”), as a successor to BofA Home Loan Servicing f/k/a Countrywide Home Loans Servicing LP, in order to resolve various actual and potential claims or disputes related to the parties’ respective rights and duties as to mortgage insurance coverage on the Subject Loans (as defined below). The loans subject to the BofA Settlement Agreement (the “Subject Loans”) are comprised of: (i) loans that were originated or acquired by an Insured and were insured by Radian Guaranty prior to January 1, 2009, excluding such loans that were refinanced under HARP 2 (“Legacy Loans”); and (ii) loans other than Legacy Loans that were or are serviced by the Insureds and were 90 days or more past due as of July 31, 2014, or if servicing has been transferred to a servicer other than the Insureds, 90 days or more past due as of the transfer date (“Servicing Only Loans”).

Implementation of the BofA Settlement Agreement remains subject to the condition precedent that the GSEs consent to the BofA Settlement Agreement. If the consent of the GSEs is obtained, the BofA Settlement Agreement will be implemented for Subject Loans held in portfolio by the Insureds or purchased by the GSEs on the Implementation Date. In addition, with respect to Subject Loans that were either not held in portfolio by the Insureds or were purchased by non-GSE investors, including securitization trusts and other investors (the “Other Investors”), the BofA Settlement Agreement requires the consent of the Other Investors for these loans to be included in the BofA Settlement Agreement other than with respect to certain rights of cancellation (described below) which will apply to such loans as of the Implementation Date. The consent of the Other Investors, who hold approximately 12% of the number of Subject Loans, is not a condition precedent to the implementation of the BofA Settlement Agreement. The BofA Settlement Agreement provides that either party may terminate the BofA Settlement Agreement if consent of the GSEs is not received by November 15, 2014, except that the parties can agree to an extension and neither party can refuse an extension while any party is actively seeking consent from the GSEs. The parties are currently in the process of seeking consent from the GSEs.

If implemented, the BofA Settlement Agreement provides that all claims decisions by Radian Guaranty on Legacy Loans (including claims paid, coverage rescissions, claim denials and curtailments) that were communicated on or before February 13, 2013 will become final and will not be subject to future challenge or adjustment. With respect to claims decisions on Subject Loans that have been or will be communicated by Radian Guaranty after February 13, 2013 (“Future Legacy Loans”), the BofA Settlement Agreement provides that, subject to certain limited exceptions and conditions, Radian Guaranty will not effect any coverage rescissions, claim denials or curtailments. To the extent any such loss mitigation actions previously have been taken on Future Legacy Loans, Radian Guaranty will reinstate coverage and pay a reimbursement amount equal to the difference between the amount actually paid by Radian Guaranty and the eligible claim amount. Radian Guaranty has further agreed that with respect to Future Legacy Loans it will not assert any origination error or servicing defect as a basis for a decision not to pay a claim, nor will it effect a curtailment of such claims; provided however, Radian Guaranty retains the right to curtail Legacy Loans that are less than 90 days delinquent as of July 31, 2014 (“Potential Curtailment Loans”) and any Future Legacy Loans serviced by a servicer other than the Insureds (a “Protected Curtailment”).

The BofA Settlement Agreement provides that for Servicing Only Loans: (i) if Radian Guaranty effected a claim payment on or before May 30, 2014, any curtailments on such loans will become final and will not be subject to future challenge, appeal or adjustment; and (ii) for claim payments for Servicing Only Loans paid after May 30, 2014, Radian Guaranty will not make any curtailments (excluding Protected Curtailments, which may continue in the ordinary course) and, to the extent any curtailments previously have been effected on such loans, Radian Guaranty will pay a reimbursement amount equal to the curtailment amount. The BofA Settlement Agreement does not affect Radian Guaranty’s right to effect rescissions or denials on any Servicing Only Loans and any such rescissions or denials will continue to be governed by the applicable master insurance policies, subject to certain requirements in the BofA Settlement Agreement regarding the documents required to perfect such claims. Radian Guaranty has further agreed not to assert any right to cancel coverage on any Subject Loan for failure to initiate certain proceedings (most commonly foreclosure proceedings) within the timelines set forth in Radian Guaranty’s master insurance policy.

The BofA Settlement Agreement contains an alternative dispute resolution process for resolving certain disputes arising under the agreement, including disputes related to the processing, determination or payment of claims on Future Legacy Loans and future Servicing Only Loans, including curtailments on Potential Curtailment Loans.

As discussed above, our reported rescission and denial activity in any given period is subject to challenge by our lender and servicer customers, and we expect that a portion of previously rescinded policies will be reinstated and previously denied claims will be resubmitted with the required documentation and ultimately paid. We have incorporated this expectation into our reserve estimate, and our IBNR reserve estimate primarily consists of our estimate of future reinstatements of previously rescinded policies and denied claims. Our total IBNR reserve estimate was $153.3 million and $281.9 million at September 30, 2014 and December 31, 2013, respectively. For both periods, a substantial portion of our IBNR reserve estimate is related to expected payments for loans subject to the BofA Settlement Agreement. The significant decrease in our IBNR reserve estimate at September 30, 2014 as compared to December 31, 2013, reflects the terms of the BofA Settlement Agreement and assumes that the agreement will be implemented following GSE consent. As of September 30, 2014, the IBNR reserve estimate of $153.3 million included approximately $112.3 million for loans subject to the BofA Settlement Agreement. The remaining IBNR reserve included an estimate of future reinstatements of previously denied claims, rescinded policies and claim curtailments of $18.3 million, $1.9 million, and $10.2 million, respectively, that relate to $140.8 million of claims that were denied within the preceding 12 months, $135.0 million of policies rescinded within the preceding 24 months, and $63 million of claim curtailments within the preceding 24 months. The decrease in our IBNR reserve estimate resulting from the BofA Settlement Agreement was partially offset by an increase in our mortgage insurance case reserves to incorporate the fact that we have agreed not to take further action to effect rescissions and claim denials on Future Legacy Loans. While our reserves include our best estimate of probable losses, if the BofA Settlement Agreement is not implemented as anticipated, our actual losses with respect to the loans subject to the BofA Settlement Agreement may differ materially from our current estimates and we may be required to recognize additional losses to increase the IBNR reserve. However, we cannot estimate the amount of any additional loss that is reasonably possible.

Generally, excluding claims that are expected to be resolved in accordance with the BofA Settlement Agreement, 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 based on our expectation that there is a reduced likelihood that a reinstatement will occur as time passes from our initial decision regarding a denial or rescission. As of September 30, 2014, for previously denied claims, this initial gross reinstatement assumption begins at 60% and declines to 0% after 12 months, while for previously rescinded policies, the initial assumed reinstatement rate begins at 20% and declines to 0% after 24 months. Our total 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 September 30, 2014, our IBNR reserve estimate incorporates an overturn assumption for amounts curtailed on previously paid 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 $8.0 million and $17.0 million as of September 30, 2014 and December 31, 2013, respectively.

We considered the sensitivity of our loss reserve estimates at September 30, 2014 by assessing the potential changes resulting from a parallel shift in Claim Severity and Default to Claim Rate for primary loans. For example, assuming all other factors remain constant, for every one percentage point change in primary Claim Severity (which we estimate to be 103% of our risk exposure at September 30, 2014), we estimated that our loss reserves would change by approximately $12 million at September 30, 2014. For every one percentage point change in our primary net Default to Claim Rate (which we estimate to be 53% at September 30, 2014, including our assumptions related to rescissions and denials), we estimated a change of approximately $23 million in our loss reserves at September 30, 2014.