Losses and Loss Adjustment Expenses

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)	2014		2013
Reserves for losses by category:
Prime	$	700,174	$	937,307
Alt-A	292,293		384,841
A minus and below	179,103		215,545
IBNR and other	223,114		347,698
LAE	56,164		51,245
Reinsurance recoverable (1)	26,665		38,363
Total primary reserves	1,477,513		1,974,999
Pool	75,785		169,682
IBNR and other	1,775		8,938
LAE	3,542		5,439
Total pool reserves	81,102		184,059
Total First-lien reserves	1,558,615		2,159,058
Second-lien and other (2)	1,417		5,295
Total reserve for losses	$	1,560,032	$	2,164,353

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(1)	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, and LAE but excluding Second-lien PDR, for the periods indicated:



	Year Ended December 31,
(In thousands)	2014			2013			2012
Mortgage Insurance
Balance at January 1	$	2,164,353		$	3,083,608		$	3,247,900
Less reinsurance recoverables (1)	38,363			83,238			151,569
Balance at January 1, net of reinsurance recoverables	2,125,990			3,000,370			3,096,331
Add losses and LAE incurred in respect of default notices reported and unreported in:
Current year (2)	422,999			584,174			899,511
Prior years	(177,360		)	(19,526		)	21,996
Total incurred	245,639			564,648			921,507
Deduct paid claims and LAE related to:
Current year (2)	9,006			31,399			12,503
Prior years	829,256			1,407,629			1,004,965
Total paid	838,262			1,439,028			1,017,468
Balance at end of period, net of reinsurance recoverables	1,533,367			2,125,990			3,000,370
Add reinsurance recoverables (1)	26,665			38,363			83,238
Balance at December 31	$	1,560,032		$	2,164,353		$	3,083,608

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(1)	Related to ceded losses on captive transactions, Smart Home (for 2012) and 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 in 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. Total incurred losses during 2014 primarily were the result of new default notices during 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 of 2014 also include the impact of the BofA Settlement Agreement, as described below.

Total paid claims decreased for 2014 as compared to 2013. Our 2013 paid claims included the $255 million payment made upon the closing of the Freddie Mac Agreement, as described below. The additional decrease in paid claims in 2014 compared to prior year periods is consistent with the overall decline in defaulted loans.

Our mortgage insurance loss reserves also 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), and also because the volume of paid claims, cures and insurance rescissions and claim denials outpaced 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 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 basis for our total incurred losses in 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.

The losses incurred in 2012 were 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.

Our aggregate weighted average Default to Claim Rate assumption (net of denials and rescissions) used in estimating our primary reserve for losses was 52% (47% excluding pending claims) at December 31, 2014 compared to 50% at December 31, 2013. Our Default to Claim Rate estimates on defaulted loans are mainly developed based on the Stage of Default and Time in Default of the underlying defaulted loans, as measured by the progress toward foreclosure sale and the number of months in default. Our gross Default to Claim Rates on our primary portfolio ranged from 16% for new defaults, to 65% for defaults not in Foreclosure Stage, and 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, and also incorporates the estimated impact of the BofA Settlement Agreement.

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)	2014		2013		2012
Rescissions	$	56.8	$	81.2	$	279.3
Denials	87.9		171.7		539.4
Total First-lien claims submitted for payment that were rescinded or denied (1)	$	144.7	$	252.9	$	818.7

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

The elevated levels of our 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, 2014 and 2013 by approximately $125 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 December 31, 2014, these assumptions also reflect the estimated impact of the BofA Settlement Agreement, as further discussed below.

We expect the amount of estimated rescissions and denials embedded within our reserve analysis to remain elevated as compared to pre-financial crisis levels; however, as our Legacy Portfolio has become a smaller percentage of our overall insured portfolio, we have experienced a reduced amount of Loss Mitigation Activity with respect to the claims we receive, and we expect this trend to continue. As a result, our future Loss Mitigation Activity is not expected to mitigate our paid losses to the same extent as in prior years. 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.

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 $163.6 million and $281.9 million at December 31, 2014 and 2013, respectively. The significant decrease in our IBNR reserve estimate in 2014 reflects the terms of the BofA Settlement Agreement. For 2014, our IBNR estimate of $163.6 million included approximately $133.0 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 curtailments of $18.3 million, $1.4 million and $3.4 million, respectively. These IBNR reserves relate to $113.3 million of claims that were denied within the preceding 12 months, $90.5 million of policies rescinded within the preceding 24 months, and $34.8 million of claim curtailments within the preceding 24 months. The decrease in our IBNR reserve estimate as a result of 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 claims denials on a population of loans referred to in the settlement agreement as Future Legacy Loans.

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 $9.0 million and $17.0 million as of December 31, 2014 and 2013, respectively.

We considered the sensitivity of First-lien loss reserve estimates at December 31, 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 103.7% of unpaid principal balance at December 31, 2014), we estimated that our loss reserves would change by approximately $12 million at December 31, 2014. For every one percentage point change in our overall primary net Default to Claim Rate (which we estimate to be 52% at December 31, 2014, including our assumptions related to rescissions and denials), we estimated a $23 million change in our loss reserves at December 31, 2014.

Settlement Agreements

On September 16, 2014, Radian Guaranty entered into 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 Subject Loans.

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 a group of Legacy Loans referred to as 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 on these loans. To the extent any such Loss Mitigation Activities 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, that 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 further 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 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 the applicable Master Policies.

Implementation of the BofA Settlement Agreement commenced on February 1, 2015 for Subject Loans held in portfolio by the Insureds or purchased by the GSEs on that date. Approximately 12% of the Subject Loans were neither held in portfolio by the Insureds nor owned by the GSEs, and will require the consent of certain other investors for these loans to be included in the BofA Settlement Agreement except with respect to certain limited rights of cancellation (described above). While we can provide no assurance whether one or more of the other investors will consent to have their Subject Loans included in the settlement, for purposes of the reserve established for the BofA Settlement agreement, we have assumed that these investors will provide consent. Therefore, to the extent that one or more of the other investors do not consent to the settlement, the associated Loss Mitigation Activities would not be reinstated under the terms of the BofA Settlement Agreement and the portion of the reserve related to those other investors would be reversed.

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. 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. 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. However, 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. Prior to consideration of the BofA Settlement Agreement, from the time the collateral account was established through December 31, 2014, approximately $48 million of additional Loss Mitigation Activity had become final in accordance with the Freddie Mac Agreement and $113 million of submitted claims had been rescinded, denied, curtailed or cancelled, but were not considered final in accordance with the Freddie Mac Agreement. Giving effect to the BofA Settlement Agreement as of December 31, 2014, these amounts would have been approximately $116 million and $23 million, respectively.