Losses and Loss Adjustment Expense

All of the balance and activity of our consolidated reserve for losses and loss adjustment expense relate to the Mortgage Insurance segment. The following table shows our reserve for losses and LAE by category at the end of each period indicated:



(In thousands)	September 30, 2015		December 31, 2014
Reserve for losses by category:
Prime	$	519,572	$	700,174
Alt-A	234,772		292,293
A minus and below	137,441		179,103
IBNR and other	107,179		223,114
LAE	41,464		56,164
Reinsurance recoverable (1)	11,071		26,665
Total primary reserve	1,051,499		1,477,513
Pool	43,234		75,785
IBNR and other	949		1,775
LAE	1,983		3,542
Total pool reserve	46,166		81,102
Total First-lien reserve	1,097,665		1,558,615
Second-lien and other (2)	905		1,417
Total reserve for losses	$	1,098,570	$	1,560,032

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


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

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



	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands)	2015		2014			2015			2014
Balance at beginning of period	$	1,204,792	$	1,714,681		$	1,560,032		$	2,164,353
Less reinsurance recoverables (1)	11,677		22,458			26,665			38,363
Balance at beginning of period, net of reinsurance recoverables	1,193,115		1,692,223			1,533,367			2,125,990
Add losses and LAE incurred in respect of default notices reported and unreported in:
Current year (2) (3)	50,436		72,408			184,490			256,729
Prior years (3)	13,037		(23,851		)	(42,158		)	(94,747		)
Total incurred	63,473		48,557			142,332			161,982
Deduct paid claims and LAE related to:
Current year (2)	2,841		4,784			3,417			5,587
Prior years	166,248		169,066			584,783			715,455
Total paid	169,089		173,850			588,200			721,042
Balance at end of period, net of reinsurance recoverables	1,087,499		1,566,930			1,087,499			1,566,930
Add reinsurance recoverables (1)	11,071		21,201			11,071			21,201
Balance at end of period	$	1,098,570	$	1,588,131		$	1,098,570		$	1,588,131

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(1)	Related to ceded losses on captive reinsurance transactions and the QSR 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.

(3)

Amounts previously reported for losses and LAE incurred in respect of default notices reported and unreported in current year and prior years have been reclassified to correct an error. There was no net change to total incurred losses in any period as a result of these reclassifications. For the three and nine months ended September 30, 2014, the amounts previously reported for losses and LAE incurred in respect of default notices reported and unreported in current year have been revised downward by approximately $34.5 million and $82.8 million, respectively, with an equal and offsetting adjustment to the amount previously reported for default notices reported and unreported in prior years. For the years ended December 31, 2014, 2013 and 2012, the amounts previously reported related to losses and LAE incurred from current year default notices should have been lower by approximately $71.8 million, $65.0 million and $75.7 million, respectively, with equal and offsetting adjustments to the incurred loss amounts related to prior years’ default notices.

Our loss reserve declined for the three and nine months ended September 30, 2015, primarily as a result of the aggregate amount of paid claims, Cures, Rescissions and Claim Denials exceeding the loss reserves established for 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 2015. For the nine months ended September 30, 2015, the impact to incurred losses from default notices reported in 2015 was partially mitigated by favorable reserve development on prior year defaults, which was driven primarily by a reduction in certain Default to Claim Rate assumptions based on observed trends of higher Cures than were previously estimated. During the first nine months of 2014, we experienced similar favorable reserve development in our estimates of future losses related to incurred losses as a result of higher Cures and lower Claim Severity rates than had previously been estimated. The overall favorable reserve development in 2015 was partially offset by adverse reserve development on prior year defaults for the three months ended September 30, 2015, which was primarily affected by a decrease in our assumption for future rescissions and denials. Our results for the nine months ended September 30, 2015 also include the impact of the BofA Settlement Agreement, as described below.

Total paid claims decreased for the three months ended September 30, 2015 compared to the same period in 2014, primarily due to the overall decline in defaulted loans and the ongoing reduction in pending claims. Claims paid for the nine months ended September 30, 2015 include $236.6 million related to the implementation of the BofA Settlement Agreement.

Our aggregate weighted average Default to Claim Rate assumption (net of Claim Denials and Rescissions) used in estimating our primary reserve for losses declined to 49% (45% excluding pending claims) at September 30, 2015, compared to 52% at December 31, 2014. The change in our Default to Claim Rate resulted primarily from a decrease in the proportion of pending claims, which have higher Default to Claim Rates, and a decrease in the assumed Default to Claim Rate for new defaults, as described below. 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. 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. During the nine months ended September 30, 2015, we reduced our gross Default to Claim Rate assumption for new primary defaults from 16% to 14% due to continued improvement in actual claim development trends. As of September 30, 2015, our gross Default to Claim Rates on our primary portfolio ranged from 14% for new defaults, up to approximately 65% for certain defaults not in Foreclosure Stage, and 81% for Foreclosure Stage Defaults. Our estimate of expected Rescissions and Claim Denials (net of expected Reinstatements) embedded in our Default to Claim Rate is generally based on our recent experience; as of September 30, 2015, we refined this assumption to give more weight to our experience in the most recent nine months. Consideration is also given for differences in characteristics between those rescinded policies and denied claims and the loans remaining in our defaulted inventory, as well as the estimated impact of the BofA Settlement Agreement.

The implementation of the BofA Settlement Agreement resulted in Reinstatements exceeding Rescissions and Claim Denials for First-lien claims during the three and nine months ended September 30, 2015. Reinstatements, net of Rescissions and Claim Denials, for primary loans (excluding loans subject to the Freddie Mac Agreement) totaled $2.9 million for the three months ended September 30, 2015 and $57.7 million for the nine months ended September 30, 2015. Rescissions and Claim Denials, net of Reinstatements totaled $53.5 million for the three months ended September 30, 2014 and $93.3 million for the nine months ended September 30, 2014.

Although our estimates of future Rescissions and Claim Denials have been declining, they remain elevated compared to levels experienced before 2009. The elevated levels of our rate of Rescissions and Claim Denials have reduced our paid losses and have resulted in a reduction in our loss reserve. Our estimate of net future Rescissions and Claim Denials reduced our loss reserve as of September 30, 2015 and December 31, 2014 by approximately $87 million and $125 million, respectively. The amount of estimated Rescissions and Claim 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 Claim 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, 2015, these assumptions also reflect the estimated impact of the BofA Settlement Agreement, as further discussed below.

As our Legacy Portfolio has become a smaller percentage of our overall insured portfolio, we have undertaken 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 recent years.

Our reported Rescission and Claim Denial activity in any given period is subject to challenge by our lender and servicer customers. We expect that a portion of previous Rescissions will be reinstated and previous Claim Denials will be resubmitted with the required documentation and ultimately paid; therefore, we have incorporated this expectation into our IBNR reserve estimate. Our IBNR reserve estimate was $50.4 million and $163.6 million at September 30, 2015 and December 31, 2014, respectively. As of September 30, 2015, the IBNR reserve estimate of $50.4 million included approximately $29.1 million for loans subject to the BofA Settlement Agreement. This amount compares to approximately $133.0 million in IBNR reserves for loans subject to the BofA Settlement Agreement as of December 31, 2014. The significant decrease in our IBNR reserve estimate at September 30, 2015 as compared to December 31, 2014, reflects the implementation of the BofA Settlement Agreement that commenced on February 1, 2015, including the reinstatement and payment during the period of certain previous Rescissions and Claim Denials.

The remaining IBNR reserve estimate as of September 30, 2015 included an estimate of future Reinstatements of previous Claim Denials, Rescissions and Claim Curtailments of $11.8 million, $0.3 million, and $1.8 million, respectively. These reserves relate to approximately $50.6 million of claims that were denied within the preceding 12 months, approximately $52.1 million of policies rescinded within the preceding 24 months, and approximately $25.7 million of Claim Curtailments within the preceding 24 months.

We also accrue for the premiums that we expect to refund to our lender customers in connection with our estimated Rescission activity. Our accrued liability for such refunds, which is included within other liabilities on our condensed consolidated balance sheets, was $3.2 million and $9.0 million as of September 30, 2015 and December 31, 2014, respectively.

BofA Settlement Agreement

On September 16, 2014, Radian Guaranty entered into a Confidential Settlement Agreement and Release (the “BofA Settlement Agreement”) 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 certain Subject Loans.

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 as of that date. Approximately 12% of the Subject Loans are neither held in portfolio by the Insureds nor owned by the GSEs, and required the consent of certain other investors for these loans to be included in the BofA Settlement Agreement. During the three months ended September 30, 2015, most of such other investors provided consent, and therefore, the associated implementation of the BofA Settlement Agreement has commenced with respect to these loans. Our previous reserve assumptions assumed that these consents would be obtained. See Note 10 of Notes to Consolidated Financial Statements in our 2014 Form 10-K for additional information about the BofA Settlement Agreement.